Private Equity

1
Private Equity

• Why Canadian Institutional Investors Should
  Participate in Global Private Equity
• Finding the Key Report Implementation

2
The Finding the Key Report

• The Finding the Key Canadian Institutional
  Investors and Private Equity research report was
  commissioned by the federal government and six
  provincial governments to assess the current
  attitudes of institutional investors towards
  Canadian private equity.
• The research was conducted by Macdonald
  Associates and based on interviews of almost 100
  institutional investors in Canada and the US,
• Key findings of the report were that there are
  barriers to private equity entry and sustained
  activity, especially for pension plans with under
  5 billion in assets. Barriers noted include
• Attitudes and limited knowledge base about
  private equity among trustees and Canadian
  consultants
• Internal staffing requirements and investment
  oversight difficulties
• Lack of supporting infrastructure such as fund of
  funds, gatekeepers, advisors and consultants
• Market entry costs
• Limited access to reliable performance data,
  specifically for the Canadian market

3
Private Equity Investment by US and Canadian
Pension Funds by Size
Large differences exist between the US and
Canada for private equity investment by
institutional investors with under 5 billion in
assets
4
Report Recommendations and Presentation Objectives

• Presentation Objectives
• Provide an overview of private equity and reasons
  why the asset class should be considered as part
  of an institutional investment portfolio
• Address potential risks and implementation issues
  related to private equity investments
• Review alternative methods for establishing a
  private equity portfolio - from fund of fund to
  direct investing

• Recommendations
• The Finding the Key report concluded that the
  CVCA should
• Increase communication and
• education on private equity
• through closer relationships with
• PIAC and other industry
• associations
• Address means of overcoming
• barriers and strengthening
• available infrastructure to support
• cost effective entry into the private
• equity asset class
• Increasing education about the Canadian private
  equity market was also recommended and will form
  the second phase of the project

5
Overview of the Institutional Committee (1)

• The Institutional Committee of the Canadian
  Venture Capital Association (CVCA) was set up
  to suggest how to implement the recommendations
  from the Finding the Key report.

Core Committee
Natalie TownsendCVCA Director Janet
RabovskyWatson Wyatt David RogersOMERS
Rosemary ZigrossiOntario Teachers Stuart
Waugh-TD Capital Robert PalterMcKinsey Kirk
FalconerMacdonald and Associates Mark
Weisdorf-MW Associates Brian Stewart-Consultant
Sam DubocEdgeStone
Advisory Committee
Institutional Investors
General Partners Service Providers
Fund of Funds, Gatekeepers Consultants
6
Overview of the Institutional Committee (2)
Advisory Committee
General Partners and Service Providers Goodmans
- Rick Nathan Goodman and Carr-Murray
Perelman Gowlings - Nicholas Dietrich Greenstone
- Livia Mahler GTI - Bernard Hamel McLean
Watson - John Eckert Penfund John
Bradlow PRIVEQ - Brad Ashley
Institutional Investors Alberta Treasury - Dan
Kanashiro BCIMC - Neil Muth CAAT - Denis
Larose CBC Pension - Debra Alves CDP - Pierre
Fortier CPP Tom Tutsch Industrial Alliance -
Richard Legault McGill - John Limeburner NBIMC -
John Sinclair PSP - Derek Murphy STM - Denis
Giroux University of Alberta - Ron
Ritter University of Ottawa - Barb Miazga Via
Rail - Chris Caswell
Fund of Funds, Gatekeepers Consultants Adams
Street - John Gray BDC - Brian Elder Cambridge -
Andrea OToole-Auerbach Harbourvest - Brooks
Zug James P. Marshall - David Kaposi Kensington
- Tom Kennedy Pacific Corporate Group - Mike
Russell Pantheon - Helen Steers Paul Capital -
Ann Watson WestAM - Tom Thompson
7
Presentation Background and Objectives

• Recommendations
• The Finding the Key report concluded that the
  CVCA should
• Increase communication and
• education on private equity
• through closer relationships with
• PIAC and other industry
• associations
• Address means of overcoming
• barriers and strengthening
• available infrastructure to support
• cost effective entry into the private
• equity asset class
• Increasing education about the Canadian private
  equity market was also recommended and will form
  the second phase of the project

