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Probitas Partners 2020 Institutional Investors Private Equity Survey

December 2019

Confidential and Trade Secret © 2019 Probitas Partners 1

Table of Contents

Topic Page

Survey Highlights 2

Background and Appetite 3

Sectors of Interest 10

Geographies of Interest 19

Middle-Market Buyouts 28

Venture Capital 31

Niche Sectors 33

Structural Issues 40

Investor Fears 45

Summary 48


Survey Highlights

Investors are still heavily focused on U.S. and European Middle-Market Buyouts, and U.S. Growth Capital.

Though many respondents felt that we are near or at the top of the market cycle, interest in Distressed Debt and Special Situations funds declined this year as the investment pace for these funds has slowed.

Though Asian-focused fundraising remains slow, respondents still expressed strong interest in China, even amid the U.S./China trade war.

Focus on investing in the U.K. was weak among Europeans, though interest in the U.K. was buoyed by Asian and North American investors.

Interest in Social Impact funds was weak, and Asian and North American respondents were much less focused on ESG than were European Investors.

Venture Capital interest increased slightly in this year’s survey – though the survey was completed before SoftBank was forced to rescue WeWork.

Few investors are targeting emerging markets, and those investors are heavily focused on emerging Asia.

The greatest fear of 64% of respondents was that we are at or near to the peak of the market cycle.


Background: Private Equity Fundraising

After reaching an all-time high in 2017, global private equity fundraising fell in 2018 due to weakness in North America and Asia.

Year-to-date fundraising in 2019 has rebounded strongly due to commitments going to mega funds headquartered in the US – though a few of those funds invest globally.

Fundraising for Asian-focused vehicles has remained weak.

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Chart I Commitments to Private Equity Partnerships

Source: PREQIN; Data as of December 31, 2018, does not include funds-of-funds


Respondents by Type of Institution

57% of respondents came from Funds-of-Funds, Insurance Companies or Endowments & Foundations, with another 16% coming from Public or Corporate Pension Plans.

Family office participation at 10% was significant.

27%

17%

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10%9%

8%

7%

5%

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Chart II Respondents by InstitutionI represent a:

Fund-of-Funds Manager

Insurance Company

Endowment/Foundation

Consultant/Advisor

Public Pension

Family Office

Corporate Pension/Private Pension

Wealth Manager/Outsourced CIO

Bank

Sovereign Wealth Fund

Source: Probitas Partners' Private Equity Investor Trends: 2020 Survey Results


Respondents by Firm Headquarters

52% of respondents were from North America while 27% were from Europe and 21% from Asia or Australia.

The bulk of respondents came from developed markets which are the major source of capital for private equity.

49%

3%

23%

4%9%

8%

4%

Chart III Respondents by Firm HeadquartersMy firm is headquartered in:

United States

Canada

Western Europe ex-UK

United Kingdom

Asia ex-Japan

Japan

Australia



Current and Target Allocations

53% of respondents were roughly at or over their target but are still looking to maintain or increase their allocations.

Only 2% of respondents were over their target and looking to decrease exposure. 28% of respondents were under target and actively committing to reach it.

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Other

Looking to reduce our target allocation or exit the asset class

Over our target but seeking to increase the target

Over our target and are looking toreduce exposure to meet that target

Roughly at our target but consideringincreasing the target

A fund-of-funds or consultant to whichthe question does not apply

Under our target allocation and actively committingto private equity to achieve that target

Roughly at our target and are looking tomaintain that level of exposure

Percentage of Respondents (%)

Chart IV Current and Target Private Equity AllocationsAs far as our current private equity allocation, we are:

2020 2019



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Other

Our need to decrease exposureto private equity

Our need to deploy significant amountsof capital allocated to private equity

The strategies that our clientshave directed us to pursue

Targeting funds that will provideaccess to co-investments

Our institution's need to diversifyits private equity portfolio

Maintaining established relationships with fundmanagers returning to market this year

A focus on those private equity sectors we believe will outperformothers in this vintage year

Our institution simply pursues the best fundsand managers available in the market



Chart V Drivers of Sector InvestmentOur sector investment focus in 2020 will be driven by (choose no more than two):

Drivers of Sector Interest

Overwhelmingly, in 2020 respondents will simply target the best funds or managers currently in market – no other reason came close, which speaks to the dominating importance of producing superior returns in a crowded market.

European respondents felt even more strongly about this, with 58% simply targeting what they perceived to be the best funds.


Size of 2020 Allocations

Investors of various size responded to the survey – though this year’s respondents skewed larger compared to last year’s respondents.

Notably, 23% of respondents planned to invest $1 billion or more in the coming year.

