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RCP Advisors, LLC
Tom Danis, Managing Principal and Co-founder
RCP Advisors: Private Equity Fund-of-Funds Manager
December 9, 2008
Introduction – Discussion on Current PE Market Conditions
●
●
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“The Denominator Effect”
o
Public Markets Down
o
Private Equity Flat?
Sovereign Wealth Funds
o
Large Pools of Capital
o
Smart Pools of Capital?
Private Equity Fundraising Landscape
o
Global PE Investing – Less Attractive
o
Niche PE Strategies – More Attractive
o
Extended Fundraising Periods Expected
Recession = Opportunity for Attractive PE Vintage Year Returns
Focused Private Equity Investments
1
“The Denominator Effect”
●
LPs Increasing PE Allocations
PE allocations increased in 2008
- 57% of LPs plan to increase PE allocations while only
2% plan to decrease PE allocations
●
Investor
Old Target
New Target
American Beacon Advisors
10%
15%
British Broadcasting Corp.
6%
10%
Los Angeles City Employees’ Retirement System
7%
8%
New York State Teachers’ Retirement System
5%
7%
Ohio Police & Fire Pension Fund
3%
7%
San Francisco Employees’ Retirement System
12%
14%
However, LPs have now reached / exceeded PE
targets due to significant declines in non-PE
portfolios
LPs Currently Exceeding PE Allocations
●
LPs above desired allocation must decide to:
o
Increase target PE allocation
o
Reduce new PE investments, including both the
number of new relationships and re-up investments
o
Actively manage existing portfolio through
secondary sales
Investor
Target
Actual
Alaska Retirement Management Board
7.0%
8.5%
California Public Employees’ Retirement System
10.0%
10.9%
California State Teachers’ Retirement System
9.0%
10.4%
Colorado Public Employees’ Retirement System
7.0%
7.7%
Los Angeles County Employees’ Retirement System
7.0%
8.4%
Pennsylvania State Employees’ Retirement System
14.0%
17.1%
16%
16.8%
State of Michigan Retirement Systems
Source – Private Equity Spotlight, October 2008; Private Equity Analyst, October 2008; Buyouts Magazine, October 2008
Focused Private Equity Investments
2
Cash Flows Back to Investors Have Slowed
$70B
$63.5
$60B
$50B
$59.6 $59.9
$58.0
$52.9 $53.8
$49.0
$42.5
$40B
$30B
$20B
$15.5
$14.5
$14.1
$10.6
$7.7
$10B
$0.8
$5.9
$0.3
$0B
-$10B
2004
2005
2006
Drawdowns
●
-$4.7
-$6.4
2007
Distributions
Q1 2008
Q2 2008
Cash Flow to LPs
Record fundraising and investment levels in 2005 – 2007 generated rising capital call volume until the recent
slowdown in 2008
●
The current difficult exit environment has led to many LPs facing negative cash flows
●
The lack of distributions further limits LPs’ ability to make new commitments
●
Certain LPs have sought liquidity by selling existing fund interests in the secondary market
- Secondary volume increased from $11.2 billion in 2006 and $12.2 billion in 2007 to $20.7 billion estimated for 2008
Source – VentureXpert 2008; Credit Suisse Strategic Partners
Focused Private Equity Investments
3
Sovereign Wealth Funds – A Growing Source of Capital
“Super Seven” Sovereign Wealth Funds
●
Sovereign Wealth Funds (“SWFs”) have
continued to expand in size and importance
o
~30 SWFs globally that manage $3.2 trillion, and
expected to grow 15-20% per year for the
next 5 years
o
next 5 years
The Abu Dhabi Investment Authority
$500-$900 Billion
The Government Pension Fund of Norway
$350 Billion
Government of Singapore Investment Corp.
$330 Billion
Kuwait Investment Authority
$250 Billion
China Investment Corp.
$200 Billion
Temasek Holdings
$159 Billion
Stabilization Fund of the Russian Federation
$158 Billion
Recent Activity of Sovereign Wealth Funds in the US
SWFs have invested ~7% of AUM in PE
o
Estimated Size
Merrill Lynch estimates SWFs will invest
$3.1 - $6 trillion into world stock markets in the
●
SWF
SWFs have been more active in direct investments
than in partnerships, especially in distressed
Investor
Amount
Firm
$1.4B / 7.5%
Carlyle
$3B
Blackstone
Abu Dhabi Investment Authority
$7.5B
Citigroup
Temasek Holdings
$9.7B
UBS
10%
Apollo
$4.4B
Merrill Lynch
$5B / 10%
Morgan Stanley
$2.5B
TPG
Mubadala Development Corp.
Beijing’s State Foreign Exchange Investment Co.
financial services
o
Many SWF investments in private equity have
included a GP-ownership stake
Abu Dhabi Investment Authority
Temasek Holdings
China Investment Corp.
