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PitchBook Q1 Benchmarking for Private Equity and Venture Capital

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In this edition of Pitchbook's Global PE & VC Benchmarking and Fund Performance Report, they dive into analysis of fund performance across PE, VC and more, with all data updated with returns through 1Q. In addition, they provide analysis covering metrics such as:
1) PE & VC fund benchmarks against public market equivalents
2) Horizon IRRs by fund size and type
3) Detailed fund return multiples

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PitchBook Q1 Benchmarking for Private Equity and Venture Capital

  1. 1. VC DISTRIBUTIONS TO LPS SLOW TO BEGIN 2016 2007 VINTAGE PE FUNDS YET TO REALIZE DPI OF 1.0X HORIZON KS-PME BENCHMARKS FOR PE & VC 6 11 16 SPONSORED BY BENCHMARKING + FUND PERFORMANCE through 1Q 2016
  2. 2. Credits & Contact PitchBook Data, Inc. JOHN GABBERT Founder, CEO ADLEY BOWDEN Vice President, Market Development & Analysis Content NIZAR TARHUNI Senior Analyst KYLE STANFORD Analyst DYLAN COX Analyst ELIZABETH ARMON Analyst BRYAN HANSON Data Analyst JENNIFER SAM Senior Graphic Designer Contact PitchBook pitchbook.com RESEARCH reports@pitchbook.com EDITORIAL editorial@pitchbook.com SALES sales@pitchbook.com COPYRIGHT © 2016 by PitchBook Data, Inc. All rights reserved. No part of this publication may be reproduced in any form or by any means—graphic, electronic, or mechanical, including photocopying, recording, taping, and information storage and retrieval systems—without the express written permission of PitchBook Data, Inc. Contents are based on information from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. Nothing herein should be construed as any past, current or future recommendation to buy or sell any security or an offer to sell, or a solicitation of an offer to buy any security. This material does not purport to contain all of the information that a prospective investor may wish to consider and is not to be relied upon as such or used in substitution for the exercise of independent judgment. Introduction 4 PE & VC KS-PME Benchmarks 5-6 KS-PME Case Study: IT 7 IRR by Fund Type 8 Quartiles & Benchmarks 9 PE IRRs 10 PE Fund Return Multiples 11 PE Fund Cash Flows 12-13 VC IRRs 14 VC Fund Return Multiples 15 VC Fund Cash Flows 16 Select Top Funds by IRR 17 Methodology 18 Contents 3 PITCHBOOK GLOBAL PE & VC BENCHMARKING & FUND PERFORMANCE REPORT SPONSORED BY
  3. 3. Donnelley Financial Solutions (NYSE: DFIN) provides software and services that enable clients to communicate with confidence in a complex regulatory environment. With 3,500 employees in 61 locations across 18 countries, we provide thousands of clients globally with innovative tools for content creation, management and distribution, as well as data analytics and multi-lingual localization services. Leveraging advanced technology, deep-domain expertise and 24/7 support, we deliver cost-effective solutions to meet the evolving needs of our clients. For more information about Donnelley Financial Solutions, visit dfsco.com. Our Venue® secure online workspace provides a powerful set of features and an intuitive design that allows you to easily organize, manage, share and track all of your sensitive information. Venue® data rooms provide complete control, allowing you to manage who has access to your data room, which documents they see, and how they can interact with those documents. Venue® gives you access to hands-on, start-to-finish service that’s unique in the industry and that earns us a satisfaction rating of more than 97% from our demanding users. Get full Venue® room service or manage your room yourself, with our experienced in-house team ready 24/7/365. As part of Donnelley Financial Solutions, the global leader in managing time-sensitive, highly confidential documents, Venue provides the control you need with the security you demand. Introduction Over the long term, private equity horizon IRRS have outpaced most other asset classes, yet on a short-term basis, the venture market has done better. Limited partners continue to see positive inflows from PE vehicles, but fundraising figures remain impressive and net cash flows have declined, an interesting trend to note given the consistent quarterly drop we’ve seen in deal flow. For venture, net cash flows to LPs were negative for the first time in three years. While that has historically been the