• Presentation Objectives
• Provide an overview of private equity and reasons
  why the asset class should be considered as part
  of an institutional investment portfolio
• Address potential risks and implementation issues
  related to private equity investments
• Review alternative methods for establishing a
  private equity portfolio - from fund of fund to
  direct investing

8
What is Private Equity?

• Long term equity and subordinated debt
  investments in non-publicly traded companies
  across different stages of development from
  venture to buyout
• Venture
• Equity for early stage and later stage growth
  companies, usually in technology or biotech
  businesses, to further develop the product or
  service, the management and sales team and to
  secure customer sales
• Buyouts and Expansion
• Equity and quasi equity for more established
  companies for growth, expansion or ownership
  change, including leveraged and management
  buyouts. May require strategic refocusing,
  management team augmentation and governance
  changes
• Mezzanine Debt
• Subordinated debt for established companies with
  strong and stable cash flows
• Other
• Specialized strategies such as distressed,
  special situations, turnarounds, secondaries and
  infrastructure

9
Characteristics of Private Equity

• Far more active than public equity investing
• Inefficient market
• Private equity managers develop and act on
  informational advantage
• Investment opportunities must be actively sourced
  and require a high degree of due diligence,
  customization and structuring
• Valuation and structure of private equity
  investments is determined through negotiation
  versus being set by an efficient public market
• Requires active involvement and governance
• Equity stakes are typically control or
  significant influence positions with rights
  outlined in a shareholders agreement
• Private equity managers typically sit on the
  Boards of portfolio companies and are expected to
  contribute to company development by utilizing
  their experience and contacts to provide
  expertise in strategic, operational, capital
  structure, financial, management and compensation
  issues
• Long term investment horizon
• Portfolio company investments are typically held
  for between 5 - 7 years and the majority of the
  returns are earned upon sale towards the end of a
  Funds life

10
Why Consider Private Equity?

• Return Enhancement
• Other asset classes are not presently providing
  sufficient returns to meet long term funding
  targets
• Produces high rates of return, with superior long
  term out-performance for top quartile managers
  relative to public benchmarks
• Most pension plan consultants suggest that
  private equity returns should exceed returns from
  a public stock market portfolio by 300500 basis
  points
• Persistency of performance among top quartile
  managers increases the likelihood of success in
  building a high performing private equity
  portfolio
• Structural, governance and informational
  advantages increase the private equity managers
  ability to consistently earn high returns
• Diversification Benefits
• Provides access to a broader range of investment
  opportunities than those available in the public
  markets
• Provides access to active managers that can add
  value to portfolio companies through active,
  hands-on management in a manner not available to
  public investments
• Provides portfolio risk diversification but the
  magnitude is difficult to measure accurately
  because the differences in public market and
  private equity data streams, which by necessity
  include interim valuations

11
Private Equity Performance Disclosed for Canadian
Pension Plans

• Ontario Teachers
• "Teachers' Private Capital outperformed its
  benchmark by 13.1 in 2004 with a one-year rate
  of return of 27.6 to add 460 million in value.
• "Over the past four years, private equity
  delivered a rate of return of 16.0..
• Caisse
• Private Equity generated 20.5 in 2004 and the
  Private Equity group made significant
  contributions to the Caisses 2004 results
• OMERS
• The return on total investment income for the
  private equity was 12.5 compared with a negative
  13.8 return in 2003
• HOOPP
• Private equity and special situations generated
  21.2 returns for 2004 and 8.9 for 2003

12
How to Evaluate Private Equity Returns

• Private equity returns are presented as internal
  rates of returns (IRRs) based on interim
  valuations until the investment is realized.
• Public equity benchmarks such as the SP and
  Nasdaq are reported on a time-weighted basis
  which makes comparison difficult, and potentially
  not meaningful
• Private equity returns are not meaningful until a
  fund is in the mature phase, typically beyond 3-5
  years when the realization process for initial
  investments begins
• Because of the lack of ready benchmarks, multiple
  comparators are often used for short and long
  term measurement
• Short term (0-5 years)
• Mainly qualitative
• Annual review of manager to ensure comfort level
• Annual review of policy execution adherence to
  stated strategy and objectives, investment pace,
  diversification, underlying performance of
  portfolio companies
• Ongoing discussions with other LPs
• Longer term (5-12 years)
• Vintage year performance comparisons (e.g first
  quartile in Thomson Venture Economics)
• Relative return target (e.g. listed index 300
  to 500 basis points)
• Absolute return target (e.g. 12 net)
• Modeling portfolio cash flows in order to create
  a public market equivalent index for better
  comparison to public indices (an opportunity cost
  benchmark see Appendix III)

