PRIVATE

EQUITY
NAVIGATOR

Private Equity Analysis from INSEADs Global Private Equity Initiative

April 2016

ABOUT US
INSEAD GLOBAL PRIVATE EQUITY INITIATIVE

PEVARA

(www.insead.edu/gpei)

(www.pevara.com)

The Global Private Equity Initiative (GPEI) drives

teaching, research and events in the field of
private equity and related alternative investments
at INSEAD, a world-leading business school. It
was launched in 2009 to combine the rigour and
reach of the schools research capabilities with
the talents of global professionals in the private
equity industry. The GPEI aims to enhance the
productivity of the capital deployed in this asset
class and to facilitate the exchange of ideas and
best practice.

Pevara is a division of eFront (www.efront.com),

a leading software provider of end-to-end
solutions dedicated to the financial services
industry with a recognized expertise in alternative
investments, enterprise risk management, and
customer relationship management. eFronts
solutions serve more than 800 customers in 48
countries, including companies in the private
equity, real estate investment, banking and
insurance sectors. eFronts primary product suites
offer tightly integrated solutions for streamlining
the management of alternative investments and
corporate risk. Founded in 1999, eFront services
clients worldwide from offices in Asia, Europe,
the Middle East and North America.
Pevaras data is obtained from actual LP cash
flows as opposed to surveys or relying on the
Freedom of Information Act to source data. LPs
who wish to contribute data to the Pevara Private
Equity Index can do so by sending an email to
data@pevara.com, after which a Pevara data
specialist will discuss the process with them.

INSEAD's global presence with campuses in

France, Singapore and the UAE offers a unique
advantage in conducting research into established
markets for private equity, while at the same time
exploring new frontiers in emerging markets to
arrive at a truly global perspective on this asset
class. The GPEI also focuses attention on newer
areas shaping the industry such as operational
value creation, responsible investing and growth
equity, and specific groups of LPs like family
offices and sovereign wealth funds.
The GPEI looks to partner with stakeholders in
the private equity industry to collaborate on
research ideas and projects. Its core supporters are:

This report is authored by Bowen White, Associate Director, GPEI and Siddharth Poddar, Research
Associate at GPEI; under the supervision of Claudia Zeisberger, Academic Director of the GPEI, Senior
Affiliate Professor of Decision Sciences and Entrepreneurship & Family Enterprise at INSEAD. We
thank Rishi Kotecha from Pevara and Hazel Hamelin, Senior Editor at INSEAD, for their invaluable
support.

INDEX
The Private Equity Navigator seeks to balance the presentation of raw data and minimal accompanying
commentary with a more engaging (if less rigorous) approach to illustrate key concepts in private
equity. Our findings are presented in five sections:

01 Executive Summary

02 Detailed Market Analysis - INSEAD & Pevara Database

03 Research by INSEADs PE Centre

04 PE News @ INSEAD

05 Insights from GPEI's Model Portfolios

Executive Summary
In this eighth edition of the INSEAD-Pevara Private
Equity Navigator we review annual PE fund activity
and provide an update on PE-related research
at INSEAD. Institutional investors continue to be
concerned with the 3Cs: China, Commodities
& Currencies. Our comments on private equity
in China in the Navigators September edition
kindled interest and surprise among our
readers, so we decided to add to the discourse
with a deeper analysis of China PE dynamics.

While a downturn in global equity markets in the

latter half of the year may have pushed valuations
lower, only investment activity in Europe showed
a noticeable uptick. Lacklustre growth in
developed economies and weak global demand
more than offset the impact of these improving
valuations. Uncertainty surrounding the global
economy was heightened by Chinas slow-down:
falling domestic demand for global commodities
and intermediate products has had a knock-on
effect in markets that service the Chinese
economy. All in all, 2015 offered many reasons
that dissuaded managers from making new
investments.

Our key findings based on our growing LP dataset are as follows:

2015 was the year of the exit and saw record
distributions

While in previous editions we documented how

private equity regularly outperformed the public
market and that returns from public markets were
more volatile over time, in this edition we can
state categorically that private equity has
outperformed public markets in nearly every
time period over the last 15 years. Only a welltimed investment in the public market index at
the low-point of the global financial crisis would
have outperformed private equity.

High valuations, economic uncertainty, and

volatility in public markets globally denote a
challenging investment environment
Global private equity outperformed a
comparable public market benchmark in nearly
all time periods
The jury is still out on Chinese PE
outperformance, as most of the returns are
unrealized

Delving deeper into the outperformance of

Chinas PE funds, we find that Chinese private
equity returns contain a much larger proportion
of unrealized returns than in other parts of the
world. While returns from Chinese PE are higher
than those from other regions, Chinese funds
have to-date realized only 30% of their overall
return, compared to 52% in global private equity
and 47% across all of Asia. Interestingly, we have
watched distributions from China increase for
four consecutive years. How that trend will impact
cash-on-cash returns from Chinese PE moving
forward remains to be seen.

2015 was another banner year for PE exits,

extending the industrys exit supercycle to a
third year. Distributions from the funds in our
dataset have never been higher. This record
activity reflected favourable valuations across a
wide range of exit paths it was the biggest year
ever for global M&A, according to Dealogic.
Coupled with liquidity in the market from monetary
easing in some key economies, this created
conditions conducive to divestment.
For five years running, the industry has returned
more capital than it has called, in sharp contrast
to the preceding five-year period (2006-2010)
when capital calls exceeded distributions in each
year. In fact, the gap between global capital called
and distributed was never wider than in 2015.
While robust distributions played their part,
a 29.0% fall in capital called during 2015
accounted for a significant part of the story.

As always, we endeavour to provide thoughtprovoking analysis and commentary on the

concerns we hear from our institutional LPs and
Family Offices; we certainly welcome your
feedback.

Claudia Zeisberger

Bowen White

Senior Affiliate Professor of Decision Sciences

and Entrepreneurship & Family Enterprise,
Academic Director, GPEI

Associate Director, GPEI

Detailed Market Analysis

INSEAD & Pevara Database
The following pages provide
an update on the PE market
during the second half of
2015.
With Q4 distribution and
capital call numbers in, we
are able to review activity
levels from the entire year.
We then compare recent
industry returns against longterm trends and, more
importantly, against public
markets to gauge the
industrys proposition of
outperformance.
3

PE Market Update
(Activity in H2 2015)

As in past editions of the Private Equity Navigator, we

start with a look at PE activity over the past six months.
The two key indicators in terms of investment and
divestment activity in any PE market are the amount
of capital called and the amount distributed by fund
managers over a given period of time. The analysis
that follows is based on data provided by 2,827 private
equity funds investing globally, with combined assets
under management (AUM) of $2.32 trillion, a more-

than-adequate proxy for industry activity levels.1 As is

the case with the global PE industry, the number of
funds and total AUM in our dataset are weighted
heavily towards the US in particular and Europe, with
Asia and the rest of the world making a relatively small
contribution.2 This edition of the Navigator features
findings from a dataset containing 81 more funds than
used in our September 2015 report.

