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Finding Winners !

GPs matter and there are ways to


help you find the best
Prof. Oliver Gottschalg of HEC Paris
Founder and Head of Research,
PERACS Independent PE Track Record Analytics and Certification

Agenda
GPs Matter !

Findings Winners by looking at the right Performance Measure


Findings Winners by understanding actual strategy
Findings Winners by identifying underlying skills

Conclusions

New Academic Research


Does Ownership Matter in Private Equity? The Sources of Variance in Buyouts
Performance, by O. Gottschalg and F. Castellaneta, published in Strategic
Management Journal, Dec 2014 (Leading Academic Journal in Management)
Analysis of 6,950 buyouts realized by 255 PE firms between 1973 and 2008 in
77 countries
Key Findings:

PE performance is fundamentally linked to choosing the right GP

The GP has a significant impact beyond just choosing deals with the right attributes
(industry, geography and timing)

The GP effect has been steadily INCREASING over the past decades, i.e. relative to
other factors it is today MORE IMPORTANT THAN EVER to get the GP selection right

The GP effect is greater in established economies than in emerging markets

The GP effect has always been greatest in times of economic difficulties


(= thats when Alpha creation counts)
3

When Alpha Creation Ability Counts Most


The GP effect has always been greatest in times of economic difficulties
ALPHA and MARKET RETURNS
By GP

ALPHA
50%
40%

Value Protecting GPs

30%
20%
10%
0%
-10%
-20%
-30%
-40%
-50%
-20%

-10%

0%

10%

20%

30%

40%

MARKET RETURNS (MSCI Global)


4

Bigger Picture: Challenges with Data and Measures in


PE: What GPs frequently say about themselves

"We are a Top Quartile


Performer."

"Our value creation is


based on operational
expertise."

"We proactively
generate proprietary
dealflow."

"Our unique
investment strategy
differentiates us from
our competitors."

makes LPs wonder how to spot true future


outperformers in a group of GPs

?
6

A possible Answer: The Suite of PERACS Analytics


Insights into Performance, Risk and Strategy
Metric 1a
Absolute and Relative Performance

Metric 2
Relevant Peer IRR Benchmark

Mega Partners, LLC - Aggregate

Mega Partners, LLC - Aggregate


Performance is measured in
the excess of the cost of the
forgone opportunity
investing capital elsewhere,
which is approximated by
the MSCI World index, both
in absolute multiple terms
based on the PERACS
Profitability Index and on an
annualized basis through
the PERACS Alpha, based on
the duration of the
investment.

2.49x
2.18x

30.70%

Metric 1c
Components of PERACS
Alpha
TVPI
Variable-Rate
Mega Partners, LLC - Aggregate
7.6%

30.7%

6.5%

Delevered
Alpha

Sector
Choice
Effect

Replicable Unique PE
Leverage Leverage
Eff
Eff

PERACS
Alpha

Benchmark represents the


Metric
2 of
aggregate performance
those PE funds who have
been empirically identified
Relevant
Peer TVPI Benchmark
as similar competitor using

28.8%
22.0%

20.0%

best available
purchased
Mega
Partners,
LLC - Aggregate

16.0%
12.3%

industry benchmarks ( that


may contain IRR time bias
imperfections).
3.3x
2.5x

PERACS Alpha

Fund A

Profitability Index

0.9%

15.7%

The Relevant Peers

29.0%

Fund B

Focal Fund IRR

2.2x

Fund C

2.4x

2.1x

Relevant Peer Benchmark IRR

1.4x

37

PERACS Alpha can be driven by


a (a) choice of an industry
sector or geography in which
also public companies outperform the MSCI world index,
(b) by a fundamental outperformance of the acquired
business(es) over their publicly
traded peers (the delivered
PERACS Alpha) net of any
differences in leverage, or (c)
by leverage. This distinguishes
between the replicable effect
of incremental leverage on the
performance of the publicly
traded peers and the unique
effect of incremental leverage
on the delivered alpha.

