Secondaries, an Area in Which Class in Speed, However in Volume Representing European Gps Are Particularly Active

Opportunities in the European Private Equity Secondary Market - 3 4 - Opportunities in the European Private Equity Secondary Market TABLE OF CONTENTS

Executive summary...... 6

1. A thriving private equity secondary market...... 8

2. Key opportunities for investors...... 16

3. Attractiveness of secondary PE investments across economic cycles ...... 20

4. Secondary market outlook...... 26

5. Resilience of the secondary market in the face of a recession and development prospects...... 31

Opportunities in the European Private Equity Secondary Market - 5 EXECUTIVE SUMMARY

The private equity (PE) secondary market has LP interest, whereas now a balance between experienced strong and unprecedented growth LP interest and GP-led transactions has been over the past few years, gaining substantial found and managers proactively approach the market momentum and, thus being one of the secondary market. The growing share of GP- most important developments in PE as an asset led deals can be explained by overall market class. This growth has mainly been driven by maturity together with overall higher pricing the sharp upturn in the PE market, reaching levels leading to innovative and more complex circa $5.1 trillion in commitments globally as solutions. GPs aim to optimize fund liquidity and of Q1 20201. Growth in the global secondary to speed up the pace of distribution to their market has surpassed that of the PE asset LPs by means of secondaries, an area in which class in speed, however in volume representing European GPs are particularly active. only 6%2 of total PE commitments, thus leaving high potential for further expansion. The secondary market has become a reliable tool Amidst the uncertainty surrounding the to diversify and optimize assets allocation and final economic impact of the current global to gain rapid exposure to PE funds (which seems pandemic, the appetite for long-term unlisted justified especially in a low-yield environment) asset classes should not be eroded despite while shortening the J-curve and securing the understandable short-term wait-and-see access to resilient exposure. Secondaries offer approach. Non-listed companies still have the an attractive risk- return profile, inter alia for the same solid fundamentals that have supported following reasons: the structural increase in allocations for years (better average performance across cycles, • Exposure to mature underlying companies low interest rate environment, investments in that are not yet valued by the market; the real economy, natural integration of ESG • Reduced investment risk/ lower dispersion practices, etc.). of returns; • Reduced blind-pool risk; The secondary market has matured, shifting • Accelerated and diversified exposure by away from a niche market characterized back-filling older vintages; by distressed sellers trading at significant • Cash efficiency with money at work from discounts, to an active marketplace focused day one; on value creation with a growing number of • Shorter investment holding periods. increasingly sophisticated participants. In the early days of secondaries, assets were often The European secondary market is driven sold at a significant discount to NAV. Today, by an increasingly sophisticated buyers and buyers are willing to accept higher prices for sellers universe, the proliferation of regulation attractive investment opportunities with an and the gradual expansion of the European PE embedded upside, while sellers are motivated primary market, all together offering growing to lock in attractive returns, generate liquidity opportunities for institutional investors. More and rationalize their portfolios. This explains the specifically the small to mid-cap segments are material increase of volume of the secondary broader and more diversified than both their market. Unlike the global financial crisis (“GFC”) equivalent public market and US PE market that led to a liquidity crisis, the current recession, in terms of available companies and type of linked to the Covid-19 pandemic, occurs in a underlying sectors. In addition to this, two context where cash is not necessarily in short characteristics of the secondary market offer a supply, thus limiting the number of distressed favorable environment for institutional investors sellers and maintaining relatively stable prices. in light of the economic environment:

Another sign of market maturity is an evolving 1. As we enter into recession territory, and nature of secondary transactions. In its early on condition that a bottom-up analysis of days, the market was mostly dominated by target portfolios is carried out, secondary

1Source: Preqin, as of April 2020 2Source: Preqin, as of April 2020

6 - Opportunities in the European Private Equity Secondary Market transactions are a way to buy mature and quality assets, at attractive valuations acting as a portfolio hedge, reducing volatility and securing long term risk-return profile;

2. Whether it is about the risk-return profile of the funds based on their end of life performances or their cash flow characteristics in the short-medium term, Secondary funds seem to be of particular interest during economic downturns as seen during the GFC with a resilience in performances and above market returns.

Entering the secondary market therefore offers an accretive strategy to other private market strategies but requires the right expertise and experience to source and assess the best deals and funds. Secondaries can be an efficient portfolio tool to build robust portfolios investing in resilient and funded assets while reducing blind pool risk associated with new private market funds as well as withstanding various economic and financial cycles. However, they require a selective investment approach that is versatile enough to cover several different cycles.

This paper includes an exclusive study from HEC Paris Professor Oliver Gottschalg, that explores the attractiveness of private equity across different economic cycles, with a particular focus on secondary investments (Section III, page 20). The results of this empirical analysis point to the attractiveness of private equity, notably secondary fund investments, during economic downturns. The report concluded that “a strategy of a relative overweighting of private equity within the portfolio, and in particular of secondary private equity fund investments within the PE allocation, may be an attractive strategy for limited partners in the current economic environment.” A THRIVING PRIVATE EQUITY 1 SECONDARY MARKET

The PE secondary market has experienced strong and unprecedented growth over the past few years reaching $88bn in transaction volume 2019, a fourfold increase to 20083, and has become increasingly sophisticated, driven by the sharp upturn in the PE market and a shift from niche to normal strategy in private markets. Within this illiquid asset class, secondaries have emerged as a liquidity solution to a growing number of investors and enabled them to exit long-term investment in an otherwise illiquid market be it for portfolio management or due to regulatory constraints.

Initially, secondary transactions merely consisted of opportunistic purchases of LP interests in private equity funds or portfolios of funds. Buyers then took on primary LP commitments to meet future capital calls in the remaining assets. This segment grew rapidly when public market conditions depreciated following the GFC and some investors found themselves with-greater-than anticipated needs for liquidity and overweighed private market allocations due to denominator effect

Secondaries have since grown rapidly into a well-structured asset class at the core of investors’ asset allocation strategies departing from its early opportunistic use. For investors, secondary private equity strategies can be an effective way to gain access to attractive risk-adjusted returns, J-curve mitigation while rapidly increasing exposure and diversification and provide an attractive cash flow profile.

A secondary transaction refers to the sale by an existing investor of its interests in a fund or a portfolio of funds to a third-party buyer.

