Investing in Private Equity Funds of Funds versus the Public Markets

Aon Hewitt Retirement and Investment Investing in Private Equity Funds of Funds versus the Public Markets Private Equity Investment Decisions Decembe...
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Aon Hewitt Retirement and Investment

Investing in Private Equity Funds of Funds versus the Public Markets Private Equity Investment Decisions December 2015 Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company.

Risk. Reinsurance. Human Resources.

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Key Points 

Private equity investors can gain exposure to the market through three different routes: direct investing in funds through limited partner interests, investing as a limited partner in a fund of funds, or investing alongside a general partner in a co-investment vehicle.



Investors with smaller exposures often do not have the resources or economies of scale to invest in multiple direct funds; therefore, they may utilize the expertise of a fund of funds manager to indirectly gain access to direct funds. However, funds of funds introduce a second layer of fees and returns can therefore be reduced compared to direct fund investing.



This paper seeks to determine whether it benefits clients more to invest in funds of funds or in public markets by using a public markets equivalent (PME) analysis. We find that on an aggregate basis, for the vintages that have reached maturity (1997–2005), funds of funds of more than $200 million outperformed the equivalent PME by between 0.77% and 4.28% over the period examined (depending on which average measure and index are used).



More recent vintages show, in aggregate, reduced outperformance relative to the older, more mature vintages. Immature vintages (2006–2010) of funds of funds over $200 million outperformed the equivalent MSCI World Total Return (TR) PME by 0.20% to 0.76% over the period examined (depending on which average measure and index are used) and underperformed the equivalent Russell 3000 TR PME on all measures. Aon Hewitt believes that the lower performance is partly related to the market cycle. Some of the lower performing vintages were invested at the height of the market and throughout the Great Recession. We believe many of the factors that drove past performance are likely to persist in the future, albeit to a lesser extent due to increased competition.



The key risks to consider when investing in private equity are associated with the wide dispersion of returns produced by different managers, which is also the case with fund of funds managers. It is therefore important to carry out careful manager selection in order to ensure that the top-performing managers are the ones most likely to be selected.

Introduction Investing in Private Equity Private equity investing can offer meaningful returns compared to the public markets, and forms part of the investment portfolio for a range of institutional investors. There is no single reason for this outperformance; rather it is likely a combination of several factors (Meerkatt et al., 2008; Diller et al., 2007). Aon Hewitt sees the factors listed in Table 1 as contributing to private markets’ outperformance. The private equity markets have become increasingly institutionalized and efficient; however, we believe that many of the core factors driving performance will persist into the future, with private equity remaining an attractive investment opportunity—albeit at a lower return than experienced in the past. Additionally, we believe that the institutionalization of the private equity markets is generally to the advantage of investors in terms of investor rights and the possibility of reducing fees, although these changes are occurring at a slower rate than in other asset classes. A more detailed explanation of the factors listed in Table 1 is shown in Appendix A.

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Table 1: Sources of Private Equity Outperformance and Their Persistence Performance Driver

Persistence

Highly active management (operational efficiencies) Ability to take long-term outlook on companies

Strong

Corporate restructuring

Strong

Management changes/improvements

Strong

Limited investment constraints

Strong

Attraction of top talent

Strong

Alignment of interest

Strong

Use of financial leverage

Strong

Genuine stock picking opportunities

Reducing (increased competition)

Inefficient market

Reducing (increased competition)

High fees (negative factor)

Slightly reducing (fees slowly coming down)

Although researchers have carried out much analysis to determine whether investing in private equity through direct funds provides meaningful returns over investing in the public markets (Harris et al., 2013), investors have less information on the relative returns available by investing through funds of funds, which are the most practical access route for some investors.