40

Fund A

Metric 5a
Lorenz Curve by % of Deals

Fund B

Focal Fund TVPI

Fund C

Relevant Peer Benchmark TVPI


41

Mega Partners, LLC - Aggregate


100%

The PERACS Risk Curve


illustrates the portion of the
cumulative PERACS Alpha
generated by the poorestperforming x% of the portfolio (as measured by % of
deals). The PERACS Risk
Coefficient expresses the
skewedness of returns from
0 (perfectly uniform) to 1
(perfectly concentrated
Alpha).

80%
Gini Coefficient: 0.88
60%

38

40%

20%
0%
-20%

Metric 4a
Strategic Positioning
Mega Partners, LLC - Aggregate
7.5%

7.5%

-40%
0%

20%

40%

60%

80%

100%

Metric 3
PERACS Value Driver Bridge

42

-5.8%

4.1%

-6.8%

1.1%

100.0%

The PERACS Value Driver


Bridge shows the percentage of total PERACS Alpha
attributable to different
drivers of performance.

Metric 4c
Strategic Consistency
Mega Partners, LLC - Aggregate

47.7%

100%

83.9%

48.0%

1.2%

The Procyclicality Score


measures the correlation in
the timing of investments of
Fund C
one given fund and the
Most Procyclical Quartile
Fund Score
Max Relevant
Competitor
Score
aggregate
of all
PE funds.

80%

Fund A

60%

Fund B

Second Most
Procyclical Quartile
Third Most
Procyclical Quartile

43

Least Procyclical Quartile

9.7%
Focal Procyclicality

FX
Total
Effect PERACS Alpha
= 30.7%

4.1%

The Strategic overlap score


measures the degree of
similarity in the investment
characteristics of one given
fund and the aggregate of
all PE funds.

0.4%

40%
This is an assessment of the
difference in investment
characteristics between the
20%
investment made in the last
5 years and those made in
0%
the last 6 to 10 years.

100.0%

Revenue Margin Multiple DeEffect


Effect
Effect leverage
Effect

Metric 4b
Investment Timing
Mega Partners, LLC - Aggregate

Mega Partners, LLC - Aggregate


60.9%

The Relevant Peers


Benchmark represents the
aggregate performance of
those PE funds who have
been empirically identified
as similar competitor using
best available purchased
industry benchmarks ( that
may contain IRR time bias
imperfections).

48.0%

Relevant Competitor
Procyclicality
44

39

Country
Size
Industry
Combined
Consistency Consistency Consistency Consistency
45

PERACS Numbers Speak Louder than words


Metric 1c
Components of PERACS Alpha

Metric 2
Relevant Peer TVPI Benchmark

Mega Partners, LLC - Aggregate

Mega Partners, LLC - Aggregate

7.6%

30.7%

6.5%
15.7%

Delevered
Alpha

0.9%

Sector
Choice
Effect

Replicable Unique PE
Leverage Leverage
Eff
Eff

PERACS
Alpha

PERACS Alpha can be driven by


a (a) choice of an industry
sector or geography in which
also public companies outperform the MSCI world index,
(b) by a fundamental outperformance of the acquired
business(es) over their publicly
traded peers (the delivered
PERACS Alpha) net of any
differences in leverage, or (c)
by leverage. This distinguishes
between the replicable effect
of incremental leverage on the
performance of the publicly
traded peers and the unique
effect of incremental leverage
on the delivered alpha.

3.3x
2.5x
2.2x

2.1x

2.4x
1.4x

Fund A

Fund B

Focal Fund TVPI

The Relevant Peers


Benchmark represents the
aggregate performance of
those PE funds who have
been empirically identified
as similar competitor using
best available purchased
industry benchmarks ( that
may contain IRR time bias
imperfections).

Fund C

Relevant Peer Benchmark TVPI

38

"The breakdown of our PERACS Alpha shows


that our outperformance over the public
markets is largely due to fundamental value
creation and not to sector choice or
leverage."

"Our unique deal making approach


translates into an ability to time deals
independently from deal volume for other PE
investors, including our closest competitors."
Metric 4b
Investment Timing
80%
Most Procyclical Quartile

60%

20%

"As you can see from the PERACS Risk


Curve, our returns are much more balanced
than the industry benchmark."