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<$50 MM $50 MM–$150 MM

$151 MM–$250 MM

$251 MM–$500 MM

$501 MM–$1 B

>$1 B Other

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2020 2019

Chart VI Private Equity AllocationsFor 2020, we or the clients we advise are looking to commit across all areas of private equity (in USD):

Source: Probitas Partners' Private Equity Investor Trends: 2020 Survey Results; other responses were basically for respondents who had no target


Manager Relationships

Most respondents were focused on evaluating re-ups with their current managers with a limited look at new relationships, which is similar to last year.

Asian respondents, many of whom have smaller legacy portfolios, were more focused on pursuing new relationships, with 58% of them stating that that was the case.

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Other

Our 2020 commitments have already been completely allocated

Pursuing separate accounts witha smaller number of managers

Evaluating re-ups with current general partnerrelationships, looking to decrease thenumber of relationships significantly

Evaluating re-ups with current general partner relationships

Actively pursuing relationships with new managers

Evaluating re-ups with current general partner relationshipswith a limited look at new relationships


Chart VII Manager RelationshipsDuring 2020, we would expect our primary focus to be:

2020 2019



Private Equity Sectors of Interest

U.S. Middle-Market Buyouts, U.S. Small-Market Buyouts, and U.S. Growth Capital Funds were the three sectors that garnered interest from more than 50% of respondents – though European Middle-Market Buyouts were close behind at 47%.

Interest in in Special Situations and Distressed Debt declined noticeably this year.

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Emerging Markets (ex-Asia)Social Impact Funds

Energy FundsMezzanine Funds

Restructuring FundsEuropean/Israeli Venture Capital

Distressed Debt FundsSecondary Funds

Asian Venture CapitalInfrastructure Funds

Mega Buyout Funds (>$5 billion or equivalent)Direct Lending/Credit Strategies

Special Situations FundsPan-Asian Funds

Growth Capital Funds — EuropeAsian Country-Focused Funds

U.S. Large Buyouts ($2.5 billion to $5 billion)European Buyouts — Pan-European

U.S. Venture CapitalEuropean Middle-Market Buyouts — Country or Region-Focused

Growth Capital Funds — U.S.U.S. Small-Market Buyouts (<$500 million)

U.S. Middle-Market Buyouts ($500 million to $2.5 billion)


Chart VIII Private Equity Sectors of InterestDuring 2020, my firm or my clients, plan to focus most of our attention on investing in the following sectors (choose no more than seven):



Private Equity Sectors of Interest

Mega-Buyout Funds were not a strong focus of interest broadly among limited partner investment staffs – but they are a core holding of many large investors who need to deploy capital in large amounts.

U.S. Venture Capital scored strongly this year as it did last year, and interest in Asian Venture continued to grow, overtaking European/Israeli Venture Capital.

For the first time, we asked about interest in Social Impact funds; they scored at the bottom of our main list, targeted by 6% of respondents.

Funds focused on Energy fell to a five-year low, attracting only 6% interest, and that was mainly from North American investors.

The table below lists those funds that attracted less than 5% of respondent support. Funds Investing in Other General Partners, another new addition this year, were only of

key interest to 1% of respondents.

Sectors Attracting Less Than 5% of ResponsesFund Type Percent

Cleantech/Green-Focused Funds 3Other Niche Sectors 2Fund-of-Funds 2Mining Funds 1Funds Investing in Other General Partners 1Agriculture Funds 1Timber Funds 0


Private Equity Sectors of Interest: European Respondents European respondents were more interested in European-focused funds – though U.S.

Middle-Market Buyout, U.S. Small-Market Buyout and U.S. Growth Capital funds all scored strongly.

Special Situations funds also scored strongly among Europeans.

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Emerging Markets (ex-Asia)

Mezzanine Funds

Secondary Funds

Mega Buyout Funds (>$5 billion or equivalent)

Infrastructure Funds

Direct Lending/Credit Strategies

Restructuring Funds

European/Israeli Venture Capital

U.S. Venture Capital

Pan-Asian Funds

U.S. Large Buyouts ($2.5 billion to $5 billion)

Asian Country-Focused Funds

Special Situations Funds

Growth Capital Funds — Europe

Growth Capital Funds — U.S.

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

European Buyouts — Pan-European


European Middle-Market Buyouts — Country or Region-Focused


Chart IX Private Equity Sectors of Interest; European RespondentsDuring 2020, my firm or my clients, plan to focus most of their attention on investing in the following sectors (choose no more than seven):



Private Equity Sectors of Interest: European Respondents As detailed in the table below, there were more fund sectors that fell below the 5%

interest hurdle in Europe, with significantly more funds sectors registering no interest. Among European respondents, neither of the new categories of Social Impact Funds or

Funds Investing in Other General Partners scored above 5%.

