probitas private equity survey trends 2014

Private Equity Institutional Investor Trends for 2014 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, special situations, and hedge funds. These services are offered by a team of employee owners dedicated to leveraging the firm’s vast knowledge and technical resources to provide the best results for all its clients.

On an ongoing basis, Probitas Partners offers research and investment tools for the alternative investment market as aids to its institutional investor and general partner clients. Probitas Partners compiles data from various trade and other sources and then vets and enhances that data via its team’s broad knowledge of the market.

n. [from Latin probitas: good, proper, honest.] adherence to the highest principles, ideals and character.

probity ¯ ¯˘

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© 2013 Probitas Partners Private Equity Institutional Investor Trends for 2014 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

U.S. Middle-Market Funds ................................................................20

Venture Capital .................................................................................21

Niche Private Equity Sectors ............................................................22

Fund Structures and Key Terms .......................................................27

Investor Fears and Concerns ...........................................................30

Our View of the Future .....................................................................33

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 2012 3Q YTD

2013

Source: Thomson Reuter

20 27 40 4964

97

148175

301

175

94 99

138

306

392

490 477

170

262

168

276

205

2

Private Equity Institutional Investor Trends for 2014 Survey © 2013 Probitas Partners

The Private Equity Fundraising Environment

• Fundraising in2013 isonpace toexceed2012’s totalas theprivateequitymarketsreturntonormalcyinthewakeoftheFinancialCrisis.

• Differenttrendsfrom2012underliethetoplinenumbersinChartI.

• Megabuyout funds in theUnitedStatesandEuropeare raising large fundsthatareboostingoverallcommitments—butmostofthesefundsaretargetingsmallerfundsthantheydidatthemarketpeak.

• In Asia, a relative strong point during the Financial Crisis, fundraising hasfallen significantly in 2012 and 2013 — especially for RMB-denominated,China-focusedfundsthathadbeengrowingsteadilysince2006.

• The overhang of undrawn commitments that built up from vintage year2006 through 2008 funds is now finally burning off, releasing pressure onlimitedpartners’allocations.

• Interest in secondary funds and distressed debt funds is moderating fromlastyear.

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Private Equity Institutional Investor Survey

Probitas Partners conducted its online survey to measure investor interest,opinions, and perspectives on investing in private equity in October 2013. Thissurvey is administered annually to gauge emerging trends and to compareinvestors’changingviewsovera longerperiodoftime.Onehundredandthirty-seven responses were received from senior investment executives globally,representing such institutions as public and corporate pension plans, fund-of-funds,familyoffices,endowmentsandfoundations,andconsultantsandadvisors.

Overview of Survey Findings

Thefollowingsummarizesthetop-linefindingsfromthesurvey:

• Steady interest in private equity. The rebound from the Financial Crisiscontinues,andinvestorsarelikelytocommitslightlymoretoprivateequityin2014than2013.Thoughtheappetitefornewmanagersisincreasing,anumberofinvestorsremainfocusedontriagingcurrentfundmanagerrelationshipsasthe lastgroupofmanagers yet to raise since thebeginningof the FinancialCrisiscomesbacktomarket.

• Continued focus on smaller buyout and growth capital funds. Investorsremainfocusedonsmaller-andmiddle-marketbuyoutandgrowthcapitalfundsintheUnitedStatesandEuropetodiversifyportfoliosandcommitcapitaltostrategieswheremanagerscanproverecurringaddedvalue.

• Many investors have already established core relationshipsinthesesectors,soarenotlookingtoaddmanynewones.

• Interest in emerging markets is declining. Investors are increasinglyconcernedwithpoliticalrisk intheemergingmarketsandare lessconvincedthat the inherent high growth story necessarily leads to strong privateequitygains.

• Credit Vehicles (distinct from mezzanine funds) are rising in interest.Credit-oriented strategies and vehicles have come into fashion, especiallyseniordebtandopportunisticcreditstrategiesinEuropeandNorthAmerica,asdifficultiesinthedebtmarketshavecontinuedtocreateopportunities.

• Energy focused funds remain a significant focus for investors, especially in North America.Thisistrueinnosmallpartduetooutperformancethesectorhasdeliveredoverthepastcoupleofyearscomparedwiththebroaderprivateequitymarkets.

• Large investors increasingly focused on co-investments.Largeinvestorswiththeteamandcapitalresourcesnecessarytodevelopco-investmentprogramsare increasinglytargetingco-investments inanefforttoenhanceoverallandnetreturns;thelargestinvestorsarepursuingdirectinvestmentsaswell.