Mega Partners, LLC - Aggregate


100%

The Procyclicality Score


measures the correlation in
the timing of investments of
one given fund and the
aggregate of all PE funds.

The PERACS Risk Curve


illustrates the portion of the
cumulative PERACS Alpha
generated by the poorestperforming x% of the portfolio (as measured by % of
deals). The PERACS Risk
Coefficient expresses the
skewedness of returns from
0 (perfectly uniform) to 1
(perfectly concentrated
Alpha).

80%
Gini Coefficient: 0.88
60%

Second Most
Procyclical Quartile
Third Most
Procyclical Quartile

40%

"PERACS identified our closest competitors


based on an analysis of the similarity in the
acquired entities. The strong aggregate
performance of these "relevant peers"
demonstrates the attractiveness of the type
of deals we make and we are proud to outperform that benchmark of the aggregate
"relevant competitor" for all of our funds."

Metric 5a
Lorenz Curve by % of Deals

Mega Partners, LLC - Aggregate


100%

41

40%

20%
0%

Least Procyclical Quartile

9.7%

-20%

0%

-40%
Focal Procyclicality

Relevant Competitor
Procyclicality

0%
44

20%

40%

60%

80%

100%
42

Further Examples from Actual PERACS clients available upon request


8

Agenda
GPs Matter !

Findings Winners by looking at the right Performance Measure


Findings Winners by understanding actual strategy
Findings Winners by identifying underlying skills

Conclusions

This year's study focuses on the persistence


of private equity performance
Question posed
Performance
% p.a.
Previous period

Methodology

Methodology

Subsequent period

Persistence is checked by means of correlation


and portfolio contribution

The study is carried out at transaction level

The performance indicators for IRR, multiple,


alpha, holding period, loss ratio and return
dispersion are analysed

Fund II
Fund I
?

2008

2014

Is continuous outperformance possible in private equity?


Which performance indicators can substantiate
persistence?

The repeatability of success in private equity is the subject of controversial debate in research
10

Persistence is analysed using two methods


B

Question posed

Methodology
Previous period's
performance indicator

Comments
Persistence

It is analysed whether the correlation between


a period and the subsequent period is
statistically significant

If there is a statistically significant correlation,


then taking a look at the relevant fund manager
performance indicator in the past may help to
form an opinion about the development of this
performance indicator in future

When analysing the portfolio it is tested to what


extent the selection of a fund that were in the
top quartile in the past in terms of the
respective performance indicator has an impact
on the expected value for the future portfolio

In doing so, either (1) this selection's influence


on the performance indicator itself or (2) this
selection's influence on the portfolio's return is
analysed

This test is only carried out if the results for


correlation are significant

Correlation
Is there a statistical correlation
between consecutive periods?

.
. . ... ? .
. . . .. . .... .. ..
. . . .. .. . .... ..
. . ..

Methodology

.
.. .
... . .. ..
.. . ..
.
.

Subsequent period's performance indicator

Portfolio contribution
How can an investor improve the
development of their future
portfolio by selecting funds that
have been successful in the past?

Portfolio performance
indicator for market
average

Portfolio
contribution

Portfolio performance
indicator when
selecting top quartile
funds

Can conclusions be drawn from the previous period's performance indicator


for the subsequent period?
11

This study analyses the persistence of private


equity at transaction level for the first time
Analysis methodology

Fund
manager
A
Fund
manager
B
Fund
manager
C
Time

Period 2

Fund I

Fund I

Fund I

98 99 00 01 02 03

Methodology

Advantages of analysis at transaction level

Persistence?
Period 1

Period 3

Fund II

Analysis not on the basis of fund generations but


the distribution of fund manager transactions over
4 year intervals (typical investment period for a
portfolio)
By using fixed intervals there is no distortion of
analysis due to different investment cycles with
different fund managers
Transaction level allows for the use of realised
transactions no distortion of portfolio analysis by
unrealised transactions

Fund II

Fund II

Certain performance indicators (e.g. loss ratio and


return dispersion) can only be calculated at
transaction level

04 05 06 07 08 09
Individual transaction

Data at transaction level allows for a deeper and broader analysis of persistence
12

Persistence is analysed for different


Performance indicators

Methodology

Example of period performance indicators for a fund manager


Number of
transactions

IRR1)

Multiple2)

Alpha

Period 1
(2002-2005)

19%

1.6

4%

Period 2
(2006-2009)

12

21%

1.7

7%

Period 3
(2010-2013)

10

16%

1.4

8%

Periods

1
Future
period 4
(2014-2017)

Can a similarly high IRR


also be achieved in the
future?