Sectors Attracting Less Than 5% of Responses

Fund Type Percent

Asian Venture Capital 4

Cleantech/Green-Focused Funds 4

Distressed Debt Funds 4

Social Impact Funds 4

Agriculture Funds 0

Energy Funds 0

Fund-of-Funds 0

Funds Investing in Other General Partners 0

Mining Funds 0

Shariah-Compliant Funds 0

Timber Funds 0

Other Niche Sectors 0


Private Equity Sectors of Interest: Asian Respondents The leading sector of interest among Asian respondents was U.S. Middle-Market

Buyout funds, with Asian Country-Focused funds, European Middle-Market Funds and Pan-Asian funds all tied for 2nd place with 53% of respondents.

Infrastructure funds scored strongly among Asian investors as more of them include infrastructure in private equity allocations.

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Other Niche SectorsAgriculture Funds

Emerging Markets (ex-Asia)European/Israeli Venture Capital

Social Impact FundsDistressed Debt Funds

Fund-of-FundsSpecial Situations Funds

Secondary FundsGrowth Capital Funds — Europe

Mezzanine FundsAsian Venture Capital

Direct Lending/Credit StrategiesGrowth Capital Funds — U.S.

Mega Buyout Funds (>$5 billion or equivalent)U.S. Small-Market Buyouts (<$500 million)

Infrastructure FundsU.S. Venture Capital

U.S. Large Buyouts ($2.5 billion to $5 billion)European Buyouts — Pan-European

Pan-Asian FundsEuropean Middle-Market Buyouts — Country or Region-Focused

Asian Country-Focused FundsU.S. Middle-Market Buyouts ($500 million to $2.5 billion)


Chart X Private Equity Sectors of Interest; Asian RespondentsDuring 2020, my firm or my clients plan to focus most of their attention on investing in the following sectors (choose no more than seven):



Private Equity Sectors of Interest: Asian Respondents


Fund Type Percent


Energy Funds 0

Funds Investing In Other General Partners 0

Mining Funds 0

Restructuring Funds 0


Timber Funds 0

Asian Venture Capital funds scored relatively strongly among Asian respondents while Special Situations funds were not highly ranked.

Social Impact funds just made the 5% cut-off. Among Asian respondents, several niche sectors scored no interest at all, including

Funds Investing in Other General Partners and Energy Funds.


Private Equity Sectors of Interest: North American Respondents Funds focused on North America took the top four spots for North American

respondents. European Country-focused and Pan-European funds were also of strong interest to

North Americans.

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Social Impact Funds

European/Israeli Venture Capital

Energy Funds

Infrastructure Funds

Mega Buyout Funds (>$5 billion or equivalent)

Secondary Funds

Asian Country-Focused Funds

Pan-Asian Funds

Distressed Debt Funds

Asian Venture Capital

Growth Capital Funds — Europe

Direct Lending/Credit Strategies

European Buyouts — Pan-European

European Middle-Market Buyouts — Country or Region-Focused

U.S. Large Buyouts ($2.5 billion to $5 billion)

Special Situations Funds

U.S. Venture Capital

Growth Capital Funds — U.S.

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



Chart XI Private Equity Sectors of Interest; North American RespondentsDuring 2020, my firm or my clients plan to focus most of their attention on investing in the following sectors (choose no more than seven):



Private Equity Sectors of Interest: North American Respondents


Fund Type Percent


Emerging Markets (ex-Asia) 4

Mezzanine Funds 4

Restructuring Funds 4

Fund-of-Funds 2

Funds Investing in Other General Partners 2

Mining Funds 2

Agriculture Funds 0


Timber Funds 0

Other Niche Sectors 0

Asian Venture Capital funds were much more highly ranked by North Americans than by Europeans.

There were several fund types that did not reach the 5% hurdle, and interest in Emerging Markets (ex-Asia) was weakest among North American respondents.

As with European and Asian respondents, North Americans did not express strong interest in Funds Investing in Other General Partners.


Sector Interest Before the GFC Compared To 2020

Table I

Institutional Investors Focus of Attention Among Private Equity Sectors

Top Five Responses

2007 2020

Sector % Targeting Sector % Targeting

U.S. Middle Market Buyouts 49% U.S. Middle-Market Buyouts ($500 million to $2.5 billion) 74%

European Middle Market Buyouts 42% U.S. Small-Market Buyouts (<$500 million) 53%

U.S. Venture Capital 34% Growth Capital Funds — U.S. 51%

Distressed Debt 30% European Middle-Market Buyouts —Country or Region Focused 47%

Asian Funds 25% U.S. Venture Capital 39%

Source: Probitas Partners' Private Equity Investor Trends for 2007 Survey and 2020 Survey

There were more categories to choose from in the 2020 survey, but the results show a heavy concentration of interest in U.S. focused funds.

Notably, the market is even more focused on U.S. Middle-Market Buyouts now, with 74% of respondents targeting them compared to 49% in 2007.