Chart II Respondents by Institution TypeI represent a:

Source: Probitas Partners’ Private Equity Institutional Investor Trends for 2014 Survey

Public Pension

Corporate Pension/ Private Pension Plan

Endowment/Foundation

Fund-of-Funds Manager

Family Office

Sovereign Wealth Fund/Government Entity

Insurance Company

Bank

Consultant/Advisor

Other

3%13%

4%

14%

11%5%

9%

31%

6%4%

4


Profile of Respondents

• Therewere137respondentstothesurvey;mostrespondentswerefrompensionplans,funds-of-funds,insurancecompanies,andfamilyoffices(ChartII).

• Respondents were geographically diverse, with strong participation fromNorthAmerica,Europe,andAsia;withinAsiatherewasaparticularlystrongresponsefromJapan(ChartIII).

• AsChartIVdetails,manyinvestorsarenearthetopoftheirallocations,thoughinvestorsexpressedmoreallocationflexibilitythisyearthantheyhadlastyear.

• Funds-of-fundsaredifferent—allocationsarenotreallyrelevantastheirabilitytoinvestisdrivenbytheirabilitytoraisefundvehiclesorseparateaccounts.

Chart III Respondents by Firm HeadquartersMy firm is headquartered in:


Western Europe

North America

Asia/Middle East

Australia21%

4%

33%42%

Chart IV Current and Target Private Equity AllocationsAs 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 but 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 5 10 15 20 25 30 35 40 45

20132014

31

1617

26

76

1

20

4

3739

12

29

5


Chart V Drivers of Sector InvestmentOur sector investment focus in 2014 is being driven by:

My institution simply pursues 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

Targeting funds that will provide access to co-investments

My institution’s need to diversify its private equity portfolio

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

47

12

9

7

3

2

14

5

1

6


• Whatdrivesinvestorstoinvest?ConsistentwithProbitasPartners’pastsurveys,allotherreasonsaresecondaryto“pursuingthebestavailablemanagersandfunds,”thoughthefocusonbestmanagershasbecomeincreasinglyimportanttoinvestorssincetheFinancialCrisis(ChartV).

• Proven,topquartilemanagerscanbedifficulttoaccess,andsincefundsonlycome to market every three to five years, many investors feel compelled tocommittothesemanagerswhentheyareavailableandopen.

• Family offices are much more likely to focus on private equity sectors theybelievewilloutperform,with33%ofthoserespondentsfollowingthatstrategy.

• Morerespondentsarelookingtoincreasecommitmentsas2014approaches,continuingtheallocationreboundafterthebottomofthefundraisingmarketin2009(ChartVI).

• ChartVII shows that two-thirdsof respondentsare focusedon their currentgeneralpartnerrelationships,withonly28%strongly focusedondevelopingnewgeneralpartnerrelationships.

• Basedonourdiscussionswithinvestors,manycontinuetheprocessoftriaginggeneralpartnerrelationshipsthattheybeganfollowingtheFinancialCrisis.

• Only3%ofrespondentstargetedseparateaccountsastheirprimarymeansofinvestinginprivateequity,thesamenumberaslastyear.

Chart VI Private Equity AllocationsFor 2014, 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

(%)

30

25

20

15

10

5

0

<$50 MM $50 MM– $150 MM

$150 MM– $250 MM

$250 MM– $500 MM

$500 MM– $1 B

>$1 B


20132014

19

15

26

22

16

21

1718

13

10 9

14

Chart VII Manager RelationshipsDuring 2014, we would expect our primary focus to be:

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

Evaluating re-ups with current general partner relationships, looking to decrease the number of relationships significantly

Evaluating re-ups with current general partner relationships

Actively pursuing relationships with new managers

Pursuing separate accounts with a smaller number of managers

Our 2014 commitments have already been completely allocated

Other



0 10 20 30 40 50 60

85

55

2828

33

22

20132014

03

5454

7


Chart VIII Private Equity Sectors of InterestDuring 2014, my firm or my clients plan to focus most of our attention on investing in the following sectors (choose no more than five):

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

European Middle-Market Buyouts — Country-Focused

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

Growth Capital Funds

Energy Funds

European Middle-Market Buyouts — Pan-European

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

Credit Strategies

Secondary Funds

Distressed Debt Funds

Asian Country-Focused Funds

Infrastructure Funds

Mezzanine Funds

Pan-Asian Funds

U.S. Venture Capital

Restructuring Funds

Fund-of-Funds

Emerging Markets (ex-Asia)

Mega Buyout Funds (>$5 billion or equivalent)

Cleantech/Green-Focused Funds

Mining Funds

European/Israeli Venture Capital

Agriculture Funds

Timber Funds

Other Niche Sectors



0 10 20 30 40 50 60 70

62

43

41

25

18

15

12

9

9

16

16

19

20

22

23

25

26

30

8

3

3

2

2

2

5

8


Sectors and Geographies of Interest

ChartVIIIdetailsthesectorsofinteresttoinvestorsfor2014:

• Ashasbeenthecaseinmostofourprevioussurveys,middle-marketbuyoutsandgrowthcapitalintheUnitedStatesandEuropedominateinterest.

