private equity institutional investor trends for 2013 survey
TRANSCRIPT
Private Equity Institutional Investor Trends for 2013 Survey
Probitas Partners is a leading independent knowledge, innovation, and solutions provider to private markets clients. We serve both institutional investors who seek to place capital and select leading fund sponsors who seek to raise capital for private equity, real estate, infrastructure, credit, and hedge funds. These services are offered by a team of employee owners dedicated to leveraging the firm’s vast knowledge and technical resources to provide the best results for all its clients.
On an ongoing basis, Probitas Partners offers research and investment tools for the alternative investment market as aids to its institutional investor and general partner clients. Probitas Partners compiles data from various trade and other sources and then vets and enhances that data via its team’s broad knowledge of the market.
n. [from Latin probitas: good, proper, honest.] adherence to the highest principles, ideals and character.
probity ¯ ¯˘
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© 2012 Probitas Partners Private Equity Investor Trends for 2013 Survey
C o n t e n t s
The Private Equity Fundraising Environment ...................................2
Private Equity Institutional Investor Survey ......................................3
Overview of Survey Findings ..............................................................3
Profile of Respondents .......................................................................4
Sectors and Geographies of Interest ................................................8
Emerging Markets ............................................................................20
U.S. Middle-Market Funds ................................................................24
Venture Capital .................................................................................26
Niche Private Equity Sectors ............................................................27
Fund Structures and Key Terms .......................................................31
Investor Fears and Concerns ...........................................................34
Our View of the Future .....................................................................38
Chart I Global Commitments Private Equity Partnerships
USD
in b
illio
ns
600
500
400
300
200
100
0
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 3QYTD
2012
Source: Thomson Reuter
20 27 40 4964
97
148175
301
175
94 99
138
306
392
490 477
170
262
168188
2
Private Equity Investor Trends for 2013 Survey © 2012 Probitas Partners
The Private Equity Fundraising Environment
• Fundraisingin2012isonpacetomeetorslightlyexceed2011’stotalastheprivate equity markets adjust to what is becoming the “new normal” in thewakeoftheGlobalFinancialCrisis.
• Underlying the top-line numbers in Chart I are a number of competingdata-points:
• MegaBuyoutfundsintheUnitedStatesandEuropeareraisinglargefundsthat are boosting commitments — but most of these funds are targetingsignificantlylessthantheydidatthemarketpeak.
• Fundraising in Asia, a relative strong point during the Global FinancialCrisis, is now under pressure — especially for RMB-denominated China-focusedfundsthathadbeengrowingstronglysince2006.
• Fundraising for venture capital funds — which had been a driving partof the “Internet Bubble” — remained limited and significantly off theirunsustainablepeaks.
• Secondaryfundraisingisonpacetomeetorslightlyexceedits2009peakastransactionvolumesincrease,inpartduetochangesinbankregulationsthatarecausingmanybankportfoliostobesold.
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© 2012 Probitas Partners Private Equity Investor Trends for 2013 Survey
Private Equity Institutional Investor Survey
ProbitasPartnersconducted itsonlinesurveyat thebeginningofOctober2012to gauge investor interests, opinions, and perspectives on investing in privateequity. This survey is administered annually to gauge emerging trends and tocompareinvestors’changingviewsoveralongerperiodoftime.Responseswerereceivedfromseniorinvestmentexecutivesglobally,representingsuchinstitutionsaspublicandcorporatepensionplans,fund-of-funds,familyoffices,endowmentsandfoundations,andconsultantsandadvisors,amongothers.
Overview of Survey Findings
Thefollowingsummarizesthetop-linefindingsfromthesurvey:
• Steady interest in private equity:ThereboundfromtheGlobalFinancialCrisiscontinuesandinvestorsarelikelytocommitslightlymoretoprivateequityin2013 than 2012; however, the appetite for new managers remains limitedasmanyestablishedprogramsremainfocusedonconsolidatingcurrentfundmanagerrelationships,withamorelimitedlookatnewrelationships.
• Continued focus on small buyout and growth capital funds:Investorsremainfocusedonsmallandmiddle-marketbuyoutandgrowthcapital funds in theUnitedStatesandEurope,backfillingunderexposedareasof theirportfolios,and on Asian country-focused funds; however, many investors have alreadyestablishedcorerelationshipsinthesesectors.
• Interest in emerging markets is under pressure: Investorsare increasinglyconcernedwithpoliticalriskintheemergingmarketsandarelessconvincedoftheinherenthigh-growthstory.ChinaandBrazilstilldominateinterestinthesector;interestinIndiahasdeclinedsignificantlywhileTurkeyandIndonesia,thoughsmallermarkets,aretherisingstarsofthemoment.
• Credit vehicles (distinct from mezzanine funds) are rising in interest:Credit-oriented strategies and vehicles have come into fashion, especially in NorthAmerica,as thedebtmarketshaveremaineddifficult,creatingopportunitiesinthesector.
• Venture capital interest remains muted:Evenwith the increasedprofileofsocial media investments, interest in venture capital remains very low, withfewer respondents listing it as a sector of interest. Furthermore, significantnumbers of investors are choosing not to invest in the sector at all. Withinventurecapital,interestincleantech-focusedfundsisnoticeablyweak.
• Large investors increasingly focus on co-investments:Largeinvestorswiththe resources to develop co-investment programs are increasingly targetingthissectorinanefforttoenhancenetreturns.
Chart II Respondents by Institution Type“I represent a:”
Source: Probitas Partners’ Private Equity Institutional Investor Trends for 2013 Survey
Fund-of-Funds Manager
Consultant/Advisor
Insurance Company
Corporate Pension/ Superannuation PlanPublic Pension/Industry Pension Plan
Family Office
Endowment/Foundation
Bank
Sovereign Wealth Fund/Government Entity
Other
33%
12%10%10%
9%
8%
7%
6%3% 2%
4
Private Equity Investor Trends for 2013 Survey © 2012 Probitas Partners
Profile of Respondents
• There were 126 respondents to the survey. As detailed in Chart II, mostrespondents were from pension plans, funds-of-funds, family offices,andendowments.
• Respondents were geographically diverse, with strong participation fromNorthAmerica,Europe,andAsiaasnotedinChartIII.
• AsChartIVdetails,manyinvestorsarenearthetopoftheirallocations(65%ofthenon-funds-of-fundsrespondents),thoughinvestorshavemarginallymoreallocationflexibilitythisyearthantheyhadlastyear.
• Funds-of-fundsallocationsare,ofcourse,different—drivenbytheirabilitytoraisefundvehiclesorseparateaccountsratherthanmakeallocationsoutofalargerportfolio.Thefundraisingmarketforfunds-of-fundshascontinuedtobedifficultsincetheGlobalFinancialCrisis.