As far as distressed investing, interest in Distressed Debt fell from 30% in 2007 to 12% this year, with Special Situations becoming the leading distressed sector, attracting 24% of 2020 respondents.

Though only the 8th ranked strategy in 2020, 29% of respondents this year were targeting Asian Country-focused funds, and 28% targeted Pan-Asian funds.


Overall Geographic Focus of Investors

As to be expected, respondents were heavily focused on the three key markets of North America, Western Europe and Asia.

Over the last four years interest in Latin America and Sub-Saharan Africa declined notably, though it has never been truly strong.

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Asia Central andEastern Europe

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Chart XII Private Equity Geographical FocusDuring 2019, my firm anticipates that the three primary areas of geographical focus for our programs will be:

Source: Probitas Partners' Private Equity Institutional Investor Trends for 2020 Survey


Most Attractive European Markets The Nordic Region, Germany and the U.K. led investor interest in specific private

equity markets in Europe. Interest in Southern and Central Europe remains weak, and interest in Eastern Europe

has never been strong.

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Do not invest in Europe

Only invest via fund-of-funds

Only invest via Pan-European funds

Eastern Europe (Russia,Ukraine, Georgia, etc.)

Central Europe (Poland, CzechRepublic, Hungary, etc.)

Italy

Spain

France

Netherlands

United Kingdom

Germany

Nordic Region


2020 2019

Chart XIII Most Attractive European MarketsFor European country/regionally-focused funds, we find the most attractive markets to be (choose no more than three):



Further Commentary On Europe

With the Brexit situation, the U.K. has become less popular among other Europeans, where it ranks 4th among European respondent interest behind the Netherlands.

The position of the U.K. in the overall survey was bolstered by Asian investors, 56% of whom are targeting the U.K. in 2020.

We also received interesting comments from a couple of investors on their views of the European market: "The current dislocation of [the] U.K. is a great opportunity to increase our

exposure." - U.S. Fund of Funds "We see Europe as a low growth environment, and so focus on managers who can

find specific good opportunities." - Canadian Public Pension


Most Attractive Asian Markets

China is the most targeted private equity market by investors, both among overall and Asian respondents alike.

Interest among Asian respondents in Japan and Australia is likely overstated to a degree due to the relatively large number of respondents from those countries.

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Do not invest in Asia

Only invest via fund-of-funds

Only invest via global funds

Only invest via Pan-Asian funds

Taiwan

Indonesia

Vietnam

Australia

South Korea

India

Southeast Asia

Japan

China


Overall Respondents Asian Respondents

Chart XIV Most Attractive Asian MarketsFor Asian focused funds, we find the most attractive markets to be (choose no more than three):



Further Commentary on Asia

Table II Which Geographies in Asia Are of the Most Interest?

Top Four Responses

2007 2020

Country/Region % Targeting Country/Region % Targeting

China 28% China 54%

India 28% Japan 30%

Japan 25% Southeast Asia 26%

We do not invest in Asia 25% We do not invest in Asia 20%


Table II at the bottom of the page highlights differences in investor interest between 2007 and 2020.

Only recently has Southeast Asia overtaken interest in India, not only because the focus on Southeast Asia has increased over the last three or four years, but also because the numbers of respondents targeting India has fallen, this year catching the attention of only 17% of investors.

Even with the ongoing trade-war between China and the U.S., 52% of North American respondents targeted China.

That overall sentiment was not unanimous among respondents as this comment makes clear: "Will avoid China at all costs" - U.S. Wealth Manager


Interest in Specific Emerging Markets

Emerging Asia dominated investor interest, taking the six top spots in the rankings, though interest in India-focused and Pan-Asian funds declined from last year.

The percentage of respondents saying that they did not invest in emerging markets declined slightly to 31%.

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Do not invest in emerging markets

Other

Only invest via global emerging market funds

Only invest via emerging market funds-of-funds

Colombia

Pan-Latin America

Mexico

Central Europe (Poland, Czech Republic, Hungary, etc.)

Indonesia

Brazil

Vietnam

Pan-Asia

South Korea

Southeast Asia

India

China

Percentage of Respondents (%)2020 2019

Chart XV Most Attractive Emerging MarketsWhich emerging markets does your firm find most attractive (choose no more than four):



Further Commentary on Specific Emerging Markets

Sectors Attracting 1% or Fewer of Total Responses in 2020

Fund Type 2019 2020

South Africa 1% 0%

Turkey 1% 0%

Peru 1% 0%

Nigeria 1% 0%

Middle East/North Africa 1% 0%

Eastern Europe (Russia, Ukraine, Georgia, etc.) 2% 0%

Russia 2% 0%

Chile 1% 1%

Sub-Saharan Africa 4% 1%

No country or region in Africa garnered the interest of more than 1% of respondents, while additionally the number of investors targeting Sub-Saharan Africa fell from 4% in 2019 to 1% in 2020.