• Interest inAsiancountry-focused fundsdeclined from24% last year to19%thisyearbecauseofcontinuingconcernsaboutChina.

Table I Investors Focus of Attention Among Private Equity Sectors Top Five Responses:

2007 2014

Sector % Targeting Sector % Targeting

U.S. Middle-Market Buyouts 49% U.S. Middle-Market Buyouts 62%

European Middle-Market Buyouts 42% European Middle-Market Buyouts 43%

U.S. Venture Capital 34% U.S. Small-Market Buyouts 41%

Distressed Debt 30% Growth Capital 30%

Asian Funds 25% Energy Funds 25%

Source: Probitas Partners’ Survey of Institutional Limited Partners, 2007 & 2014

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• Atthemargin,thereisslightlyincreasedinterestinhardassetstrategies,butthe interest isscatteredamongst infrastructure,agriculture,miningandtimberfunds—strategies thatmayormaynotbepartofprivateequityallocationsforrespondents.

• Megabuyoutfundscontinuedtorankverylowininterest,continuingtheresultsofourpriorsurveys,evenatthepeakofthemarket.Whileinvestorscontinuetoexpressalackofinterest,thesefundscontinuetoattractsubstantialcapitalinthemarket.

TableIcomparesthetop-rankedareasofinterestfromour2007survey(thesurveybeforetheFinancialCrisis)andthecurrentsurvey.Thefindingsarenotsurprising:

• U.S.andEuropeanmiddle-marketbuyout fundsscoredextremelywellbeforeandaftertheFinancialCrisis.

• InterestinU.S.VentureCapitalhasfallensignificantlyfrom2007,withonly15%ofrespondentstargetingitin2014,rankingonly15thamongallstrategies.

• EvenattheearlystagesoftheFinancialCrisis,interestindistresseddebtwashighasinvestorslookedtohedgetheirbetsinafrothyenvironment.Interestindistresseddebthasmoderatedsincethenastheexpected“100-yearflood”ofdistressedopportunitiesincorporatedebtfailedtomaterialize.

• Energy-focused fundssoared into the top five in2014on thebackof stronginterest from North American respondents, with 40% of them targetingthesector.

Chart IX Private Equity Sectors of Interest; European Respondents

European Middle-Market Buyouts — Country-Focused


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




Credit Strategies

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


Restructuring Funds


Energy Funds

Mezzanine Funds

Pan-Asian Funds


Secondary Funds

Fund-of-Funds





Mining Funds

Agriculture Funds

Timber Funds

Other Niche Sectors



0 10 20 30 40 50 60 70 80

78

40

33

22

11

11

7

4

7

11

11

13

16

18

18

24

24

31

60

4

0

2

2

2

2

10


U.S.middle-marketbuyouts’toprankinginthesurveyreflectsthefactthat42%oftherespondentsarefromNorthAmerica.Thistrendisdrivenbythefactthatmostinvestorspreferlocalfundsandstrategieswhenbuildingcoreportfolios,andthenextend their portfolios geographically as they gain knowledge and experience,and seek greater diversification. Charts IX and X, respectively, provide a lookat theprivateequityworld through theeyesofEuropeanandAsian/Australianrespondents.

• Not surprisingly, Chart IX shows European country-focused middle-marketbuyoutsasthetoprankedinterestforEuropeaninvestorswhilemiddle-marketPan-Europeanfundsalsoscoredwell.

• U.S. middle-market buyouts were also of interest to Europeans, whileinfrastructureandcreditstrategiesalsoscoredwell.

Chart X Private Equity Sectors of Interest; Asian Respondents



Pan-Asian Funds



Secondary Funds

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

Mezzanine Funds

Energy Funds


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

European Middle-Market Buyouts -— Country-Focused

Credit Strategies


Restructuring Funds

Fund-of-Funds




Mining Funds

Timber Funds



Agriculture Funds

Other Niche Sectors



0 10 20 30 40 50 60

52

35

35

28

21

14

14

7

10

14

14

21

21

24

24

28

28

31

3

3

0

0

0

0

7

11


• U.S. venture capital was of little interest — though it did outscore Europeanventurecapital.

• AsshowninChartX,Asianinvestorslookattheirhomemarketsmorefavorably,thoughU.S.middle-marketbuyoutsarestillthemajorsectorofchoice.

• European country-focused fundsandU.S. venture capital areof significantlylessinteresttoAsianinvestors;theyaremuchmoreinterestedininfrastructureandsecondaryfunds.

