Understanding private equity and private equity funds

Understanding private equity and private equity funds Table of contents 1.  History and fundamentals of private equity 2.  Market overview 3.  ...
Author: Victor Lewis
2 downloads 1 Views 1MB Size
Understanding private equity and private equity funds

Table of contents

1. 

History and fundamentals of private equity

2. 

Market overview

3. 

Private equity funds – lifecycle, structure and mechanics

4. 

Diversification within private equity

5. 

Accessing the asset class

6. 

Appendix

2

History and fundamentals of private equity

Private equity investments are speculative and involve substantial risks. It is possible that investors may lose some or all of their investments. Please see Disclosures and general risks beginning on page 45 of this presentation for a more detailed description of the risks associated with investing in private equity.

3

Private equity in perspective – a brief history

In the 19th century agrarian life shifted to complex enterprises—such as railroads— requiring more capital than one individual or family could supply

The complexity and learning curve meant than many who tried to run such companies did not succeed

Merchant banks would step into distressed situations, take control of a troubled enterprise, reorganize its finances and put in place new management

4

First true leveraged buyout  

J.P. Morgan & Co. bought the Carnegie Steel Corporation for $480 million in 1901; the corporation’s assets were merged with others to form United States Steel, the world’s largest-ever company at the time

 

After the Glass-Steagall Act (1933), investment banks took over these types of deals from merchant banks

 

In the late 1970’s firms arose specializing in using debt leverage to purchase companies in “leveraged buyouts” or LBOs, founding what became the private-equity industry

Source: The Wall Street Journal, A Short (Sometimes Profitable) History of Private Equity,,John Steele Gordon, January 17, 2012. Image source: The Morgan Library & Museum. Reprinted with permission.

5

What is private equity?  

Investments in public and non-public companies or assets through privately negotiated transactions.

 

Investments are directly into private companies or buyouts of public companies that result in a delisting of public equity.

 

Private equity managers seek to acquire quality assets at attractive valuations and use operational expertise to enhance value and improve portfolio company performance.

 

Capital is raised from investors for private equity, which can be used to: – 

Fund new technologies

– 

Invest in organic growth opportunities

– 

Make acquisitions

– 

Strengthen a balance sheet

There is no guarantee that the goals of enhancing value and improving performance will be achieved.

6

A company’s growth–from a business idea to an IPO The following illustrates a simple example of a company’s growth as facilitated by private capital:

Start-up

Build-up

Private Equity 40% Owner 100%

IPO

Public 25% Owner 60%

Owner 45%

Private Equity 30%

Source: Adapted from Private Equity: Beyond the Storytelling. Aswath Damodaran, Ph.D., New York University Stern School of Business,. Reprinted with permission. The above charts are for illustrative purposes only and do not represent actual companies or transactions.

7

A company’s growth–a public company matures The following illustrates differing ownership ratios in public companies of varying sizes:

Young growth public

Growth public Founder 15%

Founder 25%

Public 75%

Mature public

Public 85%

Insider(s) 4%

Public 96%

Source: Adapted from Private Equity: Beyond the Storytelling. Aswath Damodaran, Ph.D., New York University Stern School of Business,. Reprinted with permission. The above charts are for illustrative purposes only and do not represent actual companies or transactions.

8

Examples of public company challenges

1

Market may be mispricing the firm 2

The company’s business model may be broken 3

The company may be mismanaged

9

Value gaps create an opportunity for private equity A mature public company is taken private: The general partners (GP) of the private equity firm raise equity capital from limited partner (LP) equity investors and borrow the rest

Mature public

Private equity

Insider(s) 4%

PE equity: 40% Debt: 60% Public 96%

Source: Adapted from Private Equity: Beyond the Storytelling. Aswath Damodaran, Ph.D., New York University Stern School of Business,. Reprinted with permission. The above charts are for illustrative purposes only and do not represent actual companies or transactions.

10

How does private equity drive value creation?