Chart III Respondents by Firm Headquarters“My firm is headquartered in:”
Source: Probitas Partners’ Private Equity Institutional Investor Trends for 2013 Survey
Western Europe
North America
Asia/Middle East
Australia
35%
6%
16%
43%
Chart IV Current and Target Private Equity Allocations“As far as our current private equity allocation, we are:”
Roughly at our target and are looking to maintain that level of exposure
Under our target allocation and actively committing to private equity to achieve that target
Over our target and are looking to reduce exposure to meet that target
Roughly at our target and considering increasing the target
Over our target but seeking to increase the target
Looking to reduce our target and exit the asset class
A fund-of-funds or consultant to which the question does not apply
Other
Percentage of Respondents (%)
Source: Probitas Partners’ Private Equity Institutional Investor Trends for 2013 Survey
0 15 30 45
2012 2013
29
1714
66
67
2
01
1
3934
21
35
5
© 2012 Probitas Partners Private Equity Investor Trends for 2013 Survey
Chart V Drivers of Sector Investment“My sector investment focus in 2013 is driven by:”
My institution is pursuing the best funds and managers available in the market
A focus on those private equity sectors I believe will outperform others in this vintage year
Maintaining established relationships with fund managers returning to market this year
My institution’s need to diversify its private equity portfolio
Targeting funds that will provide access to co-investments
My need to decrease exposure to private equity
My need to deploy significant amounts of capital allocated to private equity
The strategies that my clients have directed us to pursue
Other
Percentage of Respondents (%)
Source: Probitas Partners’ Private Equity Institutional Investor Trends for 2013 Survey
0 10 20 30 40 50
46
14
12
8
5
1
0
13
1
6
Private Equity Investor Trends for 2013 Survey © 2012 Probitas Partners
• What drives investors to invest? As detailed in Chart V, consistent with ourpastsurveys,allotherreasonsaresecondaryto“pursuingthebestavailablemanagersandfunds,”thoughthefocusonbestmanagershasbecomemoreimportanttomoreinvestorssincetheGlobalFinancialCrisis.
• Proventopquartilemanagerscanbedifficulttoaccess,andsincefundsonlycome to market every three to five years, many investors feel compelled tocommittothesemanagerswhentheyareavailableandopen.
• As covered in Chart VI, more respondents increased deployment as 2013approached, continuing the allocation rebound after the bottom of thefundraisingmarketwasreachedin2009.
• ChartVII shows that two thirdsof respondentsare focusedon theircurrentgeneralpartnerrelationships,withonly28%strongly focusedondevelopingnewgeneralpartnerrelationships.
• Based on our discussions with investors, many continue to triage generalpartnerrelationships,determiningwhichtocontinuetobackandchoosingnottore-upwithothersand/orlookingtosellpositionswithstalerelationshipsinthesecondarymarket.
• Among investors new to private equity (especially in Asia) that are notburdenedbylargelegacyportfoliosbuiltduringtheLiquidityBubble,thereismuchmoreinterestinbuildingnewfundmanagerrelationships.
• Only3%ofrespondentstargetedseparateaccountsastheirprimarymeansofinvestinginprivateequity.
Chart VI Private Equity Allocations“For 2013, we or the clients we advise are looking to commit across all areas of private equity (in USD):”
Perc
enta
ge o
f Res
pond
ents
(%)
40
30
20
10
0
<$50 MM $50 MM– $150 MM
$150 MM– $250 MM
$250 MM– $500 MM
$500 MM– $1 B
>$1 B
Source: Probitas Partners’ Private Equity Institutional Investor Trends for 2013 Survey
20122013
1919
34
26
1516
10
17
1213109
Chart VII Manager Relationships“During 2013, we would expect our major focus to be:”
Evaluating re-ups with current GP relationships, looking to decrease the number of
relationships significantly
Evaluating re-ups with current GP relationships with a limited look at new relationships
Evaluating re-ups with current GP relationships
Actively pursuing relationships with new managers
Pursuing separate accounts with a smaller number of managers
Our 2013 allocation is already completely allocated
Percentage of Respondents (%)
Source: Probitas Partners’ Private Equity Institutional Investor Trends for 2013 Survey
0 10 20 30 40 50 60
2
28
3
54
5
8
7
© 2012 Probitas Partners Private Equity Investor Trends for 2013 Survey
Chart VIII Private Equity Sectors of Interest“During 2013, I plan to focus most of my attention on investing in the following sectors (choose no more than five):”
U.S. Middle-Market Buyouts ($500 MM–$2.5 B)
Growth Capital Funds
U.S. Small-Market Buyouts (<$500 MM)
European Middle-Market Buyouts (Country-Focused)
European Middle-Market Buyouts (Pan-European)
Credit Strategies
Asian Country-Focused Funds
Distressed Debt Funds
Energy Funds
Mezzanine/Credit-Focused Funds
Infrastructure Funds
Pan-Asian Funds
Secondary Funds
U.S. Venture Capital
U.S. Large Buyouts ($2.5–$5 B)
Restructuring Funds
Fund-of-Funds
Emerging Markets (Ex-Asia)
Mega Buyout Funds (>$5 B)
Cleantech/Green-Focused Funds
Mining Funds
Agriculture Funds
European/Israeli Venture Capital
Timber Funds
Other Niche Sectors
Percentage of Respondents (%)
Source: Probitas Partners’ Private Equity Institutional Investor Trends for 2013 Survey
0 10 20 30 40 50 60
58
40
40
24
17
13
11
8
8
14
15
17
19
21
23
26
35
39
7
4
3
3
1
1
4
8
Private Equity Investor Trends for 2013 Survey © 2012 Probitas Partners
Sectors and Geographies of Interest
ChartVIIIdetailsthesectorsofinteresttoinvestorsfor2013:
• Ashasbeenthecase inmostofourprevioussurveys,middle-marketbuyoutandgrowthcapitalintheUnitedStatesandEuropedominateinterestatthetopofthesurvey.
• Forthefirsttime,weaskedabout interest increditstrategiesseparatefrominterestinmezzaninefunds.Creditstrategiesrankedveryhigh—sixthamongallsectors—ascontinuingproblemsinthedebtmarketsmakethissectormore
Table I Investors Focus of Attention Among Private Equity SectorsTop five responses:
2007 2013
Sector % Targeting Sector % Targeting
U.S. Middle-Market Buyouts 49% U.S. Middle-Market Buyouts 58%
European Middle-Market Buyouts 42% Growth Capital 40%
U.S. Venture Capital 34% European Middle-Market Buyouts 39%
Distressed Debt 30% Credit Strategies 26%
Asian Funds 25% Asian Funds 24%
Source: Probitas Partners’ Survey of Institutional Limited Partners, 2007 & 2013
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© 2012 Probitas Partners Private Equity Investor Trends for 2013 Survey
attractivetoprivateequityinvestors;interestbyNorthAmericaninvestorswasparticularlystrong.
