private equity institutional investor trends for 2013 survey

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 ¯ ¯˘

1

© 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.

3


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


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:”


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 (%)


0 15 30 45

2012 2013

29

1714

66

67

2

01

1

3934

21

35

5


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



0 10 20 30 40 50

46

14

12

8

5

1

0

13

1

6


• 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


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



0 10 20 30 40 50 60

2

28

3

54

5

8

7


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



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


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

9


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):”





U.S. Small-Market Buyouts (<$500 MM)



Credit Strategies

Mezzanine Funds


Pan-Asian Funds

Restructuring Funds


Secondary Funds

Energy Funds



Fund-of-Funds




Mining Funds

Agriculture Funds

Timber Funds

Other Niche Sectors



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


• 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):”






Pan-Asian Funds


Secondary Funds

U.S. Small Market Buyouts (<$500 MM)

Mezzanine Funds


Credit Strategies

Energy Funds



Restructuring Funds



Timber Funds

Fund-of-Funds



Mining Funds

Agriculture Funds

Other Niche Sectors



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


• 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.

12


• 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


2 2

84

53

83

74

1

18

13


14


• 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



0 10 20 30 40 50 60 70

20122013

4844

2019

1312

77

913

64

32

12

411

45

4034

6261

1110

15


16


• 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



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


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



0 10 20 30 40 50 60

Asian RespondentsOverall

2535

1918

1418

1312

1312

930

10

10

618

136

216

4453

150

10

18


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%


19


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.

20


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



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


22


• 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



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



0 10 20 30 40 50 60

52

36

21

18

15

9

23


24


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



0 20 40 60

58

40

20

0

30

26

20

16

4

11

25


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



0 10 20 30 40

21

21

2

3

17

25

6

8

39

19

18

9

17

26


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



0 10 20 30 40 50 60

29

26

18

5

40

48

2

27


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



0 10 20 30 40 50

41

33

6

4

21

4

6

41

38

1211

20122013

14

2224

28


• 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


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


• 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



83

0 10 20 30 40 50 60 70 80 90

33

105

79

29

2013 2012

22

02

30


• 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



13

14

21

22

30

32

35

38

38

9

0 10 20 30 40 50 60

5

54

31


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



0 10 20 30 40 50 60

5252

4821

4426

3548

3041

2236

1319

1326

135

912

European RespondentsAsian Respondents

02

32


• 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



7

8

17

20

41

72

5

0 10 20 30 40 50 60 70 80

20

33


• 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.

34


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



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


36


• 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%


37


38


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.

39


• 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 :

40


N o t e s :

41


Probitas Funds Group, LLC Probitas Funds Group, LLC PFG-UK Ltd. Probitas Hong Kong Limited

425 California Street 1120 Ave. of the Americas 1st Floor Dudley House Nexxus BuildingSuite 2300 Suite 1802 36-38 Southampton Street Level 15San Francisco, CA 94104 New York, NY 10036 Covent Garden 41 Connaught RoadUSA USA London WC2E 7HF, UK Central, Hong Kong

Tel: +1 415 402 0700 Tel: +1 212 403 3662 Tel: +44 (0) 20 7845 5400 Tel: +852 2533 3678

Private Equity Institutional Investor Trends for 2013 Survey

private equity institutional investor trends for 2013 survey

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