 

 

Operational improvements

Financial engineering

Organic and external growth

Entry/exit timing – multiple exit routes

Strong Corporate Governance Model

Typical Applications

− 

More frequent availability and detail of information available to private equity managers than in public markets

−  −  −  − 

Provides ability to influence and change company managements

−  −  −  −  − 

Providing growth capital to developing business

Can generate implied control premium Creates alignment of interest Operates over long-term investment horizon

Addressing succession issues and growth capital needs in family-owned firms Seeks to unlock value in under-funded subsidiaries of large corporations (carve-out) Reorganizing large multi-divisional corporations to become more efficient / productive Seeks to restart growth via take-privates of undervalued and undercapitalized publiclylisted companies

11

Value creation in an illustrative buyout  

Operational improvement may drive value creation by fostering revenue growth and improved EBITDA1 margins

 

These, together with debt pay-downs and a higher valuation (“multiple expansion”) represent the potential difference between capital originally invested and the investment value when exited

16,000 Operational improvement

3,065

14,370

Multiple expansion

Investment value at exit/current

3,654 12,000 (655) 1,533 8,000

6,774

4,000

Capital invested

Revenue growth

EBITDA margin improvement

Debt paydown

1 EBITDA—A

company’s Earnings Before Interest, Taxes, Depreciation and Amortization. Valuation creation analysis is performed by Pantheon on a recent large buyout fund manager. Past performance is not indicative of future results. Future returns are not guaranteed, and loss of principal may occur. The information above is provided for illustration purposes only and to provide an example of valuation creation within a buyout fund.

12

Market overview

13

Why the rising interest in private equity? Top performing asset class

Private equity’s history of outperformance

Listed equity 7.31%

Fixed income 4.51%

Private equity 12.14%

Real estate 7.20%

0.00%

2.00%

4.00%

6.00%

8.00% Returns

10.00%

12.00%

14.00%

Source: Bloomberg. Investment returns 10 years ended December 31, 2015. Listed equity, fixed income, private equity and real estate are respectively represented by the following indexes: S&P 500, Barclays Aggregate U.S. Bond, Cambridge Associates U.S. Private Equity, Dow Jones U.S. Select REIT. Indices are unmanaged, do not incur expenses, and are not available for investment. Returns are calculated as a 10-year average (not annualized) from 2005-2015. The above chart is for illustrative purposes only. The appropriateness of private equity for any individual portfolio will vary. Please see index descriptions at the end of this presentation. Index performance is not representative of the Fund’s performance. Please call 800.835.3879 or visit our website at www.amgfunds.com/pantheon to obtain Fund performance information.

14

Private equity outperformance vs. public markets

Ten-year rolling returns (starting in 1988) 25.00%

20.00%

15.00%

10.00%

5.00%

0.00%

-5.00%

Barclays Aggregate U.S. Bonds Index

S&P 500

Cambridge Associates U.S. Private Equity Index

Source: S&P500, Barclays Aggregate U.S. Bond Index, Cambridge Associates U.S. Private Equity Index. Each rolling 10 year period is from January 1 to December 31 of the years indicated. Past performance is not necessarily indicative of future results. Future returns are not guaranteed and a loss of principal may occur. Index performance is not representative of the Fund’s performance. Please call 800.835.3879 or visit our website at www.amgfunds.com/pantheon to obtain Fund performance.

15

Embraced by institutional investors

 

U.S. public pensions have long been investing in private equity and most have steadily increased their target allocations over time—the average public fund now targets an 8.3% allocation1 Large endowments such as Harvard, Stanford and Yale have invested in private equity for decades, with current target allocations of 18%, 26% and 30%, respectively2

Rising institutional allocations to private equity 9.0%

Target allocation

 

8.5%

8.5%

2013

2014

8.5%

8.0%

7.8%

7.5%

7.8%

7.5%

7.5%

7.0% 2009

2010

2011

2012

U.S. public pension funds' average target private equity allocation Source: Preqin, May 23, 2016. Source: Harvard 2015, Stanford 2015, Yale 2015. Chart is for illustrative purposes only. Individual asset allocation will vary. Individuals must determine the percentage of allocation to private equity based on their individual portfolio. 1 2

16

Private equity owned companies include many household names

Equinox Facebook

Skype

Dell Versace

Kraft Heinz

Shake Beats Electronics Shack

Burger King Hilton Dunkin’ Donuts

The names above are presented for illustrative purposes only. They do not constitute an endorsement of Pantheon or any particular offering. This does not imply that Pantheon will invest with these managers.

17

Who invests in private equity? Institutional investors  

Public and private pension funds

 

Insurance companies

 

Foreign governments sovereign wealth funds

 

Fund-of-funds managers

 

Large family or multi-family offices

High net worth and “mass affluent” investors  

Through tailored fund vehicles

18

Private equity funds– lifecycle, structure and mechanics

19

Typical lifecycle of a private equity fund

Fundraising (1 year)

Investment period (4-5 years)

Harvest period (6-10 years)

Companies bought

Companies sold

Goal to return capital and profits to investors

Source: Pantheon. There is no guarantee that the goal of capital return will be achieved.