2
Can the multiple
achieved in the past be
perpetuated?

3
Will the fund also
generate alpha in
future?

1) IRR = return; 2) Multiple = multiple of the invested capital;

Unique dataset on 5600 realized Buyouts


analyzed in collaboration with Golding Capital Partners
13

IRR and multiple: No significant correlation


between previous and subsequent periods
Question posed
Periods

IRR

Results

Multiple

Period 1
(2002-2005)

19%

Period 2
(2006-2009)

21%

1.7

Period 3
(2010-2013)

16%

1.4

1
Future
period 4
(2014-2017)

1.6

Can a
similarly high
IRR also be
achieved in
future?

Can the
multiple
achieved in
the past be
perpetuated?

No significant correlation
(Correlation coefficient: +0.018)

.
.
. . ...
. . . .. . .... .. ..
. . . .. .. . .... ..
. . ..

.
.. .
... . .. ..
.. . ..
.
.

There is no statistically significant


correlation for IRR and multiple
between the previous and subsequent
period
The results for portfolio contribution
are not statistically significant

Subsequent period's IRR

Persistence

Previous period's multiple

Results

Comments
Persistence

Previous period's IRR

The IRR or multiple achieved in the


past does not make any statement
about the future success of a fund
manager

No significant correlation
(Correlation coefficient: -0.001)

.
. . . . ... . .. ..
. . . . ... .
. . . .. .. . .... ..
. . ..

.
.. .
... . .. ..
.. . ..
.
.

Subsequent period's multiple

Results for IRR and multiple confirm results from earlier research
14

Alpha: significant correlation exists


between previous and subsequent period
Question posed
Periods

Alpha

Period 1
(2002-2005)

4%

Period 2
(2006-2009)

7%

Period 3
(2010-2013)

8%

Results

Results

Comments
Persistence

Previous period's alpha

Significant correlation
(Correlation coefficient: +0.132)

.
.
. . ...
. . . .. . .... .. ..
. . . .. .. . .... ..
. . ..

.
.. .
... . .. ..
.. . ..
.
.

Subsequent period's alpha

600
bps

There is a statistically significant


correlation for alpha between the
previous and subsequent period
The past alpha is therefore a predictor
for the expected alpha in the future
If an investor only selects funds that
were in the alpha top quartile in the
past then they can expect a positive
return contribution of 600 basis points
compared to the market average for
their future portfolio

3
Future
period 4
(2014-2017)

Will the fund also


generate alpha in
future?

Return for
market average

Portfolio
1)
contribution

Return when
selecting top
quartile funds

1) Measured in PRoR, an adjusted return performance indicator, comparable with M-IRR

Alpha is repeatable positive return contribution of 600 bps for future portfolio
15

Persistence could not be evidenced for the


IRR and multiple performance indicators

Results

Example period performance indicators for a fund manager


Periods

IRR
1

Future
period 4
(2014-2017)

Multiple
2

Alpha
3

Can a similarly high IRR also be Can the multiple achieved in


achieved in future?
the past be perpetuated?

Will the fund also generate


alpha in future?

Is past success repeatable?


