Los Angeles Department of Water and Power Employees’ Retirement Plan
Private Equity Program Performance Report
June 30, 2010
Prepared by:
Pension Consulting Alliance, Inc.
Presented:
November 24, 2010
Table of Contents Page
Program Overview 3
Private Market Overview 4
Evolution and Current Status of the Private Equity Program 9
Investment Performance 11
Portfolio Structure 13
Partnership Summaries 16
Summary 18
Appendix Tab A
Retirement Plan Tracking Schedule A-1 Fisher Lynch Venture Partnership II, LP (FL II) A-2 HRJ Special Opportunities II (U.S.), LP (SOF II) A-3 Landmark Equity Partners XIII, LP (LEP XIII) A-4 Landmark Equity Partners XIV, LP (LEP XIV) A-5 Lexington Capital Partners VI, LP (LCP VI) A-6 Lexington Capital Partners VII, LP (LCP VII) A-7 Oaktree Principal Fund V, LP (OPF V) A-8
Tab B Health Benefits Fund Overview B-1 Health Benefits Fund Tracking Schedule B-2
Program Overview
The Los Angeles Department of Water and Power Employees’ Retirement, Disability and Death Benefit Plan (the “Plan”) Private Equity Program (the “Program") consists of both fund-of-funds and one direct partnership investment as of June 30, 2010. The Program is relatively young as the initial commitments to two secondary market fund-of-funds were made in 2006 and only 46% of commitments have been drawn down. As private equity partnerships are long-term investments that are invested over several years, the Program is expected to continue to grow and evolve over time.
Summary
As of 6/30/2010, the Program had $176.0 million in commitments across seven partnerships.
Program commitments have been allocated 68% to secondary market fund-of-funds, 23% to primary market fund-of-funds, and 9% to a direct partnership investment. As of the end of the second quarter of 2010, $80.8 million in capital had been drawn down, $15.5 million in distributions had been made, and the Program had a reported value of $66.2 million. The net since inception internal rate of return (IRR) was 0.5% as of June 30, 2010, continuing to improve from the minus (17.0%) IRR as of 12/31/08.
Portfolio Summary (as of 6/30/2010)
Partnership Type Vintage
Year Age Committed Capital
Invested Capital
Distributed Capital
Reported Value
Since Inception
Net IRR
Peer Median
IRR1 Lexington VI Secondary Fund-of-Funds 2006 4.0 yrs. $30 M $27.8 M $6.4 M $18.2 M (0.4%) (0.9%) Landmark XIII Secondary Fund-of-Funds 2006 3.6 yrs. $30 M $26.0 M $9.0 M $17.5 M 0.9% (0.9%) HRJ SOF II Primary Fund-of-Funds 2008 2.3 yrs. $20 M $18.7 M $0.0 M $19.4 M 1.5% 0.3%
FL VC II Primary Fund-of-Funds 2008 2.2 yrs. $20 M $5.6 M $0.0 M $5.1 M (8.8%) (15.0%) Landmark XIV Secondary Fund-of-Funds 2008 1.8 yrs. $30 M $2.5 M $0.0 M $2.7 M 6.7% (9.4%) Oaktree PF V Direct Partnership 2009 1.3 yrs. $16 M $2.8 M $0.1 M $3.0 M 12.1% NM Lexington VII Secondary Fund-of-Funds 2009 0.6 yrs $30 M $0.4 M $0.0 M $0.1 M NM* NM
Total Program --- --- --- $176 M $80.8 M $15.5 M $66.2 M 0.5% ---
* Investment activity is too early for meaningful results
The use of fund-of-funds has resulted in a highly diversified portfolio with exposure to more than 400 underlying private equity partnerships which have invested capital with in excess of 4,000 portfolio companies. Overall the Program is diversified across investment strategies, including buyouts (44%), special situations (34%), and venture capital (22%). Given the use of secondary market fund-of-funds, vintage year diversification has been increased with exposures to underlying partnerships dating back to the 1990’s.
Approximately $80.8 million (45.9% of the Program’s committed capital) has been invested as of June 30, 2010. The Program’s reported value plus unfunded commitments ($95.2 million) represents an approximate allocation of 2.6% of the total Plan assets as of the end of the second quarter 2010. Given the unique cash flows of private equity partnerships, continued investment activity is required for the Plan to achieve its 5% target for private equity exposure over the long-term. However, attractive partnership selection should be emphasized rather than allocating capital to achieve target allocations. Therefore PCA continues to recommend remaining highly selective in this uncertain marketplace.