20

Typical life cycle of a private equity fund A private equity fund consists of private equity “portfolio company” investments

Fund period

Fundraising  

Investment  

Activities

 

A fund’s manager – or general partner (GP) – establishes a limited partnership agreement setting forth the funds’ terms and conditions.

 

Investors in the fund – or limited partners (LPs) – commit a certain amount to the fund upfront during the fundraising period.

 

When capital is needed for portfolio acquisitions, the GP issues requests for capital from the LPs (“capital calls”), up to the LP’s

Duration

1 year

4-5 years

commitment amount.

Harvest  

 

In the harvest period, companies are sold or go public via an IPO, and the fund distributes proceeds back to the LPs.

6-10 years

Source: Pantheon.

21

How are returns realized in a private equity investment?  

Without an exit strategy, a private investment can tie up money indefinitely in an illiquid asset

 

Private equity addresses this key challenge through a 3-phased investment approach: investment, improvement, exit

Typical life cycle of a private equity company investment Phases  

Activities  

 

Make a controlling investment in a company, the majority of which may be funded with debt

 

The rest of the purchase price comes from the funds’ own equity capital

Improvement  

 

Aim to increase the company’s financial results and value by implementing operational, financial, and/or management changes

Exit  

 

Cash out of the investment to realize potential returns and return capital to investors

 

Typical exits include an IPO, trade sale to another private equity firm, or a recapitalization

Investment  

Source: Pantheon.

22

Mechanics of private equity: the J-curve effect The “J-Curve” refers to the “J” shaped line that represents the cumulative net cash flows of a private equity fund during its life  

Negative flows—and therefore negative returns—characterize the early years of a private equity fund resulting from capital calls, management fees and the cost of investments as money is put to work

 

In the hypothetical example below, flows reach breakeven and then turn positive as investments are exited after a 3-5 year holding period; distributions to fund investors are made after investments are exited Harvest period

Total commitment

Cumulative cash flow

Value creation (hold period) Investment period

Net invested capital potentially becomes positive (Breakeven point) 1

2

3

4 Distributions

5 Capital calls

6

7

8

9

10

CCF

Source: Pantheon. This is a simplified example and does not represent the performance of an actual company or fund. Private equity investments involve substantial risk. There can be no assurance that actual fund cash flows will be similar to the model set forth on this slide. Cash fllow patterns will vary depending upon the activities of the underlying private equity partnerships.

23

Typical private equity fund structure  

Private equity fund managers – known as general partners (“GPs” or “managers”) form limited partnership vehicles to invest in private companies

 

Investors commit a specific amount of capital (typically $10 million-minimum) to a private equity fund to become limited partners (“LPs”)

 

GPs also typically invest their own capital alongside limited partners

Private equity fund manager (“GP”)

Investors (LPs) Pension funds Sovereign wealth

$10mm+

$10mm

Insurance companies Corporations

Private equity fund (limited partnership)

Companies

Endowments Foundations UHNW investors Source: Pantheon.

24

Typical private equity fund characteristics

Access structure Offering process  

Investment minimum  

 

Offerings are typically exempt from registration under the Securities Act of 1933, Regulation D and are sold via private placements to qualified buyers

 

Confidential Private Placement Memorandum (“PPM”) is the primary offering document

 

Typical minimum starts at $10 million

 

Typically 1.25-2.0% per annum

 

Typically charged on committed capital during the investment period, and on invested capital thereafter

 

Typically 20% of profits after fees and expenses charged at the time an investment is sold— known as “carried interest”

 

Carried interest is typically only paid after the return of capital + fees and expenses to investors, and only after a “hurdle” return rate is achieved (generally 8%)

 

Typical fund expenses include audit, administration, etc.

Fees & Expenses Management fee  

Performance fee  

Fund expenses  

25

Diversification within private equity

26

Key diversification considerations in a portfolio of private equity investments Diversification within a private equity portfolio takes into account:  

Vintage – The first year a private equity fund makes a portfolio company investment

 

Industry – Industry sectors

 

Geography – Global regions

 

Manager – Investment managers (General Partners)

 

Stage – Private equity investments’ stages of maturity

Stage

Vintage

Portfolio Manager

Industry

Geography

Diversification does not guarantee a profit or protect against a loss in declining markets.

