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PAGE 6: HEALTHCARE-FOCUSED PE FUNDS PAGE 18: TOP FUNDS BY IRR AND OTHER BENCHMARKS

PitchBook

Bet ter Data. Bet ter Decisions. Sponsored by:

2Q 2014

GLOBAL PE & VC

BENCHMARKING & FUND PERFORMANCE Housing crisis devastates mid-2000s PE real estate fund performance

Pg.

9

CONTENTS 4 5 6 7 8 9 10-11 12 13 14 15 16 17 18 19

Introduction

CREDITS & CONTACT PitchBook Data, Inc. JOHN GABBERT Founder, CEO

PE & VC KS PME Benchmarks KS PME Case Study: Healthcare

ADLE Y BOWDEN Senior Director, Analysis

Content, Design, Editing & Data ALLEN WAG NER Editor ALE X LYKKEN Senior Financial Writer

Global IRR by Fund Type

PETER FOG EL Senior Data Analyst ANDY WHITE Senior Data Analyst

Global Quartiles & Benchmarks

Contact PitchBook www.pitchbook.com

Global Secondaries Fund Returns

RESE ARCH [email protected]

Global Real Estate Fund Returns

EDITORIAL [email protected] SALES

Global PE IRRs

[email protected]

Global PE Fund Return Multiples U.S. PE Fund Cash Flows Global VC IRRs COVER IMAG E CREDIT

Global VC Fund Return Multiples U.S. VC Fund Cash Flows Select Top Funds by IRR Methodology

Wikimedia Commons: Grzegorz Jereczek

COPYRIGHT © 2014 by PitchBook Data, Inc. All rights reserved. No part of this publication may be reproduced in any form or by any means—graphic, electronic, or mechanical, including photocopying, recording, taping, and information storage and retrieval systems—without the express written permission of PitchBook Data, Inc. Contents are based on information from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. Nothing herein should be construed as any past, current or future recommendation to buy or sell any security or an offer to sell, or a solicitation of an offer to buy any security. This material does not purport to contain all of the information that a prospective investor may wish to consider and is not to be relied upon as such or used in substitution for the exercise of independent judgment.

3 P I TC H B O O K 2Q 2014 G LO B A L P E & VC B E N C H M A R K I N G & F U N D P E R FO R M A N C E R E P O R T

Introduction Previous versions of our Benchmarking Report One very interesting development is that net included mostly private equity (PE), venture cash flows from PE funds are on pace to hit record capital (VC), debt and fund-of-funds performance highs in 2013. Through 3Q 2013, PE firms have data and metrics; however, PitchBook carries fund distributed close to $200 billion back to their returns information on several other fund types. limited partners, while LPs have contributed $89 To that end, we have included sections on the real billion. This seems to show that investors have estate and secondaries asset classes, in addition to been taking advantage of high valuations and the the usual IRRs, quartiles, multiples public-market frenzy to exit their and cash flows for PE and VC portfolio companies. Net cash flows funds. As we did last quarter, this report Rather unsurprisingly, real estate opens with our PE and VC KS PME from PE funds are funds that closed in the middle of Benchmarks, which compare the on pace for record performance of specific vintages the decade have performed terribly, highs in 2013. with the median IRRs for 2005-2007 of each fund type with the public vintages all below 0%. But the asset markets. On page six, we take a look class has since recovered, with more at how healthcare-focused private recent vintages matching or nearing IRR levels seen equity funds have performed against the Russell in the early part of the last decade, when the housing 3000® Healthcare Index. bubble expanded in the U.S. For example, the 2010 We hope the information contained in this report and 2011 vintages both have a median IRR of 14% proves insightful and acts as a starting point in your through 3Q 2013, which is higher than the 11% seen in efforts to benchmark the performance of the PE, VC 2003 vintage funds and close to the 17% rate among and other asset classes. If you have any questions, 2001 real estate vehicles. For more on real estate fund comments or suggestions, please contact us at performance, go to page seven. [email protected]

RR Donnelley is the world’s largest integrated communications company. The company works collaboratively with more than 60,000 customers worldwide to develop custom communications solutions that reduce costs, drive top-line growth, enhance ROI and increase compliance. Drawing on a range of proprietary and commercially available digital and conventional technologies deployed across four continents, the company employs a suite of leading Internet based capabilities and other resources to provide pre-media, printing, logistics and business process outsourcing services to clients in virtually every private and public sector. Our Corporate Responsibility Report is available at www.rrdonnelley.com. Our Venue® secure online workspace provides a powerful feature-set and an intuitive design that allows you to easily organize, manage, share and track all of your sensitive information. Venue® data rooms provide complete control, allowing you to manage who has access to your data room, which documents they see, and how they can interact with those documents. Venue® data rooms are backed by RR Donnelley, a $10.5 billion corporation with more than 500 locations and nearly 60,000 employees worldwide. RR Donnelley’s total revenues are larger than all other virtual data room providers combined. Whether you’re conducting due diligence for a merger, raising capital, or developing a document repository, a Venue® virtual data room is the ideal virtual workspace for managing critical information. RR Donnelley is the sponsor of the PitchBook 2Q 2014 Global PE & VC Benchmarking & Fund Performance Report. All information contained in this publication is for informational purposes only and should not be construed as legal, accounting, tax, or other professional advice of any kind, on any subject matter. RR Donnelley expressly disclaims all liability in respect to actions taken or not taken based on any or all the content herein.