• Asianrespondentswerealsomuchmorefocusedontraditionalprivateequitystrategies with little interest in alternative sectors like emerging marketsoutsideofAsia,timber,andagriculture.

Chart XI Private Equity Geographical FocusDuring 2014, I anticipate that the three major geographical focuses for our program will be:

Perc

enta

ge o

f Res

pond

ents

(%)

100

90

80

70

60

50

40

30

20

10

0

North America

Western Europe

Asia Emerging Markets Globally

Latin America

Central and Eastern Europe

Africa MENA Other


2 2

92

49

139

85

51

12


• Asfarasgeneralgeographic interest,thethreemajorgeographiesofNorthAmerica, Western Europe, and Asia continue to dominate investor interest(ChartXI).

• Notably, there was less interest in Asia reflected in this year’s survey, withrespondents targeting Asia falling from 65% from two years ago to 49%thisyear.

• Interestinemergingmarketsglobally,aswellastheindividualregionsoutsideofAsia,hasalsodeclinedoverthepastyear.

20132014

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

Nordic Region

Germany

United Kingdom

Benelux

Europe via Pan-European funds

I do not invest in Europe

France

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

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

Europe via fund-of-funds

Spain

Italy

Other



0 10 20 30 40 50 60 70

4848

2120

1217

79

1010

37

26

42

73

24

4940

6062

24

13


• As far as European markets, for the seventh consecutive year, institutionalinvestors preferred to invest in the Nordic Region by a significant margin(ChartXII).

• Germany and the United Kingdom, once again rounded out the top threegeographiesofinterest,thoughinterestintheU.K.surgedthisyear.

• Italy and Spain have rebounded slightly from last year, as both countriescontinuedtodealwiththeirmacroeconomicissues.

• Interest inCentralandEasternEuropedeclinednoticeably fromalready lowlevelstotrailallotherEuropeangeographies.

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

Nordic Region

United Kingdom

Germany

Benelux

France

Spain

Italy



Europe via fund-of-funds

Europe via Pan-European funds

I do not invest in Europe

Other



0 10 20 30 40 50 60 70 80 90

Overall RespondentsEuropean Respondents

8260

02

22

73

04

3321

6749

6748

07

1117

1110

77

42

14


• AsChartXIIIhighlights,Europeaninvestorsviewtheirhomemarketsimilarlytoglobalinvestorsintermsofgreatestareasofinterest,butwithevenmorefocusontheNordicRegion,theUnitedKingdom,andGermany.

• Europeans,aswithglobal investors, remain leeryofEasternEurope,CentralEurope,andSouthernEuropegiventhecurrenteconomicenvironment.

ChartXIVhighlightsrespondents’interestinAsiangeographiesgoinginto2014.

• ChinaremainsthetopAsiangeographyofinterestamongallparties,thoughinterestcontinuedtodeclinefromitshighof55%threeyearsagoto38%now.

Chart XIV Most Attractive Asian Markets; Asian RespondentsWhich Asian markets do you find most attractive at the moment (choose no more than three):

China

Australia

Japan

Southeast Asia

Pan-Asian funds

South Korea

India

Vietnam

Indonesia

Taiwan

Asia via global funds

Asia via fund-of-funds

I do not invest in Asia

Other



0 10 20 30 40 50 60

3621

1422

1420

07

1114

42

02

44

6

5421

4338

7

0

01

4

22

2

Overall RespondentsAsian Respondents

15


• InterestinJapansurgedfrom9%lastyearto22%thisyearonthebackoftheintroductionofAbenomicsinstitutedbythenewgovernment.

• ThebiggestdifferencebetweenAsianrespondentsandoverallrespondentsthisyearisamuchgreaterinterestinJapan;however,therewereadisproportionatenumberofJapaneserespondentsinthesurveythisyearfocusedontheirhomemarket,skewingtheAsianresults.

• In last year’s survey, 30% of overall respondents targeted India, while thisyearonly7%ofoverallrespondentsandnoneoftheAsianrespondentswerefocusedonit.

• Indonesianinterestfellto2%thisyearfrom14%lastyearasmanyinvestorshavemadebetsonIndonesiaoverthelasttwoyearsandnowhavebaselineexposures and are increasingly concerned about liquidity and politicalstabilitythere.

Table II Which Geographies in Asia Are of the Most Interest in Private Equity? Top four responses:

2007 2014

Country/Region % Targeting Country/Region % Targeting

China 28% China 38%

India 28% Southeast Asia 22%

Japan 25% Australia 22%

I do not invest in Asia 25% Japan 22%


16


TableIIhighlightshowinvestorinterestswithintheAsianmarkethavechangedsincetheFinancialCrisisstarted.