27

Manager selection is important – wide gap exists between strongest and weakest private equity performers  

The difference in performance results between top and bottom quartile investment managers (performance “spreads”) can vary significantly by asset class

 

1st quartile private equity managers outperformed those in the 4th quartile by over 13% over the past ten years–this is a dramatically wider performance spread than for public market funds where spreads have averaged about 2% or less

 

For this reason, expertise in identifying strong managers and avoiding weak ones is particularly important when investing in private equity

Performance spreads between 1st and 4th quartile managers—Ten years ended 12/31/15 Performance Spread (%)

16.00% 14.00% 12.00%

13.52%

10.00% 8.00% 6.00% 4.00% 2.00% 0.00% Private Equity

1.97%

1.82%

2.02%

U.S. Small-Cap Public Equity

U.S. Large-Cap Public Equity

U.S. Bond

Source: Thomson Reuters, Morningstar Direct. Private Equity returns are based on the Cambridge Associates U.S. Private Equity Index for all vintage years from 2005-2015. Please see index description at the end of this presentation. U.S. Small-Cap Public Equity, U.S. Large-Cap Public Equity and U.S. Bond are based on the following Morningstar categories: U.S. Small-Cap Public Equity—Small Blend, Small Growth, and Small Value. U.S. Large-Cap Public Equity—Large Blend, Large Growth, and Large Value. U.S. Bond—U.S. Taxable Bond category. Index performance is not representative of the Fund’s performance. Please call 800.835.3879 or visit our website at www.amgfunds.com/pantheon to obtain Fund performance information. Past performance is no guarantee of future results.

28

Private equity investments can occur at different stages of a company's development

Investment stage / maturity (early to late)

Venture Capital

Early-stage (start-ups) and late stage companies (development)

Growth Capital

Minority investments in established companies

Special situations

Mezzanine

Includes debt and equity instruments– usually unsecured and subordinate to other obligations

Investments include distressed debt, infrastructure, energy/utilities, and turnarounds

Buyout

Control investments in established, cash-flow positive companies

Relative risk (high to low)

Source: Pantheon. No investment or strategy implies a complete lack of risk. A private fund investment involves a high degree of risk as such investments are speculative, subject to high return volatility and will be illiquid on a long-term basis. Investors may lose their entire investment.

29

Characteristics of each stage

Stage/Maturity

Characteristics

Average Investment Life

Venture capital

   

Early-stage (start-up) and late stage (development) Typically 100% equity

7+ years

Growth capital

       

Minority investments in established companies to fund growth Strong growth characteristics Typically does not use leverage 100% equity

5+ years

       

Elements of both debt and equity instruments Fixed returns from interest payments Opportunity to participate in capital appreciation Usually unsecured and subordinate to other obligations

2-3 years

 

Investments include distressed debt, infrastructure, energy/utilities, and turnarounds Short investment cycle can produce high IRRs but lower multiple on capital

Mezzanine

Special situations

  Buyout

       

Control investments in established, cash-flow positive companies Typically uses leverage Lower volatility of returns Debt and equity instruments

Varies

4-5 years

30

Types of private equity investments

Primary investments

Co-investments

Secondary investments

31

Types of private equity investments

Type  

Characteristics  

Primary investments (“Primaries”)  

   

Investments in newly created private equity funds

Secondary investments (“Secondaries”)

   

Existing private equity fund interests sold on the secondary market

Co-investments

   

Blind pool commitment

The secondary market allows LPs in primary funds to liquidate their interests before the full 10-12 year fund term has finished A direct company investment by an LP The investment is in a company that is backed by a private equity fund in which the LP is also investing

 

The LP ends up with two separate stakes in the company. One stake is indirect – through the private equity fund, and the other is through the direct co-investment

 

Co-investment opportunities are offered by GPs to LPs for diversification reasons when the GP wants to acquire a larger stake in a company than is prudent for the fund 32

Characteristics of primaries, secondaries, and co-investments

Investment type Benefits Primaries

Secondaries

Co-investments

 

Offer due diligence opportunity on GP, strategy and track record prior to investing

 

Facilitate consistent exposure across vintages

 

Allow strategic diversification by investment stage and sector

 

Greater insight into portfolio composition at time of commitment

 

Initial fund fees and expenses already paid

Detractors

 

Initial management fees negatively impact interim NAVs

 

Longer time horizon to distributions

 

Less strategic allocation flexibility

 

Potential for overdiversification

 

Less availability in the market

 

Shorter time horizon to distributions

 

Allow the limited partner to increase exposure to a particular opportunity

 

Provide limited timeframe for due-diligence and decision making

 

Often offered on a no-fee, no-carried interest basis

 