13
J-curve Phenomenon

• Private equity funds typically experience
  declines in value in the early years of their
  development as Funds value an investment at cost
  until another round of financing, an acquisition
  or IPO occurs, while fees and write offs are
  recognized immediately
• The chart below illustrates a typical J-curve for
  typical private equity Fund. The J-curve for
  venture capital is typically longer than for
  buyout. The 1999/2000 vintage funds are
  experiencing extended J-curves in excess of 5
  years whereas 2001 vintage funds are already
  returning capital. (see Appendices V and VI for
  vintage year returns)

Illustrative
Source Thomson Venture Economics/NVCA
It is important to consider the short term,
negative impact of the J-curve when assessing
private equity performance.
14
North American and European Private Equity
Performance For All Funds
(As of December 31, 2004)
Note on Vintage Year Returns Vintage year
returns are an internal rate of return
calculation based on the year of fund formation
and first drawdown of capital. Vintage year
performance is an effective method for comparing
individual funds as it reflects the definite life
cycle to a group of funds formed in the same
vintage year.
Vintage Year
Vintage Year
Private Equity (Pooled Average)
1999-2003
1994-2003
1989-2003
1984-2003
(0.2)
9.4
12.7
13.6
All Funds
Venture Capital
(9.1)
19.9
23.3
16.9
Buyout
5.4
6.1
8.8
11.8
Private Equity - Top Quartile Cut-off
All Funds
3.5
13.2
16.1
15.9
Venture Capital
(1.4)
14.7
19.0
16.2
Buyout
7.7
11.3
15.0
16.2
Public Equity - Total Returns in US
5 yr
10 yr
15 yr
20 yr
SP 500 Gross TR
(2.3)
12.1
10.9
13.2
SP/TSX Composite (C)
3.6
10.1
8.2
9.7
10.2
SP/TSX Composite (US)
7.9
11.7
7.9
Nasdaq Composite
(11.6)
11.3
11.0
11.5
1
Russell 2000 TR
6.6
11.5
11.1
11.5
2
11.3
HSBC Smaller European (US)
6.9
8.4
12.0
Including recently formed funds which have not
drawn down 100 of capital commitments, have not
completed their investment periods and are
experiencing the J-curve effect.
Notes
1. Private Equity returns are shown net of fees
and expenses.
2. Public Equity returns are gross total
returns, which assumes dividends are re-invested
in the index
3. Canadian and European monthly total returns
have been converted to US and converted values
are then calculated as annualized total returns.
Return figures are therefore affected by
foreign exchange fluctuations over the period
Source Thomson Venture Economics, Bloomberg
private equity returns are calculated as annual
compounded internal rates of return ("IRRs"),
while those for the public market indices are
not Direct comparisons may therefore not
be meaningful
On a vintage year basis, private equity has
delivered strong long-term returns, with
sustained out-performance from top quartile
managers
15
North American and European Private Equity
Performance For Mature Funds
(As of December 31, 2004)
Developing
Note To estimate the potential impact of the
J-curve and fund maturity on vintage year
returns, we removed funds raised in the last 5
years (developing funds) The intention is to
approximate the performance of mature funds,
which, on average, should have drawn all their
capital commitments and completed their
investment cycle.
Mature Funds
Funds
Vintage Year
Vintage Year
Private Equity (Pooled Average)
1999-2003
1994-1998
1989-1998
1984-1998
All Funds
(0.2)
17.3
16.1
14.9
Venture Capital
32.0
20.1
(9.1)
43.6
Buyout
5.4
6.6
9.8
13.1
Private Equity - Top Quartile Cut-off
All Funds
3.5
23.5
23.3
20.3
Venture Capital
(1.4)
48.9
38.1
22.6
Buyout
7.7
14.3
18.4
18.7
Public Equity - Total Returns in US
5 yr
10 yr
15 yr
20 yr
SP 500 Gross TR
(2.3)
12.1
10.9
13.2
10.1
SP/TSX Composite (C)
3.6
9.7
8.2
SP/TSX Composite (US)
11.7
10.2
7.9
7.9
Nasdaq Composite
1
(11.6)
11.3
11.0
11.5
Russell 2000 TR
6.6
11.1
11.5
11.5
2
HSBC Smaller European (US)
6.9
11.3
8.4
12.0