• EvenwithstrongsocialmediaIPOsinlate2011andearly2012,globalinterestinU.S.venturecapitalremainedweak,ranking14thontheoveralllist.
• At the margin, there is increased interest in hard asset strategies, but theinterest is scattered amongst infrastructure, agriculture, mining, and timberfunds—strategies thatmayormaynotbepartofprivateequityallocationsforrespondents.
• Mega-buyout funds continued to rank very low in interest, continuing theresultsofourpriorsurveys,evenatthepeakofthemarket.
TableIcomparesthetop-rankedareasofinterestfromour2007surveyjustbeforetheGlobalFinancialCrisisandthecurrentsurvey(slightlyadjustedasthe2013resultsincludedmoresub-categories).Thefindingsarenotsurprising:
• U.S.andEuropeanmiddle-marketbuyout fundsscoredextremelywellbeforetheGlobalFinancialCrisisastheystilldonow.
• InterestinU.S.venturecapitalhasfallensignificantlysince2007,withvariousproblemsinthesectorstillplayingout.
• EvenattheveryearlystagesoftheGlobalFinancialCrisis,interestindistresseddebtincreasedasinvestorsbegantohedgetheirbetsinwhattheysawasanincreasinglyfrothyenvironment.
• Theriseofinterestingrowthcapitalandcreditstrategiesintotheupperrankshasbeenpropelledbypersistentdifficultiesindebtmarkets.
Chart IX Private Equity Sectors of Interest; European Respondents“During 2013, I plan to focus most of my attention on investing in the following sectors (choose no more than five):”
European Middle-Market Buyouts (Country-Focused)
U.S. Middle-Market Buyouts ($500 MM–$2.5 B)
European Middle-Market Buyouts (Pan-European)
Growth Capital Funds
U.S. Small-Market Buyouts (<$500 MM)
Asian Country-Focused Funds
Infrastructure Funds
Credit Strategies
Mezzanine Funds
Distressed Debt Funds
Pan-Asian Funds
Restructuring Funds
Emerging Markets (Ex-Asia)
Secondary Funds
Energy Funds
U.S. Large Buyouts ($2.5–$5 B)
Mega Buyout Funds (>$5 B)
Fund-of-Funds
Cleantech/Green-Focused Funds
U.S. Venture Capital
European/Israeli Venture Capital
Mining Funds
Agriculture Funds
Timber Funds
Other Niche Sectors
Percentage of Respondents (%)
Source: Probitas Partners’ Private Equity Institutional Investor Trends for 2013 Survey
0 20 40 60 80
76
45
33
19
10
10
10
7
7
10
10
12
14
14
14
19
21
29
55
2
0
0
0
0
5
10
Private Equity Investor Trends for 2013 Survey © 2012 Probitas Partners
• U.S. middle-market buyouts’ top ranking in the survey partially reflects thefact that43%oftherespondentsarefromNorthAmerica.Thiscontinuestobea trend formost investors toprefer local fundsandstrategiesgenerally,and thenextend theirportfoliosgeographicallyas theygainknowledgeandexperience,andseekgreaterdiversification.
• ChartsIXandXprovidealookattheprivateequityworldsolelythroughtheeyesofEuropeanorAsianrespondents.
• Not surprisingly, Chart IX shows European country-focused middle-marketbuyoutsasthetoprankedinterestforEuropeaninvestorswhilepan-Europeanfundsalsodidwell.
Chart X Private Equity Sectors of Interest; Asian Respondents“During 2013, I plan to focus my attention on investing in the following sectors (choose no more than five):”
U.S. Middle-Market Buyouts ($500 MM–$2.5 B)
Asian Country-Focused Funds
Infrastructure Funds
Growth Capital Funds
European Middle-Market Buyouts (Pan-European)
Pan-Asian Funds
Distressed Debt Funds
Secondary Funds
U.S. Small Market Buyouts (<$500 MM)
Mezzanine Funds
European Middle-Market Buyouts (Country-Focused)
Credit Strategies
Energy Funds
U.S. Large Buyouts ($2.5–$5 B)
Mega Buyout Funds (>$5 B)
Restructuring Funds
U.S. Venture Capital
Cleantech/Green-Focused Funds
Timber Funds
Fund-of-Funds
Emerging Markets (Ex-Asia)
European/Israeli Venture Capital
Mining Funds
Agriculture Funds
Other Niche Sectors
Percentage of Respondents (%)
Source: Probitas Partners’ Private Equity Institutional Investor Trends for 2013 Survey
0 10 20 30 40 50 60 70
65
41
29
24
12
12
12
0
6
18
24
24
24
41
0
0
0
0
0
0
0
24
12
29
6
11
© 2012 Probitas Partners Private Equity Investor Trends for 2013 Survey
• While U.S. middle-market buyouts were also of interest to Europeans, creditstrategieswerelessinteresting,andU.S.venturecapitalwasoflittleinterest.
• As shown in Chart X, Asian investors look at their home markets morefavorably, though U.S. middle-market buyouts are still the major sectorofchoice.
• European-basedfundsandU.S.venturecapitalareofsignificantlylessinteresttoAsian investors,although theyaremuchmore interested in infrastructurefunds,whichsomeofthemareinvestinginthroughprivateequityallocations.
• Asianrespondentswerealsomuchmorefocusedoncoreprivateequitymarketswith little interest in alternative sectors like timber, mining, or Europeanventurecapital.
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Private Equity Investor Trends for 2013 Survey © 2012 Probitas Partners
• Asfarasgeneralgeographic interest,thethreemajorgeographiesofNorthAmerica,WesternEurope,andAsiacontinuetodominateinvestorinterest.
• Asdiscussedabove,thoughnotdetailed inChartXI,respondentsfromeachoftheseterritoriesfavortheirhomemarketsastheirmostimportanttargets.
• There was less interest in Asia generally in this year’s survey, with thepercentageofrespondentstargetingAsiafallingmodestlyfrom65%lastyearto53%thisyear.
• There isvery little interest inMENAandAfrica, thoughCentralandEasternEuropeisbeginningtoreboundafterbeinghurtbytheGlobalFinancialCrisis.
Chart XI Private Equity Geographical Focus“During 2013, I anticipate that the three major geographical focuses of my program will be:”
Perc
enta
ge o
f Res
pond
ents
(%)
90
80
70
60
50
40
30
20
10
0
North America
Western Europe
Asia Latin America
Central and Eastern Europe
Middle East/North Africa
Africa Emerging Markets Globally
Other
Source: Probitas Partners’ Private Equity Institutional Investor Trends for 2013 Survey
2 2
84
53
83
74
1
18
13
© 2012 Probitas Partners Private Equity Investor Trends for 2013 Survey
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Private Equity Investor Trends for 2013 Survey © 2012 Probitas Partners
• As far as European markets, for the sixth consecutive year, institutionalinvestorspreferredtoinvestintheNordicRegionbyasignificantmargin.