4 P I TC H B O O K 2Q 2014 G LO B A L P E & VC B E N C H M A R K I N G & F U N D P E R FO R M A N C E R E P O R T

KS PME Benchmarks PE KS PME BENCHMARK BY VINTAGE

AN INTRODUCTION TO PME BENCHMARKS

1.7 1.6 1.5

IRR and cash multiples have been the gold standard of benchmarking for decades, but one of their main drawbacks is that they cannot be directly compared to indices that are used in mainstream asset classes. Public-market equivalent benchmarks (PMEs) effectively address this problem, making it possible to directly compare alternative asset fund performance to the performance of indexed asset classes by using fund-level cash flows. As there are multiple ways to calculate a PME, PitchBook has employed the Kaplan-Schoar PME method.

1.4 1.3 1.2 1.1

PME KS—TVPI, T =

+S

S

T t=0

0.9

(

(

It

)

2001 2002 2003 2004 2005 2006

0.8

Source: PitchBook

When using a KS PME, a value greater than 1.0 indicates outperformance of the public index (net of all fees). For example, the 1.27 value for 2004 vintage PE funds means investors in a typical vehicle from that year are 27% better off having invested in PE than if they had invested in public equities over the same period.

VC KS PME BENCHMARK BY VINTAGE

)

distribution t T t=0 It contribution t

2007 2008 2009 2010 2011

1.0

Kaplan-Schoar (KS) Method: NAVT IT

PME calculated using Russell 3000® Index

1.05 1.00

PME calculated using Russell 2000® Growth Index

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

0.95 A white paper detailing the calculations and methodology behind the PME benchmarks can be found at pitchbook.com. The PitchBook Blog also contains several articles with PME benchmarks and analysis. These can be read here. To find out how the PME benchmarks can be utilized to gauge performance of a specific fund or your fund portfolio, please contact us at [email protected]

0.90 0.85 0.80 0.75

Source: PitchBook

When using a KS PME, a value less than 1.0 indicates underperformance of the public index (net of all fees). For example, the 0.90 value for 2007 vintage VC funds means the value of an individual’s investments in a typical vehicle from that year would be 90% the value of what it would be if it were instead invested in the public markets. Note: The axes on both charts above are scaled differently, with the area below 1.0 much larger on the VC chart than the PE chart.

The KS PME charts on this page show the relative performance for a particular vintage of PE or VC funds against the specified index since the funds’ inception. Pre-2006 vintage PE funds have outperformed the public markets consistently going back to 2001, while VC funds across all vintages show underperformance. The stock market’s surge over the last couple of years has definitely cut into PME values for more recent vintages on both the PE and VC sides; though, in the event of a market downturn, it’s possible 2006-2011 vintage PE and VC funds begin to swing up if they generate returns better than stocks.

5 P I TC H B O O K 2Q 2014 G LO B A L P E & VC B E N C H M A R K I N G & F U N D P E R FO R M A N C E R E P O R T

KS PME Case Study: Healthcare GLOBAL HEALTHCARE-FOCUSED PE FUND KS PME BENCHMARK BY VINTAGE 1.8 PME calculated using Russell 3000® Healthcare Index

1.6

1.4

1.2

Source: PitchBook

2005 2006 2007 2008 2009 2010 2011 1.0 2001 2002 2003 2004 0.8

0.6

GLOBAL AVERAGE HEALTHCARE-FOCUSED PE FUND RETURN MULTIPLES BY VINTAGE 2.5x

1.28x 1.37x

1.05x

0.85x

0.96x

0.88x 0.40x

0.39x

0.88x

0.0x

0.42x

0.69x

1.06x 1.07x 0.72x

0.51x

1.32x 1.29x 1.30x

0.60x

0.5x

1.65x

0.60x

1.57x

1.5x

1.0x

1.90x

1.17x

1.82x

0.41x

1.94x

1.50x

2.0x

1.70x

Each quarter we try to demonstrate the diverse capabilities of PitchBook’s KS PME benchmarks, which can be used not only to compare alternative assets to the broader public markets, but also to benchmark funds with specific sector strategies against a public, sectorlevel index. This quarter, we took a look at the performance of healthcarefocused buyout and growth funds versus the Russell 3000® Healthcare Index. Like many other strategies in the private markets, pre-2004 vintage funds with significant healthcare exposure have consistently outperformed the healthcare public market equivalent. Earlier funds that focused on healthcare benefitted from some of the consolidation in healthcare services, especially in the clinics, outpatient and elderly care industries. Healthcare is a relatively specialized industry that can be capitalized on by firms that are knowledgeable about the industry and willing to shoulder the risk associated with a highly regulated and complicated industry. Private equity firms that entered the healthcare space in the early2000s did not face as much of an increase in competition for deals as firms investing in other industries. Deal activity in the healthcare space grew by 41% from 2005 to the peak in 2007, whereas private equity dealmaking as a whole grew by 50% over the same period. Later vintages, while still performing fairly well, have underperformed the healthcarefocused Russell 3000® Healthcare Index largely due to the absolute tear public markets have been on since bottoming out in 2009.