Rapid growth in the global secondary A market…

The private equity asset class is illiquid by nature even at a loss – saw secondaries as an efficient and thus considered as long-term investments exit option. At that time, secondary transactions (over 10 years) for investors (known as “Limited comprised mostly of portfolio liquidations from Partners” or “LPs”). A robust, mature secondary distressed sellers in need of short-term liquidity market has developed over the last two decades or strategic rebalancing, generally at a high as secondaries have become an efficient way discount. for LPs to diversify and manage their portfolios. Deals have increased significantly worldwide, The recent bull market changed investors’ even in the aftermath of the global financial perception on the asset class and secondaries crisis partly driven by windfall effects as became not only a recognized tool for portfolio investors wishing to rebalance their allocations management but a private market strategy and reduce unfunded private equity exposure – in itself.The growth of the market and new

3Source : Greenhill, 2020 Q1 Secondary Market Update

8 - Opportunities in the European Private Equity Secondary Market innovative transaction structures are seen to continue to provide investment opportunities for secondary fund managers. LPs take advantage of favorable market conditions to trim and shape their portfolios as desired, maximizing returns and improving allocations. Investors trade private equity fund interests as single positions, portfolios of all sizes, “tail-end” and structured transactions across all types of private equity investments (buyout, distressed, growth equity, mezzanine, venture capital and infrastructure) and across the entire maturity spectrum – from early secondaries (less than 50% funded) to more seasoned secondaries (50% or more drawn down).

LPs have also become accustomed to secondary allocation in newly started private market programs to benefit from distinctive secondary characteristics. These are mainly accelerated portfolio diversification, J-curve mitigation, effective cash profile, attractive risk-adjusted returns, and counter cyclical exposure. This effect is linked to secondary sales driven by short term liquidity needs of institutional investors which aremore likely to happen in a slowdown leading to potential attractive secondary opportunities when other private market strategies slow.

Exhibit 1 shows these trends. Private equity secondary fundraising recovered rapidly from the economic crisis and reached $21bn in the first quarter of 2020, after a 2017 all-time high. This fundraising shows no sign of slowing down with a queue of LPs seeking to sell large portfolios of fund interests and an increasing number of buyers.

Investor commitments can take the form of a single LP interest, a portfolio of LP interests, or a fund-of-funds interest. It is important to note that sellers of private equity interests sell not only their current portion of the fund’s entire Net Asset Value (NAV) but also any remaining unfunded commitments. Therefore, the secondary sale not only allows the original LP to receive liquidity for the funded part of the commitment but also releases that LP from any remaining unfunded obligations.

Exhibit 1 Private equity secondary fundraising and transactions volume (World), in $bn

Fundraising (1) Transaction (2)

310

Sources: (1) Preqin, figures as of April 2020. (2) Greenhill

Opportunities in the European Private Equity Secondary Market - 9 At the end of 2019, funds in the primary market were barely trading at any discount to carrying value (NAV) in secondary transactions (from 69% in 2009 for PE funds up to 92% in 2019). As shown in Exhibit 2, in the doldrums of the crisis, buyout funds sold on the secondary market had an average value of only 59% of their NAV. After the crisis, discounts have decreased and have stabilized over the past few years at around 95% of the NAV while secondary transactions volumes and number of players have kept growing. While overall secondary market prices have remained stable, reflecting the market’s growing appeal as a whole, a split has emerged, in which top-quality buyout stakes trade close to par (100% NAV) whereas lower quality stakes trade at discounts to NAV.

Historically, we observed that secondary pricing (discount to NAV) follow a cyclical pattern and adjust quickly to public markets and the overall economic situation. With the recent turmoil in the listed markets, we can expect a ripple effect in the PE market. In previous recessions, particularly during the GFC, average prices dropped rapidly and massively, down to discounts of around 30% to 40%. However, they recovered fairly quickly and returned to “ordinary” levels after just four quarters (albeit on lower NAVs) still allowing for attractive secondary opportunities for buyers.

Exhibit 2 Secondary pricing (discount to NAV) (2007-2019)

Source: Greenhill

…driven by the development of the B private equity primary market

The overall private equity asset class has become an increasingly popular option for asset allocation, as PE is increasingly seen as a reliable way to generate superior returns benchmarked to other asset classes. An attractive private asset class

The growth of secondaries has been substantially boosted by the maturity of the primary market, which has fueled the secondary market with various primary private equity interests for purchase.

10 - Opportunities in the European Private Equity Secondary Market Primary fundraising has grown significantly since Exhibit 3 2009, returning to and surpassing pre-crisis Private equity primary fundraising (World) in $bn levels with $438bn in 2018, a record high. This growth has led to a number of opportunities for secondaries, and not only during crisis periods. Moreover, the rise in secondaries cannot only be ascribed to returns and discounts. With more liquidity and more participants, secondaries fundraising has grown twice as fast as the primary market over the 2007-2018 period.

This growth may also be strengthened in the future by the next primary vintages are larger than in the past. Value creation is fueled by access to vintages that mostly postdate the financial crisis, originating three or four years Source: Preqin figures as of April 2020 ago, dating back to 3-4 years ago.

The entire private equity asset class has benefited from attractive returns, both in absolute terms, with recent performances driven by a positive economic cycle and lower financing costs, and in relative terms, with very low yields from traditional asset classes (fixed-income low returns and excessive volatility) supporting this trend.

The outperformance of private equity compared to public equities has been widely publicized but is only one component of its success among investors.

Private equity funds are increasingly seen as an efficient investment strategy yielding positive returns for investors when compared to public market equivalent returns (time-weighted performance of comparable investment), even though another intrinsic characteristic of the asset class is its high-performance dispersion. Dispersion of performance is expressed by the difference between top and bottom deciles. Private equity is one of the asset classes with the highest level of performance dispersion. This underscores the importance of selecting an appropriate asset allocation and choosing this right partner when investing in this asset class.

Exhibit 4 Dispersion of fund performance between 2004 and 2016

Net annualized return

30%

Top Decile 20%

1st Quartile 10% Median 3rd Quartile

0% Bottom Decile

-10% Fixed income Equity Private Debt Infrastructure Real Estate Private Equity

Asset class

Sources: Idinvest with data from BlackRock Investment Institute, Morningstar, Preqin and Thomson Reuters

Opportunities in the European Private Equity Secondary Market - 11 The European private equity market is broad and diverse

Europe is full of opportunities for private equity investments - both primary and secondary - but most investors have only begun to take advantage of them.

In terms of underlying companies, there are 11 times as many private companies as there are public companies, the majority of which are active in the small and-mid-cap segments (companies with revenues under €1bn).

Europe has more than twice as many companies as the US and three times as many small companies (those with revenues from €100m to €300m) as the US.