The best year for capital distributions in a decade, the second worst for calls
Fig 1

activity picked up in the second half, totalling $137.8

billion, but was marginally lower than the $143.3 billion
distributed in H2 2014, which set a high water mark
for capital distributed in a six-month period for our
dataset.

Annual Capital Calls and Distributions (Global)

It is clear from Figure 1 that while investment activity

recovered immediately after the global financial crisis,
managers ability to deploy capital has deteriorated
since 2011. One reason for this is asset price inflation,
as valuations were pushed progressively higher due
to quantitative easing programmes employed by central
banks around the world and investors looking for yield
in the pervading low-interest-rate environment.
Investors in 2015 met a different set of challenges, as
slowing global economic growth, sharply falling
commodity and oil prices, and volatile public equity
markets raised questions about the health of the global
economy moving forward.

2015 was the third consecutive year of strong exit

activity in global PE, while investment activity stagnated.
Indeed the gap between capital called by PE fund
managers and distributed to fund investors has never
been wider. According to our dataset, managers
distributed a record amount of capital to investors in
2015 ($271.4 billion), narrowly surpassing that distributed
in 2014 ($271.0 billion). PE funds called just $107.7 billion
in 2015, the lowest total called by funds in our dataset
in a single year over the past decade barring 2009,
when $100.2 billion was called.

On the back of continued high distributions and the

29.3% year-on-year drop in capital calls in 2015, the
ratio of capital distributed to called stood at a record
2.52x, well above the 1.78x posted a year earlier. It
was particularly pronounced in Q1 2015, when three
times as much capital was distributed as was called
($60.0 billion vs. $20.0 billion) in a period of particularly
low investment activity. The ratio fell throughout the
year, settling at a markedly low level in the final quarter
(2.19x in Q4, or $71.5 billion vs. $32.7 billion) as
opportunities to deploy capital became increasingly
available.

High valuations and economic uncertainty put a damper

on investment activity in the first half of the year, with
global capital calls amounting to just $49.8 billion,
compared to $79.9 billion in H1 2014. Volatility and
broad corrections in public equity and currency markets
in the latter half of 2015 underpinned the sluggish
pace of investment. While falling valuations presented
pockets of opportunity and capital calls picked up
marginally in the second half ($57.9 billion), they were
well off the mark set in H2 2014 ($72.5 billion).

Perhaps a better comparison (and a proxy for industry

performance) is to examine current distributions relative
to capital called in the past. If we assume a holding
period of five and a half years3 and compare H2 2015
distributions ($137.8 billion) with H1 2010 calls ($63.7
billion), we find a multiple of 2.16x, which is marginally
higher than the 2.10x figure reported in the last edition
of this report.

Distributions amounted to $133.6 billion in H1 2015, an

increase of 4.6% over the $127.7 billion distributed in
the first half of 2014. Similar to capital calls, distribution

1 While the PE industry is larger and the data in this report is a representative proxy, the advantage of our dataset is that it is obtained directly from
LPs and is hence more accurate than data obtained from a range of other sources.
2 Comprised of North America (54.6% of funds and 62.9% of global PE AUM in the Pevara dataset); Europe (36.1% of funds and 30.9% of AUM);
Asia (6.0% of funds and 5.1% of AUM); and other regions making up the balance.
3 The average holding period of portfolio companies by PE funds has increased over the years from 4.1 years for companies exited in 2008,
to 5 years for companies exited in 2012, and to 5.9 years for companies exited in 2014. For companies exited until May 2015, however, the
average holding period has decreased to 5.5 years, according to data provider Preqin.

Ratio of distributions to calls improved significantly in Asia over the year, but the US still leads
Private equity managers in North America, Europe and
Asia all generated strong distributions in 2015. However,
Europe was the only region in which capital distributions
in 2015 ($105.1 billion) exceeded those in 2014 ($77.2
billion), offsetting drops in North America and Asia to
produce this years record (Figure 2). Distributions in
North America and Asia fell from $173.8 billion to $148.4
billion and from $18.4 billion to $16.3 billion respectively.

capital distributed to capital called in Asia stood at

2.72x in H2 2015, up significantly from 1.94x in H1 2015
and 1.99x in H2 2014. This was due to a continued
slowdown in investment activity among Asian funds
since H2 2014, as capital called fell from $5.7 billion
in H2 2014, to $4.4 billion in H1 2015, to just $2.8 billion
in H2 2015.
In contrast to North America and Asia, Europe saw a
sharp increase in investment activity in the latter half
of the year, when capital calls increased from $18.9
billion in the first half to $30.7 billion in the second half.
As a result, the ratio of distributions to calls decreased
throughout the year in Europe, falling from 2.46x in H1
2015 to 1.91x in H2 2015.

Capital calls, on the other hand, shrank in all three

geographies. North America saw the largest drop in
investment activity both in relative and absolute terms,
where capital called fell by 38% (from $80.1 billion in
2014 to $49.7 billion in 2015). Capital called by funds
in Asia fell by 31% (from $10.6 billion to $7.3 billion) and
in Europe by 18% (from $60.5 billion to $49.5 billion).

Fig 2

Examining the ratio of capital distributions to calls,

North American funds presented the starkest
divergence between investment and exit activity, as
the ratio of capital distributions to calls extended to
2.99x in 2015, compared to 2.17x in 2014 and 2.45x in
2013. The ratio in North America was consistent
throughout the year as increases and decreases in
investment and exit activity in the US mirrored one
another throughout the year.

Capital Calls and Distributions by Region (in $bn)

The most significant relative change in investment and

exit activity during 2015 came in Asia. The ratio of

Private Equity Returns

& Variance
In this section we analyze private equity performance
from January through September 2015.4 Our main
performance measure is the modified internal rate of
return (MIRR) as it makes for more realistic re-investment
assumptions for investors in the industry than other
measures.5 The more conventionally applied but
theoretically unsound internal rate of return (IRR) and
the Modified Dietz IRR (the Pevara Index) are also
presented in Figure 3 for the purpose of comparison.6

We begin with an analysis of global PE performance,

examining the evolution of annual returns, assessing
recent quarterly returns, and comparing public market
and private equity returns. The section continues with
an analysis of PE returns across funds investing in
different geographies, dividing performance into
quartiles. It concludes with deeper analysis of Chinaspecific private equity performance and volatility in
the context of realized and unrealized returns.

Returns trend lower

In the first nine months of 2015, the PE industry recorded
an MIRR of 8.1%, roughly in line but slightly lower than
the 8.4% return registered over the same period in
2014. This compares with an IRR of 8.0% for the first

nine months of 2015 versus 8.3% over the same period

in 2014, and the Pevara Index of 7.8% relative to 8.1%
a year earlier.