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: PitchBook

DPI

RVPI

TVPI

Russell Investments is the source and owner of the Russell Index data contained or reflected in this material and all trademarks and copyrights related thereto. Russell Investments is not responsible for the formatting or configuration of this material or for any inaccuracy in PitchBook Data, Inc.’s presentation thereof. For more information on Russell Investments and Russell Indexes, visit www.russell.com.

6 P I TC H B O O K 2Q 2014 G LO B A L P E & VC B E N C H M A R K I N G & F U N D P E R FO R M A N C E R E P O R T

IRR by Fund Type GLOBAL MEDIAN IRR BY FUND TYPE AND VINTAGE YEAR 20%

15%

10%

5%

0% 2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

-5% PE Funds

VC Funds

Debt Funds

Fund-of-Funds Source: PitchBook

Two of the biggest takeaways when looking at IRRs across recent vintages and fund types have been the improvement of VC returns and the lackluster performance of funds-of-funds. Recent VC vehicles have performed quite well relative to pre-2007 vintage VC funds, and, in fact, are comparable to 2009-2011 PE and debt funds. But performance among fundsof-funds has lagged behind their PE, VC and debt peers among recent vintages (2008-2011). Since 2001 vintage funds registered a decade high 12% median IRR, funds-of-funds have fallen by the wayside in performance, with 2009 vintage vehicles registering a 9% IRR and 2010 funds attaining a measly 2% through 3Q 2013. This relative decline in performance may be one of the main reasons for a corresponding drop in the number of funds-of-funds to close over the last five to seven years.

GLOBAL HORIZON IRR BY FUND TYPE 20%

15%

10%

5%

0% 1-Year PE Funds

3-Year VC Funds

5-Year Debt Funds

10-Year Fund-of-Funds Source: PitchBook

Other factors may be in play, such as general consolidation within the industry, funds-of-funds’ extra layer of management fees and LPs seeking more customized solutions

to their alternative investing needs. But since hitting a high of 196 vehicles closed in 2007, there were just 90 funds-of-funds in 2010. A decade low of 62 closed in 2013.

7 P I TC H B O O K 2Q 2014 G LO B A L P E & VC B E N C H M A R K I N G & F U N D P E R FO R M A N C E R E P O R T

Quartiles & Benchmarks GLOBAL PE IRR QUARTILES BY VINTAGE YEAR While PE funds continue to improve their performance in the post-crisis era, vehicles from recent vintages have yet to match the performance of vehicles from the early 2000s. As PE firms continue to emphasize value-creation and employ the buy-and-build model for growing their portfolio companies, it’s possible they never again will. 2008-2010 vintage PE funds that invested in companies at the trough (and can be expected to exit during the current peak) have generated roughly a 10% median IRR, while the top quartile hurdle rate has been 16%-17%. It will be interesting to see whether, over the next few years, these funds can match the median IRR of 18.5% and top quartile hurdle rate of 34.1% seen among 2001 vintage PE funds.

40% 35% 30% 25% 20% 15% 10% 5% 0% -5% 25th Percentile

Median

75th Percentile Source: PitchBook

Vintage Year

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Top Quartile IRR Hurdle

34.1%

29.1%

25.7%

17.1%

11.8%

10.8%

13.5%

15.6%

17.2%

16.2%

13.9%

Median IRR

18.5%

16.2%

12.0%

12.1%

8.0%

6.8%

8.0%

10.3%

10.0%

8.8%

8.5%

Bottom Quartile IRR Hurdle

10.3%

8.0%

5.9%

5.3%

3.0%

2.4%

4.2%

5.0%

6.8%

1.8%

-1.0%

GLOBAL VC IRR QUARTILES BY VINTAGE YEAR The venture capital asset class has seen markedly improved fund performance over the last few years, despite a growing gap between the top quartile and bottom quartile hurdle rates. Vehicles languishing in the bottom quartile can continue to expect to see less than 0% IRR, but funds at the top have continued to generate strong returns. The top quartile IRR for 2004 vintage VC funds is at a decade low of 5.6%, but that has increased for every vintage since then (to 21.6% for 2011 funds). That said, VC funds still have a long way to go to match the performance of vehicles that invested during the dot-com era. Median IRRs for 1992-1995 vintage VC funds were some of the highest ever seen, and handily beat the 12.2% median IRR for 2010 VC funds.

25% 20% 15% 10% 5% 0% -5% -10% 25th Percentile

Median

75th Percentile Source: PitchBook

Vintage Year

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Top Quartile IRR Hurdle

7.6%

8.0%

8.4%

5.6%

9.5%

10.0%

13.8%

15.1%

17.4%

17.7%

21.6%

Median IRR

2.6%

5.0%

6.6%

-0.7%

5.2%

3.5%

8.0%

9.1%

9.5%

12.2%

9.2%

Bottom Quartile IRR Hurdle

-2.3%

-7.1%

0.4%

-6.2%

-2.4%

-2.7%

1.1%

-1.1%

5.5%

-2.8%

-0.8%

8 P I TC H B O O K 2Q 2014 G LO B A L P E & VC B E N C H M A R K I N G & F U N D P E R FO R M A N C E R E P O R T

Secondaries Fund Returns GLOBAL AVERAGE SECONDARIES FUND RETURN MULTIPLES BY VINTAGE 1.8x 1.56x 1.54x