China’s State Administration of Foreign Exchange
Source – Grant Thornton – Top Trends in Middle Market Private Equity; International Financial Services London
Focused Private Equity Investments
4
Private Equity Fundraising – LP Analysis
Global PE Fundraising by Year
●
Global fundraising remains strong through Q3 ’08
$475.1B
$500B
$389.4B
$400B
o
However, 2nd and 3rd quarters have slowed down
o
In addition, LPs have put decisions on hold suggesting $300B
$388.0B
$290.7B
a further slowdown in the 4th quarter
$200B
o
Historically, recession years have provided the
attractive vintage year performance
$146.3B
$100.9B
$100B
(see slide #8)
$0B
2003
●
2004
2005
2006
2007
Q3 2008
Global PE Fundraising by Quarter
Overall fundraising is expected to fall less markedly
$200B
o
Demand for mega buyout / generalist funds is expected
$163.2B
$151.0B
$150B
to slow down
o
Infrastructure, Distressed and Secondaries are
$134.3B
$90.7B
$100B
experiencing strong LP demand
$50B
$0B
Source – VentureXpert 2008
4Q 2007
Focused Private Equity Investments
1Q 2008
2Q 2008
3Q 2008
5
Private Equity Fundraising – GP Analysis
●
●
Funds in the Market
A record number of funds are seeking capital
o
>1,600 funds in the market seeking to raise $942 billion
o
$865 billion raised in 2006 & 2007 combined
o
Average number of months fundraising has increased:
•
9.5 months in 2004
•
14.2 months in 2008
# of Funds
In response to difficult marketing conditions, many
US
Europe
RoW
Total
Buyouts
161
69
55
285
Venture
229
98
132
459
Mezzanine
24
12
2
38
Fund-of Funds
107
81
16
204
Real Estate
243
123
65
431
Other
85
53
51
189
Total Number
849
436
321
1,606
Average Size ($million)
655
576
421
586
Total Value ($ billion)
556
251
135
942
GPs have lowered fund size targets or suspended
Average Number of Months Fundraising for PE Funds
fundraising efforts
●
15
14.2
Certain “First Time” funds are seeking alternative 13
12.0
methods of raising capital
11.1
10.6
11
9.5
Firms are “showing greater patience than they originally
9
anticipated, settling for smaller fund sizes, finding a white
knight to make early acquisitions possible and fundraising in
intervals between dealmaking.”
7
(1)
5
2004
2005
2006
2007
2008 YTD
Source – Private Equity Intelligence; S&P European PE Quarterly, October 2008; (1) Buyouts Magazine “Debut Fundraisers Try Range of Strategies.” September 8, 2008
Focused Private Equity Investments
6
Private Equity Strategies and Investment Momentum
Strategy
LP Demand
Comment
■With defaults expected to rise significantly, LPs are actively searching for GPs to address this attractive
investment opportunity
Distressed Debt /
Turnaround
■$45.2 billion raised in 2007 – a 161% increase over 2006, $47 billion expected to be raised in 2008
■Currently 70 firms seeking to raise $88 billion - $91 billion raised in aggregate between 2003 -2008
■Attracted to long-lived assets with recurring cash flows and current income; a recent survey revealed that 47% of
investors in unlisted infrastructure funds now have a completely separate allocation to the asset class
Infrastructure
■Volatile financing markets and less competition from CDOs / CLOs and hedge funds have resulted in abundant
deal flow at more favorable terms
Mezzanine
■$23 billion raised so far in 2008 - $16 billion raised in 2007
■Institutions needing liquidity are expected to provide ample investment opportunities for secondary buyers,
particularly at year-end; “Actual audited December statements…will trigger a lot of sales.” (1)
Secondaries
■$30 billion of aggregate target fund sizes currently in the market - $14 billion raised in 2207
■Asia and Rest-of-World-focused funds raised more money in the 3rd quarter than Europe-focused funds for the
first time in history
Emerging
Markets
■Yet, significant recent declines in public markets of developing countries may cause risk aversion among LPs
■While fundraising for buyouts remains robust, “Mega” buyouts have commanded the majority of capital, creating
greater competition for less established managers
Generalist
Buyouts
■Successful GPs generally achieve outsized returns from operational improvements and proprietary deal flow
■Fundraising has not recovered from historic highs in 1999 / 2000 (both in absolute dollars and as a percentage of
total capital raised
Venture
■While brand name firms continue to raise oversubscribed funds, lesser known VC firms have struggled
Source – Private Equity Intelligence;
(1)
Private Equity Insider “New Landscape Creates Secondary Field Day” September 24, 2008
Focused Private Equity Investments
7
Buyout Fund Returns Across Economic Cycles
Top Quartile Buyout Funds by Vintage Year
Recession
50%
Recession
42%
41%
40%
34%
33%
30%
32%
30%
30%
28%
23%
22%
20%
20%
19%
18% 18%
22%
18%
15%
15%
13%
12%
12%
10%
06
20
05
20
04
20
03
20
02
20
01
20
00
20
99
19
98
19
97
19
96
19
95
19
94
19
93
19
92
19
91
19
90
19
89
19
88
19
87
19
19
86
0%
Source – Cambridge Associates US PE Benchmarks, upper quartile net IRR calculated by vintage year as of June 30, 2008
Focused Private Equity Investments
8
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