We consider returns as of Q3 2015 as our numbers do not yet include NAV adjustments for Q4 2015.
This edition uses the net MIRR where possible. It uses a discount rate for capital calls of 12.0% with a 10-year horizon, and equally assumes
a re-investmentrate of 12.0%. For more details, refer to the December 2013 issue of Private Equity Navigator.
6 The two main issues with IRR are the re-investment hypothesis on intermediary distributions and the cost of uncalled capital. The Pevara Index,
a performance measure that calculates fund IRRs using the Modified Dietz Method, improves on the IRR by accounting for the timing of cash
flows within a period. For more details, refer to our inaugural December 2013 issue.
4

Fig 3

27.0%
26.6%
22.5%

and uncertainty in financial markets will likely constrain

Q4 PE performance. If NAVs follow a similar, albeit less
severe path to the global equity markets in Q4, annual
PE performance could sink to its lowest since 2011,
the only year since 2008 that has seen returns below
10.0%.

Annual Private Equity Returns

20.0%
20.2%
17.7%

-23.5%
-21.9%
-17.8%

9.3%
8.9%
10.6%

18.6%
18.5%
17.6%

7.7%
7.9%
8.4%

12.5%
12.7%
12.3%

17.7%
17.9%
16.8%

11.4%
11.0%
11.5%

As was the case in 2014, the decline in performance

has come in the face of record realizations. One
explanatory factor could be fund managers exiting
older investments at low time-weighted returns. It could
also be a function of fund managers exiting attractive
investments in a sellers market, while less attractive
assets in their portfolios weigh on total returns. Given
the bleak economic outlook in the near term, it could
simply be a case of fund managers exiting investments
to take what they can get before things take a turn
for the worse.

8.0%
7.8%
8.1%

* The 2015 figures are until 30 Sept due to a time lag in PE reporting

Full year performance, however, is expected to come

in below global private equitys 11.4% MIRR generated
in 2014, as the continued global economic slowdown

Since the beginning of 2014, European PE has outperformed, Asian returns have been more volatile
In this section we compare quarterly MIRR performance
from the last 12 quarter across global PE and three
regions: North America, Europe and Asia. What stands
out in Figure 4 is the sharp drop in global PE returns
as well as in each of our three regions in Q3 2015,
following three quarters of steadily increasing
performance.

European PE has provided more consistent returns

than global or North American PE, swinging from
underperformance in late 2012 and 2013 to
outperformance in late 2014 and 2015. In fact, Europe
was the only region that outperformed the global
industry during the first nine months of 2015, with
MIRRs of 12.3% and 8.1% respectively. Over the same
period, the MIRR for Asian PE was 7.7%, while North
America was the worst-performing region with an MIRR
of 5.6%. The same held true in 2014, as Europe was
the only region to outperform the global industry,
producing an MIRR of 12.5% compared to a global
MIRR of 11.4%.

The decline was most marked in Asia, which saw MIRR

fall from 6.1% in Q2 2015 to -3.5% in Q3, and reflects
the more volatile returns produced in the region over
time. In the same period, returns in Europe declined
from 5.6% to 0.7%, while those in North America fell
from 3.5% to -0.3%.
The volatility in Asia cuts both ways, as returns in the
region both lead and lag MIRR performance from
Europe and North America in different periods. In the
12 quarters displayed in the graph, Asia PE funds
produced the highest quarterly returns four times and
the lowest twice. In two instances Asian PE produced
the lowest and highest quarterly MIRR returns in
consecutive months: in Q2 2015, Asia comfortably
outperformed other geographies, posting an MIRR of
6.1%. In the very next quarter, while global MIRR fell
approximately 4 percentage points, the MIRR from
Asian funds plummeted almost 10 percentage points
to -3.5%.

Fig 4

Quarterly Private Equity Returns by Region

PE outperforms the public market, both in terms of rolling and annualized return
In this section we compare MIRR performance8 with
public index returns to establish how the PE industry
fared relative to public markets. We compare

global private equity MIRRs with quarterly performance

of the MSCI ACWI SMID Cap Index.9

Unlike IRR the MIRR can be used for comparison with public markets as it accounts for the cost of capital until investment and assumes
reasonable re-investment rates (we use a reinvestment rate of 12.0%). For a discussion of the qualities of MIRR please see our inaugural Private
Equity Navigator as well as the glossary provided.
9 The MSCI ACWI SMID Cap Index is used for reference only. The index has 7,484 constituents from 23 developed markets and 23 emerging
markets, and covers approximately 28.0% of the global investable equity opportunity set in each country.
8

Fig 5

in Q3 2005 would have generated an annualized

return of 11.5% through Q3 2015, while an investment
in public markets would have generated 7.0%.10 While
this approach does not take into account the reality
of building a portfolio and maintaining exposure to
global private equity, it does allow for a straightforward
comparison of performance.

1-year Rolling Return, PE vs Public Market - Global

What we see in Figure 6 is that an investment in private

equity outperforms a public equity investment in nearly
all circumstances. The only investments in public equity
markets that outperform private equity investment
were those made in the depths of the global financial
crisis in Q1 and Q2 2009, following a 44.0% drop in
the MSCI AWCI SMID during 2008. At several other
points in time such as in late 2001, late 2002 and
late 2011 performance converged but does not quite
intersect.

Figure 5 presents 1-year rolling returns for global PE

and global public equity markets. While returns in the
two markets are clearly correlated, the difference in
volatility is immediately apparent: PE returns are more
stable over time. The 1-year return for the MSCI tops
out twice above 60% and bottoms out for two
consecutive quarters below -40.0% during the global
financial crisis. PE returns, on the other hand, are
significantly less volatile, with 1-year rolling MIRRs
topping out at 27.0% in 2007 before falling to a low of
26.0% during the crisis. The trend in public equity
markets at the end of 2015 reinforces our view that
2015 full-year MIRR performance is likely to come in
lower than full-year 2014 returns.

This relationship holds when performance is compared

between PE and public markets in North America,
Europe and Asia, although less distinctly than in the
global comparison.

Fig 6

Annualized Returns, PE vs Public Market - Global

While the volatility of returns is an interesting technical

measure, the question of whether PE outperforms
public equity garners more attention. In order to
compare performance over time, Figure 6 presents
the annualized return generated by an investment in
PE and public equity on a given date held through Q3
2015. For example, an allocation made to private equity

A portfolio of Chinese PE funds offers the best risk-return profile

Fig 7

In this section we look at the variance in regional

private equity performance across quartiles to get a
better understanding of industry performance from a
risk-return perspective. Unsurprisingly, our results are
quite similar to those found in the last edition
obviously six months is not long in the context of PE
investment.

Benchmark IRR Quartiles (vintages 2005-2012)

by Geography

24%

14%

IRR

Figure 7 displays the variance in returns across our

three regions of activity and in China for private equity
funds in our database from vintages 2005-2012.11 12At
a global level, the best-performing fund of the top
quartile and the worst-performing fund of the bottom
quartile13 have provided returns of 29.2% and -11.5%
respectively, with a pooled mean of 8.9%.