1.08x

0.95x

1.20x

0.37x

0.92x

0.83x 0.46x

0.0x

0.40x

0.84x

0.56x

0.41x

0.60x

0.2x

0.46x

0.4x

0.72x

0.6x

1.00x

0.8x

1.33x

1.0x

0.83x

1.2x

1.28x 1.28x 1.31x 1.29x 1.32x 1.32x 0.60x

1.43x 1.42x

1.4x

0.67x

1.6x

1.47x

The sheer amount of capital commitments to PE and VC funds over the past several years, alongside an increase in the number of willing sellers of fund interests, has created a significant number of secondary investment opportunities. A number of very large funds raised by the likes of Lexington Partners and Ardian are entering the market, including Ardian’s recently closed $10 billion vehicle. Returns data suggest that secondaries investors are bringing back some handsome gains for LPs. Landmark Partners’ sixth secondaries real estate fund, a $718 million vehicle that closed in 2011, had a 32.80% IRR through Sept. 30, 2013. Other strong performances through the end of 3Q 2013 include Industry Ventures’ $405 million Fund VI (27.90%) and Ardian’s massive $7.1 billion fifth flagship fund (AXA Secondary Fund V; 27.50%). 2005 and 2006 vintage funds are commanding relatively low TVPI multiples compared to more recent vintages, suggesting that secondaries funds raised from 2007 onward were able to take advantage of cheap entry points in the years following the financial crisis. Funds raised in the midst of the buyout boom, on the other hand, are struggling to replenish their LPs; 2005 funds, nearing a decade old, have posted a paltry 0.67x DPI through the third quarter of 2013, well behind the 1.00x average DPI for 2004 funds. That said, realization multiples for boom-era funds should begin to rise in the coming quarters, given the much-discussed increase in exits that closed out 2013.

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 DPI

RVPI

TVPI Source: PitchBook

SELECT TOP PERFORMING SECONDARIES FUNDS BY IRR 2001-2004 Vintage Vintage

IRR

TVPI

Landmark Equity Partners XII

Fund Name

2004

25.4%

1.58x

Landmark Equity Partners XI

2002

23.6%

1.51x

Lexington Capital Partners V

2002

19.2%

1.66x

2005-2008 Vintage Vintage

IRR

TVPI

Vintage Ventures III

Fund Name

2007

19.0%

1.55x

Landmark Equity Partners XIV

2008

17.9%

1.28x

Montauk TriGuard Fund IV

2008

16.9%

1.44x

Vintage

IRR

TVPI

Landmark Real Estate Fund VI

2011

32.8%

1.52x

Industry Ventures Fund VI

2011

27.9%

1.30x

AXA Secondary Fund V

2011

27.5%

1.33x

2009-2011 Vintage Fund Name

Source: PitchBook

9 P I TC H B O O K 2Q 2014 G LO B A L P E & VC B E N C H M A R K I N G & F U N D P E R FO R M A N C E R E P O R T

Real Estate Fund Returns GLOBAL REAL ESTATE IRR QUARTILES BY VINTAGE YEAR 25% 20% 15% 10% 5% 0% 2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

-5%

2011

Source: PitchBook

-10% -15% 25th Percentile

Median

75th Percentile

Vintage Year

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Top Quartile IRR Hurdle

17.8%

9.3%

16.6%

5.6%

4.7%

2.8%

5.1%

8.2%

11.8%

20.7%

17.9%

Median IRR

16.6%

5.8%

11.3%

0.9%

-1.4%

-5.1%

-0.9%

2.0%

9.0%

14.3%

13.2%

Bottom Quartile IRR Hurdle

13.9%

2.5%

8.8%

-5.3%

-7.3%

-14.6%

-8.1%

-6.0%

3.0%

8.0%

10.7%

As seen on the chart above, the financial crisis, precipitated by the housing downturn, had a severe effect on real estate funds. 2006 funds, raised during the peak of the housing boom, have struggled mightily; top quartile performers are above water at 2.8%, but not by much. The median IRR is under water at -5.1%, and bottom quartile funds are at a humbling -14.6%. Subsequent vintages have fared better; the median IRR for 2007 real estate funds is close to breaking even. DPI multiples are similarly

gruesome. 2005 funds, now nearing 10 years old, haven’t distributed much capital back to their investors, as evidenced by a 0.37x average DPI multiple. In fact, realization multiples for every vintage from 2005 until 2009 are below 0.40x, while 2010 funds are outpacing the previous five vintages and already hitting 0.40x. Healthier real estate values following the U.S. housing crisis have translated into higher TVPI multiples for 2008-2011 vintages. Not surprisingly, 2005, 2006 and 2007 vintages are all below the 1.00x TVPI mark, with

2006 being hit particularly hard at 0.85x. Beginning in 2008, real estate funds were able to pick up properties and assets at thenfalling prices. As the commercial and residential real estate markets began to recover, those assets appreciated to the point that GPs have been able to report positive returns back to investors. As of 3Q 2013, the median IRR for 2008 real estate funds is back in the black at 2%. Median IRRs for 2009 (9%), 2010 (14.3%) and 2011 (13.2%) Continued on Page 11 >>

10 P I TC H B O O K 2Q 2014 G LO B A L P E & VC B E N C H M A R K I N G & F U N D P E R FO R M A N C E R E P O R T

Real Estate Fund Returns

The median IRR for 2008 real estate funds is back in the black at 2%. For LPs, fund selection has proved critical in the PE real estate market. Even for 2006 vintages, top performing funds are generating positive returns for investors, albeit at historically low percentages, while bottom quartile performers are costing LPs significant amounts of money. A handful of funds raised on the precipice of the housing crisis are managing to post impressive returns, including Bryanston Realty Partners’ Retail Opportunity Fund (2004; 80.08% IRR) and Westbrook Partners’ fifth real estate fund (2005; 43.71% IRR).