• AscoveredinChartXII,GermanyandtheUnitedKingdomonceagainroundedout the top three geographies of interest, though interest in both countriesincreasedcomparedtolastyear.
• ItalyandSpainaretheleastinterestingtoinvestors,asbothcountriescontinuedtodealwithsignificantmacroeconomicissues.
• InterestinFrancefellnoticeablycomparedtolastyear;theFrenchgovernment’srecently announced tax plan and its potential effects on private equitybecame widely discussed just as the survey was opening for responses, andthe issue might have had a greater impact if it had been known before thesurveyopened.
Chart XII Most Attractive European Markets“For European country/regionally-focused funds, I find the most attractive markets to be (choose no more than three):”
Nordic Region
Germany
United Kingdom
Benelux
I only invest in Europe through Pan-European funds
France
Central Europe (Poland, Czech Republic, Hungary, etc.)
Eastern Europe (Russia, Ukraine, Georgia, etc. )
Spain
Italy
I only invest in Europe via fund-of-funds
I do not invest in Europe
Other
Percentage of Respondents (%)
Source: Probitas Partners’ Private Equity Institutional Investor Trends for 2013 Survey
0 10 20 30 40 50 60 70
20122013
4844
2019
1312
77
913
64
32
12
411
45
4034
6261
1110
15
© 2012 Probitas Partners Private Equity Investor Trends for 2013 Survey
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Private Equity Investor Trends for 2013 Survey © 2012 Probitas Partners
• AsChartXIIIhighlights,Europeaninvestorsviewtheirhomemarketsimilarlytoglobalinvestorsintermsofgreatestareasofinterest,butwithevenmorefocusontheNordicRegionandGermany.
• Europeans,aswithglobalinvestors,remainleeryofSouthernEuropegiventhecurrenteconomicproblemsthere.
• There is significantly more interest in Central Europe from Europeans thanthereisfromoverallrespondents.
Chart XIII Most Attractive European Markets; European Respondents“For European country/regionally-focused funds, I find the most attractive markets to be:(choose no more than three)”
Nordic Region
Germany
United Kingdom
Benelux
France
I only invest in Europe through Pan-European funds
Central Europe (Poland, Czech Republic, Hungary, etc.)
Eastern Europe (Russia, Ukraine, Georgia, etc.)
Spain
Italy
I only invest in Europe through fund-of-funds
I do not invest in Europe
Other
Percentage of Respondents (%)
Source: Probitas Partners’ Private Equity Institutional Investor Trends for 2013 Survey
0 10 20 30 40 50 60 70 80 90
Overall RespondentsEuropean Respondents
8362
34
52
86
010
2820
4340
6848
34
159
312
137
33
17
© 2012 Probitas Partners Private Equity Investor Trends for 2013 Survey
Chart XIV Most Attractive Asian Markets; Asian Respondents“Which Asian markets do you find most attractive at the moment? (choose no more than three):”
China
Southeast Asia
Australia
Pan-Asian funds
Indonesia
South Korea
India
Japan
Taiwan
Vietnam
Asia via global funds
Asia via fund-of-funds
I do not invest in Asia
Other
Percentage of Respondents (%)
Source: Probitas Partners’ Private Equity Institutional Investor Trends for 2013 Survey
0 10 20 30 40 50 60
Asian RespondentsOverall
2535
1918
1418
1312
1312
930
10
10
618
136
216
4453
150
10
18
Private Equity Investor Trends for 2013 Survey © 2012 Probitas Partners
Chart XIV highlights global respondents’ interest in Asian geographies goinginto2013.
• ChinaremainsthetopAsiangeographyofinterestamongallparties,thoughthe interest fell significantly from 55% of overall respondents and 72% ofAsianrespondentslastyear.
• The biggest difference between Asian respondents and overall respondentsthis year is amuchgreater interest locally in Japan; however, therewereadisproportionate number of Japanese respondents in the survey this yearfocusedontheirhomemarket,slightlyskewingtheAsianresults.
• Lastyear30%ofoverall respondents targeted India,while thisyear13%ofoverallrespondentsandonly9%ofAsianrespondentswerefocusedthere.
Table II Which Geographies in Asia are of the most interest in private equity?Top four responses:
2007 2013
Country/Region % Targeting Country/Region % Targeting
China 28% China 44%
India 28% Southeast Asia 25%
Japan 25% Australia 21%
I do not invest in Asia 25% Pan-Asian funds 19%
Source: Probitas Partners’ Survey of Institutional Limited Partners, 2007 & 2013
19
© 2012 Probitas Partners Private Equity Investor Trends for 2013 Survey
TableIIhighlightshowinterestswithintheAsianmarkethavechangedsincetheGlobalFinancialCrisisstarted.
• In2007,China, India,and Japanwerenearly tied in investor interest. Sincethen, interest in Indiahas fallenprecipitouslyas investorsgrew increasinglyconcernedover lackofexits.Theappetite forJapanhasbeen impactedbyasimilarproblem.
• InterestinSoutheastAsianfundshasincreasedoverthelasttwoyears,driveninpartbyinvestorfocusonIndonesiaandadesiretodiversifyawayfromChinaexposure,whileAustraliabenefitsinthesurveyfromadisproportionatelylargenumberofAustralianrespondentstargetingtheirhomemarket.
• Notably,in2007aquarterofrespondentsdidnotinvestinAsia;thatnumberdeclinedtoonly15%in2013.
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Private Equity Investor Trends for 2013 Survey © 2012 Probitas Partners
Emerging Markets
• As detailed in Chart XV, China and Brazil clearly lead investor interest inemergingmarkets,thoughinterestinChinahasdeclinednoticeablyoverthelastyear.
• Thebiggestchange,however,isthefallofinterestinIndia.Inallourprevioussurveys,China,Brazil,andIndiahaveheldthetopthreepositionsinthesurvey,thoughtherankamongthethreesometimesshifted.Thisyear,however,thepercentage of respondents targeting India fell to 13% from 30% last year,droppingIndiaintotheseventhposition.Inconversationswithinvestors,themost frequentcomplaintwasthat,aftermakinganumberofbetson Indianfundsinthemiddleofthelastdecade,theywerestillwaitingforexitsandwereunwilling to make new commitments to India until they had received morecapitalback.
• Interest in Turkey and Indonesia has surged in the last two years, and asfar as individual geographies, they now round out the top five along withSoutheastAsia.