Require significant resources and expertise for evaluating deals

Summary

 

Blind pool commitments that seek to produce a higher multiple on invested capital than secondaries

 

Investments in partly known portfolios that can be valued; Seek to produce a higher internal rate of return (IRR) than primaries

 

Offers LPs increased deal exposure for lower aggregate fees but requires especially high level of expertise & speedy decision-making

33

After initial investment period, primaries and secondaries are complementary strategies  

Primaries are blind-pool, uninvested portfolios with longer time horizons to returning distributions than secondaries. Over the life of an investment, primaries offer a higher potential multiple on invested capital than secondaries

 

Secondaries are more mature, invested portfolios. They may help mitigate private equity’s J-curve effect because portfolio companies are closer to being exited, so the fund is closer to returning distributions. Over the life of an investment, secondaries’ shorter time horizon to distributions offers a higher potential internal rate of return (IRR) than primaries

Primaries Secondaries Performance (NAV + distribution)

Time

Source: Pantheon. The above chart is for illustrative purposes only.

34

Accessing the asset class

35

Accessing private equity

Institutional investors

Vehicle type

Characteristics

Co-investment

 

Concentration risk, due to single company investment

Direct fund

   

Single strategy, single manager

   

Fund of secondary investments

Secondary fund

Co-investment fund

Fund of funds

Invests in approximately 15-30 companies

Typically a known and mature portfolio, potentially mitigating risk and the J-curve

 

Invests alongside non-affiliated primary funds with excess capacity of portfolio company investments

     

Primary funds retain decision-making authority

 

Professionally managed partnership investing in single manager private equity funds

     

Can be generalist or sector/strategy specific

Investment minimum (typical) $10 million $10 million

$10 million

$10 million

Offers diversified approach (40-50 companies) Often managed by a fund-of-fund manager; difficult to replicate

$10 million

Offers a diversified approach (20-30 managers) Often difficult to replicate

Source: Pantheon. The characteristics above reflect the typical characteristics of such funds but we note that the characteristics of any particular fund in the private equity industry may and will vary.

36

Accessing private equity

Individual investors

Vehicle type

Characteristics

Stock of publicly traded private equity firm

     

A single company stock purchase

Listed private equity mutual fund

 

Mutual funds that invest in either:

Access fund

Investment minimum (typical) N/A

Does not offer direct private equity access or diversification Tax reporting is typically via K-1 $2,500

–  Listed private equity companies (Blackstone, KKR, Carlyle) –  Public companies that invest in a portfolio of private companies

 

Allows individuals who are not accredited investors to access the characteristics of private equity through the stock market

 

Tend to be closely correlated to public equity markets

 

A fund which is set up by a GP to invest in one pre-identified primary fund

     

Lower minimum investment compared with typical private equity fund

$250,000

Typically have a term one-year longer than the underlying primary fund Available at large broker/dealer wirehouses with large in-house expertise and support staff

Source: Pantheon. The characteristics above reflect the typical characteristics of such funds but we note that the characteristics of any particular fund in the private equity industry may and will vary.

37

Accessing private equity

Vehicle type

Individual investors

Registered private equity fund

Characteristics

 

Perpetually offered closed-end funds typically registered under the Investment Company Act of 1940

 

Typically structured as a fund-of-funds vehicle – may employ multiple private-equity strategies

 

Generally invest a majority of the portfolio in private equity (primary funds, secondary funds, and co-investments)

   

Can offer diversification across the asset class

   

Investment minimum (typical) $25,000-$50,000

In order to manage liquidity, a portion of the portfolio may be invested in liquid securities Low minimum investment compared with typical private equity fund Available to Accredited Investors

Source: Pantheon. The characteristics above reflect the typical characteristics of such funds but we note that the characteristics of any particular fund in the private equity industry may and will vary.

38

Appendix

39

About Pantheon  

Founded in 1982, Pantheon manages AUM of over $34 billion1, and is a leading global private equity fund investor, managing private equity funds and separate account programs for investors around the world

 

The firm’s long-term presence in Europe, the U.S. and Asia has allowed the team to develop an extensive network of relationships for rigorous on-site due diligence and ongoing investment monitoring

 

Pantheon is a trusted partner to over 380 institutional investors across the globe, including public and private pension plans, insurance companies, banks, endowments and foundations

1

AUM of $34.3B as of March 31, 2016. This figure includes assets subject to discretionary or non-discretionary management, advice or those limited to a reporting function.

40

About AMG and AMG Funds  

AMG Funds provides access to premier asset managers through a unique partnership where the investment managers are truly independent.