4%

-6%

-16%

1st Quartile

Global

Europe

2nd Quartile

North America

3rd Quartile

Asia

4th Quartile

China

Pooled Mean

10 If the returns are not annualized, the return these investments would have generated are 204.3% for private equity and 100.8% for the public
market index.
11 We do not include funds from younger vintages as they are still in the investment period, hence preliminary returns are likely to change
substantially.
12 The analysis is based on a total of 40 Chinese private equity funds.
13 The Pevara quartiles are bounded by the 5th and the 95th percentile funds, and not the best- and worst-performing. The top quartile is 75th
to 95th percentile and the bottom quartile is 5th to 25th percentile. This is done to manage performance outliers.

When broken down by region, the best- and worstperforming funds in Europe provided returns of 26.3%
and -14.4% respectively, with a range of 40.7%. In North
America, the numbers stand at 31.4% and -7.1%
respectively with a range of 38.5%, and in Asia 26.3%
and -9.3% with a range of 35.6%. The range of returns
is a gauge of volatility in each region, with Asian funds
producing the least volatile performance, followed by
North American funds, and finally European funds.

As shown in Figure 8, if we separate the performance

of global and Chinese PE funds from these vintages
by quartile, we see that Chinese PE has outperformed
the global industry in terms of IRRs in every quartile.
This underlines the robustness of China private equity
performance, as it is not just top-performing funds that
have the edge on their global peers.
Although interesting, these findings do not tell us much
about cash on cash returns, hence we provide a more
thorough analysis of Chinese funds outperformance
in the following section.

In the September 2015 edition of the Navigator, we

showcased how private equity funds investing in China
produced a superior risk-return profile relative to the
global PE industry. This was caused both by superior
returns (on a pooled mean basis) and by lower volatility
across fund returns. Interestingly, while the returns for
Chinese funds were more volatile on a quarterly and
an annual basis, fund level returns were less volatile.
Unsurprisingly, this remains the case with the difference
between the best- and worst-performing funds in China
at 29.9%, lower than both other regions and the global
average.

Fig 8

Global and Chinese Funds IRR Performance by

Quartile (as of Q3 2015)

If we consider the pooled mean IRRs as of Q3 2015,

we again see that PE funds investing in China have
outperformed their peers by a substantial margin.
While North American and European funds of these
vintages have pooled means of 9.0% (10.0% as of Q1
2015) and 8.8% (10.2%), respectively, Chinese funds of
the same vintages have a pooled mean of 13.3% (12.5%).
Asian funds that do not invest in China have a pooled
mean of just 7.0% as of Q3 2015 (6.8% as of Q1 2015).

The China Story

What is driving the outperformance of Chinese PE
funds? One clear explanation is Chinas economic
growth. With the economy boosted by government
investment growing at rates of between 8.0% and
10.0%, incomes have grown rapidly, resulting in a boom
in demand for a wide range of consumer products.
This proved an ideal time for fund managers to back
entrepreneurs and companies that catered to this
demand, as growth in these segments far outstripped
the economy at large. The sheer size of the economy
(compared to its maturity) created ample opportunities
to generate growth, be it through the identification of
new trends, the launch of new products, or the provision
of hitherto unavailable services. Meanwhile the Chinese
stock market boomed over the past decade, which
partially explains the impressive PE returns, as a
significant chunk of PE money in China finds its way
into listed companies.

globally, across our three main geographies and China.

As can be seen, the unrealized portion in Chinese
private equity is the largest both in absolute amount
(1.13x) and as a percentage of total returns (1.13x/1.61x,
or 70.0%).14 Furthermore, Chinese private equity funds
returned a lower multiple of cash invested to investors
(0.48x) than all three of our main geographies and the
global average.

Fig 9

Benchmark Performance Ratios for Funds,

Vintages 2005-2012 (as of Q3 2015)

However, on closer examination, explaining Chinese

PE performance is not so straightforward. In particular,
the countrys outperformance relates to the way
Chinese private equity firms measure fair value.
Figure 9 displays the realized distributed to paid in
capital (DPI) and unrealized residual value to paid in
capital (RVPI) return generated by private equity funds
14 1.61x is the total value to paid in capital (TVPI) for Chinese funds, which is equal to the sum of the DPI and the RVPI, or in other words, a
measure of pooled multiple returns including both realized and unrealized returns.

Fig 10

change in realized returns for Chinese funds increased

from 0.29x to 0.48x between Q3 2014 and Q3 2015,
representing a 0.19x or 66.0% increase over the period.
This exceeded the absolute increase in realized returns
globally (0.14x, representing an increase from 0.60x to
0.74x over the period), and far outstripped the
proportional increase in global realized returns of
23.0%.

Annual Capital Calls and Distributions (China)

While the increase in realized returns in 2015 is a

promising sign for investors in Chinese private equity,
China is still far behind the global average in terms of
realized returns. Going forward, given the recent
headwinds in Chinas public markets and expectations
of continued volatility amid a slowing economy in 2016,
turning these unrealized returns into cash for investors
could be challenging. Fund managers success in doing
so will, to a large extent, depend on factors beyond
their control.

A look at the amount of capital distributed by Chinese

private equity funds (Figure 10) gives an indication of
why this may be happening. Chinese PE exit activity
over the past three years has fallen short of level
realized in global PE. While distributions from Chinese
managers have grown each of the last four years
from just $0.7 billion in 2012, these funds distributed
$1.9 billion in 2013, $3.0 billion in 2014, and $4.2 billion
in 2015 this past year marked the first time that
Chinese PE funds in our database have returned more
capital than they invested. The improvement in exit
activity in 2015 led to a sharp increase in the ratio of
distributions to calls in 2015, improving from 0.23x in
2012, to 0.74 in 2013, 0.80x in 2014, and 1.95x in 2015.
This suggests the (late) emergence of a sellers market
in China, and may signal improved prospects for
Chinese PE to come.

Fig 11

Strong exit activity in 2015 also drove a distinct increase

in realized returns in Chinese PE. Figure 11 compares
the evolution of realized returns to unrealized returns
between Q3 2014 and Q3 2015. While the total value
to paid in capital (TVPI)15 increased more for Chinese
PE (1.48x to 1.61x) than global PE (1.35x to 1.41x) over
the period, the real story is all about the increase in
capital returned to investors in Chinese PE. The absolute

A Breakdown into Realized and Unrealized

Returns*

* As of Q3 for both years

TVPI = Cumulative Distributions + Period NAV divided by paid-in capital. While distributions and calls are in real time, NAVs trail by a quarter
due to the lengthy internal valuation process at PE funds.

15

Research by
INSEADs PE Centre
INSEADs

PE

Centre

regularly engages in
research covering a wide
range of topics salient to the
private equity industry. The
next few pages contain
summaries of the latest
research activity and findings
from INSEAD.

10

Holding PE to its Word

A True Measure of Value Creation
Deal selection and leverage are no longer core differentiators for PE fund managers,
as investors are increasingly looking for replicable operational expertise
Over the last 15 years, the private equity (PE)
fund model has become a mainstay in the
portfolios of the worlds largest institutional
investors. As PE assets under management
increased five-fold during that time, the industry
has rapidly matured and prospered through a
series of business cycles and extreme market
dislocations. Although the illiquidity of PE
investment often restricts fund allocations to
single-digit percentages, repeated findings in
academic and for-profit research citing the
industrys outperformance relative to public
equity markets underscores its importance in a
balanced portfolio.