Access Opportunities Once the decision has been made to invest in private equity, the vehicle used for investment must be chosen. Accessing private equity requires investing alongside a general partner through three main opportunities: directly investing in a private equity fund through a limited partner interest; committing as a limited partner to a private equity fund of funds; or making direct investments into portfolio companies/investment opportunities alongside a general partner in the form of a co-investment. Several factors influence the decision as to what type of access best suits any given investor. Table 2 summarizes the key characteristics of the available access routes. Table 2: Private Equity Access Route Comparison Investment Opportunity

Fees

Customization

Concentration Risk

Governance Requirement

Accessibility

Single layer

High

Varied

Average

High

Fund of Funds

Double layer

Low

Low

Low

High

Co-Investment

Lower

High

High

High

Low

Direct

A large investor with experienced investment professionals and strong governance is more likely to build out a portfolio of direct funds consisting of a mixture of managers, vintage years, strategies, geographies, and industry exposures. Aon Hewitt believes that building out a portfolio of direct investments is most likely to produce the highest returns. Not all investors find this opportunity practical, so smaller investors with fewer resources traditionally look to funds of funds. Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. Investing in Private Equity Funds of Funds versus the Public Markets

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Funds of funds provide diversification in terms of the previously mentioned attributes, but at the expense of a second layer of fees. Typical direct private equity funds charge a 2% management fee and take 20% carry (performance fee). Fund of fund managers typically charge a 1% management fee and take a 10% carry, but these are on top of the underlying direct manager fees and carries, which still must be paid. Fund of funds managers argue that a decrease in risk (through increased diversification) and their ability to select the top-performing managers compensates investors for the extra layer of fees. This paper seeks to determine whether this is true, and thereby whether it is truly more beneficial for an investor to invest in private equity funds of funds than in public equity markets.

Data and Approach The research in this paper uses funds of funds data sourced from Burgiss Private iQ and Preqin, two providers of private equity data. We compare the returns from private equity funds of funds to their public market equivalents (PMEs). PME calculations are important for comparing private equity to public index returns because the time-weighted return methodology typically used with public indices is not a suitable measurement for private equity returns, which have capital calls and distributions over time. This calculation treats contributions as purchases of the respective public market index at the market price on the day of each contribution and distributions as sales of the index at the market price on the day of the distribution. The remaining value of the investment on the date of the calculation is determined based on the resulting number of shares left, valued at the current market price. This form of comparison is most relevant to institutional investors, since it is typically the case that while capital is not invested with private equity managers, it will be held in other liquid assets (e.g., public equities). We performed this analysis on as many vintage years of data as were available from the data provider for a meaningful number of funds. The performance was measured at the 10-year point of fund life, the point at which a fund of funds typically reaches return maturity. Therefore, the most recent vintage year covered is 2005. To include the more recent environment, we then included funds at the five-year or longer point of fund life, with performance measured at their oldest points. A further explanation of the data selection and analysis, including a discussion of which vintage years have been included in the analysis, can be found in Appendix B.

Results Mature Funds of Funds’ Outperformance Table 3 shows the difference between fund internal rates of return (IRRs) and their respective PMEs for the Aon Hewitt defined fund of funds universe. This table uses the Russell 3000 TR and MSCI World TR as the public benchmarks for comparison. The median, mean, and pooled outperformance IRRs are shown for each vintage year and for all vintage years combined.

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Table 3: Average Measures of Outperformance of Funds of Funds Over $200 Million Compared to MSCI World TR and Russell 3000 TR PMEs MSCI World PME Outperformance Median Mean Pooled IRR IRR IRR

