TEACHERS’ RETIREMENT BOARD
INVESTMENT COMMITTEE Item Number: 14
SUBJECT: Private Equity – Semi-annual Performance Report, Period Ending September 30, 2015
CONSENT: ATTACHMENT(S): 1
ACTION: DATE OF MEETING: April 8, 2016 / 30 mins.
INFORMATION: X PRESENTER(S): John Haggerty & Steve Hartt, Meketa Investment Group
POLICY This item is governed by the CalSTRS Private Equity Investment Policy, (Teachers’ Retirement Board Policy Manual, Section 1000, Pg. I-1). Due to the delay in receiving partnership data, the Private Equity report is lagged by one quarter.
HISTORY OF THE ITEM On a semi-annual basis, in September and April, the Private Equity consultant reviews the performance report of the Private Equity portfolio. This report is critical to the monitoring and oversight responsibility of the Investment Committee.
PURPOSE Due to the specialized nature of the private equity asset class, the Investment Committee has retained a specialty consultant and receives a specialized performance report on the asset class. While the report includes one-year returns, as a long-term investor coupled with the long-term nature of the asset class, the Investment Committee is encouraged to focus on the three-, five- and ten-year results because they are less volatile and more indicative of the long-term performance trend of the underlying portfolio. One-year results are less meaningful in an asset class where the typical holding period for a portfolio company is four to five years.
Mr. Haggerty and Mr. Hartt of Meketa Investment Group, the Investment Committee’s private equity consultant, will present an oral report highlighting key issues across the CalSTRS Private Equity Portfolio. The portfolio data in the report is prepared by State Street Bank’s Private Edge Group with input from Meketa Investment Group; it is fully customizable to meet Investment Committee needs. Mr. Haggerty and Mr. Hartt will use this opportunity to alert the Committee of any areas of concern, needed policy revisions, or issues that warrant further review.
INV228 Investment Committee – Item 14 April 8, 2016 Page 2
RECOMMENDATION Staff recommends that, upon the oral report from Mr. Haggerty and Mr. Hartt, the Investment Committee receive the report for the record.
INV229 Attachment 1 Investment Committee - Item 14 S EMI-ANNUAL P ERFORMANCE R EPORT April 8, 2016
California State Teachers’ Retirement System Private Equity Program – Q3 2015 Open Session
MEKETA INVESTMENT GROUP
B OSTON C HICAGO M IAMI P ORTLAND S AN D IEGO L ONDON M ASSACHUSETTS I LLINOIS F LORIDA O REGON C ALIFORNIA U NITED K INGDOM www.meketagroup.com INV230 California State Teachers’ Retirement System Table of Contents Private Equity Program
1. Introduction and Executive Summary
2. Private Equity Industry Review
3. Portfolio Overview
4. Program Performance
5. Program Activity
6. Appendix Vintage Year Statistics Glossary
Prepared by Meketa Investment Group 2015 2 INV231 California State Teachers’ Retirement System Introduction Private Equity Program
Overview This report provides a review of CalSTRS Private Equity Program as of September 30, 2015 and includes a review and outlook for the Private Equity industry. CalSTRS began investing in the private equity asset class in 1989 and has built a large and diversified portfolio. CalSTRS currently has a 13% target allocation to the private equity asset class, with a range of 10% to 15%. As of September 30, 2015, CalSTRS had 354 investments in the Active Portfolio, and 106 investments in the Exited Portfolio (no remaining value). The total value of the portfolio was $18.2 billion, with total exposure (including unfunded commitments) of $27.6 billion.
Executive Summary Portfolio The portfolio is diversified by strategy, with Buyouts representing the largest exposure at 63% of total Private Equity exposure. Mega and Large buyout funds represent over 85% of CalSTRS’ Buyout exposure. United States is the largest geographic exposure at 68%. The commitments made to the 2005 – 2008 vintages represent 45% of CalSTRS total private equity commitments. There is limited remaining uncalled commitments to these vintage funds, however. Fund investments represent 94% of exposure, with the balance in co-investments. Performance The Private Equity Program has had mixed performance compared to benchmarks. The Program has outperformed on a Since Inception basis, but been mixed in intermediate periods. Expansion Equity and Mezzanine have generally outperformed, while Venture has underperformed in recent time periods. Buyout performance has been mixed. On a public market equivalent (“PME”) basis, the Private Equity Program has generated significant value. Adjusting for cashflows, the portfolio had a modest positive value increase from April 1, 2015 to September 30, 2015. Activity The Private Equity Program experienced a net positive cash flow of $3.5 billion during the second and third quarters of 2015. For the full year 2015, Staff made $3.9 billion of commitments. This compares to $2.8 billion of commitments in 2014.
Prepared by Meketa Investment Group 2015 3 INV232 California State Teachers’ Retirement System Private Equity Industry Review - Private Equity Program Buyouts
Quarterly Number and Aggregate Value of Private Equity-Backed Buyout Price to EBITDA – All Buyouts Through Q3 20152 Deals Globally, Q1 2008 - Q3 20151 1,200 120 12x Multiples at all
Aggregate Deal Value ($bn) Value Deal Aggregate time highs 1,000 100 10x
800 80 8x 600 60 6x
No. of Deals 400 40 EBITDA Multiple 4x 200 20
0 0 2x Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2008 2009 2010 2011 2012 2013 2014 2015 0x No. of Deals Aggregate Deal Value ($bn) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 YTD
Global private equity buyout activity remained relatively stable in terms of the volume and number of deals since 2010. Aggregate deal value increased substantially from lows reached in the 2008 to2009 timeframe. Buyout activity slowed in late 2015 and early 2016 due to macroeconomic concerns, falling oil prices, and reduced leverage availability. U.S. buyout pricing reached new peaks with total price to EBITDA of 10.3x as of September 30, 2015. Equity as a percent of purchase price remained in the 40% to 45% range. This remains well above the 30% equity contribution common in the 2000’s.