Includes immature funds that have not yet
completed their investment period and may have
significant amounts of capital yet to be drawn.
1
Nasdaq Composite Index - Total Returns available
since September 30, 2003, price return values
used prior to September 30, 2003
2
Inception for HSBC Smaller European Index is
December 31, 1985.
Notes
1. Private Equity returns are shown net of fees
and expenses.
2. Public Equity returns are gross total
returns, which assumes dividends are re-invested
in the index
3. Canadian and European monthly total returns
have been converted to US and converted values
are then calculated as annualized total returns.
Return figures are therefore affected by
foreign exchange fluctuations over the period
Source Thomson Venture Economics, Bloomberg
private equity returns are calculated as annual
compounded internal rates of return ("IRRs"),
while those for the public market indices are
not Direct comparisons may therefore not
be meaningful
For mature funds, private equitys strong long
term performance is evident across strategies and
investment styles
16
Persistence of Returns

• Stephen Kaplan and Antoinette Schoar of the
  University of Chicago completed a study on 2004
  which found that over a 17 year period
  performance persists strongly across private
  equity funds
• GPs whose funds outperform the industry on one
  fund are likely to outperform in a successor
  fund GPs who underperform are likely to repeat
  this performance as well
• Findings are markedly different from the results
  for mutual funds, where persistence has been
  difficult to detect and, when detected, tends to
  be driven by persistent underperformance rather
  than out-performance
• If there were survivorship or selection biases in
  the sample of funds, actual persistence would
  likely be greater than the persistence measured
• Investors must consider whether there has been
  any turnover of professionals or change in
  strategy since the previous fund

Persistency of performance among top quartile
managers increases the likelihood of success in
building a high performing private equity
portfolio
17
Why Private Equity Managers Produce High Returns
Over the Long Term (1)

• Access to more information
• Opportunity to conduct lengthy and exhaustive due
  diligence
• Ability to access detailed information about the
  company and during the life of the investment,
  typically through Board representation and
  internal reporting
• Market inefficiency
• Opportunity to utilize informational advantages
  and illiquidity to purchase private companies at
  more favourable valuations relative to public
  companies
• Illiquidity discounts typically narrow as private
  companies grow toward a public liquidity event or
  strategic sale
• Ability to structure security holder arrangements
  on more attractive and investor friendly terms
  than available in public equity investing

Structural, governance and informational
advantages increase the private equity managers
ability to consistently earn high returns
18
Why Private Equity Managers Produce High Returns
Over the Long Term (2)

• Active, value-added involvement and governance
• Bring value-added expertise by utilizing their
  contacts and providing experience on strategic,
  operational, financial, management and
  compensation issues
• Can implement corrective action quickly if
  performance is off plan
• Ability to control the manner and timing of
  exiting the investment to maximize shareholder
  value
• Strategic focus and alignment of interests over a
  long term horizon
• Can assist and provide clear direction to the
  management team on strategic focus and priorities
• Can align compensation towards achievement of the
  strategy
• Management can take a long term approach to
  implementing strategy since pressure to meet
  quarterly street expectations is removed

Structural, governance and informational
advantages increase the private equity managers
ability to consistently earn high returns
19
Private Equity Diversification Opportunity
171,606 Companies in the US
Revenues 100 million and above
Revenues 10 million and above
Public
7,424
Public
33
20,261
12
67
88
Private
Private
22,696
151,345
Source Dun Bradstreets Market Identifiers
Database, January 2002. Courtesy Abbott Capital
Private equity investing provides access to a
broader range of investment opportunities than
available in the public markets
20
Diversification within Private Equity Asset
Classes

• The following sub sectors of private equity funds
  have different risk profiles, return
  expectations, investment opportunities and
  overall market conditions

• Offers opportunity to diversify within a private
  equity portfolio based on the overall assessment
  of the attractiveness of investment opportunities
  (growth prospects, valuation etc.) and the amount
  of capital available for investment.