• In2007,China,India,andJapanenjoyednearlyequalinvestorinterest.Sincethen, interest in Indiahas fallenprecipitouslyas investorsgrew increasinglyconcernedoveralackofexits.

• AppetiteforJapanhasgonethroughacycleofsteadydeclinethrough2013,thenreboundingstronglythisyearonthebackoftheeconomicpoliciesofthenewJapanesegovernment.

• InterestinSoutheastAsianfundshasincreasedonlyoverthelastthreeyears,driveninpartbyinvestor’sdesiretodiversifyawayfromChinaexposure,whileAustralia benefits in this year’s survey from a large number of Australianrespondentstargetingtheirhomemarket.

• Thebiggestchangeinemergingmarketinterestoverthelastyear,detailedinChartXV,istheincreasednumbernotinvestinginemergingmarkets—nearlydoublelastyear,risingfrom18%to32%.

• China and Brazil continue to lead investors’ interest in emerging markets,thoughinterestinbothhasdeclinednoticeablyoverthelastyear.

• Interest in India continued its decline the last few years as investorscomplain about the lack of exits from previous Indian funds they backed,while interest in Turkey plummeted as political turmoil negatively affectedinvestor’sperceptions.

• TheotherBRICcountry—Russia—continuedtotrailsignificantlyinthesurvey,asithasforanumberofyears.Limitedpartnerstellusthattheyareconcernedaboutinvestors’rightsunderRussianlaw.

Chart XV Most Attractive Emerging MarketsWhich emerging markets do you find most attractive (choose no more than four):

China

Brazil

Turkey

Southeast Asia

Indonesia

I do not invest in emerging markets

Pan-Latin America

India

South Korea


Colombia

Mexico

Pan-Asia

Russia

Peru


Chile

MENA

I only invest in global emerging market funds

Vietnam

Sub-Saharan Africa

Other

Emerging market via funds-of-funds



0 5 10 15 20 25 30 35 40

20132014

33

18

20

18

23

9

10

10

6

54

8

6

2

3

2

13

33

5

20

11

32

1817

12

610

7

98

118

24

4

0

2

3

6

3

3

3

5

38

20

7

17


Chart XVI Interest in Emerging Market Private EquityMy 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 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 relatively 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

55

36

20

18

3

10

18


• Thedrivingfactorthatattractedinvestor’sinterestinemergingmarketswastheprospectofstronglong-termeconomicgrowththatwaslikelytopositivelyimpact returns. However, the number of respondents who felt compelled toinvest inemergingmarketsonthattheorydroppedfrom77%twoyearsagoto55%(ChartXVI).

• For investors who are not interested in emerging markets (Chart XVII), thereasonsaremuchmorediverseandnotdominatedbyasinglereason.

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

I find the risk/return profile in developed markets more attractive

I am not staffed properly to perform due diligence on these markets that basically offer emerging manager risk as well as emerging markets risks

These markets are not developed enough and it is difficult to find experienced managers with strong track records

I am uncomfortable with the degree of political, currency, or economic risk in emerging markets

As an organization, we are satisfied to get 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 5 10 15 20 25 30 35 40 45

40

38

32

28

17

13

13

19


Chart XVIII Most Attractive U.S. Middle-Market SectorsWhich 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

Restructuring/turnaround funds

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

Strategy is irrelevant, a demonstrable superior track record is my only concern

Funds focused on growth companies, often investing without majority control

Regionally-focused funds

U.S. middle market via fund-of-funds

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

Other



0 10 20 30 40 50 60 70

62

40

19

2

29

27

22

13

3

15

20


U.S. Middle-Market Funds

• Fund managers in the large, homogeneous market in the United Statesare predominantly differentiated by investment strategies rather thangeographicdifferences.

• The majority of respondents indicated a strong preference for funds thatgenerated returns viaoperational improvementsand thatwere staffedwithoperatingprofessionals.Thisisconsistentnotonlywithpastsurveyresultsbutalsoacrossallinvestortypes(ChartXVIII).

• Asian investors are more focused on buy-and-build strategies, with 47% ofrespondentstargetingthatapproach.

• The least favored strategy across all investor types are regionally-focusedfunds.

Chart XIX Most Attractive Venture Capital SectorsIn 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

Only historic returns no matter the sector

Venture capital via fund-of-funds

I do not invest in venture capital

Other



0 10 20 30 40 50

24

27

2

3

7

26

4

14

44

17

19

8

19

21


Venture Capital

• Venture investor interest in stage and sector remains static over our lastseveralsurveys, though interest incleantech-focused fundshascontinuedtodwindletoaverylowlevel(ChartXIX).

• Endowments and foundations remain much more active in venture capitalthan other investors and focused on early stage investments, with 63% ofrespondentstargetingthatstage.