Change in annual operating cash flow,

typically using EBITDA as a proxy

Change in valuation multiple, typically the

EBITDA multiple, and

Change in net debt, a catch-all category

representing cash generation during the
holding period

But what has produced this outperformance?

And, more broadly, how do successful PE fund
managers (general partners, or GPs) consistently
and repeatedly generate value for investors
(limited partners, or LPs) over time? Sceptics
have long pointed to a combination of job cuts
and financial engineering i.e. the aggressive
use of leverage as private equitys secret
sauce. GPs, on the other hand, have increasingly
of late pointed to operating teams and
operational value creation as the key driver of
value creation in PE.

Academic studies addressing the question of

value creation suffer from a different set of
limitations. While several studies have uncovered
specific drivers of outperformance in PE-backed
companies for example, superior margin and
efficiency improvements relative to their peers
most leave large residual values unaccounted
for and rely on simplifying assumptions to assess
large datasets and populate incomplete
transaction data. Studies that take a holistic view
and isolate PE outperformance or Alpha typically
do so by comparing performance to public equity
markets, and again provide no insight into the
source of underlying operating improvement.

This approach neither provides insight into the

drivers of operational change realized under PE
ownership, nor benchmarks the performance of
a PE-backed company to that realized by its
peers.

With an expanding universe of opportunities in

both primary and secondary PE markets, LPs
need tools to separate true operating capability
from the claims made in fund pitch documents.
In our recent report, Value Creation 2.0, we
argue that existing metrics are an inadequate
gauge of GPs ability to create value, and present
an execution-ready solution to identify value
creation talent.

A New Way
Over the past six months, INSEADs Global Private
Equity Initiative (GPEI) has developed a
framework that brings clarity to the value creation
debate, and applied it to investments made in
developed and emerging markets. The
framework IVC 2.0 both defines the crucial
financial and operational drivers underpinning
value creation in PE and provides a robust
methodology with which to assess them. The
exhibit below presents IVC 2.0 output from one
such application, our analysis of a U.S. midmarket
leveraged buyout.

Where is the Gap?

The ambiguity around value creation lies partly
in the simplistic measures applied by PE firms
to show the sources of investment returns at the
portfolio company level. Historically, they have
pointed to the following three drivers:

11

IVC 2.0 Value Creation Drivers

partially offset by an increase in a companys taxshield; IVC 2.0 captures this dynamic in the free
cash flow effect.

Extending advanced frameworks developed by

Capital Dynamics and Duff & Phelps, IVC 2.0
deconstructs an investments return into five
categories of value creation. Value created in
four of these categories change in Revenue,
change in Margin, change in Multiple, and Cash
Flow is attributed to either industry performance
or company-specific performance (which we also
dub Alpha). In our example, for instance, the
value created through change in revenue (0.51)
was predominantly accounted for by companyspecific operating improvements (80.0%, or
0.41/0.51) relative to industry performance (20.0%,
or 0.10/0.51).

In a final step, IVC 2.0 allocates the return

generated by the investment r IV in our Exhibit
to different sources of funding, according to
ownership group (PE and management in this
case) and round of investment (initial and followon funding). An in-depth review of IVC 2.0
methodology can be found in our paper here.

Show Me the Money

Real operating capability provides a tangible
means to generate value in LPs PE portfolios
irrespective of economic and market cycles. The
complexity surrounding this topic has grown
exponentially in recent years, as GPs have
developed a range of techniques at varying
degrees of maturity to engage with portfolio
companies during the holding period. IVC 2.0
provides LPs with a means to determine those
investments and GPs that create value, and those
that dont.

Whats more, IVC 2.0 explicitly breaks down the

impact of incremental leverage on investment
returns in a fifth value creation category, Capital
Structure. Increasing leverage (debt financing)
reduces the amount of fund capital required to
finance an investment, and thus increases the
return realized by the PE fund; IVC 2.0 captures
this dynamic in the leverage effect. Increasing
leverage reduces a companys annual free cash
flow due to additional interest expense, which is

INSEADs GPEI is looking for additional partners with which to explore the concept of value creation
across a set of investments and thereby help LPs or GPs better understand the sources of Alpha in
their investments. Interested parties can contact us here.
Bowen White is the Associate Director of INSEADs Global Private Equity Initiative (GPEI).

12

Case Studies

If I were the acquirer or an underwriter, would

I believe that this past success would continue?
Would I be comfortable bidding for the restaurant
chain? And if I did, would I pay full price?

After an intense ride full of highs and lows, we

faced the prospect of either bailing out or
doubling up on the bet, the effort and the
risk

"PE in Emerging Markets: Can Mekong Capital's

Operating Advantage Boost the Value in its Exit
from Golden Gate Restaurants? explores the
exit strategies for a successful growth capital
investment in Vietnam. After taking a stake in
Golden Gate in 2008, Mekong drove a range of
operating initiatives that produced a ten-fold
increase in outlets and an eight-fold increase in
EBITDA over a 5-year period. By 2013, Mekong
was exploring an exit and eager to deliver a
timely and healthy return of capital to its investors.

Adara Venture Partners: Building a Venture

Capital Firm explores challenges related to
raising capital for a private equity fund. In the
course of raising their second fund, Adara faced
the prospect of an anchor investor pulling out
because they had not yet assembled sufficient
capital to meet a deadline to complete the funds
first closing. As a consequence, the firms partners
must decide to either underwrite the shortfall
themselves or cancel the second fund.
The case examines critical decisions faced by
the partners in June 2013. They include a host
of issues at the heart of venture capital fund
management: GP economics, fundraising strategy,
investor relations, and the funds investment
strategy.

The exit route and valuation of Golden Gate,

however, were far from certain. There were no
publically traded multi-concept restaurant groups
in Vietnam and few private competitors to serve
as a benchmark. Equally concerning, Golden
Gates operating performance had weakened in
2012, missing earnings targets and same-store
sales growth in a number of its outlets. Students
must evaluate the best means of exit and whether
operational improvements are required to attract
buyers or create the foundation for a successful IPO.

An over-arching objective of this case is for

students to understand the entrepreneurial
challenge of building a venture capital firm from
the ground up. Details related to Adaras vision
& objectives, execution of that vision, and
approach to risk management place the partners
decision in context.

The case is featured in INSEADs P4 Private Equity

elective in Singapore. For more information,
please visit the case site here.

The case will be featured in INSEADs P4 Private

Equity elective in Fontainebleau. For more
information, please visit the case site here.