case, recent years have seen a series of outsized exits support distributions. With liquidity remaining low as of late, the pace and level at which late-stage private companies exit in the coming future will be closely watched in terms of how they’ll affect the distribution of cash and current fund IRRs—which today are certainly supported by hefty paper gains they have yet to realize. Throughout this report, we take a deeper look into private market IRRs, fund cash flows and return multiples, across other metrics. We hope this report helps inform your decision making process, and as always, feel free to reach us at reports@pitchbook.com with any comments or questions. MAKE WAY FOR SMARTER, ON-THE-FLY MEETING PREP US +1 206.623.1986 UK +44 (0)207.190.9809 demo@pitchbook.com pitchbook.com Introducing PitchBook Mobile. The same excellent data, technology and service from the PitchBook Platform, now available on a mobile device. Search: “PitchBook” Available for NIZAR TARHUNI Senior Analyst 4 PITCHBOOK GLOBAL PE & VC BENCHMARKING & FUND PERFORMANCE REPORT SPONSORED BY
  4. 4. 0.7 0.8 0.9 1.0 1.1 1.2 1.3 1.4 1.5 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 0.9 1.0 1.1 1.2 1.3 1.4 1.5 1.6 1.7 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 KS-PME Benchmarks IRR and cash multiples have been the gold standard of benchmarking for decades, but one of their main drawbacks is that they cannot be directly compared to indices that are used in mainstream asset classes. Public-market equivalent benchmarks (PMEs) effectively address this problem, making it possible to directly compare alternative asset fund performance to the performance of indexed asset classes by using fund-level cash flows. As there are multiple ways to calculate a PME, PitchBook has employed the Kaplan-Schoar PME method. Kaplan-Schoar (KS) Method: A white paper detailing the calculations and methodology behind the PME benchmarks can be found at pitchbook.com. PitchBook News & Analysis also contains several articles with PME benchmarks and analysis. These can be read here. To find out how the PME benchmarks can be utilized to gauge performance of a specific fund or your fund portfolio, please contact us at reports@pitchbook.com. PMEKS—TVPI, T = St=0 distribution It T tNAVT IT ( )+ AN INTRODUCTION TO PME BENCHMARKS St=0 T contribution It t ( ) PE KS-PME Benchmark by vintage VC KS-PME Benchmark by vintage Source: PitchBook The KS-PME charts on this page show the relative performance for a particular vintage of PE or VC funds against the specified index since the funds’ inception. Pre-2008 vintage PE funds outperformed the public markets consistently between 2003 and 2008, while recent VC vintages have definitely outperformed public indices as of late, doubtless benefiting from the recent venture boom that produced some notable winners. When using a KS-PME, a value greater than 1.0 indicates outperformance of the public index (net of all fees). For example, the current 1.27 value for 2005 vintage PE funds means investors in a typical vehicle from that year are 27% better off having invested in PE than if they had invested in public equities over the same period. When using a KS-PME, a value less than 1.0 indicates underperformance of the public index (net of all fees). For example, the 0.92 value for 2006 vintage VC funds means investors in a typical vehicle from that year would see only 92% of the value they would have in the public markets. PME calculated using Russell 3000® Index PME calculated using Russell 2000® Growth Index Source: PitchBook 5 PITCHBOOK GLOBAL PE & VC BENCHMARKING & FUND PERFORMANCE REPORT SPONSORED BY
  5. 5. 0 500 1,000 1,500 2,000 2,500 3,000 3,500 1Q2000 3Q2000 1Q2001 3Q2001 1Q2002 3Q2002 1Q2003 3Q2003 1Q2004 3Q2004 1Q2005 3Q2005 1Q2006 3Q2006 1Q2007 3Q2007 1Q2008 3Q2008 1Q2009 3Q2009 1Q2010 3Q2010 1Q2011 3Q2011 1Q2012 3Q2012 1Q2013 3Q2013 1Q2014 3Q2014 1Q2015 3Q2015 1Q2016 Russell 3000 (R3K): AOP Russell 2000 Growth (R2K-Growth): AOP 0.90 0.95 1.00 1.05 1.10 1.15 1.20 1.25 1-Year 3-Year 5-Year 10-Year 15-Year 1.00 1.05 1.10 1.15 1.20 1.25 1-Year 3-Year 5-Year 10-Year 15-Year Horizon PE KS-PME versus Russell 3000 Source: PitchBook PME calculated using Russell 3000® Index PME calculated using Russell 2000® Growth Index Source: PitchBook Horizon VC KS-PME versus Russell 2000 Growth Average quarterly closing price of Russell 2000 Growth & 3000 indices Source: PitchBook Russell Investments is the source and owner of the Russell Index data contained or reflected in this material and all trademarks and copyrights related thereto. Russell Investments is not responsible for the formatting or configuration of this material or for any inaccuracy in PitchBook Data, Inc.’s presentation thereof. For more information on Russell Investments and Russell Indices, visit www. russell.com. The current differences between PE and VC fund lifecycles are well illustrated by the charts to the left, although the timeline for PE has been slowly lengthening beyond historical norms. 6 PITCHBOOK GLOBAL PE & VC BENCHMARKING & FUND PERFORMANCE REPORT SPONSORED BY