• Since2007,thenumberofrespondentswhodonotinvestinventurecapitalhasmorethandoubled,from17%to44%.Asianinvestorsarethemostnegativeonthesector,with54%ofrespondentssayingtheydonotinvestinitatall,whileendowments are the most positive, with all of those respondents targetingthesector.

Chart XX Distressed InvestmentsWithin the distressed debt/restructuring sector, I am most interested in (choose no more than two):

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

Distressed debt for control funds (loan-to-own)

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

Distressed debt: active/non-control funds

Distressed debt trading funds

Distressed debt hedge funds

I do not invest in this sector

Other



0 10 20 30 40 50 60

26

21

18

3

50

55

3

1

22


Niche Private Equity Sectors

• There are several distinct distressed strategies, but many fund managerspursueacombinationoftheseapproacheswithinthesamefund.

• Most respondentspreferstrategieswithavalue-added focus thatgenerateshighermultiplesofreturn.Inallourprevioussurveys,restructuring/turnaroundfundsanddistresseddebtforcontrolfundshaveswitchedbackandforthfortheleadinthesector(ChartXX).

• Opportunisticcredit funds (thatusuallyhaveastrong focusonassetsotherthan corporate debt) are another area of focus for investors. While someinvestorshaveexpandedtheirdistresseddebtcategorytoincludemorecreditstrategies,othersstillconsideritastraightcreditorfixedincomeproduct,andthereforenotintheiralternativesallocation.

Chart XXI CreditIn the credit sector, my firm:

Perc

enta

ge o

f Res

pond

ents

(%)

100

80

60

40

20

0

Mezzanine Senior Debt BDCs/Publicly Listed Opportunistic Credit


Considers credit sector investmentsDoes not invest in this sector Invests but not as part of a private equity allocation

Invests as part of private equity allocation

35

12

14

39

48

13

21

18

90

26

21

11

42

334

23


• Over the past three years investors have been increasingly focused on theprivateequitycreditsectorastheylookatopportunitiescreatedbythestrainedbankandCLOmarkets.

• Respondentstothesurveyaremorefocusedonthemezzanine,opportunisticcredit, and senior credit sectors, although a number of investors make theircommitments to these strategies outside their private equity allocations(ChartXXI).

• Few respondents to the survey were interested in business developmentcompaniesorotherpubliclylistedvehicles.

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

Actively purchases direct positions in funds in the secondary market

Actively invests in secondary funds

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

Provides advice to clients on secondaries

Is not active in secondaries in any manner

Actively purchases direct positions in companies in the secondary market

Other



0 10 20 30 40 50

45

38

31

19

18

13

4

24


• Chart XXII reflects very few changes in investor preferences since last year,witha largenumberofrespondentsactivelypurchasingsecondarypositionsdirectlyorinvestingthroughsecondaryfunds.

• The secondary market is clearly maturing. The percentage of investors whohavesoldorareconsideringsellingfundsfromtheirportfolioreachedanall-timehighthisyearwhilethepercentageofrespondentswhoarenotactiveinsecondariesinanymannerisatanall-timelow.

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

Has an active internal co-investment program

Only opportunistically pursues co-investments

Does not invest in co-investments nor directly invests in companies

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

Other


Source: Probitas Partners’ Private Equity Institutional Investor Trends for 2014 SurveyNote: “Large Investors” denotes those survey respondents who plan to commit $500 million or more to private equity in 2014

0 10 20 30 40 50 60

Large InvestorsAll Respondents

30

3019

3426

3559

1211

1226

47

20

14

25


• AsChartXXIIIdetails,themajorityofinstitutionalinvestorsdonotpursueco-investmentsordirect investments,oronlydosoopportunisticallybecauseofstafforcapitallimitations.

• However, the largest investors are much more likely to have an active co-investmentprogram;59%oftheselargerespondentshaveanactiveinternalco-investmentprogram,whileanother7%haveoutsourcedprogramsand11%investdirectlyincompanies.

Chart XXIV Publicly Traded Private Equity VehiclesAs 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



0 10 20 30 40 50 60 70 80 90

2013 2014

43

25

79

29

22

2

86

4

26


• ComingoutoftheFinancialCrisis,therehasbeenrenewedinterestinpublicly-tradedvehicles, eitherat themanagementcompany levelor the investmentvehiclelevel.

• However, there remains little interest in investing in this sector amonginstitutional private equity investors, across all types or geographies ofinvestors,atrendthatwasmorepronouncedthisyear(ChartXXIV).