Exhibit 5 Exhibit 6 Number of European companies with revenues Number of companies with annual revenues over €100m (2018) over €100m in Europe and the US (2018)

x11

Large Cap (>€1,000m) ~ 29,000

16% Upper Mid-Market (€501-€1,000m) ~32,000

11% >€1.2bn 11% Mid Market (€100-€500m)

€300m - €1.2bn 29% ~ 2,500

~15,000 41% 73% 14%

€100 - 300m 60% 15% x3 32%

44% 54%

# of public companies # of private companies Europe USA

Source: Capital IQ Sources: Capital IQ, Arbor Square analysis

12 - Opportunities in the European Private Equity Secondary Market C Asset allocation on the rise

Private equity is booming worldwide. However, First, investors already invested in PE are the market landscape varies widely between continuing to increase their allocation. geographies, with high differences in maturity Second, the penetration rate of the asset levels. As shown in Exhibit 7, the average weight class in investors’ portfolios is continuing to of private equity in institutional asset allocation grow. in Europe is only 1.1 %; compared to 4.3% in the US. The discrepancies can be explained If we focus on France, for example, the number by investors’ risk appetite, but also because of investors exposed to private equity is private equity has a longer history as an asset steadily rising. By the end of 2018, almost two- class in the US. thirds (63%) of French institutional investors had allocated amounts to private equity (as Growth in private equity within institutional against 40% at the start of the decade4). allocations in Europe is driven by two trends.

Exhibit 7 Average weight of private equity in institutional asset allocation by country

Source: Preqin, 2019

“It is important to be invested in private equity. It helps lower the overall volatility of the portfolio (…) and we know that we are financing the real economy, this is important.” French pension fund

“We are considering the possibility of increasing the proportion of alternative assets in our investment portfolio, such as private equity, private debt and real estate. I think it is important to get a minimum return from these asset classes, especially now that government bond returns are close to zero. Alternative assets can help us generate the guaranteed returns for the policies we sell.” Italian insurance company

4Source : Indefi

Opportunities in the European Private Equity Secondary Market - 13 “We increased our private equity allocations recently. We need to diversify our portfolio given the low rates in other classes… We are looking for performance and that’s where we can find it.” French insurance company

“As a core objective of our investment strategy, we want to have a positive impact on the companies we have invested in. Private equity generates performance but also gives us the opportunity to affect social and environmental factors at the underlying companies. We can also track progress with more easily dedicated KPIs now.” French insurance company

“We moved from investment grade to private placements, from high yield to direct lending, from sovereign bonds to subordinated loans with government guarantee, from public equity to private equity.” Dutch insurance company

“I like private equity, real estate and infrastructure because they provide me with recurring income and they are very resilient. Furthermore, low volatility assets are welcome under IFRS 9.” French insurance company

“Private equity is a suitable asset class for insurance companies and it weathered the storm well during the crisis. The alpha is clearly dependent on the team selected. Not everyone can access it.” French insurance company

Source: INDEFI

Secondaries: D Still room for further growth

Secondaries have benefited from Exhibit 8 the growth of the wider private Evolution of private equity AuM* (World), in $tn equity market and market players’

newly found interest in the strategy. 4.9 While the financial industry as a 4.3 whole has taken time to recover from the 2008 crisis, private equity bounced back more quickly, seeing strong growth over the past 10 years. Global private equity AuM nearly tripled from $1.8tn in 2007 to $5.1n in the first quarter of 2020, with a CAGR (Compound Annual Growth Rate) of 8%. Private equity is continuing to gain in maturity worldwide, attracting an increasing Source: Preqin, figures as of April 2020, includes dry powder number of investors seeking an asset class with an attractive risk- return profile. Private equity funds can help build long-term value enhancing portfolios fairly desensitized from listed market while providing access to resilient and sound assets otherwise not accessible to institutional investors. This in return drives secondary AuM but at a higher rate given its positioning and appeal to investors.

Secondaries have grown much faster than primaries, and now represent 6% of total private equity AuM, a figure that is still low and leaves room for further growth...

14 - Opportunities in the European Private Equity Secondary Market Investor’ awareness driving overall E market maturity In addition to growth in the primary segment and the wider private equity market, secondaries growth has been driven by an increase awareness of market participants and an adjustment of their use of the secondary market as a liquidity solution. A far cry from the image of distressed investors, wishing to sell assets to find immediate liquidity or respond to a change of management or meet new regulatory requirements, today’s sellers are increasingly sophisticated and varied, and can include: fund-of-funds managers, asset managers, institutional investors, family offices etc. All of whom now use the secondary market as a tailored liquidity solution to their requirements and benefit from the innovation cycle and new secondary transactions available and engineered in the last decade.

Driven by the growth in PE and secondaries as well as investors’ knowledge of the asset class, the PE market has matured, become more transparent and set out to implement investment best practices. These regulatory and market standards improvement have in return increased market efficiency offering much more flexibility to investors and enabling them to tailor and adjust their exposure through the secondary market to meet their strategic objectives: • Adjust investments to new regulatory frameworks; • Lock in fund returns; • Manage risk and returns of PE portfolios with a range of different historical vintages, geographies, industry sectors, investment stages and fund managers; • Meet short-term liquidity needs; • Optimize cash flow generation; • Shift strategies and managers more easily than for primary funds.

Other strategic motivations (not least major changes in allocation strategies) have emerged recently on the LP side, usually linked to complex bespoke strategies, which generally involve greater collaboration with GPs.

Exhibit 9 Breakdown of sellers by type and location (2019)

Source: Campbell Lutyens

“I find private equity secondary investments very appealing: they help us generate high returns and to secure access to a high level of diversification as soon as we start investing, while mitigating the J-curve.” French insurance company

“Secondaries are at the core of our portfolio strategy. We set our private equity allocation targets at 50% primaries, 25% secondaries and 25% co-investment. Secondaries enable us to smooth cycle effects while getting high returns.” French insurance company Source: INDEFI

Opportunities in the European Private Equity Secondary Market - 15 KEY OPPORTUNITIES FOR 2 INVESTORS

Within the private equity asset class, investors are turning more and more to the private equity secondary market, which has become increasingly liquid and flexible.

Secondaries offer quick access to a high level of diversification in terms of geographies, vintages, fund managers, investment stages and sectors. They also enable investors to smoothen the J-curve effect, get back their cash quicker and gain exposure to resilient investments with great risk-adjusted performances.

A Flattened J-curve Secondary investments tend to mitigate the J-curve effect. The J-curve refers to the tendency of private equity funds to deliver negative returns in early years and investment gains in subsequent years as corporate portfolios mature, are exited, and return profits to the funds. This is due to investment costs and early drawdowns of capital in the fund’s life to fund the portfolio’s acquisitions, the fact that management fees are charged on the basis of committed capital, and that underperforming assets are usually identified early (and consequently written down or off).