Russell 3000 PME Outperformance Median Mean Pooled IRR IRR IRR

Vintage Year

No. of Funds

1997

3

7.50

7.11

4.03

6.34

5.75

10.37

1998

6

4.08

3.94

8.16

3.93

3.74

N/A

1999

12

0.37

0.78

5.03

0.36

0.69

6.09

2000

15

2.90

2.47

6.24

2.73

2.50

6.38

2001

10

6.21

5.93

9.79

6.09

5.23

9.91

2002

5

5.03

5.56

6.88

3.71

4.26

5.09

2003

14

4.63

4.51

4.78

2.92

2.73

2.73

2004

18

2.69

3.42

2.66

0.24

0.13

0.06

2005 Mature FoFs (1997‒2005)

23

0.73

0.67

0.63

-1.94

-2.21

-2.21

106

3.03

3.00

4.28

0.77

1.41

2.75

2006

35

1.40

1.87

1.19

-1.53

-1.32

-1.77

2007

36

0.61

0.31

0.38

-2.45

-2.77

-2.63

2008

34

-1.67

-1.09

1.10

-4.76

-4.16

-2.08

2009

8

-4.68

-4.82

-3.95

-7.53

-7.71

-6.87

2010 Immature FoFs (2006‒2010) All FoFs (1997‒2010)

9

2.71

2.66

3.23

-0.03

0.04

0.60

122

0.44

0.20

0.76

-2.53

-2.86

-2.21

228

1.27

1.51

2.50

-1.37

-0.88

0.34

Source: Burgiss, 12/31/2014

For the vintages that have reached maturity (1997–2005), the funds of funds outperformed their PME equivalents across all measures with the exception of vintage year 2005. While individual funds of funds may have underperformed their respective PMEs, on average this is not the case. On an aggregate basis (over all vintages and all PMEs), funds of funds over $200 million outperformed the equivalent PME by between 0.77% and 4.28% over the period examined, depending on which average measure and index are used. While it may be the case that some of this outperformance is driven by investment in high-beta companies, we believe that most of the performance is driven by the factors mentioned in Table 1 of the “Introduction” section, many of which we expect to persist. This outperformance represents an annual return, meaning that mature funds of funds through 2005 provided investors with a good opportunity for outsized returns above the public equity markets. This result can be considered significant - because when the comparison is made on an individual basis, we see that 81 out of 106 funds over $200 million outperformed their respective MSCI World TR PME equivalents and 64 out of 106 funds over $200 million outperformed their respective Russell 3000 TR PME equivalents.

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The lower returns of vintages 1999 and 2000 suggest that vintages invested prior to a recession are negatively impacted. It also appears that since 2001, the average outperformance of funds of funds has declined compared to the PME equivalents. This trend is likely due to the effect of the market cycle, as well as the private equity markets becoming increasingly competitive. Beginning in 2005, the amount of capital raised annually for investment in private equity increased significantly, marking a change in the industry that resulted in increased competition. Consequently, managers have found it more difficult to produce significant alpha. Unfortunately, due to the limited availability of data and the long time frame to maturity, our mature data set is short in number of time periods and captures only one vintage year (2005) that would have been impacted by the increases in capital raised. To address more recent performance, in the following section we include and examine vintages that were five years old or older (2006–2010). There are some challenges in doing so, however, as discussed below.

Immature Funds of Funds and Trends The bottom section of Table 3 shows the performance of the immature vintages. For each of these vintage years, progressively fewer years of fund life have passed. These more recent vintages show, in aggregate, reduced outperformance relative to the older, more mature vintages. On an aggregate basis, the five immature vintages of funds of funds over $200 million outperformed the equivalent MSCI World TR PME by 0.20% to 0.76% over the period examined, depending on which average measure and index are used, but underperformed the equivalent Russell 3000 TR PME on all measures. Vintages 2006–2007 show outperformance relative to the MSCI World TR, but not relative to the Russell 3000 TR. This is to be expected, given the private equity returns include ~35% exposure to non-U.S. markets, which have not performed as well as U.S. markets and are not represented in the Russell 3000 TR index. The returns for these vintages are also considerably lower than the aggregate for the mature vintage years. Aon Hewitt believes this partially demonstrates reduced private equity outperformance due to increased competition. However, Aon Hewitt also believes that the lower performance is related to the market cycle, as these vintages were invested at the height of the market and throughout the Great Recession. These funds typically take longer to develop and may have more muted returns. For example, it took eight years for the median return of the 1999 and 2000 vintages - which were invested in advance of the much shorter 2001 recession - to surpass the respective PMEs (compared to an average of five across all vintages). Additionally, they had smaller returns relative to the other mature vintages. The median returns for vintage years 2008 and 2009 have not yet outperformed their PMEs relative to either the MSCI World TR or the Russell 3000 TR indices. These two vintages immediately followed the stock market crash caused by the Global Financial Crisis. Funds in these vintage years struggled to deploy capital and are also being compared to a PME that covers a sustained public equity run (from the bottom of the crash). We believe that unless these conditions are replicated within the next couple of years (including a significant stock market crash and a drying up of liquidity), funds of funds would have little difficulty outperforming their relevant PMEs in the same way. In an attempt to determine the likely expected performance relative to the public markets - without the impact of the financial crisis - we calculated rolling five-year outperformance numbers and excluded the

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2008 and 2009 vintages, assuming that the related circumstances driving those returns are unlikely to repeat.