  6. 6. 0.27x 0.27x 0.32x 0.84x 0.44x 0.63x 0.42x 0.65x 0.38x 0.24x 0.49x 0.12x 0.20x 0.19x 0.44x 0.66x 0.83x 0.92x 0.98x 1.30x 1.13x 1.13x 1.19x 1.02x 0.59x 1.48x 0.88x 1.27x 1.35x 1.45x 1.66x 1.71x 1.48x 1.32x 1.23x 1.10x 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Median of DPI Median of RVPI Median of TVPI 0.9 1.0 1.1 1.2 1.3 1-year 3-year 5-year 10-year 15-year 0.7 0.8 0.9 1.0 1.1 1.2 1.3 1.4 1.5 1.6 1.7 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 KS-PME Case Study: IT Over the past 10 years, the venture market has seen huge growth in almost every aspect. Valuations have gone so high in the private market that last year many believed, and maybe still believe, that a bubble had formed and would come crashing down in the near future; the number of unicorns has gone from just a couple to well into triple digits in number; and the amount of funding available to private companies from VCs shows no signs of slowing. The venture industry is made up by much more than tech companies and is present in near all markets, but tech is still a main focus of many VC investors. So it comes as no surprise in many cases when the private market outperforms the public markets at certain horizons, especially with regards to IT-focused venture funds Across one to 10-year horizons, IT-fo- cused venture funds have outpaced the Russell 2000 Index by no less than 20% on each horizon. The larg- est outperformance (almost 26%) can be seen at the three-year horizon, which has been driven by the recent growth in valuations and overall rise in financing totals during that time. In our recent VC Unicorn Report, we noted that Series D+ postvaluations for unicorns had outpaced the Russell 2000 Index by more than double since 2005, which more than helps illustrate this trend. That said, for the purpose of calculation we do incorporate unre- alized values into VC IRRs with the understanding that those values could change upon a future exit. Global IT-focused VC fund KS-PME benchmark by vintage Global IT-focused VC fund return multiples by vintage PME calculated using Russell 2000® Index Source: PitchBook Source: PitchBook *As of 3/31/2016 PME calculated using Russell 2000® Index Source: PitchBook Horizon VC IT KS-PME versus Russell 2000 7 PITCHBOOK GLOBAL PE & VC BENCHMARKING & FUND PERFORMANCE REPORT SPONSORED BY
  7. 7. 0% 5% 10% 15% 20% 1-Year 3-Year 5-Year 10-Year PE Funds VC Funds Debt Funds Fund-of-Funds 0% 5% 10% 15% 20% 25% 2008 2009 2010 2011 2012 Fund-of-Funds 0% 5% 10% 15% 20% 25% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 PE Funds VC Funds Debt Funds Fund-of-Funds IRR by Fund Type Global horizon IRR by fund type Global median IRR by fund type and vintage year As LPs make decisions about alternative asset allocations, it’s important to keep in mind that diversification and a long-term mindset remain paramount. That being said, horizon IRRs for venture capital investments are outperforming private equity returns on a one-, three-, and five-year basis. On a 10-year horizon, global PE produces an IRR of 10.4% compared to VC’s 8.9%, but if current trends hold, VC returns may outpace PE on every time horizon in the next few years. Keep in mind, however, that much of this VC performance is driven by inflated valuations in an overcrowded and ballooning late- stage deal market. As expected, differences in returns across asset classes are more pronounced in the short run, and more or less converge on a 10-year horizon basis. Debt funds do not show a return until after the first few years, as the restructuring processes and distressed debt strategies that many of these firms use take more time to show an initial change in NAV. Turning to median IRR by vintage year, VC funds that first deployed capital in 2010 saw a 5.2 percentage point decrease in IRR since the last edition of this report (which did not include data from 1Q 2016). Venture returns across the board have been marked down as worry spreads that many of these late-stage companies may not ever see an exit at such frothy valuations. Meanwhile, 2011 and 2012 vintage PE funds saw IRR increases of 0.3% and 1.9% from last quarter, respectively, as managers continue to slowly refine operations at more mature portfolio companies. Source: PitchBook *As of 3/31/2016 Source: PitchBook *As of 3/31/2016 8 PITCHBOOK GLOBAL PE & VC BENCHMARKING & FUND PERFORMANCE REPORT SPONSORED BY