• TheotherBRICcountry—Russia— continued to trail significantly in thesurvey,asithasforanumberofyears.Limitedpartnerstellusthattheyareconcerned about de facto investors’ rights and alignment of interest in theRussianmarket.
Chart XV Most Attractive Emerging Markets“I find the most attractive emerging markets to be (choose no more than two):”
China
Brazil
Turkey
Southeast Asia
Indonesia
Pan-Latin America
India
South Korea
Central Europe
Colombia
Mexico
Pan-Asia
Russia
Peru
Eastern Europe
Chile
MENA
I only invest in global emerging market funds
Vietnam
Sub-Saharan Africa
Mongolia
Other
I do not invest in emerging markets
Percentage of Respondents (%)
Source: Probitas Partners’ Private Equity Institutional Investor Trends for 2013 Survey
0 10 20 30 40 50
29
13
16
19
15
47
33
10
7
4
4
44
3
3
2
2
2
2
38
20122013
20
20
18
17
1330
10
107
8
811
63
44
1
21
0
3
3
3
5
5
8
18
21
© 2012 Probitas Partners Private Equity Investor Trends for 2013 Survey
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Private Equity Investor Trends for 2013 Survey © 2012 Probitas Partners
• As detailed in Chart XVI, the driving factor attracting investor interest inemergingmarketswastheprospectofstronglong-termeconomicgrowththatwaslikelytopositivelyimpactreturns.However,thepercentageofrespondentswhofeltcompelledtoinvestinemergingmarketsonthattheorydroppedfrom77%lastyearto60%thisyear.
• Over the last year thepercentageof respondents saying that theywerenotinterestedinemergingmarketsgenerally,butratherchosetofocusonafewspecificcountrieswithlargeopportunities,increasedfrom11%to28%.
• AsdepictedinChartXVII,thereasonsinvestorsavoidemergingmarketswereledbyconcernsaboutpolitical, currency,andeconomic risks. This year, thenumberofrespondentcitingthoseconcernsincreasedbynearlytwo-fold.
Chart XVI Interest in Emerging Market Private Equity“My interest in emerging market private equity is driven by (check all that apply):”
Strong long-term economic growth in a number of these countries
Desire to diversify my private equity portfolio by geography to achieve the benefits of lack of correlation
I am less interested in emerging markets in general than in exposure to a few specific countries with large opportunities
Lower forecast returns in the established markets of private equity make this sector more attractive
As an institutional investor from an emerging market I am looking to support my home markets
Other
Percentage of Respondents (%)
Source: Probitas Partners’ Private Equity Institutional Investor Trends for 2013 Survey
0 10 20 30 40 50 60 70
60
33
28
12
1
7
Chart XVII Disinterest in Emerging Market Private Equity“For those not interested in emerging markets, I am not interested because (check all that apply):”
I am uncomfortable with the degree of political, currency, or economic risk in emerging markets
These markets are not developed enough, and it is difficult to find experienced managers with strong track records
I am not staffed properly to perform due diligence on these markets that basically offer emerging manager risk
as well as emerging markets risks
As an organization, we are satisfied with getting emerging markets exposure through publicly-traded securities
My private equity program is relatively new and we are focused on building exposure in our core,
home markets before diversifying
Other
Percentage of Respondents (%)
Source: Probitas Partners’ Private Equity Institutional Investor Trends for 2013 Survey
0 10 20 30 40 50 60
52
36
21
18
15
9
23
© 2012 Probitas Partners Private Equity Investor Trends for 2013 Survey
24
Private Equity Investor Trends for 2013 Survey © 2012 Probitas Partners
U.S. Middle-Market Funds
• Inmanysectors,geographyisamajorstrategicdifferentiatorbetweenfunds—but not in the large, homogeneous market for buyouts in the UnitedStates. Instead, this market is predominantly differentiated by variousinvestmentstrategies.
• As detailed in Chart XVIII, a majority of respondents indicated a strongpreferenceforfundsthatgeneratedreturnsviaoperationalimprovementsandwerestaffedwithoperatingprofessionals.Thisisconsistentnotonlywithpastsurveyresultsbutalsoacrossallinvestortypes.
• Interest in restructuring/turnaround funds has fallen into fourth place thisyear,withonly26%ofinvestorstargetingit.Thesefundsarethemostvolatileininvestorinterestovertime,fluctuatingsignificantlywithmarketcycles.
Chart XVIII Most Attractive U.S. Middle-Market Sectors“Which of these sectors/strategies in the U.S. Middle Market do you find most appealing? (check all that apply):”
Funds focused on operational improvements heavily staffed with professionals with operating backgrounds
Funds focused on buy-and-build strategies
Funds focused on single industries (i.e., retail, healthcare, media)
Restructuring/turnaround funds
Strategy is irrelevant, a demonstrable superior track record is my only concern
Funds focused on strongly growing companies, often investing without majority control
Regionally-focused funds
I only invest in the U.S. middle market through fund-of-funds
I do not invest in the U.S. middle market
Other
Percentage of Respondents (%)
Source: Probitas Partners’ Private Equity Institutional Investor Trends for 2013 Survey
0 20 40 60
58
40
20
0
30
26
20
16
4
11
25
© 2012 Probitas Partners Private Equity Investor Trends for 2013 Survey
Chart XIX Most Attractive Venture Capital Sectors“In venture capital I focus on funds active in the following sectors or stages (choose all that apply):”
Funds investing in multiple sectors
Technology only funds
Life science only funds
Cleantech only funds
Multi-stage
Late-stage
Mid-stage
Early stage
Seed stage
Focus solely on historic returns
I only invest in venture capital through fund-of-funds
I do not invest in venture capital
Other
Percentage of Respondents (%)
Source: Probitas Partners’ Private Equity Institutional Investor Trends for 2013 Survey
0 10 20 30 40
21
21
2
3
17
25
6
8
39
19
18
9
17
26
Private Equity Investor Trends for 2013 Survey © 2012 Probitas Partners
Venture Capital
• Ventureinvestorinterestinstageandsectorhasremainedstaticoverourlastseveralsurveys, though interest incleantech-focused fundshascontinuedtodwindletoaverylowlevelfor2013projectionsasdetailedinChartXIX.
• Endowments and foundations remain much more active in venture capitalthanotherinvestorsandarefocusedonearlystageinvestments,with50%ofrespondentstargetingthatstage.
• Since2007,thepercentageofrespondentswhostatedthattheydonotinvestinventurecapitalhasmorethandoubled, from17%to39%.Europeansarethe most negative on the sector, with 54% of respondents saying they donotinvestatall,whileendowmentsarethemostpositive,withonly12%nottargetingthesector.