1 Source: Preqin 2 Source: S&P Capital IQ
Prepared by Meketa Investment Group 2015 4 INV233 California State Teachers’ Retirement System Private Equity Industry Review – Private Equity Program Venture Capital
Value of Venture Deals, Globally1 Venture Round Valuation Trends1
$200 $45 $180 $40 Late stage $160 valuations have $35 Value of venture $140 increased $30 deals has increased dramatically substantiallly $120 $25 Seed $100 $20 Series A $ Billions
$15 Millions $ in $80 Series B Series C $10 $60 Series D+ $5 $40
$0 $20 Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3 $- 2009 2010 2011 2012 2013 2014 2015 2006 2007 2008 2009 2010 2011 2012 2013 2014 1H 15
Venture Capital has been a strong investment segment in 2014 and 2015, drawing significant capital from investors. Much of this activity has been focused on later stage transactions, in part driven by increased participation of mutual funds and hedge funds seeking to invest in a company prior to an IPO. It appears that venture activity has cooled in the later part of 2015 and early 2016 with fewer transactions being completed.
1 Source: PitchBook
Prepared by Meketa Investment Group 2015 5 INV234 California State Teachers’ Retirement System Performance Private Equity Industry Review – Private Equity Program Fundraising
Global Fundraising Activity 2010 through Q3 20151 Private Equity Dry Powder vs. Commitment Pace1 1,400 5.0 1400
1,200 4.5 1200 Years of Commitment Remaining Commitment of Years 4.0 1,000 1000 3.5 800 800 3.0 600 600 2.5
Dry Powder ($ MM) Dry Powder 400 400 2.0
200 200 1.5
0 - 1.0 2010 2011 2012 2013 2014 YTD 2015
No. of Funds Closed Aggregate Capital Raised ($bn) Dry Powder Years of Commitment Remaining
Global fundraising activity remained robust in 2015, largely in line with 2013 and 2014 activity. Compared with prior years, 2015 saw increased aggregate commitments, but fewer funds closing than in 2014 and 2013. This is likely due to a higher average fund size. While total amount of “dry powder” has increased each year since 2012, General Partners have been able to deploy new commitments, thereby limiting “overhang” which stood at 2.3 years at the end of 2014.
1 Source: Preqin
Prepared by Meketa Investment Group 2015 6 INV235 California State Teachers’ Retirement System Private Equity Industry Review – Private Equity Program Limited Partners
Annual Amount Called, Distributed and Unrealized Value Proportion of Investors At, Above or Below Their Target Allocations to (As of December 31, 2014)1 Private Equity1
900 3,000 800 2,500 700 ($bn) Value Unrealized 3% 600 2,000 500 1,500 400 Above Target Allocation At Target Allocation 300 1,000 52% 45% Below Target Allocation 200 500 100 0 0 Annual Amount Called/Distributed ($bn) Called/Distributed Amount Annual
Capital Called Capital Distributed Unrealized Value
Distributions exceeded contributions in 2013 and 2014. Anecdotal evidence indicates that, during the first half of 2015, distributions exceeded contributions as well, but slowed down in the second half of 2015. As a result of the recent cash flow dynamics, many investors are below their target allocation to private equity.
1 Source: Preqin
Prepared by Meketa Investment Group 2015 7 INV236 California State Teachers’ Retirement System Private Equity Industry Review – Private Equity Program Trends and Outlook
Credit markets supporting leveraged transactions have shown signs of deterioration. High yield bond transactions and leveraged loan volumes have declined. IPO transactions have slowed dramatically. Distressed investors have been actively reviewing the energy sector for opportunities. As a result of slower market conditions, private market transaction activity is likely to decline. The pace of limited partner capital calls and distributions would follow suit. Competition among limited partners to access top quartile funds remains robust. Funds with strong track records are regularly oversubscribed and often close quickly. Pricing in the secondary market, particularly for favored buyout funds, has been strong. As a result, limited partners are increasingly utilizing the secondary market to rationalize their portfolios. General Partners are receiving increased requests for transparency on fees they charge.
- Ongoing SEC review of general partner’s disclosure of fee and allocation practices (e.g., Blackstone, Fenway Partners). - ILPA fee disclosure template recently circulated. - California proposed legislation calling for increased fee transparency.
Prepared by Meketa Investment Group 2015 8 INV237 California State Teachers’ Retirement System Portfolio Overview Private Equity Program
CalSTRS Private Equity Overview As of September 30, 2015
Percent Remaining Unfunded Total of CalSTRS Target Value Commitments Exposure Exposure Target Range Strategy1 ($ mm) ($ mm) ($ mm) (%) (%) (%) Buyouts 11,984 5,295 17,279 62.5 70 50-85 Expansion Capital 2,482 2,097 4,580 16.6 10 5-15 Venture Capital 1,477 571 2,048 7.4 5 5-15 Distressed Debt 2,048 1,308 3,356 12.1 152 5-202 Mezzanine 195 185 380 1.4 NA NA Total Program 18,186 9,458 27,644 9.53 133 10-153
The CalSTRS private equity program was within the diversification ranges outlined in the Private Equity Policy Statement. Buyout exposure is somewhat below target, and Expansion Capital and Venture are above target. The overall private equity program is below the target outlined in the CalSTRS asset allocation study and is falling below the long term target range.
1 Commitments to secondary, proactive and co-investments are allocated based on their strategy. 2 CalSTRS private debt target is combined with Distressed Debt and Mezzanine. 3 PE program Remaining Value as a percent of total CalSTRS portfolio.
Prepared by Meketa Investment Group 2015 9 INV238 California State Teachers’ Retirement System Portfolio Overview Private Equity Program
Buyout Exposure1 Fund Currency Exposure2
Pound Canadian Sterling Dollar Euro 1.1% 0.1% 12.8%
U.S. Dollar 86.0%
The CalSTRS Buyout portfolio is largely allocated to mega and large buyouts, collectively representing over 85% of overall buyout exposure. CalSTRS investments are primarily denominated in U.S. dollars with the Euro accounting for most of the balance.
1 This chart was created using the sum of reported value and unfunded commitments of the Private Equity Program’s buyout investments as of 9/30/2015. Segment size for funds is based on Preqin’s 2014 Global Private Equity Report. 2 This chart was created using the sum of reported value and unfunded commitments of the Private Equity Program’s aggregate investments as of 9/30/2015.