13

Chinas Economy:
The Four Engines of Growth
By Dr Kevin Lu, Distinguished Fellow GPEI, Published by the Financial Times
on 19 October 2015
The mainstream view on the Chinese economy
is that it will slow considerably, and only return
to healthy growth if it can be rebalanced away
from investment and exports to a household
consumption-driven model. This view is
incomplete at least, and misguided in some
aspects. Rather, the Chinese economy, over
the next two decades before China becomes a
high-income country, will be driven by four
engines.

private sector dynamics in China, is the ability for

the government to marshal state resources to
make investments that both generate a longterm economic return and improve the quality of
life for Chinese people. An example is the
affordable housing projects called social
housing. The governments target is to build
enough social housing to accommodate 23 per
cent of the urban populace by 2020, up from an
estimated 14 per cent in 2011. This translates into
an additional 30m units over seven years,
according to UBS economist Tao Wang. While
such social housing projects will take the form
of real estate investments, they will improve
peoples quality of life in the short term and
stimulate additional demand and consumption.

First, infrastructure and related investment will

continue to drive the economy forward, as they
have for the past four decades. Chinas per capita
GDP ranks 90th in the world. Beijings most recent
urbanisation plan calls for 100m more people to
be moved from farming regions to cities by 2020,
and 250m by 2026. The need for infrastructure
and other investments driven by this continued
massive urbanisation process is enormous. The
per capita capital stock of China today roughly
equates to the level in the US in the 1930s. The
potential marginal return of capital-intensive
investment, while lower than before, is likely to
continue to be higher than what we typically see
in a high middle income country.

The fourth and final engine for Chinas continued

growth is to export infrastructure and overcapacity to other countries, through increased
connectivity under the new Silk Road and one
belt, one road strategy. The newly established
Silk Road Fund and the Asia Infrastructure
Investment Bank (AIIB) would corner-stone such
efforts. The recent industrial parks set up in
African countries like Ethiopia and Zambia long
advocated by my former World Bank colleague
Justin Lin, are another way to move beyond
exports of goods and services to exports of
capacity, and of development experience more
broadly.

The second engine is Chinas new economy,

which is centred in the services sector and
grounded on rising levels of household
consumptions, especially in urban areas. Since
2007, the services sector has consistently
outgrown the primary and secondary sectors.
Over the past five years, the contribution to GDP
growth from the services sector has grown from
39 per cent to 57 per cent, reflecting greater
demand for health care, education, tourism,
entertainment, telecommunications, etc. As the
provision of services is dominated by the private
sector, the share of government and SOE
employment in Chinas urban areas has declined
from 59 per cent in 1995 to 20 per cent in 2015.

It is clear that in August 2015 the Chinese

government mishandled its desire to manage
the domestic equity market. Fortunately, Chinas
equity market is a fraction of the size of its US
equivalent and matters very little to most Chinese
investors, the Chinese real economy or the global
economy. The fundamentals of the Chinese
economy matter far more, and they continue to
be strong and the economy will continue to grow
robustly, driven by these four engines.

The third engine, reflecting the unique state-

* This article has been slightly shortened to fit the layout of this report. For the full version, see FT.com or GPEIs
website.

14

PE News @ INSEAD
This section presents a
roundup of the latest in
private equity at INSEAD,
from what is happening in
our classrooms to an update
on PE-related events and
activities.

15

Kauffman Fellows: Southeast

Asia Venture Capital Summit
The LP panel was followed by a GP/LP showcase
featuring presentations by VC investors and LPs
among the Kauffman Fellows. The speakers
shared their perspective on early-stage investing
in Southeast Asia, Europe, the Middle East and
Silicon Valley and how to approach fundraising
from institutional LPs. Particularly well-received
speakers included Michael Kim, Founder and
Managing Partner of Cendana Capital, who
described his decision-making process for
allocating capital to seed funds and the impact
of fees on FoF performance, Rob Coneybeer,
Managing Director and co-founder of Shasta
Ventures, who described his experience in the
nascent venture capital industry during the 1990s,
and Michael Lints, Venture Partner at Golden
Gate Ventures, who described his experience
raising capital and the market opportunity in SE
Asia.

GPEI welcomed the Kauffman Fellows at INSEADs

Singapore campus on 26 January 2016 as part
of their first-ever Southeast Asia Venture Capital
Summit. Founded in 1995, Kauffman Fellows is a
Silicon Valley-based leadership program for
venture capitalists and innovators of all kinds.
The more than 400 graduates from this two-year
apprenticeship now lead venture capital,
government, corporate, university, and startup
innovation in over 50 countries around the world.
The exclusive invite-only LP/GP Summit held at
INSEAD provided a rare opportunity for LPs and
GPs to intimately discuss the evolution of venture
capital and the global outlook for the industry.
The LP/GP Summit brought together more than
200 Kauffman Fellows from around the globe
including Silicon Valley, Asia, Europe, Latin
America, and Africa a host of regional LPs, and
INSEAD faculty and research staff to exchange
ideas and network in a closed-door environment.
Following a LP luncheon, the afternoon was
divided into three sessions:

The afternoon wrapped up with roundtable

discussions spotlighting the work of GPs and LPs
selected from among the Kauffman Fellows,
faculty, and partners. Talks included how skilled
GPs can make money in a downturn, LP pet
peeves, how to pitch institutional LPs, how to win
new LP accounts by differentiating capital, and
how performance metrics tell a story.

In the first panel, LPs came together to discuss

key topics affecting venture capital today including
LP performance expectations over the next 1-5
years, specifically in the context of investment
activity and valuations in China and in the US.
Panelists discussed the main criteria considered
when allocating capital to existing VC fund
managers and to new funds, and the challenge
LPs face when expanding investment activity
beyond markets and strategies with which they
are familiar. The panelists global perspective and
varying exposure to the VC asset class provided
valuable food for thought for GPs in the room.

We would like to thank Vinnie Lauria of Golden

Gate Ventures for his help bringing the event to
our Asia campus, the Kauffman Fellows events
team, and INSEADs events team for making the
afternoon a success.

16

Asian Private Equity Adjusting to the New Normal

INSEAD PE Club (IPEC) 7th Annual Asian Private Equity Conference, 2015
On 6 November 2015, INSEADs PE Club (IPEC) held its annual private equity conference in Singapore.
The event marked the 20th edition of this well-received, student-led event across our European and Asian
campuses. Given the volatility in public markets and the shift in investor sentiment since IPECs European
conference in May, the stage was well set for attending GPs, LPs, C-level speakers and INSEAD faculty
to weigh in on the way forward for PE in the region.

20+ industry speakers, from firms such as Abraaj, General Atlantic, Golden Gate Ventures,
KV Asia, Navis Capital and PAG Asia
PE themes: LBOs as a Viable Strategy in SE Asia, Operational Value Creation in SE Asia PE

VC themes: Taking SE Asian Companies to Series A, VC Sector Battle

This years conference ran under the theme of: Asian Private Equity Adjusting to the New Normal.

Claudia Zeisberger, Professor at INSEAD and Academic Director of the GPEI, welcomed the
audience with a narrative highlighting private equitys role as a transformation agent. In the
context of emerging markets, she underscored the ability of GPs to enhance governance
and operational best practice, and help a business reach the next level of development.