Investing in a fund as a secondary investor rather than a primary investor allows to commit to the fund at a later stage of its life, often directly its distribution phase, which provides early positive cash flow from short term disposal of assets,partially mitigating or entirely eliminating the J-curve effect. As a result, investors benefit not only from cash at work from Day one of their investment but also from reduced holding periods before profits are returned to the fund and investors

Exhibit 10 The private equity J-curve

IRR Secondary fund entrance

Primary funds entrance

10 Years 0 Investment Development Liquidation stage stage stage

Source: Idinvest

16 - Opportunities in the European Private Equity Secondary Market B Diversification Secondaries allow investors to accelerate their • Geographies, industries and investment private equity exposure, deploying capital to strategies. an existing portfolio of private equity funds and mature underlying assets rather than to a Furthermore, all of the above provide LPs limited portfolio through a primary commitment with valuable insights into the strengths and drawn over the investment period of the fund. weaknesses of primary market GPs. Crossover From a portfolio perspective, investors who are between primary and secondary strategies is new to the private equity asset class often use more and more frequent; secondary capital will this key benefit of secondaries to jump-start continue to be used much more strategically their exposure. Acquiring top-quality secondary and dedicated funds will seek to actively build stakes during the first few years of a portfolio’s primary relationships with GPs to position life cycle is an attractive, lower-risk approach themselves for future opportunities. (reduced blind pool risk of funded assets) to building a private equity portfolio, especially if Lastly, secondaries provide much more visibility: private equity allocation budgets are limited. a secondary investment significantly reduces and can eliminate the risk of entering a blind pool. Secondaries also provide investors with broad, The more the LP interest is funded, the higher immediate access to diversification across their the number of underlying assets and therefore entire private equity portfolio regarding: the higher the visibility and predictability on the • Earlier vintages not accessible from a expected returns of the portfolio assets. Finally, primary investor’s situation; this “what you see is what you get” aspect • Quality fund managers, including “brand enables an investor to acquire the exact name” GPs; underlying assets he is looking for. C Resilience Secondaries have another key advantage: they tend to be more resilient than primary investments. They are proven to have a solid potential during downturns (with greater downside protection) as seen in Exhibit 11 where bottom quartile IRRs of secondary funds consistently outperform private equity funds with weak 2005-2007-2010 buyout vintages hit by the GFC vs. good developments for secondary funds thanks to overall robust underlying profiles, lower levels of leverage and attractive entry prices. Secondary funds are positioned to focus on mature and cash-generative transactions.

Exhibit 11 Secondary performance – above average returns – Bottom Quartile IRRs since inception

Source: Idinvest research, based on data from Cambridge Associates as of Q3 2019.

Opportunities in the European Private Equity Secondary Market - 17 Exhibit 12 Exhibit 13 Funds of Funds strategy mitigates the effect of Default rate* by strategy between 1995 and economic cycles (2000-2017) 2015 (World), as %

IRR by 30.6% funds type

40%

20% 14.8%

11.4%

0% 6.3% 3.4% 4.4% Buyout -20% Private Equity Fund of Funds Secondaries Buyout Fund of Growth Mezzanine Venture Funds Capital

-40% *Assessed based on the proportion of funds with a TVPI 2000 2002 2004 2006 2008 2010 2012 2014 2016 2017 multiple below 1.0x Source: Macrotrends Source: Preqin

Mature secondaries are characterized by their did not return investors’ capital (i.e. those with a exposure to more robust underlying companies, Total Value to Paid In below 1.0x) between 1995 which are generally less leveraged, which are and 2015, demonstrating that secondaries generally, more profitable and offer GPs a more have a significantly lower default rates than predictable, transparent business model (cost / other private equity strategies. The risk of return business plans, etc.), since they are on losing capital while investing in a PE secondary advanced stages of their development cycle, fund was only of 3% over the period, way lower around 3 to 5 years after the primary buyout. than other strategies, that reach over 11% for primary buyouts or 15% for growth strategies. This resilience is furthermore illustrated in Exhibit 13, which shows the proportion of funds that D Faster Distribution to Paid-In Secondaries have a faster Distribution to Paid-In (DPI) ratio than other private equity strategies as shown in Exhibit 14. Based on the past 10 years’ vintages (2005-2016), it takes an average of 6-7 years for secondary funds to reach a 1.0x DPI, compared to 8 years for buyout and growth funds and 10 years for funds of funds. Cash is returned more quickly, significantly reducing capital at risk.

Exhibit 14 Average fund distribution (DPI) by strategy

2005-2016 vintages; Source: Preqin

18 - Opportunities in the European Private Equity Secondary Market E Attractive risk-return

The risk-adjusted performance of secondaries Exhibit 15 has historically proven to be higher than other Risk-return profile and relative size of private standard private equity vehicles such as equity strategies buyouts and funds of funds (Exhibit 15). Return and risk are respectively assessed by the average net IRR and the standard deviation of net IRR, respectively based on vintages from 2005 to 2015. The concept of risk-return profile is further outlined in Section III. of this document.

Several secondary fund managers, depending on how conservative they are, may apply leverage at the deal and/or fund level in order to enhance returns. However, it should be noted that leverage directly affect risk-adjusted returns.

In addition to investment strategies, the level of leverage used in funds should be carefully assessed as part of the risk-related due diligence investors conduct when outsourcing assets to third-party asset managers as third- Note: for vintage 2005-2016 as of September 2019 party leverage adds to the leverage already Source: Preqin embedded at the underlying company’s level.

WHAT INVESTORS SAY

To make the most of secondaries, sophisticated institutional investors, experienced in private equity investments have developed bespoke secondary strategies. The majority use secondaries tactically, to support a sound long-term portfolio of primary funds with a strategic asset allocation. Their private equity allocation target generally includes a 20% to 30% share of secondaries to counterbalance their primary commitments. Other investors, generally new to the private equity asset class, prefer to concentrate only on secondaries. In this way, they maximize their exposure and have a sense of control as they can see the actual assets in their portfolios.

“In order to diversify our private equity portfolio, we started looking into different strategies such as co-investment and secondaries. We do not have the in-house capacity to do this so we outsource to specialised third-party asset managers. We are very careful to select specialised secondary fund managers, as this is a segment that requires specific expertise.” French insurance company

“Our strategy is to diversify vintages and underlying fund strategies. To do so, we have invested in pan-European secondary private equity funds and are very satisfied with the performance.” French insurance company

“70% of our private equity investment goes to secondaries as we want to smooth the J-curve effect while generating high returns.” French bank Source: INDEFI

Opportunities in the European Private Equity Secondary Market - 19 ATTRACTIVENESS OF SECONDARY PE INVESTMENTS 3 ACROSS ECONOMIC CYCLES

This section was authored by Oliver Gottschalg, Professor at HEC Paris.