Prepared by Meketa Investment Group 2015 10 INV239 California State Teachers’ Retirement System Portfolio Overview Private Equity Program
1 Regional Exposure Industry Exposure 1
Other Rest of World Business Information 6.1% 12.6% Consumer Services Technology Discretionary 9.3% 20.2% Europe 9.7% 17.9% Utilities 1.1% Real Estate Healthcare 1.8% Canada 14.8% 1.2% Telecommunications 6.1% United States 68.3% Materials Industrials 3.1% 5.8% Consumer Financial Staples Energy Services 5.0% 8.7% 8.3%
The private equity program’s geographic exposure is primarily to U.S. companies, with Europe as the next highest exposure. U.S. exposure is at the lower end of the target range (65% to 85%) The PE Program is broadly diversified across industries. Information Technologies and Healthcare are the most significant industry exposures in the PE Program.
1 These charts were created using the value of the Private Equity Program’s underlying company exposure as of 9/30/2015. Source: State Street.
Prepared by Meketa Investment Group 2015 11 INV240 California State Teachers’ Retirement System Portfolio Overview Private Equity Program
Vintage Year Composition
Vintage Year (Total Commitments)1 Vintage Year (Unfunded Commitments)2
<2005 2005 2015 <2000 2006 2013 2014 2000 2.6% 3.9% 2007 5.3% 10.9% 4.1% 2012 4.5% 5.5% 5.5% 3.8% 2001 2015 2008 3.6% 2002 3.5% 26.0% 5.1% 2011 1.1% 2009 4.6% 1.5% 2003 2010 3.1% 2010 2.2% 2.5% 2004 2009 2.8% 2011 2.2% 7.2% 2008 8.8% 2005 2012 10.3% 2014 7.0% 22.9% 2007 2006 2013 13.3% 12.6% 13.5%
The PE program made significant commitments to 2005-2008 vintage years, and represents 45% of total historical commitments. However, these vintages represent a small portion of uncalled capital currently.
1 This chart was created using the total commitments of the Private Equity Program’s aggregate investments as of 9/30/2015. 2 This chart was created using the total unfunded commitments of the Private Equity Program’s aggregate investments as of 9/30/2015.
Prepared by Meketa Investment Group 2015 12 INV241 California State Teachers’ Retirement System Portfolio Overview Private Equity Program
Co-investment Exposure1 Realization Status2
Co-investments Unrealized Fully Realized 5.8% 12.8% 10.7%
Fund Investments Partially 94.2% Realized 76.6%
The PE program is substantially focused on Fund Investments, with Co-investments at less than 6% of the total portfolio. Just under 11% of investments has been fully realized as of September 30, 2015. Unrealized investments are related to those that have yet to draw capital or are in early stages of deploying capital.
1 This chart was created using the sum of remaining value and unfunded commitments of the Private Equity Program’s aggregate investments as of 9/30/2015. 2 This chart was created using the total commitments of the Private Equity Program’s aggregate investments as of 9/30/2015.
Prepared by Meketa Investment Group 2015 13 INV242 California State Teachers’ Retirement System Portfolio Overview Private Equity Program
Largest Manager Relationships As of September 30, 2015
Number Remaining Unfunded Total Total Program of Value Commitment Exposure Exposure Manager Vehicles ($ mm) ($ mm) ($ mm) (%) The Blackstone Group1 10 1,427 1,010 2,437 8.8 TPG Capital2 15 1,503 524 2,027 7.3 Carlyle Group3 6 736 398 1,134 4.1 CVC Capital Partners4 11 534 382 916 3.3 Centerbridge Capital 5 584 319 904 3.3
CalSTRS PE program has regularly committed across several vehicles offered by the managers listed above, including select co- investments. In several cases, the commitments are managed by separate teams within the manager and execute on different strategies. Blackstone, TPG, and Carlyle each received new commitments in 2015.
1 Includes three co-investments and fund investments in four GSO partnerships. 2 Includes three co-investments and fund investments in NewBridge Asia IV, TPG Asia V, TPG Growth II/III (A), and TPG Opportunities II/III (A). 3 Includes one co-investment and fund investments in Carlyle Europe Partners III/IV. 4 Includes two co-investments and fund investments in CVC Capital Partners Asia Pacific II/III/IV.
Prepared by Meketa Investment Group 2015 14 INV243 California State Teachers’ Retirement System Portfolio Overview Private Equity Program
Annual Cash Flows – Total Program Through Q3 2015
8
6
4
2
Contributions 0 Distributions
$ in Billions 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Net Cash Flow
-2
-4
-6
Since 2011, CalSTRS has received more in distributions than it has paid in contributions due to the strong exit environment and managers’ efforts to sell assets from 2005 to 2008 vintage funds. This strong net cash flow has made it challenging for CalSTRS and other limited partners to maintain their exposure to the asset class.
Prepared by Meketa Investment Group 2015 15 INV244 California State Teachers’ Retirement System Portfolio Overview Private Equity Program
Proactive Portfolio Review As of September 30, 2015
Reported Distributions Unfunded Remaining plus Commitment Commitments Value Remaining Net IRR Vintage Year ($mm) ($mm) ($mm) Value ($mm) (%) 2003 250 14 73 168 -3.2 2005 106 32 95 152 12.0 2006 415 44 260 523 9.6 2007 20 <1 7 7 -17.8 2008 217 86 161 183 8.9 2009 50 1 27 39 -3.5 2010 200 89 121 141 12.2 2011 70 25 52 55 10.6 2012 375 252 119 121 -0.9 2013 40 19 22 22 4.7 2014 200 167 31 31 -6.5 CalSTRS Proactive Total 1,942 730 968 1,443 4.6
CalSTRS has made 21 investments across a range of managers and vehicles in the Proactive Portfolio. Several investments are made to funds, with the majority of commitments made to fund-of-funds managed by HarbourVest (BAML Capital Access), INVESCO, and Muller & Monroe. There we no new commitments in the Proactive Portfolio in 2015. The total program Net IRR has increased 70 basis points to 4.6% since March, 2015.