IRR Outperformance (%)

Figure 1: Rolling Five Years’ Outperformance of Funds of Funds Over $200 Million Compared to MSCI World TR and Russell 3000 TR PMEs

Source: Burgiss, 12/31/2014

The above results indicate that relative to the MSCI World TR, the outperformance appears to be roughly just under 200 basis points. However, this number should be adjusted - first, up to reflect the immature returns of vintages since 2005 and the impact the financial crisis would have had on vintages 2005, 2006, and 2007; and second, down to reflect that the number of U.S. companies (~66%) that exist in the private equity population is higher than that of the MSCI World TR (~49%), moving toward the Russell 3000 TR lines. After adjustment, the likely outperformance is probably in the range of 150 to 200 basis points. This is roughly where the 2010 vintage is currently performing, albeit only in the fifth year of its life. While we cannot definitively compare the impact of increased competition to the financial crisis on funds of funds returns, overall Aon Hewitt believes the private equity funds of funds’ outperformance has decreased over time as the market has become increasingly competitive. However, Aon Hewitt believes that the private markets are likely to continue to provide investors with the opportunity to achieve returns above those associated with investing in the public markets, for the reasons outlined in the “Introduction” section. It is also possible for managers in the private markets to more easily distinguish themselves from the crowd and earn returns farther above the average than is possible in the public markets. Depending on the value of liquidity to an investor, funds of funds may still prove to be a valuable investment. It should be noted that our analysis focused on median and mean returns. Upper quartile funds of funds generated returns in excess of those analyzed in this paper; thus it appears that good manager selection may lead to these better returns.

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Risk The sources of excess returns, the highly unconstrained nature of management, the typically smaller size of the companies, and the use of leverage in private equity result in higher risk than investing in the public markets. Wider economic and market trends can also affect private equity performance both positively and negatively, depending on a manager’s ability to rapidly adapt to new scenarios. As noted, the use of leverage can impact returns (both positively and negatively) by a substantial amount. While value creation in the early stages of the private equity asset class came largely from the use of leverage, most managers have moved to other higher-quality sources. Even so, when leverage is easily obtained, the industry can slip into excess use of this tool. The recent move of leverage providers from regulated banks to primarily unregulated entities looks like it may make leverage more easily available, which could add additional volatility to returns. Diligent selection of a fund of funds manager by the primary investor can help reduce exposure to managers that may overuse leverage in order to boost returns. Another key risk to consider when investing in private equity is the wide dispersion of returns produced by different managers and markets, meaning a concentrated portfolio is likely to be high on the risk spectrum. It is therefore prudent to diversify private equity portfolios across different vintage years, geographies, sectors, and strategies. A fund of funds manager provides diversification to investors that may otherwise be unattainable. However, there is also a wide dispersion of returns between funds of funds. For the mature vintage years, the interquartile range (third quartile minus first quartile) varies between 2.8% and 15.9% for funds of funds over $200 million. This demonstrates the degree to which fund of funds managers can vary in terms of ultimate performance. It is therefore important to carry out careful manager selection in order to ensure that the top-performing managers are the ones most likely to be selected.

Conclusions 

On an aggregate basis, for the vintages that have reached maturity (1997 – 2005), funds of funds over $200 million outperformed the equivalent PMEs by between 0.77% and 4.28% over the period examined (depending on which average measure and index are used).



More recent vintages show, in aggregate, reduced outperformance relative to the older, more mature vintages. Immature vintages (2006–2010) of funds of funds over $200 million outperformed the equivalent MSCI World TR PME by 0.20% to 0.76% over the period examined (depending on which average measure and index are used) and underperformed the equivalent Russell 3000 TR PME on all measures.



Aon Hewitt believes that the lower performance is partly related to the market cycle. Some of the lower performing vintages were invested at the height of the market and throughout the Great Recession. We believe many of the factors that drove past performance are likely to persist in the future, albeit to a lesser extent due to increased competition.



We also believe that the current state of the private equity market is sufficiently similar to that seen in past periods, and that unless there is a stock market crash and a drying up of liquidity in the next couple of years, funds of funds will likely outperform the PMEs (albeit at reduced levels).