Biography

Oliver Gottschalg holds a Wirtschaftsingenieur Diploma from the University of Karlsruhe, an MBA from Georgia State University and a M.Sc. and Ph.D. degree from INSEAD.

His current research focuses on the strategic logic and the performance determinants of private equity investments. A second stream of work looks at the implications of employee motivation for firm performance in different settings. In parallel to his faculty position at HEC, he is affiliated with INSEAD as a visiting researcher and the coordinator of the HEC Buyout Research program.

His work has been published in leading academic journals and in various publications for practitioners. He regularly presents his research at academic conferences and private equity symposia and serves as an advisor to leading investors in the private equity industry. At HEC, he teaches a core course on business strategy and offers an elective on Management Buyouts.

Collaboration with Idinvest

As part of Idinvest’s thoughts on the relative performance of the secondary market and due to the current pandemic crisis, the firm wished to collaborate with Oliver Gottschalg to gather empirical data in order to highlight and demonstrate the attractiveness of the private equity secondary asset class across economic cycles.

A Executive Summary

The present study empirically explores the attractiveness of different sub-asset classes within the private equity (PE) category across different economic cycles, with a particular focus on Secondary PE Investments. Based on historical information on the end-of-life performance of the largest available sample of private equity funds, as well as data on cash flow and the net asset value fluctuation over time for such funds, we identify the degree to which the overall attractiveness of private equity varies with economics cycles, and explore differences among sub-strategies within private equity across these cycles. We pay particular attention to the cash flows pattern and return profiles of private equity funds investing or being raised around the global financial crisis (GFC) to gain insights and how a major and widespread crisis affected cash flows and long-term return profiles.

The results of the empirical analysis point to the overall attractiveness of private equity, in particular during difficult economic times. They further document differences in the risk-return profile of different private equity strategies, and in particular point to the attractiveness of secondary fund investments during economic downturns. This concern the risk-return profile of the funds based

20 - Opportunities in the European Private Equity Secondary Market on their end of life performance as well as their cash flow characteristics in the short and medium term subsequent to the crisis.

Finally, we explore the supply-dynamics in the secondary PE fund market over time and find the supply-demand ratio to be comparable today to where it was a decade ago as both supply and demand increased substantially. We further fail to observe any empirical link between this supply-demand ratio and average secondary PE returns over time and hence no support for the view that that the structural features of secondary PE investments have changed since the GFC. Taken together, these findings support the view that a strategy of a relative overweighting of private equity within the portfolio, and in particular of secondary private equity fund investments within the PE allocation, maybe an attractive strategy for limited partners in the current economic environment. B PE Returns across economic cycles As a starting point of our analysis, we explored Exhibit 16 the historic link between private equity returns Average total return multiples (TVPI) for and economic cycles. To this end, we measured secondary and buyout for every of the observation period the 12-month stock market return in a given year based on return data on the MSCI ACWI from Capital- Secondary Year MSCIACWIChg_1Y Buyout TVPI IQ. We also gathered data on the average TVPI total return multiples (TVPI) for different types 2005 1.132913913 1.39 1.672857 of PE funds raised in a given “vintage” year based on information from Preqin. A correlation 2006 1.088253901 1.343125 1.614516 analysis between annual stock market returns 2007 1.187804799 1.487857 1.764775 and average PE vintage year returns reveals a 2008 1.096413714 1.662778 1.834302 negative correlation between12-month stock 2009 0.564598522 1.794167 1.925208 market return in a given year and average PE 2010 1.31489044 1.586923 1.873333 returns for vintages from that year (Exhibit 16). 2011 1.104194496 1.613125 1.926032 This suggests that historically the most 2012 0.905849262 1.517059 1.772625 attractive PE fund vintages were those funds 2013 1.134352776 1.440526 1.563514 raised immediately subsequent to times of 2014 1.202395668 1.51625 1.522805 economic contraction. We see that this overall 2015 1.020976625 1.5 1.357312 finding holds for several sub-strategies within 2016 0.957422325 1.356897 1.185385 the PE segment, and in particular for Primary Buyout funds and for Secondary PE funds. This Correlation (MSCI chg on TVPI) -0.42263 -0.06075 data suggests that historically those investors who chose to continue to commit to PE, and Source: Capital IQ, Preqin to possibly even overweigh PE during difficult economic times enjoyed greater returns.

Differences in the cash flow pattern over time (J-curve) of PE funds across C economic cycles

The cash flow pattern of PE funds over time, with an initial dominance of negative cash flows during the investment period, which are subsequently (over-) compensated by positive cash flows during the post-investment period typically follows the so-called J-curve shape. Due to their structural differences, each PE sub-strategies have different average shape of this “J-curve”.

Opportunities in the European Private Equity Secondary Market - 21 Exhibit 17 Private equity strategies cash flow profile – all vintages

Source: Preqin

Exhibit 17 shows the shape of these J-curves for sub-strategies of PE funds based on cash flow data from Preqin for all available vintage years. We observe, for example, that primary buyout offer the greatest average end-of-life cash returns, while secondary funds have a lower level of maximum capital deployment (the vertex of the curve) and a shorter payback period (the breakeven point where the cumulative cash flows become positive). It is interesting to explore how the shape of these curves differs across economic cycles. To this end, we have isolated PE funds from vintages 2008-2010 to assess how the J-curve of funds that start their activity shortly after an economic crisis is altered by the crisis.

Exhibit 18 Private equity strategies cash flow profile – 2008-10 vintage comparison

Source: Preqin

Exhibit 18 shows that the J-curve Pattern is substantially changed by economic conditions. In line with the prior finding that PE funds raised post-crisis offer attractive returns we see also here that the 10-year cash returns for most fund types are greater for the post-crisis vintages than what was the case historically (compare, for example, the .35 mean BO in year ten from Exhibit 17 with the 0.29 from Exhibit 18). However, not all fund types are affected in the same way. The impact of the post-downturn scenario is particularly pronounced (and favorable) for the secondary PE funds. The structurally attractive features of these funds (flattened J-curve and earlier breakeven point compared to other sub-strategies) are even more visible for the post-crisis vintages. At the same

22 - Opportunities in the European Private Equity Secondary Market time, the end-of life (here: 10 year) cash returns of secondary PE funds are greater than for all other sub-strategies, and even than for primary PE funds which historically has greatest cumulative cash flows from year 8.5 on. This makes secondary PE funds raised post crisis dominantly superior to other sub-strategies as far as the cash flow pattern is concerned, as historically they deployed capital more rapidly and offered faster and greater cash distributions over the ten-year observation period.