Significant correlation
Positive portfolio
contribution

600 bps additional


return

Persistence of alpha, holding period, loss ratio and return dispersion is statistically significant
16

Another Advantage of PERACS Alpha over


IRR, Quartile Discrepancy between
benchmark providers diminishes
Europe Buyouts

U.S. Buyouts

Quartiles MAX - MIN

Quartiles MAX - MIN


EU PERACS Alpha

EU IRR

US PERACS Alpha

0.20

0.20

0.18

0.18

0.16

0.16

0.14

0.14

0.12

0.12

0.10

0.10

0.08

0.08

0.06

0.06

0.04

0.04

0.02

0.02

0.00

0.00
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

US IRR

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Comparing Top Quartile Cut-Offs across commercially available databases shows much greater
disagreement for IRR than for PERACS Alpha in many vintage years
17

Agenda
GPs Matter !

Findings Winners by looking at the right Performance Measure


Findings Winners by understanding actual strategy
Findings Winners by identifying underlying skills

Conclusions

18

Empirical Assessment of Strategic Uniqueness


Method
Empirical assessment of the level of the client's strategic uniqueness / differentiation
(fund-by-fund and at the GP / total portfolio-level) based on the overlap between each
of these funds and the PE universe.
Calculation of Uniqueness Score

We divide the PE universe into "strategic cells", based on (1) industry sector, (2) timevarying deal-size quartile, (3) investment timing and (4) geography. We then measure
the Percentage of activity in each "strategic cell" for (I) the focal fund and (II) all other PE
investment activity.
We calculate the "strategic overlap" as the sum of joint activity (minimum of the
percentage invested of the firm and the percentage invested by all firms in a given cell)
over all cells.
A strategic overlap of 1 means that a fund invests exactly like the average PE firm a
score of 0 indicates that no other firm makes similar investments. This method is a
refinement of one of the criteria that determine the 'Fitness' score of the HEC-DowJones
PE Fitness Ranking.
19

Strategic Positioning Client Example


Low score indicates more differentiated market positioning
Focus overlap is relative to the full universe and the relevant competitor set highlights closest competitors

Fund V
5%
Highest Overlap Quartile

4%

Second Highest Quartile


Third Highest Quartile

3%

Least Overlap Quartile


2%
The Strategic overlap score measures the degree
of similarity in the investment characteristics of
one given fund and the aggregate of all PE funds.

1%
0.93%
0%
Focal Strategic
Overlap Score

Relevant Competitor
Strategic Overlap Score

20

Empirical Assessment of Dealflow Quality


Investment Procyclicality
Intuition
We use the comparison of the pattern of client's investment activity with the pattern of
investment activity of the overall PE universe as a proxy for the client's quality of deal
flow, i.e. ability to continue to invest during periods when all other PE firms are
decreasing their investing pace.

Calculation of Uniqueness Score


Method: We measure the correlation between client's investment pattern (i.e. number
of deals by quarter) and the investment pattern of the overall PE universe. A correlation
of 1 means that the client invests in a perfectly pro-cyclical fashion, i.e. with the same
pattern over time as the overall PE universe which does not manifest any proprietary
dealflow, whereas a correlation of -1 means that the client invests in a perfectly countercyclical fashion, which can be seen as a proxy for proprietary deal flow. This method is a
refinement of one of the criteria that determine the 'Fitness' score of the HEC-DowJones
PE Fitness Ranking.
21

Metric 4b Investment Timing Client Example


Lower score indicates less pro cyclical investing approach
Industries & Finances' buy and build strategy may help allow it to be less pro-cyclical

Aggregate
100%
Most Procyclical Quartile

80%

Second Most Procyclical

Third Most Procyclical

60%

Least Procyclical Quartile


40%

20%

The Strategic overlap score measures the degree


of similarity in the investment characteristics of
one given fund and the aggregate of all PE funds.

25.51%

0%
Focal Procyclicality

Relevant Competitor
Procyclicality

Note: this presentation is to illustrate insight generated by PERACS Analytics and should not be interpreted as suggesting the funds are competitors or comparable

22

Metric 4c: Empirical Quantification of


Strategic Consistency
Intuition
We assess the type of investments in a GP's Track Record (by size, industry sector and
geography) for the last 5 years and for the prior 5 years (i.e. the time period between
5 and 10 years ago) and measure the degree of similarity in these three dimensions.
Data Source: GP's investment Track Record

Calculation of Strategic Consistency Score


Method: We measure the consistency of investment activity as the degree of overlap in
the percentages in each category of a given dimension across the two time periods.
Example: if the volume split between the four size-categories was 20%, 20%, 50%, 10%
in the distant past and 10%, 40%, 30%, 20% in the recent past, then the size-consistency
score is the sum of the minimum between the two periods (10%+20%+30%+10%)= 70%.

