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PSERS Private Markets Fourthconfidential Quarter Report Table of Contents

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PSERS Private Markets Fourthconfidential Quarter Report Table of Contents Hamilton Lane PSERS Private Markets FourthConfidential Quarter Report Table of Contents Market Hamilton Lane Market Update 2 Update Portfolio Update 9 Executive Private Markets Portfolio Quarterly Update Summary Portfolio Snapshots Activity Commitment Activity 13 Update Cash Flow Summaries Time Horizon Performance vs. Benchmarks Performance Net Value Bridge 18 Update Net Value Drivers Top Holding Exposures Exposure Diversification by Strategy & Vintage Year Exposure by Relationship Private Markets Portfolio Impact on 22 Update Pennsylvania Holdings Diversification Performance Summary by Investment 28 Appendix Disclosures ConfidentialContact Information Market Update | Executive Summary | Activity Update | Performance Update | Exposure Update | Appendix 12/31/2017 | Proprietary and Confidential Page 1 Where Are We Now? Trends Topping the Charts Private Equity Hoards $1 Trillion in Cash - Dow Jones, March 2018 Private Equity Receives Record Amount of Capital - Financial Times, April 2018 Treasury 10-Year Yield Tops 3% for First Time Since 2014 - Bloomberg, April 2018 Private Equity Funds Active in Market Hit Record - Financial Times, April 2018 Another banner year? After 1Q, VC is already on pace to break records - PitchBook, April 2018 Valuations for Private and Public Companies Are Narrowing - Financial Times, April 2018 S&P Warns Leveraged Loan Market Could ‘Turn Sharply’ - Pension & Investments,Confidential April 2018 Market Update | Executive Summary | Activity Update | Performance Update | Exposure Update | Appendix 12/31/2017 | Proprietary and Confidential Page 2 2018 Fundraising Likely to Stay Near Record Levels Global Private Markets Fundraising by Geography $900 2.5% What will 2018 $800 fundraising bring? 2.0% $700 Capitalization Market World MSCI % of • Early days, but no $600 1.5% sign of a hangover $500 given pipeline $400 USD in Billions 1.0% • In Q1 2018, aggregate $300 capital of $138.5 million $200 0.5% raised $100 $0 0.0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 North America Europe - Western Global Asia ROW ex Asia % MSCI World Source: Cobalt (March 2018) Time Spent in Market Private Equity Funds Closed in 2013 – Q1 2018 100% 4% 16% 90% 22% 22% Fast-paced fundraising continues 28% 24% 18% 80% 17% 11% • Prevalence of ‘first and final’ 70% 19% 18% 15% fund closings 60% 26% 17% 21% 14% • 51% of funds closed in 2017 50% 15% 15% spent a year or less in market 40% 20% 17% 15% More than 24 Months • Funds spending less than 6 18% 21% 30% 19-24 Months months in market growing Closed of Funds Proportion 14% 46% 20% 13-18 Months 30% 31% 26% 26% 7-12 Months 10% 15% 6 Months or Less 0% 2013 2014 2015 2016 2017 Q1 2018 Source: Preqin (1Q 2018 ConfidentialDate of Final Close Quarterly Update) Market Update | Executive Summary | Activity Update | Performance Update | Exposure Update | Appendix 12/31/2017 | Proprietary and Confidential Page 3 Trending Up: North America Deal Activity Deal activity led by the Middle Market Aggregate Value of Private Equity-Backed Buyout Deals By Deal Value ($B); By Region Q1 2014 - Q1 2018 $120 Q1 2018: 1,023 PE-backed buyout $100 deals for aggregate value of $116B $80 • North America deal value of $76B represented 66% of total $60 • Two mega deals: Keurig and $40 Dr. Pepper merger at $21B and Thomson Reuters $20 Corporation takeover at $17B $0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2014 2015 2016 2017 2018 North America Europe Asia Rest of World U.S. Private Equity Activity Source: Preqin By Size ($B) $700 Strong 2017 for U.S. middle market $600 deals (sub $1B TEV) $500 • $338B in 2017 $400 • 2017 represented records for both $300 deal count and value $200 • $54B invested in Q1 2018 $100 $0 2010 2011 2012 2013 2014 2015 2016 2017 Q1 2018 Under $25M $25M-$100M $100M-$500M $500M-$1B $1B-$2.5B $2.5B+ ConfidentialSource: Pitchbook (April 2018) Market Update | Executive Summary | Activity Update | Performance Update | Exposure Update | Appendix 12/31/2017 | Proprietary and Confidential Page 4 The New Norm? Pricing >10x U.S. Purchase Price Multiples 12x Plenty of capital for deals, but market 11x is fully priced: purchase price multiples staying above 10.0x 10x • Middle Market pricing continues to 9x outpace Large Corporate; a trend 8x seen since 2015 7x 6x 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 1Q 2018 Large Corporate Middle Market Source: LCD, an offering of S&P Global Market Intelligence (April 2018) Public and Private Company Valuations Enterprise Value/EBITDA (ratio) 20 Private deal pricing increases 15 • Gap between prices paid for private and public companies