This finding agrees with other research (Harris et al., 2015) that found funds of funds to have produced greater returns than the S&P 500 Index and returns equal to or greater than those of the

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Russell 2000 Index. Importantly, Harris, Jenkinson, Kaplan, and Stucke (2015) examined similar vintage years and used different measures of performance, yet came to a similar conclusion overall. 

The key risks to consider when investing in private equity are associated with the wide dispersion of returns produced by different managers and markets. The performance of fund of funds managers also varies widely. It is therefore important to carry out careful manager selection in order to ensure that the top-performing managers are the ones most likely to be selected.

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Appendix A Ability to Take Long-Term Outlook on Companies The fund life of private equity funds is typically at least 10 years. This time period allows managers to take long-term views on portfolio companies compared to the public markets, where annual or even quarterly earnings changes are used to judge performance.

Corporate Restructuring Private equity fund managers are able to implement full or partial corporate restructuring initiatives. This ability can include, but is not limited to, changes to legal entities, ownerships structures, M&A activity, and operations.

Management Changes/Improvements Private equity managers often take control positions when making investments, giving them the opportunity to change management teams (including the CEO) if they feel it is appropriate.

Limited Investment Constraints The investment constraints placed on private equity funds are often considerably looser than those placed on public managers in terms of geography, industry, ownership percentages, use of leverage, and exposure to single companies.

Attraction of Top Talent The relatively high management fees and potential for large gains in terms of carried interest allow private equity funds to offer top-tier remuneration to employees.

Financial Leverage Private equity fund managers have the opportunity to use financial restructuring and leverage to help increase returns from deals. While we see this opportunity as a cyclical contributing factor, it can often enhance returns.

Alignment of Interest Although private equity funds are structured with relatively high management fees compared to public equity funds, the main source of potential returns for the manager is carried interest, which is paid out only if the portfolio performs well. Managers also often invest their own capital in their funds, increasing alignment further.

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Inefficient Market Because managers are operating in the private markets, much less information is available. The lack of information generally allows individual managers to gain advantages over other investors at purchase— from sourcing opportunities to pricing of portfolio companies.

High Fees (Negative Factor) The management and performance fees seen in private equity markets are high compared to the public markets. However, with increased competition and more pushback from investors, we see a general downward trend in the fees offered by private equity managers.

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Appendix B Sources and Definitions The research in this paper uses data sourced from Burgiss Private iQ and Preqin, two providers of private equity data. Burgiss Private iQ was used as the sole source for performance metrics, and Preqin was used to assess what range of funds was included in the parameters set for data collection. Burgiss Private iQ has the largest data set by market capitalization, is sourced directly from institutional investor portfolios, has a robust data validation process, and is broadly diversified. Because Burgiss Private iQ sources all of its data from limited partner clients, both selection and survivorship bias are mitigated as much as reasonably possible. Preqin’s data set is not as robust but is much broader. Preqin has a large range of funds included in its data set, identifies funds by name, and includes fund level information (such as fund size, geography, and strategy). The data used is net of all fees. When defining the private equity asset class for this analysis, Aon Hewitt assumes that the following strategies are included: corporate finance (buyout, distressed securities, mezzanine, and special situations), generalist, energy, and venture capital (balanced, early stage, and late stage). Only primary funds of funds have been included in the data set. The minimum fund size used in our study is $200 million for funds of funds. These specifications were chosen to give good sample sizes while ensuring that each individual fund was large and diversified enough to offer sufficient diversification to individual investors.

Time Frame Figure 2 shows the internal rate of return (IRR) for the data set used in this paper for direct funds and funds of funds. As can be seen, the IRR increases through the course of a fund’s life, and begins to level out around years nine and 10. The IRR for a given fund is often negative in the first couple of years as the fund is drawing capital but has not made distributions. The overall pattern of returns through a fund’s life is commonly referred to as the “J-curve” (Murphy, 2006). For this reason, we have decided to take the IRR at the 10-year point of a fund’s life as the single measurement point for the performance of each mature fund. Any measurement earlier in a fund’s life is not indicative of final performance for a fund of funds, and any measurement later in a fund’s life reduces the number of funds included in the data set.