Differences in the end-of-live risk-return D profile of PE Funds across economic cycles

One way to compare different PE sub-strategies with respect to their risk-return profile is to assess average returns, as well as the return distribution and in particular the downside risk for sample of sufficiently mature funds at the end of their life. To this end, we gathered data on 4,021 PE funds from vintages 2005 to 2016 from Preqin. Results from all vintages reflect the structural differences between single-fund strategies (buyout and venture) with greater average returns, but also a much higher return dispersion and in particular greater downside risk, while comingled vehicles, such as fund of funds and secondary funds offer more stable returns at lower average returns (Exhibit 19).

Exhibit 19 Private equity returns by strategy – vintages 2005-2016

Benchmark Stage Avg Of Net St Dev Of Net Avg Of Net St Dev Of Net Count Of Fund Count Of Fund Default Ratio Min Of Net Multiple (X) Multiple (X) IRR (%) IRR (%) Default Multiple (X)

Buyout 1.63 0.62 15.09% 14.81% 1,034 100 9.67% 0

Funds of Funds 1.59 0.43 12.31% 6.43% 687 16 2.33% 0.29

Infrastructure 1.38 0.47 14.26% 38.92% 209 24 11.48% 0.13

Real Estate 1.39 0.49 10.69% 13.91% 1,193 162 13.58% 0

Secondaries 1.50 0.31 17.84% 13.44% 203 6 2.96% 0.67

Venture 1.66 1.27 12.74% 28.69% 695 147 21.15% 0.03

Source: Preqin

Interestingly, also this pattern is different across economic cycles. If we focus on vintages 2007 and 2008, we see that the average IRR of primary buyout and secondary funds are identical (at 11% and 14% respectively for 2007 and 2008 for both fund types), while the secondary funds offer much lower dispersion returns and in particular a much lower downside risk (Exhibit 20).

Exhibit 20 Private equity returns by strategy – vintages 2007-2008

Vintage Benchmark Stage Avg Of Net Multiple (X) St Dev Of Net Avg Of Net St Dev Of Net Count Of Fund Min Of Net Multiple Default Ratio Multiple (X) IRR (%) IRR (%) (X)

2007 Buyout 1.71 0.61 11.36% 9% 101 0.4 15%

2007 Fund of Funds 1.64 0.44 9.05% 4% 60 0.29 5%

2007 Secondaries 1.42 0.24 10.94% 5% 9 0.92 11%

2007 Venture 1.89 1.40 9.24% 15% 60 0.07 40%

2008 Buyout 1.80 0.57 13.92% 10% 77 0.51 9%

2008 Fund of Funds 1.81 0.45 13.17% 6% 61 0.82 5%

2008 Secondaries 1.68 0.44 13.82% 5% 13 1.29 0%

2008 Venture 1.51 0.97 7.35% 15% 36 0.13 50%

Source: Preqin

Opportunities in the European Private Equity Secondary Market - 23 “Supply and Demand” dynamics for E secondary PE investments over time

One widespread hypothesis regarding the secondary PE market is the view that the historically attractive returns were driven by the illiquid market for PE fund stakes and the limited capital available to acquire such stakes. In light of the substantial increase in the level of secondary PE fundraises and (relatedly) the levels of “dry powder” available to secondary PE funds in recent years, some wonder to what extent the “Supply and Demand” dynamics for secondary PE investments have changed and to what extent this may have an impact on the expected future returns to secondary PE funds. While future returns are inherently unknown, we can explore this hypothesis in two ways. First, we try to approximate the “Supply and Demand” dynamics for secondary PE investments over time. To this end, we gather PE fundraising information from Preqin for different fund types and vintages. We then approximate the “supply of Secondary Capital in a given calendar year” by measuring the cumulative fundraising activity of secondary PE funds over the four prior years. Similarly, we approximate the opportunity set for demand for Secondary Capital in a given calendar year by measuring the cumulative fundraising of primary BO funds over the 4-8 prior years.

Exhibit 21 “Supply and Demand” dynamics for secondary PE investments over time

Year Demand ($) Supply ($) Ratio Correl with TVPI

2008 328,247.31 54,774.14 17% -6%

2009 474,353.48 70,097.42 15%

2010 630,026.79 77,097.42 12%

2011 817,425.00 55,280.26 7%

2012 959,362.64 60,848.67 6%

2013 959,649.06 66,059.39 7%

2014 955,309.90 64,002.36 7%

2015 924,192.22 88,260.26 10%

2016 788,420.41 106,494.26 14%

2017 637,683.57 117,578.89 18%

2018 620,731.83 123,021.97 20%

2019 730,089.67 110,139.59 15%

Source: Preqin

Exhibit 21 shows the results of this analysis for the years 2008 to 2019. Our data shows that indeed the Supply of Secondary Capital in a given calendar year has indeed more than doubled over the past 12 years. At the same time, however, the opportunity set for demand for Secondary Capital in a given calendar year has increased as well. The two values do not move in a correlated fashion and the ratio of “supply to opportunity set of demand” changes over time. Interestingly, however, as of 2019, this ratio is exactly at the same level of 2009. Hence the “Supply and Demand” dynamics for secondary PE investments seems to be quite similar today to where they were shortly after the outbreak of the GFC, and in particular we do not find any evidence that these supply- demand-dynamics are any less favorable today than during the GFC.

We can further explore the link between this Demand-Supply Ratio over time and the returns to

24 - Opportunities in the European Private Equity Secondary Market Secondary PE funds raised in a given year. This would allow us to empirically explore if there is a “money chasing deals” effect in the secondary PE fund stake market. However, our data suggest a non-correlation between capital pressure in secondary market and secondary returns and hence we do not find any support for such an effect. (See Exhibit 21).

In summary, our results point to the overall attractiveness of private equity, in particular during difficult economic times. They further document differences in the risk-return profile of different private equity strategies, and in particular point to the attractiveness of secondary fund investments during economic downturns. This concerns the risk-return profile of the funds based on their end of life performance as well as their cash flow characteristics in the short and medium term subsequent to the crisis. Finally, we explore the supply-dynamics in the secondary PE fund market over time and find the supply-demand ratio to be comparable today to where it was a decade ago as both supply and demand increased substantially. We further fail to observe any empirical link between this supply-demand ratio and average secondary PE returns over time and hence no support for the view that that the structural features of secondary PE investments have changed since the GFC. Taken together, these findings support the view that a strategy of a relative overweighting of private equity within the portfolio, and in particular of secondary private equity fund investments within the PE allocation, may be an attractive strategy for limited partners in the current economic environment.