narrows in 2017 10 • Investors paid 12.5x for private companies vs. 16.8x for public companies 5 in 2017 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Russell 2000 Private Equity Deal Multiples ConfidentialSource: Boston Consulting Group (April 2018) Market Update | Executive Summary | Activity Update | Performance Update | Exposure Update | Appendix 12/31/2017 | Proprietary and Confidential Page 5 Debt: Make it a “Lite” U.S. Leveraged Loan Volume By Capital ($B) $700 Debt still in strong supply $600 • 2017 was record year for volume at $500 $650B $400 • Three months into 2018 volume $300 already at $218B $200 $100 $0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 YTD 2018 Pro Rata Institutional Source: LCD, an offering of S&P Global Market Intelligence (April 2018) U.S. Covenant Lite Loans In $B; Percent of Leveraged Loan Market Covenant lite loans accounted for $500 100% 75% of the leveraged loan market $450 90% in 2017 $400 80% $350 70% • Highest volume on record in last $300 60% 18 years $250 50% $200 40% $150 30% • Better financial health across $100 20% companies in recent years $50 10% $0 0% • How long will this credit cycle last? 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 YTD 2018 Cov-lite Volume Cov-lite % ConfidentialSource: LCD, an offering of S&P Global Market Intelligence (April 2018) Market Update | Executive Summary | Activity Update | Performance Update | Exposure Update | Appendix 12/31/2017 | Proprietary and Confidential Page 6 Despite Sizeable Exit Activity... Market moving towards being a net investor? Given buyout liquidity ratios converging to 1.0x Global Buyout-Backed Exits $500 1500 $464 $366B exit activity in 2017, uptick $429 from lower value and count seen $353 $400 $366 in 2016 $337 $255 1000 • Lower liquidity value expected $300 $276 $264 $252 Count $241 – according to Bain: by 2017, $233 more than 80% of exits $ in Billion $200 $175 $149 500 involved companies that PE $82 firms had acquired from 2009- $100 $65 $68 $52 $44 on $0 0 • Value in North America relatively 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 steady last four years North America Europe Asia-Pacific Rest of World Total Count Source: Bain, Dealogic (March 2018) Annual Liquidity Ratio by Strategy Liquidity ratios see (Distributions/Contributions) movement • VC and Credit rebound to >1.0x ratio • U.S./EU Buyout see declines, but hold on to be net distributors • Note, year is young but Q1 2018 liquidity strong ConfidentialSource: Hamilton Lane Data via Cobalt (January 2018) Market Update | Executive Summary | Activity Update | Performance Update | Exposure Update | Appendix 12/31/2017 | Proprietary and Confidential Page 7 Focus Topic: What is Your IRR Telling You? In today’s world of credit line usage...it’s complicated Know your numbers: Credit Line Fees GP Theoretical “Crossing Lines - Deals Gross IRR (Credit Line) Using Fund Line” 34% 1.5x --- Diligence Gross IRR (No Credit Line) “Just the Deals, Please” 23% 1.4x --- --- Actual Net LP IRR (Credit Line) 22% 1.3x “Cash Experience” Pro Forma for Credit Line Net LP IRR (No Credit Line) 15% 1.3x --- “The Way it Was” Pre Credit Lines ConfidentialThe IRR comparisons shown above are for illustrative purposes only Market Update | Executive Summary | Activity Update | Performance Update | Exposure Update | Appendix 12/31/2017 | Proprietary and Confidential Page 8 Portfolio Update Overview • Committed Capital of $30,281.2M to 206 Active Partnerships across 69 GPs • Unfunded Commitment of $4,724.4M and NAV of $7,642.4M as of December 31, 2017 • The Portfolio made 3 new investments ($300.0M) during the quarter Activity • The Portfolio liquidated 7 investments during the quarter • Cash flow positive for the quarter as distributions of $845.1M outpaced contributions of $334.8M • Cash flow positive for the year as distributions of $2,808.7M outpaced contributions of $1,316.3M • 11.41% Since Inception Net IRR remained relatively steady from last quarter • 134 investments (63%) generated Net Value gains for the quarter, for an aggregate Portfolio Net Value gain of $365.4M Performance • Platinum Equity Capital Partners III, L.P. appreciated $21.8M during the quarter • Platinum Equity Capital Partners II, L.P. depreciated $28.0M during the quarter • Portfolio Since Inception IRR outperformed the Burgiss All Private Markets benchmark by 535 bps • 2015 Vintage Year investments accounted for 14% of Total Exposure as of December 31, 2017 • 2015 Vintage Year investments accounted for 12% of Portfolio NAV Exposure • Private Equity investments accounted for 67% of Portfolio NAV as of December 31, 2017 • Private Equity investments accounted for 68% of Total Exposure Confidential•Top Portfolio Holding: $86.5M - 1.0% of Exposed NAV Market Update | Executive Summary | Activity Update
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