Chart XXV Issues Regarding Fund StructureThe issues I focus on most when investing or advising a client 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

Structure or inclusion of a key man provision

Carry distribution waterfalls

Cap on fund size

Transaction fee splits

Ownership of the management company

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

Strict adherence to the ILPA Private Equity Principles

Inclusion of a strong environmental, social, and governance “ESG” policy

Other



0 10 20 30 40 50 60 70

17

19

29

30

36

36

46

48

48

12

10

60

3

10

27


Fund Structures and Key Terms

• As with most of our past surveys, the level of general partner financialcommitment to a fund remains the most important term for investors as itis one of the key factors in assuring alignment of interest between limitedpartnersandgeneralpartners(ChartXXV).

• Europeaninvestorsweremorefocusedonthelevelofmanagementfees,with64% of respondents focused on that attribute, while Asian investors ranked“KeyMan”provisionsassecondontheirlistofmostimportantterms.

• Forthefirsttimethisyearweaskedinvestorshowimportantstrictadherencetothe ILPAPrivateEquityPrinciplesor the inclusionofastrongESGpolicywas inreviewingfundstructuresandterms.Overallneitheroftheseissuesrankedhighly,though 24% of pension plan respondents targeted strict ILPA compliance and20%ofEuropeanrespondentsfeltthatstrongESGpolicieswereimportant.AsianandAustralianinvestorswereleastconcernedwiththeseissues,andnoneofthefamilyofficeorinsurancecompanyresponseswereconcernedwithESGpolicies.

28


• InpastsurveysweaskedinvestorsinmoredetailabouttheILPAPrivateEquityPrinciplesandfoundthatthoughfewinvestorsinsistedonstrictcompliancetothePrinciples,amajorityofinvestorsofalltypesusedthemasastartingpointfortermsnegotiations.

• AfterapauseduringtheFinancialCrisis,therehasbeenaresurgenceinthird-partyinvestmentinprivateequitymanagementcompanies.

• Similar to our previous surveys, limited partners’ strongest reaction is thattheseinvestmentscreatepossibleconflictsofinterestbetweeninvestorswhoacquire positions in general partner management companies and limitedpartnersinthefunds(ChartXXVI).

• Though many investors feel these structures create potential conflicts ofinterest, only 22% stated that this would lead them to reject investing inthe underlying funds, down from 41% last year. Geographically, there is adistinctdifference,withonly5%ofAsianinvestorssayingtheywouldrejectafundbecauseof third-party investment in thegeneralpartner,while31%ofEuropeanrespondentssaidthattheywouldrejectsuchafund.

• Only 6% of respondents felt that investing in a private equity managementcompanyrepresentedanattractiveopportunity.

Chart XXVI Third-Party Investments in Private Equity Management CompaniesI 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 better handled through private as opposed to public structures

Is a natural response to succession issues in private equity funds

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



6

7

17

20

22

80

3

0 10 20 30 40 50 60 70 80

18

29


30


Investor Fears and Concerns

• The greatest fear of most private equity investors was that large funds arebecoming generalized asset managers and are moving away from their keyinvestmentstrengths.Lastyear,thiswasonlythethirdmostnotedissuewith33%ofrespondentsmentioningit(ChartXXVII).Europeaninvestorsfeltevenmorestronglyaboutthisissue,with64%mentioningit.

• ThebiggestdifferencegeographicallywasinAsia,wherethegreatestconcern(mentioned by 40% of respondents) was that too much money was chasingtoofewexperiencedprivateequityprofessionals inwhatarebecomingover-heatedemergingmarkets.

• Fears thateconomicdifficultieswould impactalternative investment returnsfell significantly from the first-ranked issue last year (mentioned by 48% ofrespondents)toonlyfifthplacethisyear.

• Wealsoencouragedrespondentstostatetheirowngreatestfearsorconcernsnotincludedinourpre-setlist.Answersincludedthefollowing:

• Fund managers do not have enough “skin in the game” and as a consequence we are starting to see again practices seen prior to the Financial Crisis in terms of leverage level, especially in the United States.

• The opportunity is good, but the investment structures are poor.

• Lack of adequate exit opportunities (IPOs, strategic buyers) to absorb the number of companies that will need to be exited over the next two to four years.

• Credit bubble fed by aggressive searches of yield will cause another private equity crisis in a few years’ time.

• Poor liquidity and distributions.

• Generational transition at firms when heir apparents likely have modest attributable track records largely from the last ten years.

• Too much secondary capital to be invested and the rapid increase in co-investment activity.

• Large limited partners are not being active enough with their general partners.

• Are the right funds getting funded, are the right limited partners getting access, are the right entrepreneurs getting funded?