As detailed below, there were many more countries or regions that were not targeted by any respondents going into 2020.


What Drives Investor Interest in Emerging Markets?

As it has been in the past, the anticipation of strong long-term economic growth in a few emerging markets is the biggest driver of interest, while a desire to diversify their portfolio to reduce correlation also has an impact.

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We do not invest in emerging markets

Other

As an institutional investor from an emerging market, we arelooking to support our home markets

Lower forcast returns in the established markets of private equitymake this sector relatively more attractive

We are less interested in emarging markets in general than inexposure to a few specific countries with large opportunities

Desire to diversify our private equity portfolio by geography toachieve benefits of lack of corellation

Strong long-term economic growth in a number of these countries


Chart XVI Interest in Emerging Market Private EquityOur interest in emerging market private equity is driven by (check all that apply):



Why Are Other Investors Not Interested in Emerging Markets? 50% of respondents felt the risk/return tradeoff in developed markets was more

attractive while 41% were uncomfortable with political, currency or economic risks in emerging markets.

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Other

Our private equity program is newand we are focused on building exposure inour core, home markets before diversifying

As an organization, we are satisfied to getemerging markets exposure through

publicly-traded securities

These markets are not developed enoughand it is difficult to find experience

managers with strong track records

We are not staffed properly to perform due diligenceon these markets that basically offer emerging

manager risk as well as emerging markets risks

We are uncomfortable with the degree of political,currency, or economic risk in emerging markets

We find the risk/return profile in developedmarkets more attractive


Chart XVII Disinterest in Emerging Market Private EquityFor those not interested in emerging markets, we are not interested because (check all that apply):



U.S. Middle-Market Strategies of Interest

There is a heavy focus on strategies looking to generate returns through operational improvements, including buy-and-build and industry-focused funds, which continues the trend over the last decade.

Unlike Europe, regionally-focused funds are not heavily favored as a key differentiator.

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Other

We only invest via funds-of-funds

We do not invest in the U.S. middle market

Strategy is irrelevant, a demonstrable superiortrack record is my primary concern

Regionally-focused funds

Restructuring/turnaround funds

Funds focused on growth companies, ofteninvesting without majority control

Funds focused on single industries(i.e., energy, retail, healthcare, media)

Funds focused on buy-and-build strategies

Funds focused on operational improvements heavily staffedwith professionals with operating backgrounds


Chart XVIII Most Attractive U.S. Middle-Market StrategiesWhich of these sectors/strategies in the U.S. middle market does your firm find most appealing (check all that apply):



Interest in Industry-Focused Funds

As it was last year, Healthcare and Technology focused buyout and growth capital funds were the strongest area of focus.

Energy-focused funds, which five years ago were targeted by 30% of respondents, have continued to decline, with only 8% of investors targeting them this year.

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We do not invest in industry-focused funds

Industry is irrelevant, we simply focus on the best managers

Agribusiness

Energy

Media/Telecommunications

Retail/Consumer

Financial services

Industrials

Technology

Healthcare


Chart XIX Interest in Industry-Focused FundsAs far as funds focused on single industries, we are most interested in (choose no more than three):



Interest in Sectors Within Energy

There are very different sector strategies within energy investing as detailed below. Recently, interest in renewable energy has climbed notably while other areas fell. Investors outside North America are much less interested in energy, with 57% of Asian

respondents and 67% of European investors saying they don’t invest in energy.

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Other

We do not invest in funds focused on energy

Energy debt funds

Distressed energy funds

Diversified funds with broad mandates

Oilfield services

Upstream oil & gas funds

Energy/power infrastructure funds

Renewable energy funds

Midstream oil & gas funds


Chart XX Interest in Sectors within EnergyIn the energy sector, we are most interested in (choose no more than three):



Venture Capital Interest

Early-stage venture was the strongest focus of respondents and this year there was notably less focus on niche industry sectors.

33% of last year’s respondents stated that they did not invest in venture capital, a number that fell to 25% this year.

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We do not invest in venture capitalWe only invest via fund-of-funds

We are focused solely on historic returns

MicroVC fundsSeed stageEarly stageMid-stageLate stage

Multi-stage

Venture debt fundsCleantech only funds

Digital Media/Internet only fundsArtificial Intelligence only funds

Fintech only fundsFunds investing in multiple sectors

Life Science only fundsTechnology only funds


Chart XXI Most Attractive Venture Capital SectorsIn venture capital, we focus on funds active in the following sectors or stages (choose all that apply):



Further Commentary on Venture Capital

The bulk of the survey responses were gathered after WeWork pulled its IPO, but before it was restructured by Softbank. It is not possible to know whether WeWork’s restructuring might have had an impact on the

survey results.