Prepared by Meketa Investment Group 2015 16 INV245 California State Teachers’ Retirement System Program Performance Private Equity Program
Performance Against Benchmarks
1 year 3 year 5 year 10 year Since Inception CalSTRS PE Program 5.6 13.4 12.5 9.7 13.1 State Street PE Index1 7.4 13.8 13.8 11.3 12.2 Custom Benchmark2 3.4 17.5 17.6 11.3 12.7 Excess vs. State Street PE Index (%)3 -1.8 -0.4 -1.3 -1.6 0.9 Excess vs. Custom Benchmark (%)3 2.2 -4.1 -5.0 -1.6 0.5
The State Street PE Index is utilized to review performance of the PE Program for periods 10 years or less, while the Custom Benchmark is utilized to assess performance over longer time periods. The CalSTRS PE Program’s overall performance has been mixed compared to its benchmarks. In general, the PE Program has not met the State Street PE Index or the Custom Benchmark for periods under ten years. However, over long periods, CalSTRS PE program has achieved strong returns. Calculation of a PME indicates that since inception CalSTRS PE Program has generated over $13.5 billion of value compared to investing in the Russell 3000.
1 The State Street PE Index return was calculated by the State Street Global Exchange. The Since Inception return is a pooled return for all Private Equity funds with vintage years of 1990 or later. 2 Custom Benchmark is a composite of a) the Russell 3000 Index plus 300 basis points since 7/1/08, and b) the Russell 3000 Index plus 500 basis points, adjusted for 3 years of cash flows at the 90—day T-bill rate for periods before 7/1/08. Calculated by State Street. 3 Excess returns may not equal the difference between the CalSTRS PE Program and benchmark due to rounding.
Prepared by Meketa Investment Group 2015 17 INV246 California State Teachers’ Retirement System Program Performance Private Equity Program
Private Equity Program vs. Public Equity Benchmark Rolling 10-year Returns1
Over long periods of time, the CalSTRS private equity program has consistently outperformed a public equity benchmark of Russell 3000 + 300 basis points as evidenced by rolling 10 year returns shown above. This outperformance has narrowed in the most recent years.
1 Private Equity Program and Russell 3000 returns calculated on a time weighted basis.
Prepared by Meketa Investment Group 2015 18 INV247 California State Teachers’ Retirement System Program Performance Private Equity Program
Program Value Change – April 1 to September 30, 2015
25
1.0 20 -3.5 0.4
15
10 20.2 $ in Billions 18.2
5
0 Beginning NAV Contributions Distributions Value Change Ending NAV
The CalSTRS PE program value decreased by $2 billion in the six months from April to September, largely driven by strong distributions during this period. Adjusting for cash flows, the Private Equity portfolio had a positive value change of approximately $400 million during this time period.
Prepared by Meketa Investment Group 2015 19 INV248 California State Teachers’ Retirement System Program Performance Private Equity Program
Strategy Performance Against Benchmarks1
Since 1 year 3 year 5 year 10 year Inception Buyouts 5.5 13.7 12.6 9.8 12.1 SSGX – Buyouts2 5.6 13.2 13.6 11.7 12.1 Venture Capital 12.6 14.2 12.4 7.8 16.7 SSGX – Venture Capital2 19.3 19.7 17.5 10.7 13.9 Equity Expansion 4.4 14.5 15.3 12.9 21.6 SSGX – Growth Equity2,3 7.4 13.8 13.8 11.3 14.3 Mezzanine 1.3 13.0 12.1 9.5 13.2 SSGX – Mezzanine2 3.2 8.8 9.9 9.4 9.7 Distressed Debt 1.9 10.4 10.3 8.7 9.7 SSGX – Distressed Debt2 2.0 10.6 11.1 10.7 11.8 Proactive Portfolio 9.8 10.4 8.9 4.7 4.6 SSGX – All Private Equity2 7.4 13.8 13.8 11.3 12.2
CalSTRS Private Equity portfolio had delivered mixed performance compared to strategy benchmarks. In general, Equity Expansion and Mezzanine have outperformed, while Venture, Distressed Debt, and Proactive Portfolio have underperformed. Buyouts performance has been mixed.
1 Arrows indicate program outperformance or underperformance against benchmark. 2 SSGX benchmark returns were calculated by the State Street Global Exchange for each listed strategy. The Since Inception returns for each strategy are pooled returns for matching funds with vintage years of 1990 or later. 3 SSGX – Growth Equity Since Inception return is a pooled return for Growth Equity funds with vintage years of 1992 or later.
Prepared by Meketa Investment Group 2015 20 INV249 California State Teachers’ Retirement System Program Performance Private Equity Program
Performance By Investment Vehicle
Since 1 year 3 year 5 year 10 year Inception1 Funds 5.2 13.2 12.4 9.7 13.5 Co-Investments 10.8 14.3 12.8 8.6 8.2
Recent Co-investment performance has exceeded that of Funds. The Co-investment program suffered some early losses, contributing to the lower returns on a Since Inception basis.
1 Fund investments began in 1988 and co-investments began in 1996.
Prepared by Meketa Investment Group 2015 21 INV250 California State Teachers’ Retirement System Program Performance Private Equity Program
Performance by Geography
Since 1 year 3 year 5 year 10 year Inception United States 4.3 13.8 12.6 9.2 13.1 SSGX – U.S. Funds1 7.9 14.9 14.7 11.5 12.6 Europe 5.2 9.7 8.6 13.1 15.7 SSGX – Europe Funds1 5.8 11.1 12.2 11.7 12.7 Rest of World 12.7 14.3 15.8 8.8 9.4 SSGX – Rest of World1 7.0 11.9 10.2 8.9 8.2
U.S. and European investments have been the source of the stronger long term returns, with Rest of World also contributing in the more recent time periods. CalSTRS U.S. and European investments have not matched the benchmarks for more recent time periods.
1 SSGX benchmark returns were calculated by the State Street Global Exchange for each listed region. The Since Inception returns for U.S. Funds, Europe Funds, and Rest of World Funds are pooled returns for matching funds with vintage years beginning 1990, 1994, and 1996 respectively.