This method is a refinement of one of the criteria that determine


the 'Fitness' score of the HEC-DowJones PE Fitness Ranking
23

Metric 4c Strategic Consistency


Investment consistency can be executed by GPs operating at very different ends of the deal spectrum
Industries & Finances demonstrates consistency of a country focused fund targeting small buy-and-build

Aggregate
100%
This is an assessment of the difference in
investment characteristics between the
investment made in the last 5 years and
those made in the last 6 to 10 years.

86.7%

33.3%

Country Consistency Size Consistency Industry Consistency

Note: this presentation is to illustrate insight generated by PERACS Analytics and should not be interpreted as suggesting the funds are competitors or comparable

24

Agenda
GPs Matter !

Findings Winners by looking at the right Performance Measure


Findings Winners by understanding actual strategy
Findings Winners by identifying underlying skills

Conclusions

25

Beyond the Vintage Year Quartile:


The PERACS 'Relevant Peer Benchmark'
An Innovative PE Performance Benchmark based on
empirically-derived 'Relevant Competitor Funds'
Fact

Existing vintage year benchmarks are of limited accuracy:


Vintage criterion groups funds with very different investment focus
Does not account for market dynamics where funds with similar focus from
consecutive vintages compete for similar deals and LP commitments

Problem

Self-selection of peers is often seen by LPs as subjective and


potentially biased

Idea

PE funds should be benchmarked against their 'relevant peers'

Solution

Empirically derive funds that directly compete with a given GP for


investment opportunities to objectively capture funds active in the same
'space' within the PE universe
26

How to empirically identify


'Relevant Competitor Funds'*
Assessment of investment activity by 'strategic cells'

Compose data set on fund-level performance and investment activity


(individual deals) of large sample of PE funds

Define a space within the PE universe ("strategic cell") as the


combination of a given:
Industry sector (GICS classification at the 2-digit level)
Region
Investment time period (based on 3-year window around date of
investment) and
Size category (based on time-varying deal-size quartile)

For example, all US upper-mid-cap automotive deals made between


1997 and 2009 fall into the same 'strategic cell'

* Proprietary US Patent Pending

27

How to empirically identify


'Relevant Competitor Funds'*
Calculating the 'strategic overlap score' between two PE funds
Measure the percentage of activity (based on the investment volume and the # of
deals) in each "strategic cell" for each PE fund
Calculate the "strategic overlap" for each pair of PE funds as the sum of joint activity
(i.e. the minimum of the percentages invested in a given strategic cell by both funds)
over all strategic cells
A strategic overlap of 1 means that a firm invests exactly like the average firm a
score of 0 indicates that no other firm makes similar investments
Identification of relevant competitor fund based on 'strategic overlap score'
'Comparable' funds that should be benchmarked against each other can then be
derived as a function of the 'strategic overlap score'
For example, we consider funds as 'relevant competitors' whenever their 'strategic
overlap score' (by investment volume) exceeds 15% and consider the degree of
'competitive overlap' in the calculation of the benchmark:
The 'Relevant Competitor Benchmark' (RCB) for a given fund is the average performance of all its 'relevant competitors', weighted by their 'strategic overlap score'
* Proprietary US Patent Pending

28

Intuitive Validity of the Empirical Approach


Example for most relevant 'Competitor Funds' according to our method:
Fund to be benchmarked: Large Cap Europe Fund
List of Relevant Competitors (by order of strategic overlap)
BC European Capital VII
Third Cinven Fund, The
Blackstone Capital Partners IV, L.P.
CVC European Equity Partners III LP
KKR European Fund
Hellman & Friedman Capital Partners IV, L.P.
Charterhouse Capital Partners VI
Carlyle Europe Partners, L.P.
Illustrative Example based on Data Provided by Thomson Reuters
29