Chart XX Distressed Investments“Within the distressed debt/restructuring sector, I am most interested in (choose no more than two):”
Distressed debt for control funds (“Loan-to-Own”)
Restructuring/turnaround funds (focused on equity, not debt)
Opportunistic credit (mispriced debt, small loan portfolios, etc.)
Distressed debt active/non-control funds (often hold through restructuring)
Distressed debt trading funds
Distressed debt hedge funds
I do not invest in this sector
Percentage of Respondents (%)
Source: Probitas Partners’ Private Equity Institutional Investor Trends for 2013 Survey
0 10 20 30 40 50 60
29
26
18
5
40
48
2
27
© 2012 Probitas Partners Private Equity Investor Trends for 2013 Survey
Niche Private Equity Sectors
• There are several distinct distressed strategies, but many fund managerspursueacombinationoftheseapproacheswithinthesamefund.
• AsnotedinChartXX,mostrespondentspreferstrategieswithavalue-addedfocusthatgenerateshighermultiplesofreturn.Consequently,distresseddebtforcontrolfundshadthestrongestinterest.
• Forthefirsttimethisyear,weaskedinvestorstorankseparatelyopportunisticcredit funds. They clearly differentiated between this strategy and theothersand investorsweremuchmore interested inopportunistic creditovertradingstrategies.
• 26%ofrespondentssaidthattheydonotinvestinthedistressedsectoratall,including32%ofEuropeanrespondents.
Chart XXI Secondary Market Investments“In the secondary market my firm (choose all that apply):”
Actively purchases direct positions in the secondary market
Actively invests in secondary funds
Is not active in secondaries in any manner
Has sold or is considering selling funds in our portfolio for portfolio management purposes
Provides advice to clients on secondaries
Actively purchases direct positions in companies in the secondary market
Other
Percentage of Respondents (%)
Source: Probitas Partners’ Private Equity Institutional Investor Trends for 2013 Survey
0 10 20 30 40 50
41
33
6
4
21
4
6
41
38
1211
20122013
14
2224
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Private Equity Investor Trends for 2013 Survey © 2012 Probitas Partners
• 2012 has been an extremely active year for both secondary fundraisingand transaction volume, driven in part by regulatory changes impactingbankportfolios.
• Chart XXI reflects very few changes in investor preferences since last year,witha largenumberofrespondentsactivelypurchasingsecondarypositionsdirectlyorinvestingthroughsecondaryfunds.
• The most frequently mentioned ”Other” strategy was purchasing secondarypositions in fundswhere thebuyerhadanestablished relationshipwith thegeneralpartnerandsoughttoincreaseitsexposureinfunds,whereinvestorssoughttogainstrategicaswellasfinancialbenefit.
Chart XXII Directs and Co-Investments“Regarding directs and co-investments, my firm (choose all that apply):”
Does not invest in co-investments nor directly invests in companies
Has an active internal co-investment program
Provides advice to clients on co-investment or direct investments
Invests directly in companies
Requires or prefers a co-investment as a means of diligencing a new fund manager
Has an outsourced co-investment program
Only opportunistically pursues co-investments
Other
Percentage of Respondents (%)
Source: Probitas Partners’ Private Equity Institutional Investor Trends for 2013 SurveyNote: “Large Investors” denotes those survey respondents who plan to commit $1 billion or more to private equity in 2013
0 10 20 30 40 50 60
Large InvestorsAll Respondents
916
916
2848
3926
611
511
2516
50
29
© 2012 Probitas Partners Private Equity Investor Trends for 2013 Survey
• As Chart XXII details, the majority of institutional investors do not pursueco-investmentsordirect investments,oronlydosoopportunisticallybecauseofstafforcapitallimitations.
• The largest investors are much more likely to have an active co-investmentprogram; nearly half of these large respondents have an active internal co-investmentprogram,whileanother11%haveoutsourcedprogramsand16%investdirectlyincompanies.
Chart XXIII Publicly Traded Private Equity Vehicles“As far as publicly traded private equity vehicles, my firm (choose all that apply):”
Has not made an investment in the sector in the past and has no plans to do so
Previously invested in the sector but is decreasing or eliminating our exposure
Has invested in publicly traded private equity fund-of-funds and plans to maintain or build
this exposure in the future
Has not made an investment in the sector in the past but is considering doing so
Has invested in publicly traded private equity vehicles that invest directly in companies and plans to
maintain or build this exposure in the future
Other
Percentage of Respondents (%)
Source: Probitas Partners’ Private Equity Institutional Investor Trends for 2013 Survey
83
0 10 20 30 40 50 60 70 80 90
33
105
79
29
2013 2012
22
02
30
Private Equity Investor Trends for 2013 Survey © 2012 Probitas Partners
• Coming out of the Global Financial Crisis, there has been some renewedactivity inpublicly-tradedvehicles,eitherat themanagementcompany levelortheinvestmentvehiclelevel.
• However,asdetailedinChartXXIII,thereremainslittleinterestinthissectorgenerally among institutional private equity investors, across all types orgeographiesofinvestors.
• One interesting difference from last year’s survey is that more investorspreviouslyactiveinpubliclytradedprivateequityvehiclesarenowdecreasingoreliminatingtheirexposure.
Chart XXIV Issues Regarding Fund Structure“The issues I focus on most as far as terms or structure of a fund are (choose no more than three):”
Level of general partner financial commitment to the fund
Distribution of carried interest between the senior investment professionals
Overall level of management fees
Carry distribution waterfalls
Cap on fund size
Structure or inclusion of a key man provision
Ownership of the management company
Transaction fee splits
Level of carried interest
Structure or inclusion of a no-fault divorce clause
Sharing of carry and/or investment decision making with a third-party sponsor
Other
Percentage of Respondents (%)
Source: Probitas Partners’ Private Equity Institutional Investor Trends for 2013 Survey
13
14
21
22
30
32
35
38
38
9
0 10 20 30 40 50 60
5
54
31
© 2012 Probitas Partners Private Equity Investor Trends for 2013 Survey
Fund Structures and Key Terms
• TheILPAPrincipleshavehadasignificantimpactonfundtermsandhavebeenwidelyadoptedasastartingpointfornegotiations.
• Asithasbeeninmostofourpastsurveys,thelevelofgeneralpartnerfinancialcommitmenttoafundhasbeenthemostimportanttermformostinvestorsascoveredinChartXXIV;theexceptionthisyearwasforinsurancecompanies,whoweremorefocusedonthe levelofmanagementfeesandoncarrydistributionwaterfallsthangeneralpartnercommitmentlevel.
• The distribution of carried interest between senior professionals — an issueinvestorbelieveisimportanttoteamstability—roseinimportancefromfourthlastyeartosecondthisyear.