There were distinct differences in responses by investors in different geographic regions; for example, 39% of Europeans said they did not invest in Venture Capital.

Endowments and Foundations have long been supporters of Venture Capital, which continues to hold true as only 8% of them stated that they did not invest in the sector.

One comment left by a respondent gives more insight as to why several investors are not interested in the sector: "We don't invest because it's difficult to access the top funds that you would need to be in, and

we can't invest large enough amounts of capital to make a difference in our overall portfolio" -Canadian Public Pension


Distressed Investing Interest

Special Situations and Restructuring/Turnaround funds led respondent interest this year as they did last year.

Many LPs are concerned about the slow investment pace of distressed debt funds that they have backed in the recent past and are concerned about the ability of distressed debt for control funds to gain control in what is a very competitive market.

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We do not invest in this sector

Distressed debt hedge funds

Distressed debt trading funds

Distressed debt: active/non-control funds

(often hold through restructuring)

Opportunistic credit (mispriced debt,small loan portfolios, etc.)

Distressed debt for controlfunds (loan-to-own)

Restructuring/turnaround funds(focused on equity, not debt)

Special situations funds (usually combiningdebt and equity, often invests in stressed

companies)


Chart XXII Distressed InvestmentsWithin the distressed private equity sector, we are most interested in (choose no more than two):



Secondary Market Interest

Since the Great Financial Crisis (“GFC”), investors have become more active in secondaries directly, either in selling positions from their portfolios or buying partnership positions.

As a result, interest in investing in specialist secondary funds has declined, though interest is still significant.

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Is not active in secondaries in any manner

Provides advice to clients on secondaries

Actively purchases direct positions incompanies in the secondary market

Actively invests in general partner led secondaries

Actively invests in secondary funds

Actively purchases direct positionsin funds in the secondary market

Has sold or is considering selling funds in ourportfolio for portfolio management purposes


Chart XXIII Secondary Market InvestmentsIn the secondary market, my firm (choose all that apply):



Further Commentary on Secondaries

Over the last three- or four-years activity in general partner (“GP”) led secondaries has soared, with a focus on GPs generating liquidity for current investors, most often as part the process of raising a new fund. There are concerns with certain investors, however, that these processes are

burdened with potential conflicts of interest between the GP and selling investors. Purchase prices in the secondary market are now quite high, with its impact explained

by a comment from one of the respondents: "Still see it as a seller's market - as a buyer or investor, the returns would only

work because of the leverage used, in many cases" - Canadian Public Pension


Directs and Co-investments

Investor interest in co-investments has increased steadily since the GFC, especially among large investors who can commit greater resources; 65% of larger investors have active internal or outsourced co-investment programs.

Very few respondents are active in direct investing.

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Does not invest in co-investmentsnor directly invests in companies

Has an outsourced co-investment program

Provides advice to clients on co-investments ordirect investments

Requires or prefers a co-investment as ameans of diligencing a new fund manager

Invests directly in companies

Only opportunistically pursues co-investments

Only co-invests with fund managers with whomit already has a relationship

Has an active internal co-investment program


All Respondents Large Investors

Chart XXIV Directs and Co-InvestmentsRegarding directs and co-investments, my firm (choose all that apply):

Source: Probitas Partners' Private Equity Investor Trends: 2020 Survey ResultsNote: "Large Investors" denotes those survey resondents who plan to commit $500 million or more to private equity in 2019


First-Time Funds

Many investors are interested in first-time funds but are most focused on spin-out groups with attributable track records.

Few investors look to sponsor first-time funds.

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Does not invest in first-time funds in any form

Looks to act as a sponsor for first-time funds, providing early capitalcommitments or working capital

Pursues co-investment opportunities as a fund launches as a preferredmethod of performing due diligence

Is attracted to teams pursuing niche strategies that present compellinginvestment opportunities

Focuses on firms that have invested together as a fund-less sponsor orthrough separate accounts

before launching a third-party fund

Is willing to look at a team of experienced investors coming together forthe first time

Focuses on groups with attributable track records

Focuses on "spin outs" where the team has significant experience workingtogether


Chart XXV First-Time FundsAs far as first-time funds are concerned, my firm (check all that apply):



Private Credit Interest and Allocations

There is significant interest in Opportunistic Credit, Mezzanine and Diversified Debt Funds both overall and within private equity allocations.

Investments in private credit are made from various portfolio allocations, with specific private debt allocations being the most important for pure-play debt managers.