  8. 8. Quartiles & Benchmarks Global PE IRR quartiles by vintage year Source: PitchBook *As of 3/31/2016 In the last edition of this report, we discussed the widening gap between top-quartile and bottom-quartile PE managers in the years since the recession. That trend, however, is not as pronounced when we include the most recent fund return data from 1Q 2016. The difference in IRR between top and bottom-quartile managers is 11.5% for both 2011 and 2012 vintages, less than the 12%- 13% difference seen for vintages from 2008 to 2010. Meanwhile, 2009 is no longer the best year to have deployed capital—at least on an IRR basis—since the recession. 2012 vintages, with a median IRR of 12.0%, now hold that distinction. Median IRR for funds that first deployed capital between 2005 and 2008 is still below 10%, as is expected with net asset values worldwide nosediving during the financial crisis. Certain managers were able to keep their businesses solvent through restructurings and refinancings, then exit years later after prices had recovered. Many other firms, however, were forced to exit their investments at lower EBITDA multiples or extend their holdings for so long that IRRs became diluted accordingly. Global VC IRR quartiles by vintage year Top-quartile benchmarks for VC funds have moved consistently lower for three consecutive vintages starting with 2011 funds. Vintage 2010 funds have posted a top quartile IRR of nearly 32%, riding high on the unique opportunity many of these funds had to invest in the likes of Facebook, Uber, Twitter and other current or previous unicorns while they were in the early stages. Globally, 2010 vintage VC vehicles have invested in more than 70 companies that have achieved a $1 billion-dollar valuation while in the private market, and were positioned to ride the growth of valuations coming out of the crisis. While the subsequent vintages have fallen back from the 2010 top-quartile IRR, each vintage is still returning an IRR above 20%. The ability for each vintage to capitalize on the growth in valuations has been limited each succeeding year. Much of the IRR value within these later vintages may still be yet unrealized, which will bring more into focus whether or not these larger IRRs have been underpinned by true or artificial valuations. Source: PitchBook *As of 3/31/2016 Vintage Year 2006 2007 2008 2009 2010 2011 2012 2013 Top Quartile IRR 11.3% 14.8% 16.3% 18.7% 16.3% 18.3% 18.1% 19.5% Median 7.7% 9.3% 9.2% 10.1% 8.7% 11.2% 12.0% 7.3% Bottom 3.0% 4.5% 3.9% 6.3% 3.3% 6.9% 6.6% -1.7% Vintage Year 2006 2007 2008 2009 2010 2011 2012 2013 Top Quartile IRR 10.2% 16.6% 18.0% 20.8% 31.9% 26.2% 21.9% 20.3% Median 4.4% 8.2% 8.1% 11.1% 11.7% 16.8% 13.5% 16.2% Bottom -7.5% -0.3% 1.5% 5.6% 7.0% 3.4% 6.3% 8.0% -5% 0% 5% 10% 15% 20% 25% 30% 35% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 25th Percentile Median 75th Percentile -15% -10% -5% 0% 5% 10% 15% 20% 25% 30% 35% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 25th Percentile Median 75th Percentile 9 PITCHBOOK GLOBAL PE & VC BENCHMARKING & FUND PERFORMANCE REPORT SPONSORED BY
  9. 9. Private Equity IRRs Global PE horizon IRR by size bucket PE horizon IRR by region Source: PitchBook *As of 3/31/2016 When observing returns to any asset class over time, it’s important to remember the market conditions that these investments have weathered. For example, PE horizon IRRs are lower on a 10-year time frame than five, due to the stretched hold periods and asset write-offs that happened during the recession. Meanwhile, the three-year horizon IRR is the highest in our dataset, due to the fact that these investments were made before the recent run-up in valuations and have been subsequently marked as such—even though many of these returns have yet to be fully realized through an exit. Interestingly, our data show that PE funds sized between $250 million and $500 million, and $1 billion+ largely track each other in performance. The horizon IRRs for these two buckets are within one percentage point of each other on a one, three, five, and 10-year basis. Funds under $250 million in size underperform the rest of the asset class on a one and three- year horizon—perhaps due to a more pronounced J-curve effect in smaller, more operationally focused funds—but returns converge on a five and 10-year basis. Globally, all fund sizes report between a 10.3% and 10.9% 10-year horizon IRR, with the smallest funds producing the largest returns in that range. Focusing now on returns by geographic region, US PE funds perform better than both Europe and the rest of the world on a three-, five-, and 10-year basis. As with differences in size of funds however, the disparity in returns is less pronounced over the longer-term. US PE funds have a 10.9% 10-year horizon IRR, compared to 8.7% in Europe and 10.1% in the rest of the world. Source: PitchBook *As of 3/31/2016 0% 5% 10% 15% 20% 1-Year 3-Year 5-Year 10-Year U.S. PE Funds European PE Funds Rest of World PE Funds 0% 5% 10% 15% 1-Year 3-Year 5-Year 10-Year Under $250M $250M-$500M $500M-$1B $1B+ 10 PITCHBOOK GLOBAL PE & VC BENCHMARKING & FUND PERFORMANCE REPORT SPONSORED BY
  10. 10. 1.62x 1.43x 1.22x 1.09x 0.93x 0.80x 0.79x 0.45x 0.25x 0.16x 0.04x 0.07x 0.08x 0.23x 0.31x 0.48x 0.55x 0.61x 0.85x 0.95x 1.00x 1.00x 1.70x 1.56x 1.48x 1.43x 1.48x 1.42x 1.38x 1.28x 1.25x 1.24x 1.10x 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Median of DPI Median of RVPI Median of TVPI PE Fund Return Multiples Global average PE DPI multiples over time by vintage Global median PE fund return multiples by vintage Source: PitchBook *As of 3/31/2016 Source: PitchBook *As of 3/31/2016 0.0x 0.2x 0.4x 0.6x 0.8x 1.0x 1.2x 1 2 3 4 5 6 7 8 9 Years since inception 2005 2006 2007 2008 2009 2010 2011 As PE exit activity fell in 1Q 2016, median TVPI growth slowed for many funds. Each vintage from 2008- 2010 showed either no change or a decrease in TVPI from last quarter. However, PE managers for 2011 and 2012 vintages are still having success, growing investment multiples by 12% and 20% respectively on an annualized basis in 1Q 2016. In these more recent funds, there remain many quality portfolio companies that have recently become ready for sale and can find willing buyers to pay outsized multiples despite the overall slower exit environment. Turning now to DPI, or the cash distributions to LPs divided by the initial cash paid-in, 2009 vintages have returned on average 85% of capital to investors after just six years, faster than any other year in the dataset. Meanwhile, with new data from 1Q 2016, 2006 vintage funds have now returned on average 100% of capital to investors—a long wait for investors who jumped into the market just before the downturn. 11 PITCHBOOK GLOBAL PE & VC BENCHMARKING & FUND PERFORMANCE REPORT SPONSORED BY
  11. 11. PE Fund Cash Flows YEAR TOTAL CONTRIBUTIONS ($B) TOTAL DISTRIBUTIONS ($B) NET CASH FLOW ($B) 2002 ($72.7) $27.6 ($45.1) 2003 ($78.5) $55.8 ($22.8) 2004 ($108.0) $141.3 $33.3 2005 ($138.8) $152.2 $13.5 2006 ($226.0) $179.7 ($46.3) 2007 ($306.0) $210.5 ($95.5) 2008 ($301.5) $118.4 ($183.1) 2009 ($171.3) $59.4 ($111.9) 2010 ($250.7) $169.8 ($80.8) 2011 ($252.9) $253.4 $0.4 2012 ($267.1) $327.1 $59.9 2013 ($225.9) $373.5 $147.6 2014 ($273.6) $452.7 $179.1 2015 ($294.1) $444.9 $150.8 2016* ($96.2) $124.1 $27.9 Global PE funds’ annualized cash flow by year Global PE distributions to LPs have never been higher than they were in 2014 through 2015. A total of $898 billion was distributed from PE investments in those two years, while $568 billion was contributed back into new vehicles, for a net cash flow of $330 billion back to LPs. The first quarter of 2016 saw $124 billion in cash returned to LPs and $96 billion contributed to new funds, amounting to a net cash flow of about $28 billion—well behind the pace set during the last two years. This decrease was expected, as the number of PE-backed exits in the US fell by 26% quarter over quarter in 1Q 2016, while the number of new PE deals decreased by just 7% over the same period. We expect that net cash flow to LPs will continue to decrease, and may even become negative in the -$400 -$300 -$200 -$100 $0 $100 $200 $300 $400 $500 $600 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016* Total Contributions ($B) Total Distributions ($B) Net Cash Flow ($B) Global PE funds’ net cash flows Source: PitchBook *As of 3/31/2016 Source: PitchBook *As of 3/31/2016 12 PITCHBOOK GLOBAL PE & VC BENCHMARKING & FUND PERFORMANCE REPORT SPONSORED BY