Prepared by Meketa Investment Group 2015 22 INV251 California State Teachers’ Retirement System Program Activity1 Private Equity Program
CalSTRS Private Equity Completed Investments – 2015
Fund Size Commitment Investment Geography Strategy ($ mm) ($ mm) Ardian VII Global Secondary 7,000 250 Bain Capital Asia III Asia Buyout 3,000 125 Blackstone Capital Partners VII Global Buyout 15,000 488 BlueRun Opportunity Fund Global Venture Capital 50 6 Carlyle Equity Opportunity Fund II North America Growth 2,400 150 Carlyle Europe IV Europe Buyout 3,000 161 Carval North America Debt Related 3,000 100 Castlelake IV North America Debt Related 4,000 150 Co-investments Various Various 114 114 Coller Capital VII Global Secondary 6,500 150 Cortec VI North America Buyout 1,100 100 EnCap Fund X North America Energy 6,000 200 Equistone V Europe Buyout 2,000 140 Fortress Credit Opportunities IV North America Debt Related 2,000 200 GGV Capital Select North America Venture Capital 400 50 Madison Dearborn VII North America Buyout 4,000 200 NEA 15 North America Venture Capital 2,500 195 NEA Opportunity Fund North America Venture Capital 350 35 PAG Asia II Asia Buyout 3,500 150 RRJ Capital Master Fund III Global (w/China) Growth 4,000 200 Summit Growth Equity IX North America Growth 7,000 100 Summit VC IV North America Venture Capital 7,000 50
1 Source: CalSTRS Deal Log dated January 11, 2016.
Prepared by Meketa Investment Group 2015 23 INV252 California State Teachers’ Retirement System Program Activity Private Equity Program
CalSTRS Private Equity Completed Investments – 2015 (Continued)
Fund Size Commitment Investment Geography Strategy ($ mm) ($ mm) TA XII Global Growth 4,000 180 Thoma Bravo SOF II North America Buyout 1,000 35 TPG Growth III Global Growth 3,000 200 Vivo Capital VIII North America/China Venture/Growth 750 46 WCAS XII North America Buyout 3,500 150
For the full year 2015, CalSTRS made $3,925 million commitments to 26 Funds and 6 Co-investments. The commitments are diversified by manager, geography and strategy.
Prepared by Meketa Investment Group 2015 24 INV253 California State Teachers’ Retirement System Appendix – Vintage Years Private Equity Program
Capital Total Unfunded Total Reported Distributions Inv. State Street # of Committed Contributions Commitment Distributions Value plus Reported Value Multiple Net IRR PE Index IRR Vintage Years Investments ($ mm) ($ mm) ($ mm) ($ mm) ($ mm) ($ mm) (x) (%) (%)1 Vintage Year 1988 1 100.0 88.7 0.0 168.6 0.0 168.6 1.9 14.2 NA Vintage Year 1989 6 239.2 229.1 0.0 598.0 0.0 598.0 2.6 18.4 NA Vintage Year 1990 4 77.0 77.0 0.0 161.6 0.0 161.6 2.1 20.2 18.7 Vintage Year 1991 4 37.9 37.1 0.0 89.7 0.0 89.7 2.4 24.3 21.0 Vintage Year 1992 7 158.6 157.1 0.0 435.6 0.2 435.8 2.8 31.8 21.0 Vintage Year 1993 8 368.2 370.8 0.0 1,145.6 0.0 1,145.6 3.1 32.9 14.2 Vintage Year 1994 8 341.2 344.4 0.0 1,026.0 0.0 1,026.0 3.0 31.9 17.1 Vintage Year 1995 7 425.1 382.0 0.9 827.7 0.2 827.9 2.2 23.3 20.1 Vintage Year 1996 9 332.0 326.7 0.7 482.9 1.3 484.2 1.5 9.2 9.9 Vintage Year 1997 11 956.1 932.4 2.0 1,780.9 0.2 1,781.1 1.9 15.0 9.7 Vintage Year 1998 12 1,441.1 1,359.7 24.6 2,149.2 9.4 2,158.6 1.6 9.2 7.9 Vintage Year 1999 17 1,194.2 1,126.1 19.8 1,287.8 51.9 1,339.7 1.2 3.2 2.4 Vintage Year 2000 21 2,878.4 2,737.1 45.5 4,846.3 174.7 5,021.0 1.8 15.0 3.2 Vintage Year 2001 14 1,840.8 1,797.1 32.7 3,705.1 131.1 3,836.3 2.1 23.1 9.9 Vintage Year 2002 7 578.9 509.2 6.2 742.7 76.1 818.8 1.6 16.4 9.5 Vintage Year 2003 16 1,630.1 1,514.4 74.7 2,244.5 343.7 2,588.2 1.7 13.3 10.6 Vintage Year 2004 30 1,451.6 1,394.2 42.0 2,000.2 522.4 2,522.6 1.8 14.2 9.0 Vintage Year 2005 37 5,358.3 5,002.9 365.9 5,988.1 2,065.1 8,053.1 1.6 9.0 7.9 Vintage Year 2006 40 6,533.0 6,009.7 386.4 6,000.1 2,358.7 8,358.8 1.4 6.6 7.3 Vintage Year 2007 38 6,899.5 6,437.7 355.3 5,901.4 3,468.6 9,369.9 1.5 8.0 9.1 Vintage Year 2008 24 4,581.8 4,009.3 484.6 2,926.8 2,362.0 5,288.8 1.3 7.3 10.4 Vintage Year 2009 9 1,165.1 969.0 143.7 938.6 562.0 1,500.6 1.5 12.4 13.7 Vintage Year 2010 14 1,117.0 802.2 232.2 384.2 778.6 1,162.8 1.4 13.6 11.0 Vintage Year 2011 25 2,300.6 1,628.1 654.0 297.9 1,873.7 2,171.7 1.3 13.2 10.9 Vintage Year 2012 19 1,935.8 1,244.7 691.1 171.2 1,370.6 1,541.8 1.2 11.9 10.8 Vintage Year 2013 24 2,323.8 1,040.1 1,273.7 151.2 1,027.5 1,178.7 1.1 11.4 7.2 Vintage Year 2014 33 2,861.3 698.9 2,162.3 2.0 727.7 729.7 1.0 5.1 -0.9 Vintage Year 2015 22 2,741.4 282.1 2,459.3 0.3 280.4 280.7 1.0 -1.8 -6.5
