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) 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 $- 2009 2010 2011 2012 2013 2014 2015 2006 2007 2008 2009 2010 2011 2012 2013 2014 1H 15 Venture Capital has been a strong investment segment in 2014 and 2015, drawing significant capital from investors. Much of this activity has been focused on later stage transactions, in part driven by increased participation of mutual funds and hedge funds seeking to invest in a company prior to an IPO. It appears that venture activity has cooled in the later part of 2015 and early 2016 with fewer transactions being completed. 1 Source: PitchBook Prepared by Meketa Investment Group 2015 5 INV234 California State Teachers’ Retirement System Performance Private Equity Industry Review – Private Equity Program Fundraising Global Fundraising Activity 2010 through Q3 20151 Private Equity Dry Powder vs. Commitment Pace1 1,400 5.0 1400 4.5 1200 1,200 Years of CommitmentRemaining 4.0 1000 1,000 3.5 800 800 3.0 600 600 2.5 Dry Powder ($ Dry Powder MM) 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 ($bn) Dry Powder Years of Commitment Remaining Global fundraising activity remained robust in 2015, largely in line with 2013 and 2014 activity. Compared with prior years, 2015 saw increased aggregate commitments, but fewer funds closing than in 2014 and 2013. This is likely due to a higher average fund size. While total amount of “dry powder” has increased each year since 2012, General Partners have been able to deploy new commitments, thereby limiting “overhang” which stood at 2.3 years at the end of 2014. 1 Source: Preqin Prepared by Meketa Investment Group 2015 6 INV235 California State Teachers’ Retirement System Private Equity Industry Review – Private Equity Program Limited Partners Annual Amount Called, Distributed and Unrealized Value Proportion of Investors At, Above or Below Their Target Allocations to 1 1 (As of December 31, 2014) Private Equity 900 3,000 800 2,500 700 Unrealized Value($bn) 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.