Reflecting the conferences focus on venture capital, Steve Leonard, the Executive Deputy Chairman
at Infocomm Development Authority (IDA) and Adviser to National Research Foundation Singapore,
delivered a key-note address describing the SMART Nation initiative in Singapore. Steve described
the start-up ecosystem in Singapore, and how the IDA seeks to align university, entrepreneurial,
VC, corporate, and government stakeholders to tackle todays global challenges. He stressed the
importance of pushing Singapores entrepreneurial community to think beyond developing solutions
on a local scale and to consider SE Asia, Asia Pac and global solutions.

The conferences first panel focused on investment opportunities produced by Asias booming
middle class. With panelists representing a broad range of asset classes and investment strategies,
the discussion highlighted opportunities across the food, internet and healthcare sectors resulting
from increased disposable income and access to technology among the regions middle class.

The Conferences second and third panel sessions were divided into VC and PE tracks. Panels in the
VC track covered the challenges and best practice related to raising Series A financing for regional
start-ups, and hosted a lively debate among sector specialists in fintech, marketplaces and logistics.
Panels in the PE track explored the viability of the LBO model in Asia with a focus on activity in
Singapore and Malaysia and concluded with a discussion focusing on operational value creation in
SE Asian control and minority investments.

The conference concluded with a well-attended careers session and cocktails on the top floor
of INSEADs new Leadership Development Centre.

The Conference was attended by more than 150 participants, including alumni, investment professionals,
general and limited partners, C-level executives and students. We would like to thank all of the events
participants and congratulate the student team for putting together a great event!
The next IPEC conference will take place on 27 May in Fontainebleau.

17

GPEI in South America

In December 2015, GPEIs Academic Director
Professor Claudia Zeisberger made a longoverdue trip to South America on invitation from
PwC Brazil, our research partner since 2011. In
addition to a stop in So Paulo, Professor
Zeisberger also visited with key INSEAD
stakeholders in Argentina. The trip provided the
opportunity not only to engage with family offices
and family businesses in the region, but also to
share insight from GPEIs recent research with
INSEAD alumni chapters in both countries.
Professor Zeisberger arrived in Buenos Aires
shortly after Mauricio Macri won the Argentine
presidency in a closely contested race against
Daniel Scioli. Sentiment on the ground in
Argentina was positive due in large part to the

behind nine of Brazils largest businesses: Banco

Itau, Votorantim Industrial, The Suzano Group,
Grupo Globo, Gerdau, The Camargo Correa
Group, RBS Group, Grupo Libra, and Grupo
Cornelio Brennand. Given the challenging
economic environment in Brazil, the families
shared a prudent yet sanguine view on their
plans and the way forward for Brazil.
To close the year 2015 in So Paulo, the Brazil
Alumni Private Equity Club, led by Ricardo Kanitz
(MBA'08J), hosted Professor Zeisberger for a
breakfast talk. The lecture focused on "The Role
of Growth Capital in Emerging Markets and
attracted a record turnout for the PE Club. Bain
was kind enough to host and provide space for
the talk, which concluded with an engaging
discussion on the future prospects for the private
equity industry in Brazil.

new market-friendly administration, and Macris

policy decisions have proved a bright spot among
difficult headlines out of emerging market
economies. Conversations with family businesses
in Buenos Aires reflected the countrys optimism
and potential.

We would like to thank PwC, Bain, and INSEADs

alumni for their warmth and hospitality throughout
the trip.

The INSEAD Alumni Association in Argentina

hosted Claudia at an event with other leading
global business schools to share perspectives
on private market investment in the country.
Presentations were followed by a cocktail party
with wine tasting that rounded up the trips
Argentina leg in good INSEAD fashion.
Professor Zeisberger concluded her trip to South
America with a stop in So Paulo, where PwC
hosted a closed-door meeting with the families

18

PE Events @ INSEAD
Future PE Events

69th CFA Institute Annual Conference

14th Annual INSEAD PE Conference, Europe

The Annual Conference is the CFAs flagship event

each year and one of the largest and the longest
running educational gatherings of investment
professionals, attracting between 1,100 and 1,800
attendees from 70 countries in prior years. GPEIs
Academic Director Claudia Zeisberger will teach a
Masterclass on Private Equity at the event, held in
Montreal, Quebec, Canada on 8 11 May 2016. Learn
more here.

INSEADs Private Equity Club (IPEC) will again host its

annual conference in Fontainebleau. In its 14th year,
the Conference has grown into the largest private
equity conference hosted by an academic institution
in Europe. This years conference under the headline
Value Creation in a World of Excess Capital will be
held at INSEADs Fontainebleau campus on 27 May.
Learn more here.

Past PE Events

AVCJ Private Equity & Venture Forum 2015,

Hong Kong

7th Annual INSEAD PE Conference, Asia

The AVCJ Forum is the leading PE and VC event in

Asia, held in 2015 at the Four Seasons in Hong Kong
on 3-5 November. For 28 consecutive years, the AVCJ
Forum has been the chosen platform where private
equity's leading figures share their views on the global
and Asian market, debate their predictions and set the
trends that shape the future of investments in the
industry. GPEI presented its latest research focusing
on performance in Chinese PE on the LP track. Learn
more about this research here.

INSEADs Private Equity Club (IPEC) hosted its second

PE conference of 2015 on 6 November at INSEADs
campus in Asia. Marking the 20th edition of the IPEC
Conference on both campuses, this years Asian event
focused on the state of the PE industry following a
volatile first three quarters of 2015, under the theme
"Asian PE - Adjusting to the New Normal. Separate
VC and PE tracks offered perspective on investing in
both early-stage and mature businesses in Asia. Learn
more here.

Kauffman Fellows: Southeast Asia Venture

Capital Summit, 2016

Invest Europe-INSEAD Single-Family Office Day,

2016

GPEI welcomed the Kauffman Fellows at INSEADs

Singapore campus on 26 January 2016 as part of their
first-ever Southeast Asia Venture Capital Summit. The
invite-only LP/GP Summit held at INSEAD brought
together more than 200 Kauffman Fellows, a host of
regional LPs and INSEAD faculty to discuss the
evolution of VC and the global industrys outlook. The
event provided an opportunity for Asia-based LPs to
engage with leading VC investors in a closed-door
environment. Learn more here.

Invest Europe and INSEAD held an invitation-only event

gathering single family offices from around the globe
in Geneva on 15 March. Attendees shared their
experiences investing in private equity and discussed
the latest trends and investment opportunities in
European PE. The event featured single family offices
from South America and Asia who shared their
perspective on investing and managing family interests
in an emerging markets context. Learn more here.

19

Insights from GPEI's

Model Portfolios
In this section, we track the
evolution of our two model
portfolios to provide insights
into their construction and
management and the
challenges associated with
a growing and maturing
portfolio.