1 Source: Thomson Reuters, by comparable universe (All Private Equity, Buyout, or Venture) and vintage year.
Private Equity Market Overview
Fund raising activity remains at low levels year-to-date in 2010. Through the first nine months of 2010, approximately $68.3 billion in domestic commitments have been raised. Annualizing this activity projects the calendar year activity for 2010 to be below the $95.8 billion raised last year. Buyouts continue to lead fund raising activities through September 30, 2010 raising $41.8 billion of commitments, followed by venture capital at $8.9 billion, secondary and “other” at $8.5 billion, mezzanine at $5.4 billion, and fund-of-funds at $4.1 billion. The “denominator effect”
(i.e., as the total value for a plan’s assets decreases in parallel with public market holdings while private equity valuation changes lag the public markets, the private equity portfolio becomes a larger percentage of the shrinking portfolio) and continued uncertainty in the marketplace, significantly dampened fund raising activity in 2009 and has continued to be slow in 2010.
U.S. buyout deal volume over the past couple of years has been well below the peak transaction levels of $137 billion and $475 billion for 2008 and 2007, respectively. Activity levels remained at low levels through the first nine months of 2010 with only $38 billion in transaction value year-to-date. The 2009 calendar year was marked by slow activity in the first nine months with an increase in activity in the fourth quarter, totaling $39 billion in transaction value for the year. Therefore, the calendar year transaction activity for 2010 is expected to outpace last year’s level. In addition, approximately $25.6 billion in announced deals were pending as of the end of the third quarter 2010.
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1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 YTD 10
Billions
Commitments to U.S. Private Equity Partnerships
Buyouts Venture Mezzanine Secondary and Other Fund‐of‐funds
Source: Private Equity Analyst through September 2010
Purchase price multiples (as represented by total enterprise value divided by earnings before interest, taxes, depreciation and amortization) declined from their 2007 peak but have already rebounded to 8.5x as of the third quarter, up from 7.7x in 2009. The current 8.5x purchase price multiple is above the ten-year average for the industry (7.8x). The initial decline in purchase price multiples can be attributed to valuations under pressure and the lack of available financing. However, many industry participants believe that the recent increase in purchase price multiple has been impacted by the significant amount of “dry powder” remaining in the industry combined with the approaching investment period termination has resulted in general partners feeling pressured to deploy capital. In addition, investors should be monitoring transaction activity between private equity firms. Historically, transactions between private equity firms have been reasonable under the circumstances, such as a smaller firm selling to a larger firm or a transaction where the purchasing firm has a particular area of expertise that is believed to position them to continue to add value. However, given the challenging environment, investors should be alert for transactions between private equity firms that may be completed to simply create liquidity and/or deploy capital. According to “Buyouts,” sponsor-to- sponsor transactions (also known as secondary buyouts) represented 9% of all control-stake transactions (based on the number of transactions) in the second quarter of 2010, down from 14% in the second quarter and 10% in the first quarter.
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Billions ($)
Disclosed U.S. Quarterly LBO Deal Volume*
* total deal size (both equity and debt Source: Thomson Reuters Buyouts
6.7x 6.0x 6.6x 7.1x 7.3x
8.4x 8.4x
9.7x 9.1x
7.7x 8.5x
0.0 2.0 4.0 6.0 8.0 10.0 12.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Q3 10
TEV/EBITDA
Purchase Price Multiples
Source: S&P LCD
Portfolio companies acquired in the 2001 to 2004 time frame were purchased in an environment where the industry purchase price multiple was below the current average (i.e. a lower valuation environment). Conversely, the 2005 to 2008 time frame suggests a higher valuation environment for investment transactions. The influence of industry valuations at purchase is not absolute, but is commonly a material component of performance.
The average debt multiple has exhibited a similar pattern as the purchase price multiple, declining from a peak in 2007 to a recent low in 2009 and a rebound in the first nine months of 2010. The decline in average debt multiple from its peak resulted in an increase in the average equity component of a transaction to 42% as of the third quarter 2010 up from 31% in 2007.