 

AMG Funds is not beholden to a single investment approach or a single manager in delivering quality investment solutions. This innovative approach leverages each manager’s specific expertise to deliver products that cover the complete asset class spectrum.

 

Delivering the talents of all of these portfolio managers under a consolidated platform allows AMG Funds to offer unmatched access to specialized investment expertise.

41

Definitions Advisory Committee: Fund agreements often establish an investor advisory committee appointed by the sponsor. but comprised of members representing a number of the fund's investors. One of their key roles is on the resolution of conflicts of interest Buyout: Funds that acquire controlling interests in companies with a view towards later selling those companies or taking them public Carried Interest: This is the general partner's share of the profits of the investments made within a private equity fund. It is normally expressed as a percentage of the total profits of the fund. It typically ranges from 5-10% of profits for fund-of-funds and secondary funds and 15-20% of profits for direct funds Catch-up: Once the general partner provides its limited partners with their preferred return, if any has been set, it then typically enters a catch-up period in which it receives the majority or all of the profits until the agreed upon profit-split, as determined by the carried interest, is reached Clawback: Gives the limited partners the right to reclaim a portion of the GP's carried interest in the event that losses from later investments cause the GP to withhold too much carried interest Investment Constraints: A percentage limit to ensure diversification by company or fund. For example, no more than 10% of capital commitments in any one portfolio company Co-investment Rights: By having co-investment rights, an LP in a fund can invest directly in a company also backed by the fund manager itself. In this way, the LP ends up with two separate stakes in the company; one, indirectly, through the private equity fund to which the LP has contributed; another, through its direct investment Committed Capital: The amount of capital that each limited partner agrees to contribute to the fund when and as requested by the GP Distressed: Funds that invest in debt securities of financially distressed companies at a discount Distribution: Cash or stock returned to the LPs after the GP has exited from an investment. Stock distributions are sometimes referred to as 'in-kind" distributions. The partnership agreement governs the timing of distributions to the limited partner, as well as how any profits are divided among the limited partners and the general partner Drawdown: Also known as capital calls. Issued to limited partners when the general partner has identified a new investment and a portion of the limited partner's committed capital is required to pay for that investment DPI (Distributions to paid-in): See "Realization Multiple" below Due Diligence: Investing successfully in private equity at a fund or company level involves thorough investigation. As a long-term investment, it is essential to review and analyze all aspects of the deal before signing. Capabilities of the management team, performance record, deal flow, investment strategy and legal are examples of areas that are fully examined during the due diligence process Fund-of-fund: A private equity fund that, instead of making direct investments in companies, invests in a number of private equity funds, which in turn, invest the capital directly General Partner ("GP"): The firm managing the private equity fund GP Commitment: The amount of capital that the GP contributes to its own fund in the same way that an LP does. Generally 1% in commingled strategies

42

Definitions Growth Equity: Funds that invest in later-stage, pre-IPO companies Investor Giveback: Investors are typically required to return distributions to meet their share of any fund obligations or liabilities Investment Period: The period during which the general partner is permitted to make new investments on behalf of the private equity fund in portfolio companies. Typically 3-5 years In-kind Distribution: Distributions of stock (as opposed to cash) Internal Rate of Return (IRR): In a private equity fund, the net return earned by investors from the fund's activity from inception to a stated date. The IRR is calculated as an annualized effective compounded rate of return, using monthly cash flows and annual valuations Investment Company Act of 1940: Often known as the Company Act or the 1940 Act, it is the primary source of regulation for mutual funds and closed-end funds and was established to protect public interest in these types of securities Key Person: There are certain individuals ("key persons") deemed to be important in managing the investments of the fund. Key person events vary from fund to fund. When triggered these events generally cause a suspension of the fund's investment period. If triggered, the fund is typically prevented from making new investments until a sufficient number of new key persons are appointed to the satisfaction of the investors J-curve: Used to illustrate the historical tendency of private equity funds to experience capital outflows and negative returns in early years and cash flow distributions and investment gains in future years as its portfolio companies mature Lead Investor: The firm of individual that organizes a round of financing and usually contributes the largest amount of capital to the deal Legal Structure: Generally formed as limited partnerships but could also be limited liability companies Limited Partner: Institutions or individuals who contribute capital to a private equity fund Limited Partnership: The standard vehicle for investment in private equity funds. The partnership's general partner makes investments, monitors them and finally exits them for a return on behalf of investors — limited partners Minimum Commitment: Most private equity funds impose a minimum subscription amount or capital commitment threshold in order to become a limited partner. This is typically $5-10 million for funds aimed at institutional investors Mezzanine: Used to provide a middle layer of financing in some leveraged buyouts, subordinated to the senior debt layer, but above the equity layer. Mezzanine financing shares characteristics of both debt and equity financing Management Fee: The annual fee, typically a percentage of LP commitments to the fund, is intended to cover the basic costs of running and administering a fund. Generally based on committed capital and could be 2% per annum for a top-tier primary GP. Fees are typically lower for funds-of-funds Multiple (gross & net): Also known as the multiple of invested capital ("MOIC") or total value to paid in capital ("TVPI"). It is calculated by dividing the fund's cumulative distributions and residual value by the paid-in capital. It gives a potential investor insight into the fund's performance by showing the fund's total value as a multiple of its cost basis. It does not take into account the time value of money