2.0x

1.87x

1.8x 1.6x

1.00x

1.04x 0.40x

0.91x 0.36x

0.69x

0.55x

0.62x

0.73x 0.38x

0.0x

1.04x

0.85x

0.34x

0.2x

0.99x

0.34x

0.4x

0.37x

0.6x

0.94x 0.59x

0.8x

1.23x 1.29x 1.19x

1.09x

0.55x

1.0x

0.66x

1.2x

1.06x

1.22x

0.36x

1.40x

1.4x

0.75x

vintages are all considerably higher, as firms were able to take advantage of depressed real estate values in the aftermath of the crisis and sell and monetize their investments recently at much higher prices. As an asset class, real estate has stabilized in recent years. One-, five- and 10-year horizon IRRs for real estate funds outpace VC funds and funds-of-funds by significant margins. In fact, at the five-year horizon, the median IRR for real estate funds (12%) trails only one asset class (secondaries at 13%) and outperforms other strong asset classes like private equity (8%) and debt (10%).

GLOBAL AVERAGE REAL ESTATE FUND RETURN MULTIPLES BY VINTAGE

1.63x

Continued from Page 11 >>

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 DPI

RVPI

TVPI Source: PitchBook

SELECT TOP PERFORMING REAL ESTATE FUNDS BY IRR 2001-2003 Vintage Vintage

IRR

TVPI

Beacon Capital Strategic Partners II

Fund Name

2002

42.4%

2.11x

Morgan Stanley Real Estate Fund IV International

2001

31.1%

1.98x

Hearthstone Multi-State Residential Value-Added III

2003

26.3%

1.38x

2004-2008 Vintage Fund Name

Vintage

IRR

TVPI

2004

80.1%

2.48x

Westbrook Real Estate Partners V

2005

43.7%

1.70x

Beacon Capital Strategic Partners III

2004

37.3%

1.84x

Bryanston Retail Opportunity Fund

2009-2011 Vintage Vintage

IRR

TVPI

SH Group I

Fund Name

2011

32.7%

2.31x

Blackstone Real Estate Partners VII

2011

30.2%

1.29x

Principal RE Strategic Debt Fund I

2009

27.9%

3.38x

Source: PitchBook

11 P I TC H B O O K 2Q 2014 G LO B A L P E & VC B E N C H M A R K I N G & F U N D P E R FO R M A N C E R E P O R T

Private Equity IRRs PE funds have posted strong returns as an asset class since the 2008 financial crisis. Over the three-year IRR horizon, PE vehicles are returning 13.1%, bolstered by a 13.8% median IRR for funds of $1 billion or more. Smaller funds aren’t performing as well; funds of between $250 million and $1 billion are returning 10.9% at the three-year mark, and funds of less than $250 million are lagging relative to their bigger counterparts at 9.9%. In fact, across the one-, three-, five- and 10-year horizons, funds of less than $250 million are underperforming compared to the $250 million-$1 billion and $1 billion+ size buckets. The frothy exit environment has had a positive impact on those smaller funds, however. Looking at one-year horizons, funds of less than $250 million are posting IRRs of about 9.2% through 3Q 2013, a substantial uptick from the 7.4% they were generating in 2Q 2013. Funds of $1 billion and larger also saw an increase in their one-year horizon IRR from the previous quarter (13.6% to 15.0%). We expect the trend to continue in the coming quarters, as investors offload aging portfolio companies, particularly investments made in the heady days of 2006-2008. Across the pond, markets have stabilized somewhat for European firms, allowing them to exit more investments and report sturdier returns to their investors. The oneyear horizon IRR for all European funds is steadily increasing, from the 9.5% we witnessed in 2Q 2013 to 12.7% as of 3Q 2013.

GLOBAL PE HORIZON IRR BY SIZE BUCKET 25%

20%

15%

10%

5%

0% 1-Year

3-Year

Under $250M

5-Year $250M-$1B

10-Year $1B+ Source: PitchBook

The one-year horizon IRR for funds of $1 billion or more grew from 13.6% in 2Q 2013 to 15.0% in 3Q 2013. PE HORIZON IRR BY REGION 35% 30% 25% 20% 15% 10% 5% 0% 1-Year

3-Year

U.S. PE Funds Rest of World PE Funds

5-Year

10-Year

European PE Funds Source: PitchBook

12 P I TC H B O O K 2Q 2014 G LO B A L P E & VC B E N C H M A R K I N G & F U N D P E R FO R M A N C E R E P O R T

PE Fund Return Multiples GLOBAL AVERAGE PE FUND RETURN MULTIPLES BY VINTAGE 2.5x 2.01x