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Figure 2: IRR Progression of Funds of Funds and Direct Funds Through Fund Life

Source: Burgiss, 12/31/2014

Although some funds can end up lasting significantly longer than 10 years, the data set becomes susceptible to survivorship bias after the 10-year point. When a fund winds down, it is removed from the data set (for example, if a fund winds down in year 11, it is not included in performance data from year 12 onward). This effect is not seen before year 10; therefore, there is little or no survivorship bias in the data set. For any fund that does last significantly more than 10 years, it is likely that most of the major cash flows happened in the first 10 years of the fund’s life—meaning there should be no significant changes in the IRR after the 10-year mark.

Performance Metrics Public index returns are often calculated using time-weighted rate of return (TWRR) methodology. However, this method is not a suitable measurement for private equity returns. Time-weighted rates of return are not indicative of manager performance, and this discrepancy is a major contributing factor to private equity returns. In order to compare private equity performance to the public markets, we use a PME - an explanation of which follows. This form of comparison is most relevant to institutional investors, as it is typically the case that while capital is not invested with private equity managers, it will be held in other liquid assets (e.g., public equities). The PME used throughout this paper was sourced from Burgiss Private iQ and is calculated using the Long-Nickels Index Comparison method (ICM) IRR methodology (Harris et al., 2013). This calculation is essentially the sum of the contributions (treated as purchases) and distributions (treated as sales) of the private market investment over the chosen time period, reflected using the respective index values at the time of the cash flows. The PME IRR is calculated in the same way as a standard IRR and uses the original private market investment cash flow timings and the theoretical public market (dis)investment amount in place of the original private market valuation. The main drawback to the method is that if a fund makes a particularly large distribution, the theoretical sale of shares in the public index can cause the calculation of the IRR to be less than 100%. Burgiss Private iQ shows an error in this instance, and

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therefore we have omitted these specific data points from the PME data sets. The number of funds in which this occurs is small compared to the data set (three out of 88). Average performance for any group of funds is calculated using three different methods: mean, median, and pooled return. The mean and median are calculated based on a group of individual fund returns. The pooled return is calculated by aggregating all the cash flows for each fund in a vintage year and calculating a single IRR.

Vintage Year Selection When determining which vintage years should be included in the study, a balance was struck between the size of the data set in each year and the number of years included. The private equity universe is continuously growing in terms of number of managers and funds, as well as the amount committed to the asset class by investors each year. Before 1997, there was a limited number of private equity funds of funds that fit our definition (that is, being “large and diversified”). We have chosen to constrain which funds are included in the sample by including only funds of funds over $200 million. As a result of the growth in the industry and setting the minimum fund size as a nominal amount, a trend of more funds being included in the sample for each vintage year was established. Selecting a minimum fund size that grew through time would have been difficult because the number of funds and amount of capital raised each year does not show a consistent growth pattern. The data also needs to span a number of vintage years sufficient to cover at least one economic cycle. This time horizon ensures that any findings from the analysis are not contingent upon certain economic conditions. Figure 3 shows the TWRR for all funds of funds over $200 million and the growth of 100 for the S&P 500 TR, starting in 1997 and progressing to the end of 2014. TWRR was used in this instance because it gives a measure of returns on a quarterly basis. While it is not our preferred measure of fund returns, the absolute measure in this case is not important since we are looking at the trends of returns over time. It can be seen that the time period includes multiple economic cycles and a large range of overall market performance during individual quarters. The vintage year selection that was settled on for mature funds (1997–2005) was a relatively successful period for the private equity markets. We think the period is representative enough to draw reliable conclusions. For completeness, we have included vintage years after 2005. For these vintages, the reported performance may not necessarily be the same as at the end of the fund’s life, but it is indicative enough to include in the research.

