ANNUAL REPORT 2018 ANNUAL REPORT 02 Annual report 03 Report of the Managing Board 08 Consolidated financial statements 09 Consolidated balance sheet 10 Consolidated income statement 11 Consolidated cash flow statement 12 Notes to the consolidated financial statements 13 1. Accounting policies for the consolidated balance sheet 15 2. Accounting policies for the consolidated income statement 16 3. Financial instruments and risk management 17 4. Notes to the consolidated balance sheet 22 5. Notes to the consolidated income statement 25 6. Supplementary information consolidated financial statements 26 Company financial statements 27 Company balance sheet 28 Company income statement 29 7. Notes to the company balance sheet 38 8. Supplementary information company financial statements 41 Other information 42 Independent auditor’s report REPORT OF THE MANAGING BOARD Market and Economic Developments 2018 Slower Issuance of Leveraged Finance Further Increase in Dry Powder Divergent Economic Growth Amid Series As market participants repriced macro risk, Reflecting deal activity and fundraising, REPORT OF THE MANAGING BOARD02-07 of Shocks demand for high-yield bonds and leveraged unfunded commitments continued to rise in Following rapid and synchronized global loans slowed substantially. In the US and 2018. At the end of the year, dry powder of growth in 2017, the world economy lost some European high-yield markets, issuance in private equity funds as defined above stood momentum in 2018. While the US economy the final quarter fell to around at USD 1,310 billion, USD 173 billion more continued to grow primarily as a result of USD 23 billion, almost 80% less than in Q4 than at the end of 2017. Broadly consistent significant tax cuts and deregulation, 2017. As a result, the annual volume with their share in the fundraising market, economic confidence was undermined decreased to USD 244 billion, the smallest buyout funds accounted for 53% of unfunded elsewhere by a series of shocks, including amount since 2009. Although the decline in commitments. growing trade tensions, a temporary spike in issuance in the leveraged loan market was oil prices, unsteady emerging markets amid comparatively less dramatic (-7%), overall Business Overview monetary tightening by the US Federal leveraged finance volume in the US and Over the course of the last 19 years, Reserve, concerns about fiscal sustainability Europe shrank by almost 17%. AlpInvest has become one of the largest in Italy and lingering uncertainty about the private equity investors in the world and conditions under which the United Kingdom Declining Momentum in M&A Market and today pursues opportunities across the will leave the European Union. As a result, Leveraged Buyouts private equity spectrum, including large and growth in the major economies diverged The repricing of risk and the surge in market middle market buyout, growth capital, increasingly, with year-on-year GDP growth volatility took a toll on M&A activity. In the distressed debt, venture capital, and private in the US of +2.9% in 2018 compared with second half of 2018, global M&A volume subordinated debt. AlpInvest invests globally +1.8% in the euro Area. slowed to around USD 1.75 trillion, about throughout North America, Europe, Asia 27% less than in the preceding six-month Pacific, and emerging and other Monetary Policy Divergence period. However, thanks to a very robust first non-traditional markets. These investments and Dollar Appreciation half of the year, annual M&A volume was still generally fall within three investment Economic divergence was mirrored in significantly higher than in 2017. As far as strategies: Primary Fund Investments, monetary divergence. Although inflation leveraged buyouts (“LBOs”) are concerned, Secondary Investments and Co-Investments. remained well-behaved in the US, tight labor deal volume almost halved in the second half During 2018, the team that focused on market conditions and rising capacity of 2018, resulting in an annual decline of Partnership Investments was discontinued. utilization prompted the US Federal Reserve 18% compared with 2017. Although the However, we still believe that investing to continue to raise interest rates. With four slowdown in LBO activity during 2018 was directly in GPs can be an attractive strategy rate hikes totalling 100bps, the upper limit of particularly pronounced in the US, it and are considering alternatives to pursue the federal funds target range reached 2.5%. remained the most active region, accounting opportunities in this segment. These rate hikes were accompanied by for more than 50% of the USD 258 billion quantitative tightening to reduce the US deal volume worldwide. As of December 31, 2018, aggregate capital Federal Reserve’s balance