2008

1.12x 1.01x

2007

1.20x 0.98x

0.53x

2006

1.27x 0.98x

1.37x 0.87x

0.79x

2004

1.32x

0.55x

1.30x

2003

1.30x 0.71x

1.40x

2002

0.5x

1.43x

0.60x

1.48x

1.86x

1.5x

1.0x

1.72x

0.60x

1.69x

0.43x

1.79x

0.87x

2.0x

2009

2010

2011

0.0x 2001

2005

DPI

Thanks to a strong exit environment, distributions from PE firms to their investors continued to be made at a quick pace through 3Q 2013. We don’t expect the momentum to slow much in our next report, given the strong exit numbers we found in the U.S. and Europe in 4Q 2013. As we’ve discussed in previous reports, private equity valuations, particularly in the U.S., have been high recently, to the benefit of sellside PE firms and their LPs. The latest DPI multiples reflect a strong third quarter for realizations, even for pre-crisis funds that have underperformed relative to other vintages. 2005 funds, for instance, have struggled to return capital to their investors, but 3Q recorded a healthy increase in the average DPI multiple from the second quarter, from 0.78x to 0.87x. 2006 funds continue to struggle, but as investments from that vintage continue to be sold off,

RVPI

TVPI

Source: PitchBook

GLOBAL AVERAGE PE DPI MULTIPLES OVER TIME BY VINTAGE 1.8x 1.6x 1.4x 1.2x 1.0x 0.8x 0.6x 0.4x 0.2x 0.0x 2 2001

3 2002

4

5 6 7 8 Years since final close 2003

2004

2005

9

10 2006

11 2007

Source: PitchBook

the average DPI multiple will inch closer and closer to 1.00x. Funds raised between 2008 and 2009 are showing higher TVPI multiples than earlier vintages, suggesting

that deals made in the midst of the financial meltdown (at lower multiples) are benefitting from the higher valuations in today’s environment.

13 P I TC H B O O K 2Q 2014 G LO B A L P E & VC B E N C H M A R K I N G & F U N D P E R FO R M A N C E R E P O R T

U.S. PE Fund Cash Flows U.S. PE FUNDS ANNUALIZED CASH FLOW BY YEAR $300 $250 $200 $150 $100 $50 $0 -$50

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013*

-$100 -$150 -$200 -$250 Contributions ($B)

U.S. PE investors distributed about $105 billion more to LPs than they called down through the first three quarters of 2013. That’s close to double the entire net cash flow in 2012 ($54.1 billion), which represented a 10-year high before 2013’s numbers started tabulating. Net cash flows have been in positive territory since 2011, but began to skyrocket in 2012 and 2013 thanks to the lucrative exit environment. Distributions to LPs stand at $193.8 billion through 3Q, putting 2013 on pace to eclipse the record $233.4 billion distributed in 2012. As we covered in our 2Q 2014 U.S. PE Breakdown Report, 2013 ended on a very strong note for PE exits, totaling $58 billion of capital exited in 4Q across 222 liquidity events. Given those final quarterly figures, LPs may end up receiving, on a net basis, triple what they got in 2012.

Distributions ($B)

Net Cash Flow ($B)

*as of 9/30/2013 Source: PitchBook

Year

Distributions ($B)

Contributions ($B)

Net Cash Flow ($B)

2001

$19.33

$(40.56)

$(21.23)

2002

$21.05

$(51.35)

$(30.29)

2003

$42.84

$(55.67)

$(12.83)

2004

$105.12

$(70.17)

$34.95

2005

$106.74

$(92.18)

$14.55

2006

$117.58

$(149.29)

$(31.71)

2007

$143.97

$(199.46)

$(55.49)

2008

$66.28

$(204.20)

$(137.91)

2009

$50.26

$(104.37)

$(54.11)

2010

$124.05

$(143.53)

$(19.48)

2011

$152.45

$(147.17)

$5.28

2012

$233.44

$(179.31)

$54.13

2013*

$193.80*

$(88.76)*

$105.03*

*as of 9/30/2013 Source: PitchBook

14 P I TC H B O O K 2Q 2014 G LO B A L P E & VC B E N C H M A R K I N G & F U N D P E R FO R M A N C E R E P O R T

Venture Capital IRRs On the whole, larger, more established VC firms are outperforming their smaller peers in terms of returns. As the chart to the right indicates, funds larger than $500 million are outpacing the three other size buckets in the one-, three- and 10-year horizons. Particularly in the short-term; the one-year horizon IRR for funds of at least $500 million stand at 11.2%, well above the secondhighest median of 4.6% for the $250 million-$500 million bucket. Smaller funds make up the ground as time goes on, but after 10 years, $500 million+ funds still outpace the little guys at 4.1% (versus 3% for all sizes). Moreover, despite recent increases in valuations and the frothy exit environment, the fiveand 10-year horizons for VC funds remain well below the one- and three-year horizons, especially for larger vehicles. By geography, U.S.-based VC funds perform significantly better than funds based in the rest of the world. That could be a matter of experience, similar to the discrepancy in how larger U.S. funds generate better returns compared to their smaller counterparts. Overall, non-U.S. funds are treading water at the one-, five- and 10-year horizons, while the low point for U.S.-based funds stands at 2.44% at the fiveyear horizon. As discussed on page 8, the disparity between topperforming funds and the bottom quartile is significant. Between 2001 and 2011, the bottom quartile generated negative returns in eight of 11 years.