  12. 12. YEAR TOTAL CONTRIBUTIONS ($B) TOTAL DISTRIBUTIONS ($B) NET CASH FLOW ($B) 2002 ($52.0) $17.7 ($34.3) 2003 ($54.3) $42.5 ($11.8) 2004 ($73.8) $104.5 $30.7 2005 (93.5) $106.5 $13.0 2006 ($146.0) $122.8 ($23.2) 2007 ($197.4) $141.6 ($55.8) 2008 ($191.9) $74.8 ($117.1) 2009 ($104.0) $45.5 ($58.5) 2010 ($147.8) $122.0 ($25.8) 2011 ($145.2) $157.3 $12.0 2012 ($151.3) $226.7 $75.4 2013 ($136.7) $240.3 $103.6 2014 ($166.2 $291.6 $125.4 2015 ($173.5) $264.3 $90.8 2016* ($57.8) $63.2 $5.4 US PE funds’ annualized cash flow by year next few quarters due to the strong fundraising numbers seen in the PE marketplace lately. US PE fundraising value through the first three quarters of 2016 increased by 9% year over year. Despite lagging deal flow numbers, firms are still finding useful ways to deploy capital, namely add-on transactions and tech buyouts. This newly committed capital will be called down sooner rather than later, and a large portion of deals completed in 2014-2015 are still some years away from an exit. Thus, we expect capital contributions to outpace distributions in the near term. US PE funds’ net cash flows -$300 -$200 -$100 $0 $100 $200 $300 $400 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016* Total Contributions ($B) Total Distributions ($B) Net Cash Flow ($B) Source: PitchBook *As of 3/31/2016 Source: PitchBook *As of 3/31/2016 13 PITCHBOOK GLOBAL PE & VC BENCHMARKING & FUND PERFORMANCE REPORT SPONSORED BY
  13. 13. Venture Capital IRRs Source: PitchBook *As of 3/31/2016 Global VC horizon IRR by size bucket VC horizon IRR by region On a 10-year basis venture funds have underperformed the horizon IRRs of their three and five-year counterparts. Through the first quarter of 2016, 10-year horizon IRRs came in at roughly 9%, whereas 3 and 5-years yielded 17.4% and 13.1%, respectively. As a majority of asset classes saw their performance suffer following the financial crisis, the venture market saw deal activity decline, valuations drop lower, and liquidity become increasingly difficult to come by. Consequently, the lagged performance of funds on a 10-year basis is largely driven by venture funds with vintages just prior to the recessions that fell victim to nontraditional market conditions. When looking at three and five-year horizon IRRs, venture funds have performed relatively strong. We believe that this trend has been fundamentally driven by record 0% 5% 10% 15% 20% 1-Year 3-Year 5-Year 10-Year U.S. VC Funds Rest of World VC Funds Global median VC IRR by vintage Source: PitchBook *As of 3/31/2016 demand for the asset class, which can be easily highlighted by the outsized amounts of capital committed by both LPs as well as nontraditional investors. Given that a considerable amount of fund managers today are sitting on impressive paper gains, we could see a disconnect between current marks and where funds are actually able to exit portfolio companies moving forward. 0% 5% 10% 15% 20% 1-Year 3-Year 5-Year 10-Year Under $100M $100M-$250M $250M-$500M $500M+ Source: PitchBook *As of 3/31/2016 0% 10% 20% 30% 40% 50% 60% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 VC Top Quartile VC Top Decile 14 PITCHBOOK GLOBAL PE & VC BENCHMARKING & FUND PERFORMANCE REPORT SPONSORED BY
  14. 14. 0.86x 0.84x 0.45x 0.72x 0.48x 0.75x 0.35x 0.41x 0.43x 0.13x 0.01x 0.10x 0.19x 0.38x 0.51x 0.62x 0.82x 0.85x 1.04x 1.07x 1.21x 1.15x 1.11x1.16x 1.23x 0.97x 1.26x 1.26x 1.40x 1.47x 1.60x 1.48x 1.44x 1.25x 1.20x 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Median of DPI Median of RVPI Median of TVPI VC Fund Return Multiples Global average VC DPI multiples over time by vintage Global median VC fund return multiples by vintage Source: PitchBook *As of 3/31/2016 Driven by the factors we mentioned in the previous section, fund TVPIs of most recent vintages have climbed higher relative to the last publish of this report. In fact, going back to 2006, every vintage since saw a slight bump, with the exception of both 2007 and 2010 vintages, which experienced slight declines. In step with what we have previously reported, the median TVPI of 2009 vintages once again came in higher than any other vintage over the last decade at 1.6x. That said, its 2008 and 2010 counterparts have followed rather closely, sporting TVPIs of 1.47x and 1.48x, respectively, as of the end of 1Q 2016. 