These dynamics have caused the more conservative capital structures for transactions completed in the current environment. However, the equity component of a transaction has already declined from an average of 46% in 2009.
Venture capital investment activity increased throughout 2009 and 2010 and is on track to exceed last year’s levels. Approximately $16.0 billion was invested across 2,371 transactions in the first nine months of 2010, up from $12.7 billion invested across 2,004 transactions in the first nine months of 2009. For the full 2009 calendar year, $17.9 billion was invested across more than 2,800 companies. In comparison, approximately $28.0 billion was invested across more than 3,900 companies during 2008 and 4,000 companies attracted $30.5 billion of venture capital investment in 2007.
4.1x
3.5x 3.9x 4.1x 4.6x 5.0x 5.1x 6.0x
4.8x 3.7x
4.5x
0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Q3 10
Debt/EBITDA
Average Debt Multiples
Source: S&P LCD
$0
$1
$2
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$9
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Billions
Quarterly U.S. Venture Capital Deal Volume*
Source: Thomson Reuters
* only includes equity portion of deal value
Exit opportunities for venture-backed companies are showing signs of increased activity, but the markets have yet to exhibit consistent exits. In the first nine months of 2010, 327 venture- backed M&A transactions representing $12.4 billion in value were completed, well above the
$4.6 billion in value transacted in the first nine months of 2009 ($13.6 billion transacted during the 2009 calendar year). However, quarter-over-quarter activity has been volatile. Venture- backed M&A activity exhibited a spike in the fourth quarter of 2009, totaling $8.9 billion transacted across 74 deals, but was not able to keep that quarterly pace in the first three quarters of 2010.
Eleven venture backed companies went public in 2009, raising $1.6 billion. IPO activity has increased during the first nine months of 2010 as 31 venture-backed companies went public, raising $2.7 billion.
80 82 101
86 107107
97
65 88 90
108 94
109
8589
65 65 656974 121
98 108
0 20 40 60 80 100 120 140
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$12
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# of transactions
Billions
Quarterly U.S. Venture Capital M&A Activity
Source: Thomson Reuters
7 8 17
13 10
17
7 19
17 25
12 25
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0 5 10 15 20 25 30
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# of transactions
Billions
Quarterly U.S. Venture Capital IPO Activity
Source: Thomson Reuters
According to the Thomson Reuters’ U.S. Private Equity Performance Index as of 6/30/2010, recent private equity results remained strong with a one-year return of 16.0%. However, the latest three-year return is slightly negative with a minus (0.4%) return. The five-year and ten- year results are also disappointing on an absolute return basis, but the 20-year performance is more in-line with long-term expectations.
Source: Thompson Reuters
On an opportunity cost basis, private market returns have outperformed versus the broad public markets (as represented by the Russell 3000 for domestic markets and the MSCI EAFE for international markets) over all periods evaluated. Private market returns trailed smaller domestic equity stocks (as represented by the Russell 2000 Index) over the latest year and three-year periods. In aggregate, private market results have performed as expected, providing excess performance over the long-term in addition to providing diversification benefits.
Source: MPI Stylus, Thomson Reuters
Thomson Reuters' U.S. Private Equity Performance Index as of June 30, 2010
Fund Type 1 Yr 3 Yr 5 Yr 10 Yr 20 Yr
Early Stage VC 1.8% ‐2.6% 0.8% ‐4.5% 24.1%
Balanced VC 8.6% ‐0.9% 6.4% 0.3% 14.8%
Later Stage VC 20.4% 4.2% 8.5% 0.8% 17.0%
All Venture 8.4% ‐0.7% 4.4% ‐1.6% 18.4%
Small Buyouts 1.4% ‐1.4% 2.6% 3.3% 11.5%
Med. Buyouts 15.1% 1.2% 7.5% 2.7% 11.7%
Large Buyouts 20.5% 3.0% 6.8% 4.0% 12.4%
Mega Buyouts 17.2% ‐1.9% 4.0% 3.8% 6.9%
All Buyouts 17.3% ‐1.1% 4.5% 3.8% 8.7%
Generalist 24.1% 6.1% 13.6% 8.9% 9.1%
All Private Equity 16.0% ‐0.4% 5.2% 2.8% 11.4%
Public Market Performance Comparision, as of June 30, 2010
Fund Type 1 Yr 3 Yr 5 Yr 10 Yr 20 Yr
All Private Equity 16.0% ‐0.4% 5.2% 2.8% 11.4%
Russell 3000 15.7% ‐9.5% ‐0.5% ‐0.9% 7.9%
Russell 2000 21.5% ‐8.6% 0.4% 3.0% 8.2%
MSCI EAFE 6.4% ‐12.9% 1.4% 0.6% 7.1%
BC Aggregate 9.5% 7.5% 5.5% 6.5% 7.1%
Evolution and Current Status of the Private Equity Program
Program Evolution
After adopting the Private Equity Investment Policy in December of 2005, the Plan focused on selecting appropriate investments for inclusion in the portfolio. As discussed in the investment policy, private equity investments are expected to achieve attractive risk-adjusted returns and, by definition, possess a higher degree of risk with a higher return potential than traditional investments. Fund-of-fund vehicles, investing in both the primary market and secondary market, shall be emphasized to create a diversified private equity portfolio.