Hypothetical Example:
Relevant Peer TVPI Benchmark
Mega Partners, LLC Aggregate
3.3x
2.5x

2.2x

2.1x

2.4x
1.4x

Fund A
Focal Fund TVPI

Fund B

Key Insights into two distinct


GP skills:
High Relevant Peer
Benchmark
= Superior Target Choice
Focal Fund beats Relevant
Peer Benchmark
= Superior Execution /
Implementation

Fund C

Relevant Peer Benchmark TVPI

30

Metric 3:
PERACS Value Driver Bridge
Fund B
70.8%

-8.0%

12.4%

-15.7%
100.0%

The PERACS Value Driver


Bridge is a refinement of
the widely-used Value
Attribution analysis, which
(1) quantifies value drivers
on an annualized basis
and
(2) includes currency effects
and separates revenue
growth from margin
improvements as drivers
of EBITDA growth.

40.4%

Revenue
Effect

Margin
Effect

Multiple Deleverage
FX
Effect
Effect
Effect

Total

31

Different Value Drivers Reflect Different


Strategies
20%

-15%

5%

20%

60%

-30%

100%

10%

100%

FX
Effect

Total

80%
40%
20%

Revenue
Effect

Margin
Effect

Multiple Deleverage
Effect
Effect

FX
Effect

Total

Growth Player: Growth drives margin and Multiple improvement,


but requires additional cash investment
-10%

50%

Revenue
Effect

Margin
Effect

Multiple Deleverage
Effect
Effect

Buy and Build strategy requires additional borrowing, leads


to synergies = improved margins and substantial multiple expansion
90%

100%

-40%

30%

0%

100%

20%
20%

20%

Revenue
Effect

20%

Margin
Effect

Multiple Deleverage
Effect
Effect

FX
Effect

Leveraged play in a favorable macro environment

Total

Revenue
Effect

Margin
Effect

Multiple Deleverage
Effect
Effect

FX
Effect

Total

Difficult environment pushes for efficiency gains and careful cash


management to ensure survival

In-depth understanding of the GPs strategy and value creation skills serve as basis of
assessment of likely future performance
32

Agenda
GPs Matter !

Findings Winners by looking at the right Performance Measure


Findings Winners by understanding actual strategy
Findings Winners by identifying underlying skills

Conclusions

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Conclusions

If you look for a predictor of future performance dont consider IRR


anymore, look at PERACS Alpha instead
When a GP states its investment strategy is different, we can prove
this in numbers

Likewise, when a GP states he doesnt go with the cycle, we can show


also this in numbers
When a GP states he didnt change its strategy, we have some
numbers to show it

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Thank you for your attention !

35

About Professor Oliver Gottschalg


Current Positions

Education

Director of the HEC PE Observatory

Dipl. Wirtschaftsingenieur (TU Karlsruhe)

Academic Dean of the TRIUM


Global Executive MBA Program

MBA (Georgia State University)

Founder and Head of Research,


PERACS PE Track Record Analytics

Ph.D. (INSEAD)

Research
Published in the Review of Financial Studies, Harvard Business
Review, Academy of Management Review, Strategic
Management Journal, Journal of Banking and Finance, etc.
Featured over 100 times in the business media (press, radio,
TV and online) in the past 2 years, including The Economist,
Financial Times, Wall Street Journal, Financial News, Les Echos,
etc.

Consulting
Tailored projects for leading sponsors, institutional investors
and advisors. Repeatedly served as advisor to policy makers at
the national and European level in questions related to the
possible regulation of private equity.