sheet. By contrast, committed1 to AlpInvest had grown to more the European Central Bank remained on hold Resilience on the Exit Side than €74 billion from 190 investors in terms of its policy rates, resulting in More challenging financial market conditions worldwide. We believe that this growth is a widening interest rate differentials and dollar also impacted divestments of private clear indication of the support we have appreciation versus the Euro of almost 5%. equity-backed portfolio companies. However, received from our investors and is also a although exits - especially via initial public reflection of the increasing importance of Rising Market Volatility due offerings - slowed during the year as market private equity in developed economies, to Growth Concerns volatility rose, this slowdown was not large including many Asian economies. Higher short-term and long-term interest enough to prevent exit volume from rising on rates and dollar appreciation led to a a year-on-year basis. For transactions for AlpInvest employed 102 full-time employees significant tightening of financial conditions in which deal values are known, the global (‘FTE’) as of December 31, 2018, and the the United States. With economic growth transaction value rose 4% to USD 352 billion. male/female ratio of all employees is 56:44. slowing in Europe and China, market AlpInvest is committed to building a diverse participants became increasingly concerned Buoyant Interest in Private Equity as an work environment and shaping an inclusive about the outlook for the US, notwithstanding Asset Class culture for its staff, which we believe are robust fundamentals. As a result, market Dislocations in global equity and credit essential to making good investment volatility rose meaningfully, as evidenced by a markets did not discourage investors to decisions and generating attractive results 50% increase in the VIX index. Meanwhile, commit large amounts of capital to private for our investors. In 2018, we launched a new stocks in the US and around the globe came equity funds (encompassing funds targeting Diversity and Inclusion Framework, which we under significant selling pressure, adding buyouts, venture capital, growth capital, seek to build out further during 2019. further to the tightening of financial mezzanine and distressed debt). Although conditions. Growth concerns were inflows to partnerships that had their final The size and composition of the Board are accentuated by the flattening of the US yield close in 2018 fell 12% compared with the based on the profile and strategy of the curve, with the difference between 10-year previous year, at almost USD 447 billion 2018 Company. The professional expertise, yields and 2-year yields narrowing to only was the third most active fundraising year on experience and various competences of the 17bps by the end of 2018. record. Commitments to buyout funds totalled members of the Board should support this USD 245 billion, or 55% of total commitments, profile and strategy. AlpInvest strives to have broadly in line with previous years. 1 Total capital committed to AlpInvest and its affiliates includes €7.0 billion of investor mandates that are managed on behalf of investors by AlpInvest Partners B.V. (or its controlled affiliates), but for which the investment decisions were made by parties other than AlpInvest or its affiliates (€6.7 billion before the end of 2002 and €0.2 billion was committed before AlpInvest began managing such investments in 2013). ALPINVEST ANNUAL REPORT 2018 3 REPORT OF THE MANAGING BOARD (CONT’D) a balanced composition of the Board, and will Operating Committee, and a dedicated Since 2009, AlpInvest has been publishing a consider diversity including, where possible, Responsible Investment officer is responsible detailed Annual Review, which provides age and gender, as one of the selection for its development and integration. The further information on the development of our criteria when proposing new members for the investment teams are closely involved in the business and can be found on AlpInvest’s Board in the future. Since January 1, 2016, the execution of this strategy and, together with website. Board has been comprised of one female and the legal team, are responsible for ensuring three male members. that a fund’s investments comply with the Returns criteria which have been agreed upon with the The table below represents the development Responsible Investment limited partners in the fund. Every new of the gross and net life-to-date internal rate Since 2008, AlpInvest implemented a formal investment is screened through AlpInvest’s of return (‘IRR’) of investments made by process to integrate Responsible Investment Responsible Investment due diligence process. AlpInvest on