21
Benefits of Diversification
45.0
Risk of Total Loss
42.0
40.0
Risk of Some Loss
35.0
30.0
30.0
30.0
25.0
20.0
15.0
10.0
5.0
1.0
1.0
0.0
0.0
Direct Investment in Single Private
Investment in Single Private Equity
Investment in Private Equity Fund of
Company
Fund
Funds
of Portfolio Company Investments
1
6 - 12 (Buyout) 20 - 40 (Venture)
400 - 1200
Note Data contains about 5,000 direct
investments, 300 funds and 50,000 simulated fund
of funds Source Weidig and Mathonet report,
"The Risk Profiles of Private Equity", January
2004, Courtesy TD Capital
A diversified private equity portfolio can
significantly reduces volatility and risk of loss
22
Depth and Growth of the US Private Equity
Industry (1)
Source Thomson Venture Economics
Private equity investing has grown substantially
into an established industry offering depth and
diversity of investment strategies and fund
managers
23
Depth and Growth of the US Private Equity
Industry (2)

• Tougher environment for generating high absolute
  private equity returns as increased competition
  makes it more difficult to find undervalued
  companies or proprietary deal flow
• Relative out-performance versus public markets is
  still expected with increased focus on manager
  selection and taking a tactical approach
• Focusing on private equity sub asset classes
  and/or markets which are less capitalized yet
  still capable of generating high returns
• Selecting private equity managers which have
  shown discipline through previous market cycles
  and an ability to substantially build the value
  of investee companies
• Considering the impact of partnership dynamics
  such as increasing age and net worth of the
  private equity managers on the ability to
  continue to out-perform public market
  alternatives

While achieving historical absolute returns may
be challenging in the future, relative
out-performance to public markets is still
expected
24
Global Private Equity Funds Raised vs. Invested
The historical capital overhang is dissipating as
investment activity has outpaced fund raising
activity
25
Presentation Background and Objectives

• Recommendations
• The Finding the Key report concluded that the
  CVCA should
• Increase communication and
• education on private equity
• through closer relationships with
• PIAC and other industry
• associations
• Address means of overcoming
• barriers and strengthening
• available infrastructure to support
• cost effective entry into the private
• equity asset class
• Increasing education about the Canadian private
  equity market was also recommended and will form
  the second phase of the project

• Presentation Objectives
• Provide an overview of private equity and reasons
  why the asset class should be considered as part
  of an institutional investment portfolio
• Address potential risks and implementation issues
  related to private equity investments
• Review alternative methods for establishing a
  private equity portfolio - from fund of fund to
  direct investing

26
Perceived Risks of Private Equity (1)
27
Perceived Risks of Private Equity (2)
28
Unique Implementation Issues (1)
29
Unique Implementation Issues (2)
30
Unique Implementation Issues (3)
31
Unique Implementation Issues (4)
32
Maintaining a Private Equity Allocation

• To achieve a target allocation, it is necessary
  to over-commit to the asset class

Amount of Total Portfolio in Private Equity

• Assumes one-time commitment of 10 of portfolio
  to a private equity Fund of Funds
• 10 target allocation is never reached with
  single fund commitment
• Amount of net invested capital in Private Equity
  declines rapidly after year five
• An ongoing program (committing approximately 1.0x
  allocation every 2 years) is required to achieve
  and maintain a target allocation to private equity

Due to the timing of distributions and drawdowns,
net invested capital peaks at approximately 60
of committed capital in year 5 in this example
33
Private Equity Fees

• Management fee of 1.5 to 2.5 on the total
  capital committed, often reduced after 5 years
• All distributions go to the investor until
  cumulative distributions represent a repayment of
  all capital commitments including management fees
  plus, typically, an 8 compound annual rate of
  return.
• Performance based compensation in the form of a
  carried interest, typically 20 is paid to the GP
  thereafter (subject to GP catch up provisions if
  they exist)
• Cost of building an experienced, internal
  investment team to source, evaluate, monitor and
  manage direct equity investments in private
  companies is high