Initial commitments to the Program focused on secondary market fund-of-funds, given their unique characteristics. Secondary market fund-of-funds purchase established private equity interests from existing limited partners providing several attractive benefits to investors making their initial commitments to the asset class. Benefits include: i) capital is rapidly deployed to a diversified portfolio of assets (including across prior vintage years); ii) positions are commonly purchased at a discount to net asset value; iii) risks associated with “blind pools” (a risk that is typically present in primary fund-of-funds as commitments have yet to be made to specific partnerships) is reduced as capital has already been invested; and iv) return of capital to investors is significantly accelerated as investments are made in mature holdings that are closer to achieving liquidity. Additional commitments have been made to primary market fund-of-funds targeting “special situations” (i.e. distressed strategies) and venture capital. The Program’s first commitment to a direct partnership investment (Oaktree Principal Fund V) began investing capital during the first quarter of 2009.
The chart below highlights the evolution of the Program in terms of quarterly cash flows and since inception IRRs at each quarter end. The Program is in the funding/portfolio construction stage as contributions (blue bars) represent the largest proportion of cash flows. The significant contribution amounts in the fourth quarter of 2006 and the first quarter of 2008 represent the initial funding of two opportunities that were materially invested when WPERP made its initial capital contributions, resulting in a relatively large cash flow. The initial distributions (green bars) beginning in 2007 represent the benefits of secondary market fund-of-funds that begin returning capital early in the partnership life cycle. These initial distributions, combined with a high valuation environment, produced strong IRRs for the Program early in its construction. The decline in the IRR in 2008 highlights the material valuation declines due to the economic crisis and the initial funding of the Program’s two primary market fund-of-funds. Investment activity and distribution activity declined throughout 2009. Distribution activity has actually increased in 2010, as $2.9 million in distributions were returned to the Program during the first six months.
The net since inception IRR increased throughout 2009 and into 2010 as valuations have improved.
Current Status
As of 6/30/2010, the Program had committed $176.0 million across two primary market fund-of- funds, four secondary market fund-of-funds, and one direct partnership. The Fund’s secondary funds-of-funds, which began investing in 2006, have drawn down $53.7 million in capital, distributed $15.4 million back to the Program, and had a reported value of $38.6 million. The near-term distributions back to the Program are representative of secondary market fund-of- funds that invest in mature private equity partnerships that are near the liquidity phase of their partnership life cycle. The Fund’s primary funds-of-funds began drawing capital in 2008 and have called $24.3 million in capital and had a reported value of $24.6 million. The direct partnership made its initial capital call during the first quarter of 2009, drawing down $2.8 million to date and had a reported value of $3.0 million as of June 30, 2010 while also returning $0.1 million of capital.
Fund Portfolio Summary as of June 30, 2010
Secondary Fund-of-Funds
Primary Fund-of-Funds
Direct
Partnerships Total Portfolio
# of Partnerships 4 2 1 7
Capital Committed $120.0 M $40.0 M $16.0 M $176.0 M
Capital Contributed $53.7 M $24.3 M $2.8 M $80.8 M
Unfunded Commitment $66.3 M $15.7 M $13.2 M $95.2 M
Capital Distributed $15.4 M $0.0 M $0.1 M $15.5 M
Reported Value $38.6 M $24.6 M $3.0 M $66.2 M
Investment Multiple 1.0x 1.0x 1.1x 1.0x
-25.0%
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
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IRR
Millions
Program Quarterly Cash Flows and IRR
Contributions Distributions IRR
Investment Performance
This section examines the Program’s performance results from a variety of viewpoints, including: since inception internal rates of return, horizon IRR, contributions vs. reported values plus distributions, and current payback.