• Asfarasthe“Other”responses,themostfrequentlycitedtermwassimply“alloftheabove.”
Chart XXV Issues Regarding Fund Structure; Asian Respondents vs. European Respondents “The issues I focus on most as far as terms or structure of a fund are (choose no more than three):”
Level of general partner financial commitment to the fund
Cap on fund size
Structure or inclusion of a Key Man clause
Overall level of management fees
Distribution of carried interest between the senior investment professionals
Carry distribution waterfall
Transaction fee splits
Structure or inclusion of a no-fault divorce clause
Sharing of carry and/or investment decision making with a third-party sponsor
Level of carried interest
Other
Percentage of Respondents (%)
Source: Probitas Partners’ Private Equity Institutional Investor Trends for 2013 Survey
0 10 20 30 40 50 60
5252
4821
4426
3548
3041
2236
1319
1326
135
912
European RespondentsAsian Respondents
02
32
Private Equity Investor Trends for 2013 Survey © 2012 Probitas Partners
• Thereweresomeverydistinctdifferences in investorviewsonkeystructuralissuesbygeography.ChartXXV laysout thedifferencesbetweenAsianandEuropeaninvestors.
• Asianinvestorsaremuchmoreconcernedaboutcappingfundsize—asmanyofthesuccessfulfundmanagersinAsiahavebeengrowingquicklyandraisingmuchlargerfollow-onfunds.Theyarealsofocusedonkeymanclauses—giventherelativelyhighlevelofseniorstaffturnoverinAsiahistorically.
• Both Asians and Europeans remain very focused on the general partnerfinancialcommitmenttothefund.
Chart XXVI Third-Party Investments in Private Equity Management Companies“I believe third-party ownership of private equity management companies (choose all that apply):”
Raises the possibility of conflicts of interest between limited partners and investors
Leads me to reject investing in the underlying private equity funds
Is a natural response to succession issues in private equity funds
Is better handled through private as opposed to public structures
Is likely to expand significantly beyond the large funds that have such relationships
Is irrelevant to the fund investment process
Presents an interesting investment opportunity
Other
Percentage of Respondents (%)
Source: Probitas Partners’ Private Equity Institutional Investor Trends for 2013 Survey
7
8
17
20
41
72
5
0 10 20 30 40 50 60 70 80
20
33
© 2012 Probitas Partners Private Equity Investor Trends for 2013 Survey
• AfterapauseduringtheGlobalFinancialCrisis,therehasbeenaresurgenceinthird-partyinvestmentinprivateequitymanagementcompanies.
• Similar to our previous surveys, Chart XXVI shows that limited partners’strongest reaction is that these investments create possible conflictsof interest between investors who acquire positions in general partnermanagementcompaniesandlimitedpartnersinthefunds.
• Prompted by conversations with limited partners, we decided this yearto specifically ask whether such an investment would lead them to rejectcommitting to the underlying funds of a manager who sold a position in itsmanagementcompany:41%oftherespondentssaidthatitwould.
• Only 7% of respondents felt that investing in a private equity managementcompanyrepresentedanattractiveopportunity.
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Private Equity Investor Trends for 2013 Survey © 2012 Probitas Partners
Investor Fears and Concerns
• AsdetailedinChartXXVII,thegreatestfearofmostprivateequityinvestorswasthatmacro-economicdifficultieswouldhaveawidespreadimpactonallalternativeinvestmentreturns.
• Exceptionstothisdominantfearwerepensionplans,whosegreatestfearwas that management fees and transaction fees on large funds weredestroying alignment of interest between general partners and limitedpartners, and endowments and foundations, who most feared that therewas toomuchmoneycoming intoall sectorsofprivateequity relative toinvestableopportunities.
• Thebiggestdifferenceonageographicbasiswas inAsia,wherethesecondgreatest concern (mentioned by 36% of respondents) was that too muchmoneywaschasingtoofewexperiencedprivateequityprofessionalsinwhatarebecomingover-heatedemergingmarkets.
• Interestingly, 25% of all respondents were still concerned that the highpurchase price multiples paid by buyout funds for companies from 2005through2007wouldcontinuetodragdowntheirportfolioreturns.
• Wealsoencouragedrespondentstostatetheirowngreatestfearsorconcernsnotincludedinourpre-setlist.Answersincludedthefollowing:
• Private equity is fast becoming a mainstream rather than an alternative asset class. This will lead to a further erosion of returns.
• In a low rate environment our denominator is not increasing while private managers are coming back to market. We will be unable to continue to commit to private managers at the same level due to concerns about illiquidity.
• Regulation
• Venture is well poised to generate superior returns for elite managers. My concern is uneducated LPs allocating into the asset class blindly. For now I think there is sufficient friction to moderate this, but a perennial concern.
• Increasing number of secondary transactions between sponsors.
• How to source and diligence international managers, especially in emerging markets.
• The private equity industry remains highly competitive and is maturing, leading to a compression of returns.
• Value trapped in mature funds by illiquidity.
• Lack of exits by private equity.
Chart XXVII Greatest Fears Regarding the Private Equity Market“My three greatest fears regarding the private equity market at the moment are:”
Economic difficulties will have widespread impact on all alternative investment returns
Management fee levels and transaction fees on large funds are destroying alignment of interest between fund managers
Large firms in the market are becoming generalized asset managers and moving away from key investment strengths
Too much money pursuing too few experienced private equity professionals in the hot emerging markets
Private equity is most effective as a niche market — too much money is being raised in all private equity sectors
High purchase price multiples paid for buyout portfolio companies in 2005 through 2007 will dramatically impact my long-term returns
Investment by third parties into fund management companies is decreasing alignment of interest between limited partners and general partners
Commitment overhang and allocation pressure will continue to impact my ability to invest in attractive opportunities in 2013
Continued volatile IPO markets will negatively impact venture capital returns
The venture capital investing model is broken and future strong performance is unlikely to return
I find myself increasingly at odds with other limited partners due to preferential treatment
Decreased leverage availability will hurt companies needing working capital or re-financing
Access to top quartile ventures capital managers is impossible without a previous relationship, and new managers are unattractive
The number of funds in my portfolio is too large for my firm to effectively monitor
Decreasing opportunities are limiting my access to co-investments
Another technology bubble is in the process of forming
We do not have adequate staff in place to deal with issues in my current portfolio
Other
Percentage of Respondents (%)
Source: Probitas Partners’ Private Equity Institutional Investor Trends for 2013 Survey
0 10 20 30 40 50 60
48
39
33
25
10
8
10
14
15
17
28
30
7
5
5
5
5
7
35
© 2012 Probitas Partners Private Equity Investor Trends for 2013 Survey
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Private Equity Investor Trends for 2013 Survey © 2012 Probitas Partners
• Table III takes us back to the beginning of 2007 and highlights investors’concernsbeforetheGlobalFinancialCrisiswasfullydevelopedandcomparesthemtofearsgoinginto2013.