Fees are higher than quoted equities but net
return from private equity tends to be higher
over the long term
34
Private Equity Allocation Targets
Strategic (Targeted) Allocation to Private Equity
by Type of Organization, 1995-2003 (North
America) ()
Source Goldman Sachs International Russell
Investment Group Alternative Investing Report 2003
North American institutional investors have
generally been increasing their target
allocations to private equity
35
Private Equity Investment by US and Canadian
Pension Funds
Canadian corporate pension plans and endowments
have less invested in private equity than US plans
36
Presentation Background and Objectives

• Presentation Objectives
• Provide an overview of private equity and reasons
  why the asset class should be considered as part
  of an institutional investment portfolio
• Address potential risks and implementation issues
  related to private equity investments
• Review alternative methods for establishing a
  private equity portfolio - from fund of fund to
  direct investing

• Recommendations
• The Finding the Key report concluded that the
  CVCA should
• Increase communication and
• education on private equity
• through closer relationships with
• PIAC and other industry
• associations
• Address means of overcoming
• barriers and strengthening
• available infrastructure to support
• cost effective entry into the private
• equity asset class
• Increasing education about the Canadian private
  equity market was also recommended and will form
  the second phase of the project

37
Ways to Invest In Private Equity
Fund of Funds
Non-Discretionary Advisor
Internal Direct Investments
Internal Fund Selection
Degree of Plan Sponsor Involvement
Lower
Higher
Internal Resources Required
Lower
Higher
External Fees
Higher
Lower
38
Evolution of Private Equity Investment by
Institutional Investors
Stage IV Full Fund Investment Program with a
Direct Co-Investment Program
Stage V In-house Private Equity Investment Group
Stage III Full Fund Investment Program
Stage II Fund of Funds and Limited Fund
Investments
Stage I No Private Equity Investments

• Investments in Fund of Funds
• Investments in Private Equity Funds with the
  assistance of an Advisor
• Small staff

• Lack of interest and/or restrictions concerning
  alternative investments
• No dedicated Private Equity staff

• Investments in Private Equity Funds with or
  without the assistance of an Advisor
• Investments in Fund of Funds for specific
  geographies or sub asset classes
• Small dedicated Private Equity Fund investment
  staff

• Investments in Private Equity Funds
• Co-investments generated through Fund Investments
• Investments in Fund of Funds requiring external
  expertise
• Medium-sized dedicated Private Equity investment
  staff

• Active direct investments, co-investments and
  Fund Investments
• Investments in Fund of Funds requiring external
  expertise
• Specialization (eg. industry, venture vs. LBO,
  etc.)
• Dedicated large Private Equity staff

39
Why a Fund of Funds or Advisor?

• Access to top tier private equity managers
  because of institutional scale and resources,
  historical relationships and market presence
• Access to an experienced investment team and
  disciplined process for private equity manager
  due diligence, selection and portfolio
  construction
• Benefits of scale are passed on to the investor
• Investors can build a portfolio of 20-30 managers
  without having to commit over US100-200 million
  required to build the portfolio directly
  (assuming US5-10 minimum per fund)
• Enables private equity investing to be practical
  and cost effective for smaller institutional
  investors
• Eases administrative burden
• negotiation of agreements
• consolidation of cash flows
• consolidated reporting
• tracking of cash commitments, drawdowns and
  distributions
• performance reporting
• liquidation of in-kind distributions

40
Fund of Fund Fees

• Management fee in the range of 75-100 basis
  points on the total capital committed, often
  reduced after 5 years
• All distributions go to the investor until
  cumulative distributions represent a repayment of
  all capital commitments including management fees
  plus, typically, an 8 compound annual rate of
  return
• Performance based compensation in the form of a
  carried interest is typically paid to the GP
  thereafter. The carried interest varies
  depending on the type of investment
• Primary Fund Investments 0-5 Carried
  Interest
• Secondary Fund Investments 5-10 Carried
  Interest
• Direct Co-Investments (if any) 10-15 Carried
  Interest
• These fees are in addition to the fees paid to
  the private equity fund manager