43

Definitions Net Asset Value ("NAV"): The value of an investor's holdings Organizational Expenses: The costs of establishing and running the fund. These generally include the out-of-pocket expenses the manager incurred in forming the fund and any related vehicles, such as printing, travel, legal, accounting, filing and other organizational expenses Paid-in Capital: The cumulative amount of capital that has been drawn down or called from investors Portfolio Company: A company in which a private equity fund invests Primary Fund: Also known as a direct fund. Pools of actively-managed capital that invest in private equity companies with the intent of creating value in the companies in which they invest Preferred Return/Hurdle: The minimum annual return that the limited partners are entitled to receive before the general partners may begin receiving carried interest. If there is a hurdle, the rate is typically around 8%. A minimum annual internal rate of return promised to the LPs before the GP shares in profits Realization Multiple: Also known as the "distributions to paid-in" or ("DPI"). It is calculated by dividing the cumulative distributions by paid-in capital. The realization multiple, in conjunction with the investment multiple, gives a potential private equity investor insight into how much of the fund's return has actually been "realized", or paid out, to investors Residual Value: Also known as the RVPI. It is calculated by dividing the fund's residual value by paid-in capital. It provides a measurement, in conjunction with the investment multiple, of how much of the fund's return is unrealized and dependent on the market value of its investments Secondaries: Also known as secondary investment. Purchasing existing private equity fund commitments from an investor seeking liquidity in such fund prior to its termination Term: The life or duration of a private equity fund. Typically 10 -13 years depending on whether direct or fund-of-funds. Extensions of one year at a time and usually no more than four years are common Top Quartile Returns: The top 25% of all private equity returns, typically for a given vintage year Transaction Fees: GPs may charge portfolio companies certain transaction fees. Typically, any transaction fees received by a GP offsets some portion of the management fee charged to LPs of the fund to avoid "double-charging" Venture Capital: Investment in early and development-stage companies Vintage Year: The first year that the private equity fund draws down or "calls" committed capital for a portfolio company investment is known as the fund's vintage year Withdrawal: Transfers of interests in private equity funds are severely limited, although may be permitted with the consent of the GP

44

Disclosures and general risks Private equity investments are speculative and involve substantial risks. It is possible that investors may lose some or all of their investment. In general, alternative investments such as private equity or infrastructure involve a high degree of risk, including potential loss of principal invested. These investments can be highly illiquid, charge higher fees than other investments, and typically do not grow at an even rate of return and may decline in value. In addition, past performance is not necessarily indicative of future results. Private equity investments represent illiquid securities, are generally not listed on any securities exchange or traded in any other market, and are subject to substantial limitations on transferability. In addition to all of the risks inherent in alternative investments, private equity investments involve specific risks associated with private equity investing. Interests in private equity funds and many of the securities held by such funds may be difficult to value and will be priced in the absence of readily available market quotations, based on determinations of fair value, which may differ from the values that would have been used had a ready market for the investments existed. Such differences may be material. Private equity funds are not registered as investment companies under the Investment Company Act of 1940, as amended (the “1940 Act”), and investors in such funds will not benefit from the protections of the 1940 Act. Operating results for the portfolio companies in which private equity funds invest during a specified period will be difficult to predict. Such investments involve a high degree of business and financial risk that can result in substantial losses. The securities in which a private equity fund may invest may be among the most junior in a portfolio company’s capital structure and, thus, subject to the greatest risk of loss. Generally, there will be no collateral to protect an investment once made. Private equity funds may invest in companies whose capital structures are highly leveraged. Such investments involve a high degree of risk in that adverse fluctuations in the cash flow of such companies, or increased interest rates, may impair their ability to meet their obligations, which may accelerate and magnify declines in the value of any such portfolio company investments in a down market. Investors in private equity funds will have only limited rights to receive information about such funds or their managers, and will have no recourse against such funds or their managers. Private fund investments are less transparent than public investments and private fund investors are afforded fewer regulatory protections than investors in registered public securities. Private equity funds are subject to risks associated with legal and regulatory changes applicable to private equity funds. Private equity funds often make illiquid investments for which there are no readily available market prices. This risk is exacerbated to the extent that private equity funds generally provide valuations only on a quarterly basis.