GLOBAL VC HORIZON IRR BY SIZE BUCKET 12% 10% 8% 6% 4% 2% 0% 1-Year

3-Year

5-Year

10-Year

-2% Under $100M

$100M-$250M

$250M-$500M

$500M+ Source: PitchBook

$500M+ funds are outpacing other buckets in the one-, three- and 10-year horizons. VC HORIZON IRR BY REGION 12% 10% 8% 6% 4% 2% 0% 1-Year

3-Year

5-Year

10-Year

-2% U.S. VC Funds

Rest of World VC Funds Source: PitchBook

15 P I TC H B O O K 2Q 2014 G LO B A L P E & VC B E N C H M A R K I N G & F U N D P E R FO R M A N C E R E P O R T

VC Fund Return Multiples GLOBAL AVERAGE VC FUND RETURN MULTIPLES BY VINTAGE 2.0x

DPI

Higher valuations have increased TVPI levels across several vintages, particularly 2005 funds. Compared to 2Q 2013, TVPI multiples for 2005 vintage funds jumped from 1.62x to 1.79x in 3Q 2013. Other vintages showed sizable increases, as well, most notably 2003 (1.12x to 1.34x) and 2007 (1.27x to 1.36x). High valuations have also positively affected realization multiples for LPs; 2005’s DPI rose from 0.70x in 2Q 2013 to 0.88x by the end of the third quarter, reflecting a lucrative exit environment for VC firms in 2013. We expect to see DPI multiples continue to increase in our next Benchmarking Report, given the 18% quarter-over-quarter pop in capital exited in 4Q 2013 in the U.S., not to mention the number of VC-backed companies taken public recently that will gradually see their investors pare down their stakes through secondary offerings.

0.31x

2006

2007

2008

RVPI

2009 TVPI

1.01x

1.03x

1.11x

1.01x

1.02x

0.85x 2005

1.20x

1.16x

0.41x

2004

1.21x

1.35x

1.30x

0.38x

2003

0.99x

0.43x

0.0x

1.36x

0.88x

0.72x

2002

1.05x

0.36x

2001

1.34x

0.97x

0.42x

1.23x

0.84x

0.5x

0.36x

1.0x

1.31x

0.94x

1.5x

1.79x

2010

2011

Source: PitchBook

High Valuations have positively affected realization multiples for limited partners. GLOBAL AVERAGE VC DPI MULTIPLES OVER TIME BY VINTAGE 0.9x 0.8x 0.7x 0.6x 0.5x 0.4x 0.3x 0.2x 0.1x 0.0x 2

3 2001 2005

4

5 6 7 Years since final close 2002 2006

8

2003 2007

9

10

11

2004 Source: PitchBook

16 P I TC H B O O K 2Q 2014 G LO B A L P E & VC B E N C H M A R K I N G & F U N D P E R FO R M A N C E R E P O R T

U.S. VC Fund Cash Flows U.S. VC FUNDS ANNUALIZED CASH FLOW BY YEAR $40 $30 $20 $10 $0 2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

-$10 -$20 -$30 -$40 Contributions ($B) Distributions from U.S. VC investors have been on the rise in recent years. Through 3Q 2013, net positive cash flow stands at $6.23 billion, not far off the $8.82 billion LPs received on a net basis in 2003, the current high-water mark in the post dot-com era. Through the third quarter, GPs have distributed $17.3 billion back to LPs. That likely means they won’t surpass 2012 ($33.3 billion), though 2013 will no doubt close out strong, given the relatively high amount of capital that was exited in 4Q 2013 ($11.6 billion). Distributions should remain high for some time; VC firms took a historically high number of portfolio companies public in 2013 (84) and 1Q 2014 (37), as we discussed in our 2Q 2014 VC Industry Report. IPOs are often lucrative exit routes over the long-term, but initial returns are small or non-existent, given the tendencies of VCs to hold onto their shares post-IPO.

Distributions ($B)

Net Cash Flow ($B)

*as of 9/30/2013 Source: PitchBook

Year

Distributions ($B)

Contributions ($B)

Net Cash Flow ($B)

2001

$9.47

$(22.55)

$(13.07)

2002

$9.97

$(19.88)

$(9.91)

2003

$28.50

$(19.68)

$8.82

2004

$7.24

$(23.44)

$(16.20)

2005

$11.65

$(25.89)

$(14.24)

2006

$22.28

$(31.04)

$(8.76)

2007

$24.00

$(30.62)

$(6.62)

2008

$10.81

$(28.19)

$(17.38)

2009

$10.34

$(22.11)

$(11.76)

2010

$17.61

$(25.29)

$(7.68)

2011

$26.75

$(30.43)

$(3.68)

2012

$33.28

$(29.88)