2007 vintages have also seen an interesting trend, particularly, in regard to their DPI multiples. Despite being raised directly before the financial crisis, 2007 vintage vehicles have seen higher DPIs than any other vintage over the past decade. After pacing alongside other vintages for the first five years of their lifecycle, 2007 vintages began distributing capital back to LPs at a rather impressive clip six years post-inception. DPI multiples for the 2007 vintage more than doubled six years in, only to increase another twofold between years seven (0.34x) and nine (0.84x). Robust exit volume in 2013 and 2014 supported ample distributions to LPs. Today, we’ve seen exit activity decline and, consequently, distributions across most vintages have done the same. We think this trend will remain in place for the near future and we’ll likely see DPI multiples remain subdued moving forward. 0.0x 0.1x 0.2x 0.3x 0.4x 0.5x 0.6x 0.7x 0.8x 0.9x 1 2 3 4 5 6 7 8 9 10 Years since inception 2005 2006 2007 2008 2009 2010 2011 Source: PitchBook *As of 3/31/2016 15 PITCHBOOK GLOBAL PE & VC BENCHMARKING & FUND PERFORMANCE REPORT SPONSORED BY
  15. 15. VC Fund Cash Flows Global VC funds’ annualized cash flow by year YEAR TOTAL CONTRIBUTIONS ($B) TOTAL DISTRIBUTIONS ($B) NET CASH FLOW ($B) 2004 ($27.1) $9.4 ($17.8) 2005 ($32.8) $13.5 ($19.3) 2006 ($39.6) $26.4 ($13.2) 2007 ($45.3) $33.2 ($12.0) 2008 ($42.5) $11.1 ($31.4) 2009 ($33.8) $14.5 ($19.3) 2010 ($40.5) $27.4 ($13.2) 2011 ($46.3) $33.0 ($13.4) 2012 ($44.6) $37.5 ($7.0) 2013 ($43.7) $38.1 ($5.6) 2014 ($36.3) $54.7 $18.4 2015 ($49.5) $65.6 $16.1 2016* ($16.4) $9.4 ($7.0) For the first quarter of 2016, net cash flow from investors to LPS came in at -$7 billion, taking that metric negative for the first time since 2013. At face value, a negative cash flow would seem a bad signal, which may fit into the overall narrative that has been painted throughout the year. But when compared historically, the negative cash flow is neither surprising nor is it cause for concern, as just two years have seen a positive overall cash flow since 2003. Diving into 1Q data, it’s easy to see what happened to distributions to LPs. Coming in at $9.4 billion, 1Q distributions were well below the $15 billion+ average we had seen in 2014 and 2015. A sluggish exit market saw zero IPOs during the first month of the year, and just seven exits completed of $500 million or higher to go along with the lowest total VC-backed exit count since 2Q 2013. But if $9.4 billion were to finish 2016 as the quarterly average, however, it would surpass any quarterly distribution average for at least 10 years prior to 2014. At the same time as distributions were down, LP contributions came in at one of the highest levels we have seen. The more than $16 billion contributed by LPs is indicative of the growth in deal sizes across the venture landscape, as investors continue to show their willingness to put large amounts of capital to work in the right opportunities. -$60 -$40 -$20 $0 $20 $40 $60 $80 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016* Total Contributions ($B) Total Distributions ($B) Net Cash Flow ($B) Global VC funds’ net cash flows Source: PitchBook *As of 3/31/2016 Source: PitchBook *As of 3/31/2016 16 PITCHBOOK GLOBAL PE & VC BENCHMARKING & FUND PERFORMANCE REPORT SPONSORED BY
  16. 16. Fund name Vintage IRR DPI Menlo Ventures XI 2010 64.22% 0.51x TPG Biotechnology Partners IV 2012 47.38% 0.73x Lightspeed Venture Partners IX 2012 43.11% 0.00x Institutional Venture Partners XIV 2012 36.14% 0.24x 5AM Ventures III 2009 36.10% 1.35x Sofinnova Ventures VIII 2011 30.04% 0.93x Fund name Vintage IRR DPI Northcreek Mezzanine Fund I 2010 26.70% 1.29x VSS Structured Capital II 2009 25.99% 1.55x Fortress Investment Fund III PIK Notes 2009 20.24% 1.53x Monroe Capital Partners Fund 2011 18.39% 0.63x Merion Investment Partners II 2010 17.50% 0.64x Yukon Capital Partners 2009 16.20% 0.79x Central Valley Fund II 2012 15.17% 0.07x Select Top Funds by IRR 2009 to 2012 vintage mezzanine funds Fund name Vintage IRR DPI New Horizon Capital IV 2011 23.90% 0.22x Valor Equity Partners II 2007 23.32% 0.85x Trustbridge Partners IV 2011 19.52% 1.96x Insight Venture Partners VI 2007 19.27% 1.96x Spectrum Equity Investors VI 2010 18.31% 0.60x Aurora Resurgence Fund 2008 17.00% 0.55x FTV III 2007 16.60% 1.19x 2007 to 2011 vintage growth funds 250M+ Fund name Vintage IRR DPI DN Capital- Global Venture Capital III 2012 165.40% 