Performance: Since Inception IRR
As of 6/30/2010, the Program’s since inception net IRR was 0.5% representing an improvement from the minus (0.1%) as of the first quarter 2010 and the minus (17.0%) net IRR reported as of year-end 2008. Initially committing to secondary market fund-of-funds that invest in mature holdings that can return capital relatively rapidly initially minimized the “j-curve”, but the funding of the primary market fund-of-funds in 2008 combined with valuation declines at year-end 2008 has resulted in negative since inception performance results. Program results improved throughout 2009 and continue to exhibit an upward trend in the first half of 2010.
The chart above represents the total Program’s net IRR at multiple points in time since the Program’s inception (June of 2006). The Program’s absolute return performance objective over the long-term is a 15% net of fees internal rate of return, since inception.
Performance: Horizon IRR
To compare performance across shorter time periods relative to policy benchmarks, PCA calculated customized “cash flow adjusted” benchmark returns. The actual cash flows (contributions and distributions) of WPERP’s private equity portfolio are assumed to be invested in the policy benchmarks to arrive at a comparative performance measurement. As highlighted in the table below, the WPERP portfolio has underperformed the public market proxy (Russell 3000 Index plus 300 basis points) over the latest one-year and two-year periods, driven by the strong rebound in the public markets in late 2009 and early 2010. The Program has outperformed over the longer three-year and since inception periods. The Portfolio outperformed the Cambridge Custom Benchmark (the Cambridge Associates PE/VC Blended Index at an 85%/15% mix) over the latest two-year period while underperforming over the one- year period, three-year period and since inception.
Cash Flow Adjusted Benchmark Comparison: periods ending 6/30/10
One-Year Two-Year Three-Year Since Inception*
WPERP Portfolio 15.5% (0.5%) (0.8%) 0.5%
Russell 3000 Index + 300 bps 19.0% (0.1%) (2.2%) (0.6%) Cambridge Custom Benchmark** 17.2% (0.9%) 0.2% 2.4%
*initial capital call made in June of 2006
**The Cambridge Custom Benchmark began in Q4 2006 with the Russell 3000 + 300 bps benchmark utilized for Q3 2006.
8.6%
21.4%
-17.0%
-0.5%
0.1% 0.5%
-30%
-20%
-10%
0%
10%
20%
30%
as of 12/31/06
as of 12/31/07
as of 12/31/08
as of 12/31/09
as of Q1 2010
as of Q2 2010 Private Equity Program Performance
Net Since Inception IRR Long-Term Target Range
Contributions vs. Reported Value plus Distributions
Another way to view a program’s progress is to examine the contributions, distributions, and reported value of a portfolio. Given the nature of private market investing, it is not uncommon for contributions to exceed distributions and reported value as investments are initially held at cost and management fees are assessed early in the partnership. The Program’s initial commitments had provided an attractive start as distributions combined with reported value of investments exceeded contributions through the calendar year 2007. However, funding of the primary market funds-of-funds and valuation declines at year-end 2008 resulted in an investment multiple below 1.0x. As of 6/30/2010, the Program had an investment multiple of 1.0x. The following chart portrays the historical trend of these since-inception components.
Current Payback
An additional metric that PCA examines as a measure of private market progress is the payback. This measure highlights the amount of distributions made to the limited partners as a function of contributions.
This measure is relatively high (at 19.2%) given the portfolio’s immaturity, but this is representative of secondary market fund-of-funds that return distributions back to investors more rapidly than traditional private equity partnerships. However, new commitments that are expected to have longer paybacks will decrease the payback as capital is drawn down. The decline of exit activity across the private equity industry in 2009 slowed distributions from the Program’s secondary market fund-of-funds, reducing the payback measure but distribution activity has increased in the first half of 2010.