1 The State Street PE Index All Private Equity median return as of September 30, 2015.
Prepared by Meketa Investment Group 2015 25 INV254 California State Teachers’ Retirement System Appendix – Strategy Private Equity Program
Distributions Capital Total Unfunded Total Reported plus Reported Inv. State Street # of Committed Contributions Commitment Distributions Value Value Multiple Net IRR PE Index IRR Strategies Investments ($ mm) ($ mm) ($ mm) ($ mm) ($ mm) ($ mm) (x) (%) (%)1
Buyouts 221 33,305.0 27,962.0 4,971.2 32,509.1 11,390.0 43,899.1 1.6 12.1 12.1 Distressed Debt 47 6,122.8 4,514.1 1,308.4 4,390.6 2,047.8 6,438.4 1.4 9.7 11.8 Equity Expansion 71 5,864.9 4,052.2 1,692.3 4,831.4 2,115.6 6,947.1 1.7 21.6 14.3 Mezzanine 16 902.5 702.6 185.3 935.1 194.6 1,129.7 1.6 13.2 9.7 Venture Capital 91 3,730.6 3,101.9 570.8 3,312.0 1,470.4 4,782.4 1.5 16.7 13.9 Proactive Portfolio 21 1,942.4 1,175.2 729.6 475.9 967.6 1,443.5 1.2 4.6 12.2
1 The State Street PE Index All Private Equity Pooled Average Return as of September 30, 2015.
Prepared by Meketa Investment Group 2015 26 INV255 Glossary of Terms As of September 30, 2015
INV256 California State Teachers’ Retirement System Glossary of Terms Private Equity Program
Private equity investors have developed a number of unique terms to describe their investment work. The following glossary of private equity terms is intended to help make sense of these terms. Advisory Board: Private equity partnerships often establish an advisory board comprised of representatives of the Limited Partners to oversee the on-going work of the General Partners. Advisory boards typically meet once each year to review the partnership’s investments. It is important to note that unlike the Board of Directors of a public company, the advisory board has very little power to control the activities of the General Partners. Angel Investor: Angel investors are individuals who invest their own capital directly in small, early stage companies. Angels are an alternative source of funding for entrepreneurs. Such investments are characterized by high levels of risk and potentially a large return on investment. Blind Pool: Most private equity partnerships are organized as blind pools, meaning that Limited Partners commit capital to the partnership before any actual investments are made. At the point of commitment, the Limited Partners do not know specifically how their money will be used (hence the term blind pool), and must therefore rely entirely upon the track record and experience of the General Partner. Buyout Fund: A buyout partnership uses the partners’ capital to purchase existing, established businesses. The acquired firms may be family owned prior to purchase, or may be operating divisions of larger companies seeking to restructure their businesses. In a few cases, the buyout partners may purchase all of the outstanding shares of a publicly traded company, effectively taking it private. Buyout funds are not involved in venture capital or startups. Buyout partnerships own the acquired companies outright, or in combination with other buyout partnerships. In some cases the buyout partners will replace the existing management with a new team, or the acquired firm will be left autonomous. The buyout partners frequently take one or more board seats in order to ensure control of the business. Capital Call (Contribution): Once a partnership has declared its first close, the General Partners will begin to make portfolio investments. As each investment is made, the capital necessary to fund the investment is “called” from the Limited Partners. Carried Interest: The share of profits that the fund manager is due once it has returned the cost of investment to investors. Carried interest is normally expressed as a percentage of the total profits of the fund. The industry norm is 20%. The fund manager will normally therefore receive 20% of the profits generated by the fund and distribute the remaining 80% of the profits to investors. Carrying Value: The General Partner must list on the partnership’s balance sheet a value for every investment held. These valuations are called carrying values, and in most cases are simply the original cost of the investment. Note that carrying values in most cases are not audited and do not represent actual market values. Cash Flow Positive: When a company generates more free cash than it consumes in normal operations, it is deemed to be cash flow positive. Such companies may not need extra financing or debt in order to grow. Cash on Cash Return: The simple gross total return earned by the Limited Partners, calculated as the total distributions received divided by the total contributions made. Thus, if an investor supplied a total of $100 in cash calls and contributions, and received over the life of the partnership $200 in distributions, the cash on cash return would be 100%. The cash on cash return is typically reported as a multiple. In the example above, the investment returned 2x (two times). Claw-Back Provision: A claw-back provision ensures that a General Partner does not receive more than its agreed percentage of carried interest over the life of the fund. So, for example, if a General Partner receives 21% of the partnership's profits instead of the agreed 20%, Limited Partners can claw back the extra one percent.