Opportunities in the European Private Equity Secondary Market - 25 SECONDARY MARKET 4 OUTLOOK

The secondary market is maturing, and has developed over time, gradually shifting from LP-led transactions limited to the opportunistic sale of LP interests in a portfolio of funds to a secondary buyer to more and more GP-led transactions in response to various liquidity needs. These new complex types of transactions have emerged, initiated by GPs, to provide their existing LPs with different liquidity options while further managing the portfolio to generate higher performances.

This type of transactions requires skills in sourcing, valuing, and structuring the best deals to deliver performance. As few institutional investors have the in-house capacity to execute such deals but most of them decide to rely on third-party specialized PE secondary managers.

A Three main types of transactions Initially, secondary transactions were merely opportunistic purchases of LP interests in private equity funds or portfolios of funds. Today, to meet the growing needs of sellers, the secondary market has matured and proven innovative in deal structuring.

Three dominant transaction types have emerged: LP-led transactions, GP-led transactions, and direct secondaries. Exhibit 22 highlights how these transactions work by identifying players (LPs, GPs, companies, secondary managers, etc...) and their interactions.

Exhibit 22 Presentation of the three main types of secondary transactions: LP-led; GP-led and direct secondary transactions

Secondary fund

Exiting Secondary fund LP Money Money transfer transfer

The purchaser takes over Newco LP primary commitment

Transfer of assets to the Newco, GP generally remains the same Portfolio companies

LP-led transactions: Sale of an interest or a portfolio GP-led: GP initiates the sale of a set of PE assets to offer of interests in a single fund or a portfolio of funds. The liquidity options to its existing LPs, while securing additional purchaser becomes a replacement LP in the fund or funds time and funding to maximize the value of its unrealized in question. portfolio.

Source: Idinvest

26 - Opportunities in the European Private Equity Secondary Market Direct secondaries: Sale of an interest in a direct private equity investment or a portfolio of direct private equity investments to a new third-party investor. The buyer either manages the investment/ portfolio or appoints a manager (typically a direct secondaries manager) to do so.

Source: Idinvest

LP-led transactions

LP-led transactions consist in a private equity fund investor selling its interest in a fund or a portfolio of funds to another investor. The purchaser takes over the original LP’s commitment in the fund or portfolio of funds. The advantage of these transactions is that secondary investors can get exposed to promising companies with significant residual value creation that the LP may not have identified as such or that his portfolio reshuffling oversees. These plain vanilla transactions initiated by the LP are the most common type of transaction in the secondary market. GP-led transactions

More ‘structured’ secondaries have emerged recently as acquirers develop solutions to meet more complex seller requirements. These transactions are led by the general partner and referred to as GP-led. Working with a secondary specialist, the GP initiates and manages the sale of a set of PE assets to offer a liquidity option to its existing LP base while securing additional time and funding to maximize the value of its unrealized portfolio. Existing LPs have the option to sell their stakes in the fund or to roll-over their initial investment, while other secondary investors are brought in to the investment table (via a call for tender or a new investment vehicle) to restructure the portfolio. Secondary investors therefore aim to recapitalize existing fund portfolios, allowing the GP to extend the fund’s life while facilitating liquidity options for current fund LPs. These transactions are quite complex as they entail combining various interests and require strong knowledge of the portfolio as well as engineering capacities. Direct secondaries

Direct secondaries involve the purchase of underlying portfolio companies directly held by a private entity (generally a financial institution or a large corporate) whose priorities and interests have changed. This is a special form of GP-led transaction. The new investor takes over the management of the underlying companies, leaving the previous investor free to focus on other assets and portfolios. The underlying companies are transferred to a new vehicle created by a secondary asset manager and managed by a new GP. This type of transaction gives secondary investors the opportunity to reshape the financial structure of the underlying companies.

Opportunities in the European Private Equity Secondary Market - 27 Increasing prevalence of GP-led B transactions

LP-led deals still represent 70% of total Exhibit 23 transacted volumes with plain vanilla LP- Secondary transaction volume by type (as %) led transactions driven by demand for well- known funds. They have been proportionally reduced over time as more complex GP-led transactions and direct secondaries grow at a faster pace offering an additional exit route for LPs. Alongside these highly competitive LP- led transactions, GP-led deals offer investors privileged access to bespoke transactions allowing faster value creation relying on both secondary buyers’ and GPs’ expertise.

As the secondary market matures, some key Source: Greenhill success factors have emerged for secondary asset managers. Having both primary and secondary capabilities positions the manager in a favourable sourcing position regarding the GP universe. Primary investment capacities allow secondary practices to build valuable relationships with GPs. It creates leads for secondary investments and also allows to firm up the due diligence process when faced with a large portfolio of fund stakes thanks to existing market knowledge and primary intelligence.

Secondaries represent a highly complex activity for LPs and remain underdeveloped in portfolios despite their benefits. Unfortunately, most LPs do not have in-house expertise to access the secondary market. Only a select few institutional investors have the internal capacity to execute these complex transactions while others outsource this strategy to a third-party asset manager well versed in the financial engineering, sourcing and execution of secondary transactions. Choosing the right partner is thus a key element to access the secondaries asset class.

Regarding GPs active on the secondary market, the essential requirement is having an experienced, specialized team with a proven track record dedicated to the secondary market as these investments require sourcing skills, valuation and structuring capacities to deliver compelling secondary returns. Private equity managers with capacity in both primaries and secondaries have therefore a substantial advantage when it comes to sourcing and executing the best opportunities.

28 - Opportunities in the European Private Equity Secondary Market Geographies: An increasingly C secondary market

Exhibit 24 The PE secondary market landscape varies from Secondary sellers geography in 2019 (as %) one country to another. The first secondary fund was raised in the US in 1988, and since then, many other specialized GPs have appeared in North America, raising increasingly larger funds. The US therefore remains a dominant geography, but Europe and Asia are beginning to seize a larger share, with c.32%5 of transaction value in 2019. Indeed, the past few years have been marked by several large transactions in Europe and Asia, with a flow of interesting opportunities continuing to build up. These regions should continue to grow as they present a deep pool of opportunities (number of companies, number of PE primary transactions, etc.) and as GPs are increasingly addressing the secondary market Source: Campbell Luytens but not yet in the magnitude of North American.

Strategies: Buyouts attracting more D and more secondary funds

If investors trade on the secondary market across all types of private equity strategies (buyout, distressed, growth equity, mezzanine, venture capital, infrastructure and real estate), mega and middle-market buyout funds dominate the market and are on the rise among preferred strategies. Initially, most of these transactions took place in the US, but today, transactions in the European small-cap and mid-cap segments offer considerable secondary opportunities.