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Program Investment Multiple
Contributions Program Reported Value Distributions
Millions
0.0% 1.5%
18.3% 16.6% 16.2% 18.3% 19.2%
0%
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60%
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120%
Q2 06 Q4 06 Q4 07 Q4 08 Q4 09 Q1 10 Q2 10
Payback
Total Portfolio Payback
Return of Contributed Capital (100% payback)
Performance Summary
The Program’s initial commitments to secondary market fund-of-funds performed well and had avoided the “j-curve.” However, the funding of the primary market fund-of-funds in 2008 combined with valuation declines at year-end 2008 resulted in negative since inception performance results. Performance improved over the twelve months of 2009 and the first six months of 2010 and is currently at 0.5%, as represented by the net since inception IRR.
Portfolio Structure
This section examines the Program’s portfolio structure and diversification from a variety of viewpoints, including: number of holdings, investment structures, sector exposures, and vintage year diversification.
Holdings Diversification
The Plan’s initial commitments to secondary market fund-of-funds are providing “core”
exposures as they are highly diversified across partnerships and number of underlying holdings.
As of 6/30/2010, LEP XIII held interests in 136 partnerships and 1,023 underlying portfolio companies. LCP VI held interests in 223 partnerships representing more than 2,500 underlying portfolio companies. LEP XIV, which had called 18% of committed capital as of quarter-end, held interests in 60 partnerships and 819 underlying portfolio companies. HRJ SOF II is diversified across nine special situation partnerships while Fisher Lynch Venture Fund II has committed to 15 venture capital partnerships to date. LCP VII, which made its initial capital call in December of 2009 and has drawn only 1.5% of commitments to date, has exposure to 155 partnerships to date.
Investment Structure Exposures
As of 6/30/2010, the Fund’s portfolio is invested across primary market fund-of-funds, secondary market fund-of-funds, and one direct partnership. Secondary market fund-of-funds represent the largest proportion of reported value at 58%, followed by primary market fund-of- funds at 37% while the direct partnership represents 5%.
Direct Partnerships
5%
Primary fund‐
of‐funds 37%
Secondary fund‐of‐funds
58%
Investment Structure Diversification:
market value
Including unfunded commitments as of June 30 2010, the total exposure (market value plus unfunded commitments) changed slightly. Secondary market fund-of-funds exposure increased to 65%, the direct exposure increased to 10%, while primary market fund-of-funds decreased to 25% of the total exposure.
Segment Exposures
Based on reported value, the Plan’s portfolio is diversified across buyout (44%), special situations (34%), and venture capital (22%).
These exposures are an aggregation of the underlying partnerships within the secondary market fund-of-funds as defined by each of the firms, while HRJ SOF II and Oaktree Principal Fund V are entirely categorized as special situations (i.e., distressed) and Fisher Lynch Venture Fund II as venture capital. Sector diversification is expected to be maintained as the Plan’s current partnerships continue to invest capital and additional primary market fund-of-funds are added to the Program and begin funding.
Direct Partnerships
10%
Primary fund‐
of‐funds 25%
Secondary fund‐of‐funds
65%
Investment Structure Diversification:
total exposure
Buyout 44%
Special Situations
34%
Venture 22%
Sector Diversification: market value
Geographic Diversification
Based on reported value, the Plan’s portfolio is diversified across geographies, including North America (77%), Europe (14%), “Rest of World” (ROW) at 1%, Asia (3%) with 5% “Not Classified”.
The geographic classification is primarily based on the location of the underlying partnership and therefore the exposure to North America is may be somewhat overstated. For example, a fund may be classified as North America since the fund is located in the U.S. and emphasizes U.S. transactions, but may also have some transactions outside of the U.S.
Vintage Year Diversification
Due to the Plan’s initial commitments to secondary funds, the Program is diversified across vintage years with meaningful exposures beginning in the 2000 vintage year. Going forward, commitments are expected to continue to be diversified across vintage years to gain exposure to investments made at varying points of an economic cycle.
However in some secondary transactions where new investment vehicles are created, a specific vintage year (i.e. 2007) is applied even though the underlying partnerships are actually diversified across a broader spectrum of vintage years. This, in addition to the fact that all but one of HRJ SOF II’s partnerships have a 2007 vintage year, primarily accounts for the significant exposures to the 2007 vintage year. The Plan’s recent re-up commitments to Landmark Equity Partners and Lexington Capital Partners are expected to provide additional exposure to partnerships emphasizing the vintages in the 2003 to 2006 time period while the commitment to Oaktree Principal Fund V will provide exposure to the 2009 vintage year. As the Program matures and evolves there are expected to be variations in vintage year exposure, but the primary goal is to gain exposure across multiple years and the Program has successfully achieved this diversification to date.