Prepared by Meketa Investment Group 2015 28 INV257 California State Teachers’ Retirement System Glossary of Terms Private Equity Program
Closings and Closing Dates: Every partnership must specify the date upon which the General Partners will cease fundraising and begin making actual investments with the Limited Partners’ committed capital. That date is called the closing date, and defines the vintage year of the partnership. Most partnerships, however, have several closing dates, and all partnerships must eventually have a final closing. In most cases, the final closing lags six to nine months after the first closing. If a majority of the original Limited Partners consent, a partnership can remain open to new investors after the final closing and while early investments are being made, in order to have time to attract additional investors. Co-Investment: In some cases, Limited Partners want the right to make additional direct investments in one or more of the underlying companies purchased by the General Partner. If the partnership agreement gives co-investment rights to specific Limited Partners, then they may elect to invest additional monies “along side” the General Partner in various deals. In these cases, the co-investing Limited Partners would have two investments in an underlying property: their share of the partnership’s investment, and their direct additional co-investment on the side. Note that co-investment rights may be available only to the largest Limited Partners. Co-investment rights are often negotiated by very large Limited Partners when they have strong convictions about the deal finding skills of the General Partners, because co-investment rights permit them to make even larger investments in the underlying properties than would otherwise be possible, without paying carried interest. Committed Capital: When a private equity Limited Partnership is formed, each Limited Partner agrees to contribute a specific amount of capital to be invested over the life of the partnership. Once the agreement is signed, the Limited Partners are legally bound and committed to supply the agreed upon capital when it is called for by the General Partner. Consolidation (Roll Up): Many industries in America are highly fragmented, as the market space is serviced by a large number of locally owned businesses. By consolidating fragmented industries (i.e., purchasing many local businesses), private equity firms can create a single larger company with greater market control, more attractive financial characteristics, and potentially, better pricing flexibility and lower costs. Convertible Bonds: Some private equity partnerships, generally those that provide mezzanine financing, may take convertible bonds as part of their compensation for providing investment capital. The convertible bond pays interest like other bonds, but can be exchanged for shares of the company stock at a favorable price if certain conditions are met, hence the term convertible. Direct Investment: Partnerships that invest in companies are said to make direct investments. The alternative is a partnership that invests in other partnerships, a fund of funds. EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization): The “top line” profits of a private company are the monies earned before paying interest and taxes, and adding back depreciation and amortization. Unlike public companies, which are valued as the multiple of bottom line earnings to the stock price (P/E or price to earnings), private companies are valued as the multiple of EBITDA to the price of the stock. There is no simple conversion factor that will convert an EBITDA multiple to a P/E for all companies, but in general, a factor of 2 is appropriate. Thus, a private company selling for an EBITDA multiple of 6 is priced about as richly as a public company with a P/E of 12. EBITDA Multiples: The ratio of a private company’s top line earnings to the price of its shares. See EBITDA above. Enterprise Value: A measure of a company's value, often used as an alternative to straightforward market capitalization. Enterprise Value is calculated as market cap plus debt, minority interest and preferred shares, minus total cash and cash equivalents.
Prepared by Meketa Investment Group 2015 29 INV258 California State Teachers’ Retirement System Glossary of Terms Private Equity Program
Fee Income: The General Partners in a private equity partnership generally receive two types of compensation: fee income as payment for their portfolio management services, and a share of any profits (carried interest) as incentive compensation. Fund of Funds: A private equity partnership that consists primarily of investments in other partnerships, as opposed to direct investments in individual companies and deals. The General Partners of a fund of funds thus act as a manager of managers to create a diversified portfolio of partnerships, each of which in turn consists of a portfolio of direct investment deals. Although a fund of funds is a collection of partnerships, the fund of funds itself is a partnership, and therefore has a vintage year, a commitment period, a distribution phase, and a final end. Thus, fund of funds have finite lifetimes, just like their underlying partnerships. The advantages of a fund of funds are high diversification and “one stop shopping,” i.e., the client has a single relationship with the fund of funds manager. The disadvantages of fund of funds are higher costs (another entire layer of management fees and carried interest), an additional loss of liquidity, and an additional loss of control by the Limited Partners. Just as with direct private equity funds, a fund of funds is organized as a blind pool. That is, when a new fund of funds is announced, and a subscription target set, early investors do not know what specific sub-funds will be selected by the manager. Generally, the Private Placement Memorandum gives the General Partner almost unlimited latitude in making subsequent investments. General Partner: The control partner in private equity partnerships, analogous to the portfolio manager in a public stock portfolio. Under the IRS code, the General Partner must commit some personal capital to the partnership (a minimum of 1% of the partnership’s committed capital), and unlike the Limited Partners, is liable for leverage and other losses generated by the partnership. Growth (Expansion Capital): A strategy that entails providing capital to a private company with the intention that the capital be used to expand operations. Generally, expansion capital strategies result in minority equity positions in companies, but with some degree of control over how the expansion capital is spent. Hurdle Rate: The minimum rate of return that the Limited Partners must receive before the General Partners have a right to a share of any additional profits (carried interest) produced by the partnership’s investments. For example, the partnership may specify that once the Limited Partners have received distributions representing an 8% total return on their commitment (the hurdle rate), the General Partner will share in all future distributions until they have been allocated 80% to the Limited Partners, and 20% to the General Partners (their carried interest). In-Kind Distribution: Most distributions from private equity partnerships are in cash. However, in some cases, a private deal will be taken public through an initial public offering (IPO), or through a trade sale for stock to a public company. In these cases, the Limited Partners will receive their distributions in the form of publicly traded common stocks and/or rights and warrants. Investment Period: The period of time after the first closing during which the General Partner will call capital from the Limited Partners and make partnership investments. Legally, the investment period is usually six years. Practically, it is three to four years. Not to be confused with the term of the partnership, generally ten to twelve years. IPO (Initial Public Offering): When a private company issues publicly traded stock, it becomes known as a public company. The initial sale of publicly available stock is called the initial public offering, or IPO.