Exhibit 25 Breakdown of secondary private equity by strategy in 2019 (World), as %

LP-led transactions, broken down by transaction value Sources: Public data, Idinvest estimates

5Source: Campbell Lutyens Opportunities in the European Private Equity Secondary Market - 29 New developments in secondary E transactions

The secondary market is evolving quickly, and GPs have introduced a number of innovations. Recent trends reveal the growing use of new instruments: preferred equity financing and stapled secondaries.

Preferred equity is a financial instrument, similar to mezzanine financing, enabling LPs to maintain their exposure to a fund and gain liquidity, without selling their stake. It is a flexible instrument for meeting liquidity needs.

Stapled secondaries combine the purchase of an existing pool of private equity assets with a commitment of primary capital to the GP’s next fund.

30 - Opportunities in the European Private Equity Secondary Market RESILIENCE OF THE 5 SECONDARY MARKET IN THE FACE OF A RECESSION AND DEVELOPMENT PROSPECTS

Secondaries have shown outstanding historical to support economic and financial losses. performance globally since their inception two decades ago. The private equity secondary • As any market, the secondary market is market is still relatively small, representing taking a hit in these uncertain times but around 6% of total private equity assets as we expect the rebound to be quick and of Q1 20206. Given the intrinsic differences healthy given the fact that the underlying between public and private equity markets’ market is still in its growth/catch-up phase, metrics, it is likely that secondary private equity compared to the PE market. Following the will remain smaller than its public counterpart. GFC, the secondary market rebounded However, the private equity secondary market relatively quickly, surpassing pre-crisis has seen significant growth. In 2019, the volume levels and normalized pricing returned over of transactions has reached €88 billion, a new the course of 2010. record high. • GP-led secondary activity is likely to resume This growth is partly due to the expansion of in the near-term as sponsors tap the robust the primary markets. Commitments of investors secondary market as a strategic capital to the primary PE market has reached $5.1 source. trillion in Q1 20206. However, it also reflects the increasingly active approach investors • Lastly, investors are likely to continue using have been taking in managing their alternative the secondary PE market to adjust, portfolios. Secondaries offer flexibility combined increase and monitor their PE exposure, with resilient exposure. They also benefit from as it gives them room to grow with PE conservative valuations that will not run afoul of assets making up around 4% of total assets future changes in accounting standards (IFRS) on average in Europe. or improved market transparency. Beyond this growing demand, the underlying PE Now, how will the market evolve in the coming market offers many opportunities to investors years? given its diversity. In particular, the small and mid-cap segments in the European market • While the global economy has come to a offer a broader choice than the equivalent standstill during the Covid-19 pandemic, public market and the US PE market (number of financial sponsors and their investors are companies, underlying sectors, etc…). actively assessing the impact on their portfolios and future liquidity needs. Greater resilience and a broad and maturing underlying market are key factors that will • Across the globe, central banks undoubtedly strengthen future growth in the PE and governments have coordinated secondary market, especially given the current unprecedent fiscal and monetary stimulus conditions of financial markets.

6 Source: Preqin, as of April 2020

Opportunities in the European Private Equity Secondary Market - 31 Indeed, in an economic downturn, markets typically witness increased volatility stemming from an increasing uncertainty surrounding earnings slowdown. This, in turns, results in lower public valuations as investors re- price market risk. In such conditions, liquidity requirements and portfolio management motivate LPs to sell part of their PE portfolio in a narrower bid-ask spreads environment, resulting in a larger deal flow. This seller-driven market represents an attractive opportunity for secondary fund managers able to acquire quality asset at favourable valuations. Secondaries can therefore be a useful tool for investors to monitor market timing through the various economic and financial cycles and build robust portfolios benefitting from this counter cyclical effect.

Nevertheless, in order to weather these cycles as effectively as possible and benefit from potential downturn, it requires an opportunistic, selective investment approach combined with dedicated capacities and expertise in secondary strategies.

32 - Opportunities in the European Private Equity Secondary Market Glossary of terms

Terms Definition

Leveraged buyout funds invest in mature businesses, usually Buyout taking a controlling interest. Investment often involves the use of leverage to enhance the rate of return. Sale of an interest in a direct private equity investment or a portfolio of direct private equity investments to a new third- Direct secondaries party investor. The buyer either manages the portfolio or appoints a manager (typically a direct secondaries manager) to do so. DPI (Distribution to Paid- The proportion of called-up capital that has been distributed In) or returned to LPs.

Sale of an interest or a portfolio of interests in funds that are Early secondary almost completely unfunded.

Investment strategy in which a fund invests in other types Fund of funds of funds. The different underlyings are funds instead of companies. Sale initiated by a GP of a set of PE assets to offer liquidity GP-led transaction options to its existing LPs, while securing additional time and funding to maximize the value of its unrealized portfolio. Targets profitable, but still maturing, investee companies with Growth significant growth potential . Investment horizons are mid- to- long-term, similar to those seen with buyout funds. Performance metric based on cash flows realized and the valuation of the remaining interest in the partnership. IRR is IRR (Internal Rate of Return) an estimated figure, given that it relies not only on cash flows realized but also the valuation of unrealized assets. Borrowed money that amplifies the risk-return profile of an Leverage investment and in turn amplifies any subsequent gains and losses. Sale of an interest or a portfolio of interests in a single fund or LP-led transaction a portfolio of funds. The purchaser becomes a replacement LP in the fund or funds in question. Specialized form of debt often used in leveraged buyout Mezzanine activity, where it fills the gap between equity capital and senior debt contributions. Market value of a fund’s total net assets (total assets minus NAV (Net Asset Value) liabilities).

A secondary transaction where the buyer of the LP interest agrees to commit fresh, primary capital to a new fund being Stapled secondaries raised by the GP of the fund in which the interest was purchased. Pools of capital that typically invest in small, early-stage and Venture Capital emerging businesses that are expected to have high growth potential but have limited access to other forms of capital.

Opportunities in the European Private Equity Secondary Market - 33 34 - Opportunities in the European Private Equity Secondary Market This document has been prepared by Idinvest Partners and/or its partners, and is intended solely for the recipient. It is for information purposes only and should in no way be construed as a solicitation or an offer to buy or sell financial instruments, nor as legal, tax or financial or any other kind of advice. No investment decisions should be based solely on the information contained in this document. This document has not been approved by a regulatory body. Recipients are encouraged to contact their own advisers for an analysis of any information contained in this document. The information presented does not purport to be exhaustive relative to the recipient’s requirements.

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Opportunities in the European Private Equity Secondary Market - 35 Idinvest Partners

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