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Figure 3: Quarterly Pooled TWRR and S&P 500 TR Growth of 100

Source: Burgiss Private iQ, 12/31/2014

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References Aleksandar Andonov. “Delegated Investment Management in Alternative Assets” Maastricht University, Netspar Theme Conference (2014). http://www.netspar.nl/files/Evenementen/2014-0619%20ipw/papers/077%20andonov.pdf Andrew Ang and Morten Sorensen. “Investing in Private Equity” CAIA (2013). https://www.caia.org/sites/default/files/3.Research%20Review.pdf Canterbury Consulting. “The Case for Private Equity” (2015). http://www.canterburyconsulting.com/media/1180/the-case-for-private-equity.pdf Christian Diller and Christoph Kaserer. “What Drives Private Equity Returns? Fund Inflows, Skilled GPs, and/or Risk?” Center for Entrepreneurial and Financial Studies (CEFS) and Department for Financial Management and Capital Markets Technische Universitat Munchen (2007). http://papers.ssrn.com/sol3/papers.cfm?abstract_id=665602 Robert S. Harris, Tim Jenkinson, Steven N. Kaplan, and Ruediger Stucke. ”Financial Intermediation in Private Equity: How Well Do Funds of Funds Perform?” Social Science Research Network (2015). http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2620582 Robert S. Harris, Tim Jenkinson, and Steven N. Kaplan. “Private Equity Performance: What Do We Know?” Journal of Finance (2013). http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1932316 Austin M. Long and Craig J. Nickels. “A Private Investment Benchmark” The University of Texas System (1996). http://alignmentcapital.com/pdfs/research/icm_aimr_benchmark_1996.pdf David Lovejoy. “White Paper No. 40: Private Equity Investing” Greycourt (2011). http://www.greycourt.com/wp-content/uploads/2012/01/WhitePaper040.pdf Heino Meerkatt, John Rose, Michael Brigl, Heinrich Liechtenstein, M. Julia Prats, and Alejandro Herrera. “The Advantage of Persistence. How the Best Private-Equity Firms ‘Beat the Fade’” The Boston Consulting Group (2008). http://www.bcg.de/documents/file15196.pdf Daniel Murphy. “Understanding the J-Curve: A Primer on Interim Performance of Private Equity Investments” Goldman Sachs (2006). http://www.goldmansachs.com/gsam/pdfs/USTPD/education/understanding_J_Curve.pdf Matthew Rice. “Private Equity: The Role of Private Equity in Diversified Portfolios” DiMeo Schneider & Associates, L.L.C. (2012). http://www.dimeoschneider.com/documents/Research-the-role-of-privateequity-in-diversified-folders-429.pdf

Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. Investing in Private Equity Funds of Funds versus the Public Markets

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Contact Information Karen Rode, CFA, CPA Partner Aon Hewitt Investment Consulting, Inc. +1.312.381.1244 [email protected] Thomas Wyss, FIA, CERA Consultant Aon Hewitt Investment Consulting, Inc. +1.312.381.5158 [email protected]

Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. Investing in Private Equity Funds of Funds versus the Public Markets

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Aon Hewitt Retirement and Investment

About Aon Hewitt Investment Consulting, Inc. Aon Hewitt Investment Consulting, Inc., an Aon plc company (NYSE: AON), is an SEC-registered investment adviser, and provides investment consulting services to over 480 clients in North America with total client assets of approximately $1.7 trillion as of 6/30/2014. More than 270 investment consulting professionals in the U.S. advise institutional investors such as corporations, public organizations, union associations, health systems, endowments, and foundations with investments ranging from $1 million to $310 billion. For more information, please visit www.aonhewitt.com/investmentconsulting.

About Aon Hewitt Aon Hewitt empowers organizations and individuals to secure a better future through innovative talent, retirement, and health solutions. We advise, design, and execute a wide range of solutions that enable clients to cultivate talent to drive organizational and personal performance and growth, navigate retirement risk while providing new levels of financial security, and redefine health solutions for greater choice, affordability, and wellness. Aon Hewitt is the global leader in human resource solutions, with over 30,000 professionals in 90 countries serving more than 20,000 clients worldwide. For more information, please visit aonhewitt.com.

© Aon plc 2015. All rights reserved. Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc. This document is intended for general information purposes only and should not be construed as advice or opinions on any specific facts or circumstances. The comments in this summary are based upon Aon Hewitt Investment Consulting’s preliminary analysis of publicly available information. The content of this document is made available on an “as is” basis, without warranty of any kind. Aon Hewitt Investment Consulting disclaims any legal liability to any person or organization for loss or damage caused by or resulting from any reliance placed on that content. Aon Hewitt Investment Consulting reserves all rights to the content of this document.

Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. Investing in Private Equity Funds of Funds versus the Public Markets

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