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Invests as part of ourprivate equity allocation

Invests as part ofour private debt allocation

Invests as part of our fixed income allocation

Invests from some other allocation Is considering investing in this sector Does not investin the sector at all

Chart XXVI CreditIn the credit sector, my firm:

Source: Probitas Partners' Private Equity Investor Trends: 2020 Survey ResultsNote: Some sectors total greater than 100% of respondents as a few investors had multiple responses


Real Asset Interest and Allocations

Many of these sectors attract investments from general real asset allocations or more targeted allocations such as infrastructure or timber, but there are respondents who invest in certain sectors through private equity allocations.

Infrastructure is the area of most interest while timber is the least.

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Oil & Gas Infrastructure Metals & Mining Agricultural Farmland Timber Ships or Aircraft

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Invests as part ofprivate equity allocation

Invests but not as part ofprivate equity allocation

Is considering investingin this sector

Does not investin the sector at all

Chart XXVII Real AssetsIn the real asset sector, my firm:

Source: Probitas Partners' Private Equity Investor Trends: 2020 Survey ResultsNote: Some sectors total greater than 100% of respondents as a few investors had multiple responses


Key Issues Regarding Fund Structure

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Strict adherence to the ILPA Principles

The structure of a long-term subscription credit line, ifincluded

Inclusion of a strong Environmental,Social and Governance policy

Structure or inclusion of ano-fault divorce clause

Outside ownership of the management company

Transaction fee splits

Ownership allocations of the management company bysenior staff

Sharing of carry and/or investment decision makingwith a third-party sponsor

Issues of transparency and disclosure

Level of carried interest

Structure or inclusion of a key man provision

Carry distribution waterfalls

Cap on fund size

Overall level of management fees

Distribution of carried interest betweenthe senior investment professionals

Level of general partner financialcommitment to the fund


Chart XXVIII Issues Regarding Fund StructureThe issues we focus on most when investing or advising a client as far as terms or structure of a fund are (choose no more than four):



Key Fund Structure Issues: Differences by Headquarters of Respondents

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Strict adherence to the ILPA Principles

The structure of a long-term subscription credit line,if included

Outside ownership of the management company

Transaction fee splits

Structure or inclusion of ano-fault divorce clause

Level of carried interest

Issues of transparency and disclosure

Ownership allocations of the management companyby senior staff

Sharing of carry, profits and/or investment decisionmaking with a third party sponsor

Inclusion of a strong Environmental,Social and Governance (ESG) policy

Carry distribution waterfalls

Distribution of carried interest betweenthe senior investment professionals

Structure or inclusion of a key man clause

Overall level of management fees

Level of general partner financialcommitment to the fund

Cap on fund size


European Respondents Asian Respondents

Chart XXIX Issues Regarding Fund Structure: European Respondents vs. Asian RespondentsThe issues we focus on most when investing or advising a client as far as terms or structure of a fund are (choose no more than four):



Commentary on Issues Regarding Fund Structure

Among respondents overall, alignment of interest was the major concern as evidenced by the number of respondents focused on the level of manager’s financial commitment to the fund.

However, there were distinct differences on investor’s focus depending on where they were from; Chart XXIX in the previous slide provides details on the differences between European and Asian investors.

Interestingly, one area of particular interest is the inclusion of a strong ESG policy: It is ranked 14th among pre-identified issues among overall respondents (Chart

XXVII) with only 16% of respondents focused on it among their targeted concerns. However, there were large differences in responses on ESG importance

geographically by firm headquarters: European respondents: 36% North American respondents: 12% Asian respondents: 0%


Fund-level Leverage

The increased aggressive use of subscription credit lines by certain fund managers has caused greater attention on the use of fund-level leverage.

Many investors understand the usefulness of subscription credit lines in managing drawdowns but prefer their use to be moderate.

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For private debt funds, we prefer vehicles that are levered

For private debt debt funds, we do not invest in vehicles that arelevered

The use of subscription credit lines by a fund manager is irrelevantto our due diligence process

For private equity funds, we do not invest in vehicles that arelevered, except for the use of subscription credit lines

As far as subscription credit lines, we prefer their use to be verymoderate


Chart XXX Fund-level LeverageAs far as fund-level leverage is concerned (please answer all as appropriate):



Most Used Benchmarking Databases or Tools As is evident from the numbers, many investors use multiple databases or tools. Cambridge and PREQIN are the market leaders across most geographies, though

Pitchbook has a number of adherents in North America; PME usage is increasing across all geographies.

APER, Bison and PERACS were also listed but did not generate more than 5% usage for any geography.