North America 77%
Europe 14%
Asia 1%
ROW 3%
Not Classified 5%
Geographic Diversification: market value
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pre‐99 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
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Vintage Year Diversification
Reported Value
Portfolio Structure Summary
As of June 30, 2010, approximately 46% of the Plan’s committed capital had been invested and the Program has developed a diversified portfolio of underlying private equity investments. The secondary market commitments have provided the desired diversification benefits (including sector, geography, manager, holdings, and vintage year) to date and are expected to continue to provide these diversified exposures as the remaining commitments are drawn down and invested. These positions represent attractive core holdings that should allow the Plan to opportunistically commit capital to additional segments.
Partnership Summaries
The Program’s underlying partnerships are at various stages of their respective investment cycles and longer-term results are expected to be impacted by varying factors. The following table and discussion is intended to provide additional insights into the progress and longer-term outlook for each of the underlying partnerships.
Partnership Status Update
Partnership/
Vintage
Sector/
Type Commitment % Invested/
Returned
Investment
Multiple Progress Note
LCP VI / 2006
Diversified/
Secondary fund-of-funds
$30 M 83%/26% 1.0x Significantly invested. Long-term results will be driven by the return of exit opportunities in the marketplace and the associated valuations achieved. Distribution activity has increased in 2010.
LEP XIII / 2006
Diversified/
Secondary fund-of-funds
$30 M 87%/35% 1.0x Significantly invested. Long-term results will be driven by the return of exit opportunities in the marketplace and the associated valuations achieved. Distribution activity has increased in 2010.
SOF II / 2008
Distressed/
Primary fund- of-funds
$20 M 93%/0% 1.0x Significantly invested. Valuations have rebounded from declines experienced in the economic downturn. Long-term returns to be driven by managers’ ability to implement their respective distressed/restructuring investment strategies.
FL II / 2008
Venture/
Primary fund- of-funds
$20 M 28%/0% 0.9x Early in the investment cycle. Capital has been committed to underlying partnerships that will draw down capital over multiple years. An extended “j-curve” is expected due to the focus on venture capital partnerships that invest in less mature companies. However, capital is being deployed in an attractive (i.e. low) valuation environment.
LEP XIV / 2008
Diversified/
Secondary fund-of-funds
$30 M 8%/0% 1.1x Early in the investment cycle. Transaction activity was slow in 2009 as buyer/seller pricing was out of equilibrium. Secondary market activity has increased in 2010 as pricing has come more into equilibrium with an increase in bid pricing.
Partnership/
Vintage
Sector/
Type Commitment % Invested/
Returned
Investment
Multiple Progress Note
OPF V / 2009
Distressed/
Direct
$16 M 18%/5% 1.1x Early in the investment cycle. The rebound in debt pricing is believed to have slowed investment activity. However, capital is expected to be deployed in an attractive/opportunistic environment.
LCP VII / 2009
Diversified/
Secondary fund-of-funds
$30 M 1%/0% 0.3x Initial capital call made in December of 2009, primarily for fees and expenses. Very early in the investment cycle. Transaction activity was slow in 2009 as buyer/seller pricing was out of equilibrium. Secondary market activity has increased in 2010 as pricing has come more into equilibrium with an increase in bid pricing.
Lexington Capital Partners VI, L.P. (LCP VI)
LCP VI is a secondary market fund-of-funds that is a highly diversified portfolio of mature private equity holdings. The delay of exit activity in 2009, combined with prior valuation declines, dampened performance results from previous highs. Longer-term results will be impacted by the timing of exits and the valuation at exit. Given the highly diversified nature of the portfolio, ultimate results will be significantly impacted by the overall recovery of the private equity markets.
Landmark Equity Partners XIII, L.P. (LEP XIII)
LEP XIII is a secondary market fund-of-funds that is a highly diversified portfolio of mature private equity holdings. The delay of exit activity in 2009, combined with prior valuation declines, dampened performance results from previous highs. Longer-term results will be impacted by the timing of exits and the valuation at exit. Given the highly diversified nature of the portfolio, ultimate results will be significantly impacted by the overall recovery of the private equity markets.