MSc. of Management (INSEAD)

Work Experience
Federal Reserve Bank, US
Bain & Company Private Equity Practice

Teaching
HEC Grande Ecole Program
HEC Executive Education
Harvard Executive Education
TRIUM Global EMBA Program
INSEAD Executive Education
LBS Executive Education
Tsinghua University Executive Education
Company-Specific Executive Programs
36

About PERACS
PERACS is not just another performance benchmark, but it provides
customized and insightful metrics to quantify relevant elements of past
performance, risk attributes and strategic differentiators
Independent, credible, trustworthy, global, conflict-free, and singularly
focused
Granular analysis built up from company by company portfolio analysis
Formulaic and transparent. Trusted standardized comparisons
Dynamic quarterly updates and annual reviews
Methodology of leading industry academics and investors
Value added service provided by GPs to their LPs
Used in GP marketing materials with success

PERACS: The Global Standard for PE Performance Analytics


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PERACS in the ILPA Newsletter

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Milestones of the establishment of PERACS as the


World Standard for Advanced PE Track Record Analytics
February 2015

February 2014
January 2014
Winter 2012/2013

1000th fund analyzed on behalf of LP Clients, PERACS GP Client-announced Fund Closings exceed USD
70B, PERACS Performance Metrics available on Bloomberg Terminal, first GP Client engagements in
Mezzanine, VC, Emerging Market PE
"LP Champion" projects set up with LPs of all types, from fund-of-funds, over Sovereign Wealth investors to
insurance companies, public and private pension funds, university endowments and family offices from
basically all relevant parts of the world
PERACS Client-announced Fund Closings exceed USD 55B
Research Project ILPA-CA-HEC, leveraging PERACS methods

Spring 2013

"LP Champion" Initiative launched, supporting LPs with risk/return analysis of existing portfolio and in fund
due diligence

January 2013

20% of Fundraising GPs (buyouts in EU and US, by volume target fund size) use
PERACS numbers

Summer 2012

First PERACS Client Work Performed

Spring 2012
Winter 2011/12
2011

2000 - 2010

Exploratory Conversations with leading GP and LPs


Design of Standardized Metrics, Value Proposition and Business Model
Exploratory Consulting Engagements with three of the Worlds 50 Largest GPs
10 years of applied research, developer of Wall Street Journal PE Rankings, consulting engagements
Confidential

39

Diverse Senior Team Delivers Innovative Services

Exceptional access to applied research and experienced investing professionals

Client focused senior professionals based in Europe and North America

Deep analytic resources

In-house systems development

PERACS Founder and Head of Research; senior strategic consultant to global


Oliver
Gottschalg corporations; Head of the Private Equity Observatory at HEC Paris; Academic Dean of
TRIUM Global Executive MBA Program; leading private equity researcher

Gerry
Flintoft

Extensive track record with oversight of PE at the $50 billion LACERA pension plan;
Director of Alternatives with PineBridge (formerly AIG Investments); advised clients on
portfolio construction, emerging markets, private credit, and hedge fund seeding; ILPA
Board Member and Chartered Alternative Investment Analyst (CAIA)

Peter
Mayrl

18 years of experience in European PE, both on the direct side (Permira, Lyceum) and
on the FoFs side (Allianz, Idinvest); experience in strategic consulting at Bain & Co

Fernando
Vazquez

Co-Founder of Conversus listed PE fund; MD and investment committee member of


Bank of Americas PE fund business; corporate finance and banking experience in
developed and emerging markets; ILPA Research Chair and CFA
Confidential

40

Industry Leading Advisory Board


John Breen

Chairman of the PERACS Advisory Board, Head of Private Investments &


Investment Committee Member Sanabil Investments, Saudi Arabian Investment
Company; Former Head of Funds and Secondaries, Canada Pension Plan Investment
Board (CPPIB); former Vice Chairman Institutional Limited Partners Association

Thomas C Franco

Partner with Clayton, Dubilier & Rice, LLC

Jeff Gendel

Managing Director at Gen II Fund Services, LLC

John Higgins

Managing Director of the Americas, PEI Media

Kathy Jeramaz-Larson

Executive Director of the Institutional Limited Partners Association (ILPA)

Andrea Lowe

Chief Executive of LPEQ, the Listed Private Equity Association

Stephen Marquardt

CEO of Doughty Hanson & Co

Spencer Miller

Managing Director and Head of London Office of OPTrust Private Markets Group

Tom Rotherham

Formerly Director Head of Private Markets BTPS/ Hermes Equity Ownership


Services Limited

Sheryl Schwartz

Managing Director, Caspian Private Equity

Confidential

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