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CambridgeAssociates

PREQIN Pitchbook Public MarketEquivalentanalysis

Burgiss Hamilton Lane State Street AVCJ

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North America Europe Asia Other Emerging Markets

Chart XXXI BenchmarkingAs far as fund performance benchmarking, we use the following databases or tools in different fund geographies (please choose all that apply):



Key Investor Fears

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The number of funds in our portfolio is toolarge for our firm to effectively monitor

We do not have adequate staff in place todeal with issues in my current portfolio

Fees being paid to general partners over a fund's life arenot being properly documented or disclosed

Access to top quartile venture capital managers is impossiblewithout previous relationships, and new managers are unattractive

Increased competition among limited partners is limiting my access to co-investments

Generational transitions at a number of long-lived firmsare generating concern about those firm's future success

Another technology bubble is in the process of forming

Management fee levels on large funds are destroyingalignment of interest between fund managers and investors

Too much money pursuing too few experienced privateequity professionals in the hot emerging markets

The trend of external parties investing in private equity management companies isincreasing the potential for conflicts of interests

The trend towards long-lived subscription lines is increasing risk and distortingreported IRR

Large firms in the market are becoming generalized assetmanagers and are moving away from key investment strengths

Purchase price mulitples in large-market buyouts and megabuyoutsare too high and threaten future returns

Purchase price multiples in middle-market buyoutsare too highand threaten future returns

Too much money is pursuing too few attractive opportunities across all areas of private equity

The current private equity market feels like we are at the top of the cycle


Chart XXXII Greatest Fears Regarding the Private Equity MarketOur three greatest fears regarding the private equity market at the moment are:



Key Investor Fears: 2007 vs. 2020

Table III: What Keeps You Up At Night?

Top Five Responses:2007 2020

Issue % Issue %

Management fee levels and transaction fees on large funds are destroying alignment of interest between fund managers and investors

51%The current private equity market feels like we are at the top of the cycle 64%

The amount of leverage in the buyout market is unsustainable, and over the next 2 years credit problems will hurt performance of recent vintage funds

48%Too much money is pursuing too few attractive opportunities across all areas of private equity 54%

There is too much money available in the large buyout market and that will dramatically impact future returns 39%

Purchase price multiples in middle-market buyouts are too high and threaten future returns 48%

Private equity is most effective as a niche market and too much money is being raised in all sectors of private equity

35%Purchase price multiples in large-market and mega-buyouts are too high and threaten future returns 33%

Recapitalizations are boosting IRRs temporarily, but adding to fund risk by re-levering companies 30%

Large firms in the market are becoming generalized asset managers and are moving away from key investment strengths

20%


There is a definite shift in concerns from our pre-GFC survey to this year, with fear we are at the top of a cycle as the leading concern.

Though investors are heavily focused on middle-market buyouts in the U.S. and Europe, they are also very concerned that purchase price multiples are too high.


Further Commentary on Investor Fears

Chart XXXII on Slide 45 only lists those responses that collected 5% interest from investors

There were differences in investor concerns by geography and fund type: North American’s were most worried that we were at the top of the market cycle,

with 77% mentioning it. European and Asian respondents were more focused on the fact that they felt that

there was too much money in the market, with 73% of Europeans and 63% of Asians feeling that way.

The biggest fear of insurance companies was that purchase price multiples for middle market buyouts were too high, with 65% of them targeting that fear.

83% of endowments and foundations felt that we were at the top of the market cycle.


Summary

Though the largest fear among investors is that we are at or near the top of the market cycle, they are still very interested in private equity, with no one looking to decrease their exposure. That is largely because investors feel that potential risks and returns are still attractive compared to other asset classes.

Though many investors are wary of where we are in the market cycle, there is no consensus on what may trigger a market downturn, though political risks as well as pure economic risks are of concern.

In the past, distressed debt and special situations funds were looked at as a hedge for market down cycles, but many investors are more wary due to the extreme actions taken by central banks during the last market downturn. Evidenced by the current lack of interest for these strategies, investors are much more concerned that future government actions will mitigate against strong returns in the coming cycle, especially at the large end of the market.

Though there is a strong interest in Middle-Market Buyouts globally, investor’s third largest fear currently is that Middle-Market purchase price multiples are too high.

Investors’ are also concerned that reported purchase price multiples are in many cases being aggressively adjusted in order to seem more conservative and feel multiples overall are increasingly understated.

In discussions with smaller limited partners, there is a growing feeling that their interests are no longer aligned with large limited partners on a number of issues as their concerns and investment strategies continue to diverge.


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+1.415.402.0700

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+852.3757.9728

Probitas Funds Group, LLC ("PFG") is a member of FINRA and is regulated by the U.S. Securities and Exchange Commission. PFG is also a member of SIPC. There are several members of the Probitas Partners group of companies. PFG-UK Ltd. is authorized and regulated by the Financial Conduct Authority and Probitas Hong Kong Limited is licensed to carry on Type 1 and Type 4 regulated activities in Hong Kong. In addition, PFG is licensed as an international securities dealer in the Province of Ontario and licensed as a Type 2 Financial Dealer in Japan. PFG and PFG-UK Ltd. are exempt from registration in Australia by the ASIC.

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