Prepared by Meketa Investment Group 2015 30 INV259 California State Teachers’ Retirement System Glossary of Terms Private Equity Program
IRR (Internal Rate of Return): The annualized rate of return on capital that is generated or capable of being generated within an investment or portfolio over a period of time, assuming all cash flows can be reinvested at the same rate. Mathematically, the IRR of an investment is the discount rate applied to that investment such that the net present value of the investment is zero. IRR is commonly used to measure profitability by applying the calculation to the after tax cash flows to arrive at an after-tax equity yield rate. J-Curve: Many private equity partnerships have small negative returns in their first years of operation as capital is invested. The negative returns result because the partnership’s investments have not matured and turned a profit, but the partnership has nevertheless experienced various operating costs. When early deals begin to mature and are liquidated at a profit, the partnership’s returns should become positive. Thus, the graph of the partnership’s returns versus time can resemble the capital letter “J.” Later Stage Fund: A venture capital partnership that specializes in investing in startup companies that have already achieved at least some actual revenues, or a venture fund that provides subsequent rounds of venture financing after all of the capital provided in the first rounds has been consumed. Lead Investor: Describes a General Partner who is the “lead” investor in a deal, as opposed to co-investors or follow-on investors. The term implies that the lead investor has taken the lead in sourcing, evaluating, and executing the deal. Leverage: Many General Partners use both equity capital provided by the Limited Partners and money borrowed from banks or other lenders to finance their investments. Any borrowed money is called leverage. If a deal is successful, leverage can often enhance the returns of the Limited Partners substantially. On the other hand, too much leverage can cripple an investment with interest and financing costs. It is important to note that the Limited Partners are not responsible for the repayment of any borrowed money. Leveraged Buyouts: The purchase of a private or public company wherein the bulk of the purchase price is paid using borrowed money. Limited Partner: All investors in a Limited Partnership other than the named General Partner are defined under the IRS code as Limited Partners. Limited Partners have only the control rights defined for them in the Private Placement Memorandum, and are generally passive investors in the partnership’s deals. A very important point is that Limited Partner’s total liability for all deals made by the partnership are limited strictly by law to the Limited Partner’s committed capital. Thus, even if the General Partners borrow a great deal of money (leverage), and lose it all, the lenders have no recourse to the assets of the Limited Partners. In effect, a Limited Partner can lose no more than the amount of money invested. Look-Back Provision: See Claw-Back Provision above. Mezzanine Financing: An additional level of financing provided to a private company to expand sales, market share, or develop new products. Most mezzanine financing is structured as a package of high coupon bonds with equity “kickers,” i.e., rights to acquire the company’s stock at a favorable price at a future point. Companies seeking mezzanine financing often have substantial revenues, and if not actual profits, the expectation of imminent profitability. Multiples and Multiple Expansion: Managers purchasing public common stocks often buy companies with low price to earnings multiples when they believe some factor will induce other investors to bid up the price of the stock without an increase in actual earnings, thus causing the price multiple to expand. In the same fashion, a General Partner may purchase a private company with a low EBITDA multiple, expecting to profit through an expansion of that multiple. A typical example of a multiple expansion plan is consolidation. Many small companies, operating independently, may each be priced at relatively low multiples. But if purchased and combined into a larger, cohesive entity, investors might be willing to pay a higher multiple for the aggregate than for any individual component.
Prepared by Meketa Investment Group 2015 31 INV260 California State Teachers’ Retirement System Glossary of Terms Private Equity Program
Placement Agent: Unlike public stock management companies, most of whom utilize an in-house sales force to market their services, private equity partnerships are generally marketed by third-party placement agents. These outside marketing firms and individuals are paid a commission by the General Partner. Platform Company: Some private equity buyout funds attempt to add value by merging companies into larger, more cost efficient enterprises. This strategy generally begins with the acquisition of a platform company, often a market leader, to which other companies are added. PPM (Private Placement Memorandum): Because Limited Partnership interests are not registered with the SEC, private equity managers must distribute a comprehensive document to prospective investors that describes the broad investment thesis of the partnership, and highlights any risks involved in the partnership. This document is called a Private Placement Memorandum. Public to Private: If a private partnership (or group of private partnerships) purchases all of the outstanding shares of a publicly traded company, the company’s shares may be de-listed from the stock exchange. The company is then said to have been “taken private.” For example, in June 1989, the private partnership Wings Holdings acquired the public stock of Northwest Airlines in a $3.65 billion-dollar leveraged buyout. Following this acquisition, Northwest became a privately held corporation for the first time since 1941. Secondary Fund: Occasionally, a Limited Partner will wish to sell his interest in a partnership before the term of the partnership is completed. Any such sale is termed a secondary market sale. A secondary fund creates a portfolio of partnership interests from earlier partnerships purchased in the secondary market. The advantage of a secondary fund is that it gives investors an opportunity to invest in seasoned partnerships from closed funds of prior vintage years. Sponsor: Every private equity opportunity that Meketa Investment Group evaluates is assigned to a sponsor. This individual, who is a member of Meketa Investment Group’s Private Equity Investment Committee, is responsible for the collection of information and the evaluation of the opportunity. Take Down/Draw Down: A take down or a draw down is the same as a capital call. Term: The term of a private equity partnership is its expected lifetime, and is specified in the Private Placement Memorandum. Most partnerships have a term of ten years, with the option to extend the term once or twice by an additional year if the Limited Partners approve. The term of a partnership consists of several phases. After the final closing, no new commitments are accepted and the partnership enters the commitment phase or investment phase, legally lasting up to six years, but generally lasting three to four years, during which the individual investments are made. A distribution phase follows, during which mature investments are realized and profits distributed to the partners. The final phase is the liquidation phase, during which all remaining properties and assets are sold in order to terminate the partnership. Trade Sale: The most prevalent exit strategy for many private equity managers involves selling a company in the private markets, usually through an auction process, to other private equity investors or to larger companies. This type of exit is termed a trade sale. Turnaround: A turnaround strategy involves buying a troubled company, usually for a relatively low price, and making significant managerial or organizational changes to better the company’s operations and enhance profitability.
Prepared by Meketa Investment Group 2015 32 INV261 California State Teachers’ Retirement System Glossary of Terms Private Equity Program
VCOC (Venture Capital Operating Company): The IRS code defines one category of private partnerships to be venture capital operating companies for tax purposes. The General Partners of VCOCs are not required to register with the SEC as investment advisors. The name venture capital operating company relates only to the partnership’s legal and tax structure, and does not imply that the partnership will invest in venture capital deals. For example, a middle market buyout fund, which invests only in mature companies with enterprise values of between $200 million and $1 billion, may be structured as a venture capital operating company. Venture Capital: Money supplied to entrepreneurs to create new businesses is called venture capital. It is the first stage of financing for any new venture. Traditionally, the recipient of the venture capital was a small group of entrepreneurs with an idea and a business plan, but no management team, corporate structure, revenues or profits. In the 1990s, however, venture capital was often used to seed established teams of entrepreneurs with well-defined products and in-place corporate structures. Thus, there is great variability in the meaning of venture capital and in the types of deals financed with venture capital money. Vintage Year: The calendar year in which the first cash flow to a partnership occurred. This cash flow can be intended for management fees or investment capital. Vintage year can be used to differentiate the partnerships established over time by a General Partner, to track portfolio commitment pacing, and to benchmark portfolio performance. Warrants: Just like publicly traded companies, private companies may issue warrants to their shareholders or to other groups providing some form of financing. A warrant is the right to purchase shares of the company’s stock at a future date at a predetermined price, called the exercise price. Warrants become valuable if the exercise price is below the market price of the stock.
Prepared by Meketa Investment Group 2015 33 INV262