45

Disclosures and general risks (cont.) A private fund investment involves a high degree of risk. As such investments are speculative, subject to high return volatility and will be illiquid on a long-term basis. Investors may lose their entire investment. Private equity fund managers typically take several years to invest a fund’s capital. Investors will not realize the full potential benefits of the investment in the near term, and there will likely be little or no near-term cash flow distributed by such funds during commitment periods. Private equity funds are subject to significant fees and expenses, typically, management fees and a 20% carried interest in the net profits generated by the fund and paid to the manager. Private fund investments are affected by complex tax considerations. Private equity funds may make a limited number of investments. These investments involve a high degree of risk. In addition, funds may make minority investments where the fund may not be able to protect its investment or control, or influence effectively the business or affairs of the underlying investment. The performance of a fund may be substantially adversely affected by a single investment. Private equity fund investors are subject to periodic capital calls. Failure to make required capital contributions when due will cause severe consequences to the investor, including possible forfeiture of all investments in the fund made to date. This document is confidential and is intended solely for information of the person to whom it has been delivered. It is not to be reproduced or transmitted, in whole or in part, to third parties. It is presented for information purposes only and is not intended to be either a specific offer by any AMG Funds or Pantheon entity to sell or provide, or a specific invitation for a consumer to apply for, any particular financial product or service that may be available. Nothing contained in this document is intended to constitute legal, tax, securities or investment advice. The general opinions and information contained herein should not be acted or relied upon by any person without obtaining specific and relevant legal, tax, securities or investment advice. The information in this document is supplied by Pantheon Ventures (US) LP, an affiliate of AMG Funds LLC. AMG Funds LLC does not guarantee the accuracy of such information, but believes it to be reliable. Additional information is available upon request. Investment products are not FDIC insured, are not bank guaranteed and may lose value. Any statements regarding market events, future events or other similar statements constitute only subjective views, are based upon expectations or beliefs, should not be relied on, are subject to change due to a variety of factors, including fluctuating market conditions, and involve inherent risks and uncertainties, both general and specific, many of which cannot be predicted or quantified. Future events and actual results could differ materially from those set forth in, contemplated by, or underlying these statements. In light of these risks and uncertainties, there can be no assurance that these statements are now or will prove to be accurate or complete in any way. This material is distributed by AMG Distributors, Inc., a member of FINRA/SIPC. AMG Distributors, Inc. is a wholly owned subsidiary of AMG Funds LLC and Pantheon Ventures (US) LP is majority owned by Affiliated Managers Group, Inc. (AMG).

46

Disclosures and general risks (cont.) Index descriptions Indices are unmanaged, are not available for investment, and do not incur expenses. The S&P 500 Index is a capitalization-weighted index of 500 stocks. The S&P 500 Index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major indices. The S&P 500 Index is proprietary data of Standard & Poor’s, a division of McGraw-Hill Companies, Inc. All rights reserved. The Barclays U.S. Aggregate Bond Index is an index of the U.S. investment-grade fixed-rate bond market, including both government and corporate bonds. The Dow Jones U.S. Select REIT Index measures U.S. publicly traded Real Estate Investment Trusts. The Cambridge Associates U.S. Private Equity Index is based on data compiled from 970 U.S. private equity funds (buyout, growth equity, private equity, energy and mezzanine funds), including fully liquidated partnerships, formed between 1986 and 2010. The Cambridge Associates U.S. Private Equity Index has limitations (some of which are typical to other widely used indices) and cannot be used to predict performance of the Fund. These limitations include survivorship bias (the returns of the index may not be representative of all private equity funds in the universe because of the tendency of lower performing funds to leave the index); heterogeneity (not all private equity are alike or comparable to one another, and the index may not accurately reflect the performance of a described style); and limited data (many funds do not report to indices, and the index may omit funds, the inclusion of which might significantly affect the performance shown).

© 2016 AMG Funds LLC. All rights reserved.

063016

PT381

47