20

Summary Observations
We began managing our two hypothetical billion-dollar private equity portfolios, with allocations to real funds
in the Pevara database, as of December 2013.16 The objective was to step into the shoes of a large institutional
investor in an attempt to understand the challenges of managing a portfolio and how these are addressed.
We decided to make Portfolio 1 largely representative of the global PE market, which implied a strategic focus
on buyouts and a geographic focus on North America. For a different perspective, we built Portfolio 2 with a
larger exposure to growth capital-focused strategies, and a larger allocation to Europe and emerging markets
(mostly Asia). Moreover, we juiced our portfolios by only selecting funds from the top three quartiles, implicitly
assuming selection skill.17 As we will see below, however, substandard performance has pushed some of our
funds into the fourth quartile, underscoring the challenge of identifying superior fund management talent.

Key Insights
Although the strategies driving portfolio construction and on-going allocation decision making varied between
our two model portfolios as has their performance the insights that have so far emanated from both are
similar. The challenges encountered reflect not only the complexity of managing a PE portfolio from a risk/return
perspective but also the real world decisions LPs must consider when resourcing their PE programme.
As distributions of capital flow from mature funds in each portfolio, we have had to make commitments to new
funds in order to maintain a billion-dollar gross exposure in both. In H1 we made new commitments of $60.0
million across two new funds in Portfolio 1, and $70.0 million across two funds in Portfolio 2. In H2 we only made
new allocations in Portfolio 2: we committed $85.0 million to three new funds, bringing our total commitment
in 2015 to $155.0 million across five funds.
Both portfolios continue to balloon beyond their initial 20 funds: we are now managing 26 and 31 funds in
Portfolio 1 and 2 respectively. In almost every half-year period since inception, we have added new funds to
our model portfolios not an easy task, as LP investment teams must vet and invest in new managers while
continuing to monitor existing fund relationships. Moreover, while we mechanically maintain a billion-dollar
exposure to PE with little consideration for market timing, LPs face the additional complexity of a live market
ecosystem, a particularly challenging proposition in the current macroeconomic environment. We have not yet
looked into disposing of fund stakes through secondary transactions, but we may do so in the near future in
order to reduce the number of our fund relationships.
In a classic illustration of disclaimers the world over past performance is not a guide to future results our
smart fund selection process (in which we omit funds from the bottom quartile) has come under pressure. Less
than 30 months since creating our portfolios, 6 of our 40 original funds have moved into the bottom quartile,
one in Portfolio 1 and five in Portfolio 2. Of the six funds that have fallen into the bottom quartile, four are Asiafocused growth capital funds, one is a European growth capital fund, and the sixth a buyout fund investing in
emerging markets. Unsurprisingly, manager selection is not easy.
In addition to maintaining a consistent gross exposure, maintaining our target geographical exposure has also
been a challenge. We now appreciate the benefit of target allocations, as both underlying performance and the
availability of funds in a given strategy or geography were unavailable when we made new commitments. For
instance, despite our best efforts, our exposure to North America has increased from 63.5% to 71.5% (with the
bulk of the gain made at the expense of European exposure), and to buyouts from 75.0% to 82.6% in Portfolio
1. Similarly, in Portfolio 2 our exposure to buyouts has increased from 54.0% to 61.3%, largely at the expense
of the portfolios allocation to venture capital, which has fallen from 11.0% to 5.9%.

For a detailed summary of the current geographic and strategy spread of the two portfolios, see the Appendix, including the IRR, MIRR, TVPI
and NAV of all individual funds.
For a more detailed look at how the portfolio was created and is managed, and portfolio allocation strategies, refer to the Private Equity
Navigator methodology on GPEIs website.
16
17

21

J-Curves and
Portfolio Returns
The diagrams below illustrate the cash flows
associated with our two portfolios, reflecting
drawdowns (capital called), distributions, and the
resulting net cash positions (the J-Curve). Only the
original 20 funds in each of the two portfolios are
included in this analysis to allow us to track the
development of the curve.

persistently low at $435.3 million as of year-end

2015.
Portfolio 2 saw a continuation of the upward trend
witnessed in the first half of 2015, with capital calls
of $31.4 million and robust distributions of $162.3
million between July and December 2015. As a result,
this portfolio has now seen more capital distributed
than called for six quarters in succession, resulting
in the formation of a classic J in the accumulated
cash-flow curve. As of Q4 2015, the net drawdown
for this portfolio was $373.2 million. With the average
age of our portfolios nearing six years, we can expect
continued upward momentum in both portfolios over
the coming quarters.

In H2 2015, the J-Curves for both Portfolios 1 and 2

showed upward momentum. In Portfolio 1, H2
distributions of $53.0 million compared to calls of
$35.9 million helped reverse the J-curves downward
path since the beginning of 2014. While still above
the all-time low net drawdown of $487.5 million
reached in Q3 2013, the drawdown remains

Fig 12

Portfolio 1: Cash Flows and J-curve

Fig 13

Portfolio 2: Cash Flows and J-curve

Comparison of portfolio returns

Our full portfolios, which include the additional
commitments to maintain a billion-dollar gross
commitment to PE, now have an average age of
about four years. The value of Portfolio 1 stands
at a TVPI of 1.43x, implying a return of about
43.0%, or $405.6 million, on invested capital. The
MIRR for Portfolio 1 currently stands at 13.1%, up
from 12.8% in H1 2015.

comfortably outperform the market (all funds in

the Pevara database) by almost 3 percentage
points. This implies that while our smart fund
selection process may not prevent funds from
falling in relative performance, preventing new
commitments to fourth quartile funds can produce
superior portfolio-level performance.

The TVPI for Portfolio 2 is marginally higher than

Portfolio 1 at 1.48x, implying a return of 48.0%, or
$487.6 million, on invested capital. In the last six
months, the MIRR for Portfolio 2 decreased from
13.4% to 13.2%, bringing the performance of our
two portfolios broadly in line as of year-end 2015.
In the first half of 2015, while the MIRR for Portfolio
1 decreased marginally, that for Portfolio 2
increased by almost 2 percentage points.

Fig 14

When we only consider returns from more mature

funds (vintages 2008-2012), Portfolio 2 also
outperforms Portfolio 1 only marginally. Both

MIRR Comparison as of December 2015 for

Funds of Vintages 2008-2012

13.3%
11.3%
10.7%

22

14.5%
11.9%
14.0%

17.8%
22.4%
8.2%

10.8%
12.7%
10.3%

7.9%
10.5%
10.3%

13.3%
13.4%
10.6%

APPENDIX
Portfolio 1:
Strategy: Buyouts 82.6%; Growth 3.0%; Venture 4.1%; Others (Distressed and Mezzanine) 10.4%
Geography: North America 71.5%; Europe 22.2%; Asia 4.1%; Other Emerging Markets 2.2%

Portfolio 2:
Strategy: Buyouts 61.3%; Growth 22.5%; Venture 5.9%; Others (Distressed and Mezzanine) 10.3%
Geography: North America 39.1%; Europe 36.2%; Asia 20.3%; Other Emerging Markets 4.4%

23

Published by StoneBench