0.33x DCM VII 2014 70.52% 0.00x ARCH Venture Fund VIII 2014 53.47% 0.00x DCM A-Fund 2011 29.30% 0.30x Sante Health Ventures II 2011 27.45% 0.68x Union Square Ventures 2012 Fund 2011 24.03% 0.13x 2010 to 2014 vintage early-stage VC funds 2009 to 2012 vintage US Bay Area VC funds Fund name Vintage IRR DPI Sun Capital Partners VI 2013 65.50% 0.20x Cortec Group Fund V 2011 47.10% 0.00x TowerBrook Investors V 2013 44.12% 0.07x TSG6 2012 41.70% 0.38x Acorn General Fund One 2010 39.40% 3.10% Vestar Capital Partners VI 2013 34.01% 0.38% 2009 to 2013 vintage B2C funds Fund name Vintage IRR DPI Cortec Group Fund V 2011 47.10% 0.00x Sentinel Capital Partners IV-A 2008 35.23% 1.35x Odyssey Investment Partners Fund IV 2009 30.91% 1.76x Altaris Health Partners II 2008 28.30% 2.15x Clayton Dubilier & Rice Fund VIII 2009 27.00% 1.53x Apollo Investment Fund VII 2008 27.00% 1.50x 2007 to 2011 vintage US New York Metro buyout funds Source: PitchBook Source: PitchBook Source: PitchBook Source: PitchBook Source: PitchBook Source: PitchBook Note: The funds returns data on this page is as of 11/15/2016. 17 PITCHBOOK GLOBAL PE & VC BENCHMARKING & FUND PERFORMANCE REPORT SPONSORED BY
  17. 17. PitchBook currently tracks over 34,000 funds around the world and has returns data on close to 8,300 vehicles. In this edition of the quarterly Benchmarking Report, PitchBook examines data from over 5,600 funds and 24,000 distinct LP commitments. We are constantly adding historical performance as it becomes available; this explains many apparent discrepancies that may appear between reports. All returns data in this report is net of fees through 1Q 2016, as reported by LPs. DEFINITIONS PE fund: Unless otherwise noted, PE fund data includes buyout, diversified PE, energy - alternative/ renewables, energy - oil & gas, mezzanine, mezzanine captive, growth and restructuring/ turnaround. Debt fund: For this report, the debt fund classification includes general debt, direct lending, infrastructure debt, bridge financing, credit special situations, distressed debt, real estate debt and venture debt. Vintage year: The vintage year as reported by the fund GP and LPs, or the year in which a fund holds its final close. Internal rate of return (IRR): IRR represents the rate at which a series of positive and negative cash flows are discounted so that the net present value of cash flows equals zero. The cash flows are calculated from the entire value of a fund, so IRRs are also based upon value that remains within the vehicle. Horizon IRR: Horizon IRR shows the IRR from a certain point in time. For example, the one-year horizon IRR figures in this report show the IRR performance for the one-year period from 1Q 2015 to 1Q 2016, while the three-year horizon IRR is for the period from 1Q 2013 to 1Q 2016. Distributions to paid-in (DPI): A measurement of the capital that has been distributed back to LPs as a proportion of the total paid-in, or contributed, capital. DPI is also known as the cash-on-cash multiple or the realization multiple. Remaining value to paid-in (RVPI): A measurement of the unrealized return of a fund as a proportion of the total paid-in, or contributed, capital. Total value to paid-in (TVPI): A measurement of both the realized and unrealized value of a fund as a proportion of the total paid-in, or contributed, capital. Also known as the investment multiple, TVPI can be found by adding together the DPI and RVPI of a fund. As the charts depict medians of fund return multiples that are calculated based on aggregated statistics, they may not necessarily add up, whereas on an individual basis they shall. Methodology Donnelley Financial Solutions is the sponsor of the PitchBook Global PE & VC Benchmarking Report. All information contained in this publication is for informational purposes only and should not be construed as legal, accounting, tax, or other professional advice of any kind, on any subject matter. Donnelley Financial Solutions expressly disclaims all liability in respect to actions taken or not taken based on any or all the content herein. 18 PITCHBOOK GLOBAL PE & VC BENCHMARKING & FUND PERFORMANCE REPORT SPONSORED BY
  18. 18. See how the PitchBook Platform can help your private equity firm close your next deal. demo@pitchbook.com We do contact information, LP investment preferences, custom benchmarking, mandates, fund performance data. You focus on building relationships.

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