Despite additional fees, Fund of Funds offer a
cost effective solution for smaller pension
funds. For larger pension funds with in-house
private equity teams, the incremental fees must
be weighed against the other benefits gained.
41
Conclusions

• Private equity is an important part of an
  institutional portfolio, offering return
  enhancement and diversification benefits versus
  traditional asset classes
• Risk and implementation issues unique to private
  equity can be addressed by experienced internal
  resources or by engaging a Consultant, Fund of
  Funds, or Gatekeeper (collectively Advisor)
• There is a significant opportunity for Canadian
  institutional investors, especially those with
  assets under 5 billion, to increase
  participation in private equity either directly
  or through an Advisor
• Investment industry professionals should work
  together to increase communication and education
  about private equity among managers,
  trustees/directors, and consultants and to
  address perceived barriers to entry into the
  asset class for Canadian investors

42
Private Equity

• Appendices
• Appendix I Canadian and US Contributors to the
  Finding the Key Report
• Appendix II List of Advisory Board Members for
  the Finding the Key Report
• Appendix III Private Equity Performance
  Measurement and Benchmarking Studies
• Appendix IV Building a Private Equity Portfolio
  Structure
• Appendix V US Venture Funds Annualized Net
  Cumulative IRR by Vintage Year
• Appendix VI US Buyout Funds Annualized Net
  Cumulative IRR by Vintage Year

43
Contributors to Finding the Key Report (1)

• Canada

44
Contributors to Finding the Key Report (2)

• Canada - continued

United States Abbott Capital Management
LLC BellSouth Pension California Public Employees
Retirement System California State Teachers
Retirement System Cambridge Associates
LLC Colorado Public Employees Retirement
System Credit Suisse First Boston Flag Venture
Partners Florida State Board of
Administration Grove Street Advisors Harbourvest
Partners LLC Harvard Endowment Fund MIT Endowment
Fund Massachusetts Pension Reserves Investment
Management Oregon Public Employees Retirement
Fund Pennsylvania State Employees Retirement
System RBC Capital Partners (U.S.) State of
Wisconsin Investment Board Teacher Retirement
System of Texas Verizon Investment Management
Corporation
45
Advisory Board Members for Finding the Key
Report
46
Private Equity Performance Measurement and
Benchmarking Studies

• "A Method for Comparing Private Market Internal
  Rates of Return to Public Market Index Returns", 
  Austin M. Long and Craig J. Nickels,
  (www.alignmentcapital.com /publications/ Index
  Comparison Method), August 1995.
• "Benchmarking and Performance Measurement", Mark
  Weisdorf and Janet Rabovsky, extracted from the
  Research Guide, 'Private Equity Due Diligence
  Investment Selection in an Inefficient Asset
  Class', to be published in 2005 by Private Equity
  International and Probitas Partners.
• "Private Equity Benchmarking with PME",
  Christophe Rouvinex, Venture Capital Journal,
  August 2003.
•  
• "Benchmarking the Returns to Venture", Woodward
  and Hall, Working Paper 10202, National Bureau of
  Economic Research, www.nber.org(wpaper/w10202),
  December 2003.
•  

47
Building a Private Equity Portfolio Structure

• Portfolio structure decisions must address style,
  sector, geographic and vintage year
  diversification
• The primary style decision is the relative
  weighting of venture and buyouts
• Additional considerations include
• Mezzanine debt
• Distressed
• Venture stage
• Secondary purchases
• The sector decision involves expertise and
  experience across a number of different
  industries
• The geographic decision focuses on the relative
  weights of North America, Europe and other
  geographic regions
• The vintage year decision should address building
  the portfolio over time with relatively level
  commitments but not timing market entry beyond
  tactical relative weightings
• Plans make a strategic allocation first which
  increases as their comfort level with private
  equity increases
• Allocations of smaller than 5 will not provide
  meaningful diversification benefits or positive
  impacts on overall portfolio returns

48
US Venture FundsAnnualized Net Cumulative IRR by
Vintage Year
As of 03/31/2004
Source Thomson Venture Economics
49
US Buyout FundsAnnualized Net Cumulative IRR by
Vintage Year
As of 03/31/2004
Source Thomson Venture Economics