$3.39

2013*

$17.30*

$(11.08)*

$6.23*

*as of 9/30/2013 Source: PitchBook

17 P I TC H B O O K 2Q 2014 G LO B A L P E & VC B E N C H M A R K I N G & F U N D P E R FO R M A N C E R E P O R T

Select Top Funds by IRR ’06-’08 VINTAGE BUYOUT $10B+ Fund Name

2004-2007 VINTAGE GROWTH

Vintage

IRR %

DPI

Vintage

IRR %

DPI

Apollo Investment Fund VII

2008

26.3%

0.97x

Evolution Capital Partners I

2006

31.2%

3.08x

Advent Global Private Equity VI

2008

19.2%

0.44x

Insight Venture Partners V

2005

21.3%

1.15x

Carlyle Partners V

2008

12.7%

0.48x

FTV III

2007

20.2%

0.78x

Apollo Investment Fund VI

2006

11.3%

0.84x

RLH Investors II LP

2007

20.1%

1.27x

Olympus Growth Fund V

2007

19.1%

0.36x

CVC European Equity Partners V

2008

9.6%

0.45x

TPG Partners VI

2008

9.0%

0.29x

Permira Europe IV

2006

7.8%

0.42x

Fund Name

W Capital Partners Fund II

2007

14.5%

0.85x

Pharos Capital Partners II

2004

10.2%

0.48x

Source: PitchBook

Source: PitchBook

’06-’08 VINTAGE EUROPE BUYOUT Fund Name

Vintage IRR %

DPI

Triton Fund II

2006

18.9%

1.54x

Waterland Private Equity Fund IV

2008

16.8%

0.63x

Graphite Capital Partners VII

2007

13.1%

0.51x

Astorg IV

2007

12.4%

0.62x

Accent Equity 2008

2007

12.3%

0.36x

Clessidra Capital Partners Fund II

2008

11.0%

0.42x

ECI 9

2008

10.0%

0.06x

2007 VINTAGE VC $500M+ Fund Name

Vintage

IRR %

DPI

Technology Crossover Ventures VII

2007

18.9%

0.48x

Canaan VIII

2007

13.5%

0.28x

Battery Ventures VIII

2007

12.5%

0.62x

Frazier Healthcare VI

2007

11.0%

0.53x

SV Life Sciences Fund IV

2007

10.3%

0.36x

JMI Equity Fund VI

2007

8.1%

0.31x

Source: PitchBook

Source: PitchBook

PRE-2000 VINTAGE U.S. BUYOUT Fund Name

Vintage IRR %

DPI

DLJ Merchant Banking Partners I

1992

58.1%

2.54x

Vestar Capital Partners I

1988

56.4%

3.54x

Berkshire Fund III

1992

55.1%

3.82x

Thoomas H. Lee Equity Partners I

1984

53.8%

3.94x

Levmark Capital

1995

49.6%

2.30x

Warburg Pincus Ventures

1994

48.2%

5.13x

ABRY Broadcast Partners I

1995

47.3%

3.33x

Source: PitchBook

PRE-2000 VINTAGE U.S. VC Fund Name

Vintage

IRR %

DPI

Accel V

1996

188.4%

19.62x

Clearstone Venture Partners I

1998

154.7%

2.80x

Menlo Ventures VII

1996

135.6%

4.71x

Oak Investment Partners VII

1997

134.9%

3.83x

WPG EF III Liquidating Trust

1997

127.6%

3.94x

Kleiner Perkins Caufield & Byers VII

1994

124.6%

32.41x

WPG VA IV Liquidating Trust

1997

123.0%

3.86x

Source: PitchBook

Data is as of Sept. 30, 2013. IRR medians are calculated based on the median value of all IRR values for each fund as reported to PitchBook by LPs. DPI averages are calculated based on the average of all DPI values for each fund as report to PitchBook by LPs.

18 P I TC H B O O K 2Q 2014 G LO B A L P E & VC B E N C H M A R K I N G & F U N D P E R FO R M A N C E R E P O R T

Methodology PitchBook currently tracks more than 25,000 funds around the world and has returns data on more than 8,000 vehicles. In the quarterly Benchmarking Reports, PitchBook examines data from more than 6,000 funds and 18,500 distinct LP commitments. We are constantly adding historical performance data as it becomes available; this explains many apparent discrepancies that may appear between reports. All returns data in this report is net of fees through 3Q 2013, as reported by LPs.

DEFINITIONS PE Fund: Unless otherwise noted, PE fund data includes buyout, growth, co-investment, mezzanine, restructuring and energy funds. Debt Fund: For this report, the debt fund classification includes general debt, mezzanine and distressed debt. Vintage Year: The vintage year as reported by the fund GP and LPs, or the year in which a fund holds its final close.

Horizon IRR: Horizon IRR shows the IRR from a certain point in time. For example, the one-year horizon IRR figures in this report show the IRR performance for the one-year period from 3Q 2012 to 3Q 2013, while the three-year horizon IRR is for the period from 3Q 2010 to 3Q 2013. DPI (Distributions to Paid-In): A measurement of the capital that has been distributed back to LPs as a proportion of the total paid-in, or contributed, capital. DPI is also known as the cash-on-cash multiple or the realization multiple. RVPI (Remaining Value to Paid-In): A measurement of the unrealized return of a fund as a proportion of the total paid-in, or contributed, capital. TVPI (Total Value to Paid-In): A measurement of both the realized and unrealized value of a fund as a proportion of the total paid-in, or contributed, capital. Also known as the investment multiple, TVPI can be found by adding together the DPI and RVPI of a fund.

Internal Rate of Return (IRR): IRR represents the rate at which a series of positive and negative cash flows are discounted so that the net present value of cash flows equals zero.

19 P I TC H B O O K 2Q 2014 G LO B A L P E & VC B E N C H M A R K I N G & F U N D P E R FO R M A N C E R E P O R T

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