• Thoughconcernsaboutmanagementfeesandtransactionfeesdestroyingalignment of interest were among the top three concerns pre- and post-GlobalFinancialCrisis, in2007investorswereveryawarethattherewastoo much debt and equity available in the buyout market and that thestrongreturnsleadingupto2007wereunlikelytocontinue.
• Inthesurveyfor2013planning,athirdofrespondentsareconcernedthatlargefirmsinthemarketarebecomingassetmanagersfocusedonAUMgrowth and are moving away from their key investment strengths — anissuethatwasnottopicalin2007.
Table III What keeps you up at night?Top three responses:
2007 2013
Issue % Targeting Issue % Targeting
Management fee levels and transaction fees on large funds are destroying alignment of interest between fund managers and investors.
51% Economic difficulties will have widespread impact on all alternative investment returns.
48%
The amount of leverage in the buyout market is unsustainable, and over the next two years credit problems will hurt performance of recent vintage funds.
48%Management fee levels and transaction fees on large funds are destroying alignment of interest between fund managers and investors.
39%
There is too much money available in the large buyout market and that will dramatically impact future returns.
44%Large firms in the market are becoming generalized asset managers and are moving away from their key investment strengths.
33%
Source: Probitas Partners’ Survey of Institutional Limited Partners, 2007 & 2013
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© 2012 Probitas Partners Private Equity Investor Trends for 2013 Survey
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Private Equity Investor Trends for 2013 Survey © 2012 Probitas Partners
Our View of the Future
Several key trends for 2013 emanate from the survey and our ongoingconversationswithinvestors:
• We are approaching a new normal in private equity.Fundraisinggloballyisonpace tomeetor slightlyexceed2011’s totals,and interest for2013seems to be slightly stronger than 2012. Fundraising totals at the lastmarketpeakseemmoreclearlyacyclicalaberration.
• Many investors are still dealing with pre-Global Financial Crisis legacy portfolio issues and will continue to in 2013. In our experience, manyinvestorswithlargelegacyportfoliosbuiltbeforetheGlobalFinancialCrisisare still triaging current general partner relationships: deciding who tocontinue toback (andusuallyat increasedallocations)andwho tosellormanageout,withalimitedlookatnewrelationships.
• The new performance metric — distributed cash. Many investors haveaddedakeymetricofperformancetoIRRandMultipleofCapital—andthatiscashreturned,bothinabsolutetermsandasapercentofcapitaldrawndown. As fund managers who last raised money just before the GlobalFinancialCrisisreturntomarketin2013,investorswillincreasinglydemandtoseemorereturnedcapitalasaprecursortocommitmentstonewfunds.
• Investors are becoming more cautious on emerging markets. Interestinemergingmarketshasdeclinedasthepast18monthshaveshownthatemergingmarketshavenotdecoupledfromthedevelopedmarketsandthatwhile thegrowthstory inemergingmarketsover thenext25yearsseemsstrong,whatwillhappeninprivatemarketsoverthenextfiveyearsismuchmoreuncertain.
• Interest in venture capital will remain weak. Though the mixed successofventure-backedsocialmediacompaniesoverthe18monthsinthepublicmarketshasbroughtmoreattentiontothesector,poorreturnsoverthelastdecadestillputthesectoroutoffavor.Anumberofinvestorshavealreadygivenuponventurecapitalentirely,movingtheirinteresttoothersectors.Individual fundswithvery strong track recordswill stillbeof interest,butallocationsfortheshrinkinguniverseofactiveinvestorswillremainsmall.
• Though not a major factor in our survey, we see increasing interest by certain limited partners in hard asset plays. Certain sophisticatedinvestors,worriedabouteconomicuncertaintyandpotential inflation,areturningtohardassetsectorssuchasmining,agriculture,andtimber.Manyoftheseinvestorsarecreatingseparateinflation-linkedallocationsoutsideoftheirprivateequity,realestate,anddebtallocations,butmanyofthemalso express frustration because there are few products in these sectorsavailable with experienced management teams and deep track records.However,investorinterestinthesesectorsisattractingnewmanagersthatarebringingstaffwithcorporatesectorexperience to the table to tryandaddresstheseissues.
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© 2012 Probitas Partners Private Equity Investor Trends for 2013 Survey
• The secondary market will continue growing in 2013: Two factors aredrivingthis—increaseddealflowdrivenbybankingregulationandEuropeaninsuranceriskrules,andbytheincreasedwillingnessofcertaininvestorstorebalanceportfoliosbysellingpositionstoredeploycapital.BothDodd-FrankandBaselIIIarebeingimplementedovertime,andInsolvencyIIregulationsaffectingEuropeaninsurancecompanieshavenotbeenfinalized,sothefulleffectoftheseregulationshasnotyetbeenfelt.
• The past as future — “middle-market, operationally-focused funds.”In all of our past surveys and in conversations with investors, there hasalwaysbeenapronouncedpreferenceformiddle-marketbuyoutfundswithoperational focus. We do not expect that to change. What does continuetovarytremendouslyamongst investors,however, is thedefinitionofwhat“middlemarket”is,orwhatdefinesan“operationalfocus.”
• But not “just another middle-market buyout fund.” Middle-marketbuyoutsareacoreareaofmany investors’portfolios,andmany investorshavealreadymadesignificantcommitmentsinthesector.Managersseekingnewcommitmentsneedtodemonstrateaclearcompetitiveadvantagethatseparatesthemfromwhatisaverycrowdedpack.
• The primary concern for investors is the global economy — but there is little consensus on how things will play out.Theongoingeconomicissuesin Greece, Spain, and Italy, the risk of the fiscal cliff in the United States,and faltering stockmarkets inChinaandBrazil haveall caught investors’attentiontoonedegreeoranother.Butnothinghasyetreachedatipping-point,somanyinvestorsaremuddlingthrough.Inaddition,riskdoescreateopportunity: some investors have focused attention on markets like Spainand Italy inanticipation that theyhavehitbottomandcurrentpricing forcompaniesisattractive;othersarecertainthattheirinvestmentcommitteeseitherdonotagreewiththatassessmentoraresimplynotpreparedtotaketheheadlineriskofinvestinginthesemarketsatthemoment.
N o t e s :
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Private Equity Investor Trends for 2013 Survey © 2012 Probitas Partners
N o t e s :
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© 2012 Probitas Partners Private Equity Investor Trends for 2013 Survey
Probitas Funds Group, LLC Probitas Funds Group, LLC PFG-UK Ltd. Probitas Hong Kong Limited
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Private Equity Institutional Investor Trends for 2013 Survey