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

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

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

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

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

Economic difficulties will have widespread impact on all alternative investment returns

Commitment overhang and allocation pressure will continue to impact my ability to invest in attractive opportunities in 2014

Investment by third parties into fund management companies is decreasing alignment of interest between limited partners and general partners

Access to top quartile venture capital managers is impossible without previous relationship, and new managers are unattractive

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

The private equity market is increasingly illiquid, hampering returns and limiting my ability to reinvest

The venture capital investing model is broken and future strong performance is unlikely to return

Continued volatile IPO markets will negatively impact venture capital returns

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

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

Another technology bubble is in the process of forming

Other



46

38

36

20

7

6

7

8

8

15

28

30

6

6

3

5

5

9

0 10 20 30 40 50

31


Table III What keeps you up at night? Top three responses:

2007 2014

Issue % Targeting Issue % Targeting

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

51%Large firms in the market are becoming generalized asset managers and are moving away from their key investment strengths.

46%

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.

38%

There is too much money available in the large buyout market and this will dramatically impact future returns.

44% Private equity is most effective as a niche market — too much money is being raised in all sectors.

36%


32


• Table III takes us back to the beginning of 2007 and highlights investors’concernspre-FinancialCrisisandcomparesthemtofearsgoinginto2014.

• Concerns about management fees and transaction fees destroyingalignment of interest were among the top three concerns pre- and post-FinancialCrisis.In2007investorswereveryawarethattherewastoomuchdebtandequityavailableinthebuyoutmarketandthatthestrongreturnsleadingupto2007andbeyondwereunlikelytocontinue.

• In this year’s survey,nearlyhalfof the respondentswereconcerned thatlargefirmsinthemarketwerebecomingassetmanagersfocusedonAUMgrowthandweremovingaway from their key investment strengths—anissuethatwasnottopicalin2007.

• In2007,amajorconcernofinvestorswasthattoomuchmoneywasgoingintothelargemarket;by2014theconcernwasthattoomuchmoneywasgoingintoprivateequityoverall.

33


Our View of the Future

Severalkeytrendsfor2014emergefromthesurveyandourongoingconversationswithinvestors:

• Fundraising globally will hit a new post-Financial Crisis high this year with continuing strength in 2014.WeaknessinAsiaandemergingmarketfundraising are being made up by strong interest in North America andEurope,whilesignificantrealizationsandcontinuedstrongpublicmarketsvaluationsaregivinglimitedpartnersmoreroomtodeploycapital.However,thestaffofmanylimitedpartnersisbeingstressedbyawaveofre-upsthatisaffectingtheirbandwidthtoreviewnewrelationships.

• The new performance metric — cash — driving increased exits. Manyinvestorshaveaddedakeymetricofperformance to IRRandmultipleofcapital: distributions on paid in capital (“DPI”), or actual cash returned.Thisnewmetricisforcinggreaterrealizationsbeforemanyfundmanagersareabletosecurenewfundcommitments. InNorthAmericaandEurope,increaseddistributionsareleadingmanyinvestorstorecyclecashreceivedintonewcommitmentstofundswithsolidDPIperformance.

• Investors are becoming more cautious regarding emerging markets.Anumberofkeyemergingmarketshavebeenplaguedbylimitedliquiditywhileothershavesufferedfrompoliticalturmoil.Thoughinvestorsbelievethatthelong-termeconomicgrowthpotentialofemergingmarketsishigh,theyarelesscertainoftheshorter-termprospectsforprivateequityreturnsinspecificmarkets,especiallycomparedwithwhatappeartobecompetitivereturnsindevelopedmarketswithlessrisk.

• Interest in venture capital will remain weak — but that is not necessarily bad.Alargenumberofinvestorshavegivenuponventurecapitalentirely,with 43% of respondents to this year’s survey saying they do not investin venture capital, the highest mark ever. However, a number of limitedpartners still targeting the sector believe that the lack of price inflationforventurecompanyinvestmentsthatshouldresultfromlesscompetitionshouldincreasefutureventurecapitalreturns.

• Increased interest in hard asset plays.Anumberofsophisticatedinvestorsworried about economic uncertainty and future asset shortages, as wellasthoseseekingtomatchlong-termliabilities,areincreasinglyturningtohardassetsectorssuchasenergy,agriculture,mining,andtimber.Severalpensionfundshavecreatedseparateinflation-linkedallocationsoutsideoftheirprivateequity,realestateanddebtallocations,thoughmanyinvestorswith theseallocationsexpress frustrationbecause thereare fewproductsavailablewithexperiencedmanagementteamsanddeeptrackrecords.

• The past as future — “middle-market, operationally-focused funds.”Inallofourpastsurveysandconversationswithinvestors,therehasalwaysbeenapronouncedpreferenceformiddle-marketbuyoutfundswithoperationalfocus.Wedonotexpectthattochangeprospectively.Whatdoescontinuetovaryonthetopic,however,isthedefinitionofwhat“middlemarket”is,orwhatdefinesan “operational focus.”Given increased interested in thespace,weexpecttoseebroaderdefinitionsemerge.

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

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