HRJ Capital Special Opportunities II (U.S.), L.P. (SOF II)
SOF II is a primary market fund-of-funds focused on special situation (i.e. distressed strategies).
SOF II’s investment strategy is opportunistic given the current economic climate, but commitments were made prior to the economic downturn and capital was deployed in a higher valuation environment. SOF II experienced material unrealized declines in late 2008, but has rebounded through 2009 and into 2010. Long-term results of SOF II will be significantly impacted by the underlying partnerships ability to manage their investments through this difficult environment. The strategy and focus of the underlying investment strategies are well positioned to attractively manage the existing portfolio of assets.
HRJ Capital implemented an “over-commitment” strategy in the construction of its fund-of-funds and became overextended in 2008 with commitments to general partners significantly outweighing commitments from limited partners, as the fund raising environment became very difficult. This led the partners to seek additional capital sources to resolve the situation. On July 15, 2009, HRJ Capital sold specific assets of HRJ Capital to Capital Dynamics, a private equity manager headquartered in Switzerland. Capital Dynamics has taken over the management of SOF II. CD HRJ SO II GP L.P is the new General Partner post closing and an over-commitment status remains with SOF II. The General Partner continues to explore options to resolve/minimize the over-commitment status, such as secondary market sales, additional limited partner commitments, and other debt facilities after negotiations to establish a debt facility failed.
Fisher Lynch Venture Fund II (FL II)
FL II is a primary market fund-of-funds focused on the venture capital sector that has committed capital to 15 underlying partnerships. FL II is early in the fund’s life cycle and is investing capital in an attractive valuation environment and is expected to benefit from an economic recovery over the longer-term. Given the nature of venture capital investments that target immature portfolio companies, particularly through a fund-of-funds environment, FL II is expected to exhibit results in the “j-curve” (i.e. negative since inception IRR) for an extended period of time.
Landmark Equity Partners XIV, L.P. (LEP XIV)
LEP XIV is a secondary market fund-of-funds that began investing capital in 2008. Investment activity was slow in 2009 as buyer/seller pricing was out of equilibrium. LEP XIV is early in its investment cycle and is expected to be investing capital in an attractive environment for secondary market transactions, enhancing the prospects for longer-term results.
Oaktree Principal Fund V (OPF V)
OPF V is a direct partnership implementing a distressed debt-for-control investment strategy.
The Fund began investment activities in early 2009 and is expected to benefit from an uncertain economic environment.
Lexington Capital Partners VII, L.P. (LCP VII)
LCP VII is a secondary market fund-of-funds that made its initial capital call in December of 2009 (primarily for fees and expenses). Since LCP VII is early in its investment cycle, it is expected to be investing capital in an attractive environment for secondary market transactions, enhancing the prospects for longer-term results. Investment activity has materially increased subsequent to mid-year 2010 as LCP VIII has since drawn down an additional 21% of committed capital.
Summary
As of 6/30/2010, seven commitments totaling $176 million had been made, resulting in $80.3 million in contributed capital, $15.5 million distributed back to the Plan, and $66.2 million in reported value. Overall, the Program has generated a net since inception IRR of 0.5% as of June 30, 2010. Approximately 46% of the Program’s committed capital has been called down as of the end of the second quarter 2010. The Program’s reported value ($66.2 million) plus unfunded commitments ($95.2 million) represents an approximate allocation of 2.6% of the total Plan as of 6/30/2010. The Program’s emphasis on fund-of-funds, particularly secondary market fund-of-funds, has resulted in the formation of a highly diversified portfolio across investment strategy, manager, and vintage year.
Date of Total Actual Total Rpt. Value
As of: Investment Initial Age Capital Contribution Percent Remaining Distribution Reported Plus Net
6/30/2010 Group Focus Investment (Years) Committed to Date Invested Contribution to Date Value Rem. Contr. Multiple IRR
Investments
Lexington Capital Partners VI Secondary Diversified Jun-06 4.0 30,000,000 24,824,282 82.7% 5,175,718 6,420,940 18,210,484 23,386,202 1.0x -0.4%
Landmark Equity Partners XIII Secondary Diversified Nov-06 3.6 30,000,000 25,994,053 86.6% 4,005,947 8,969,920 17,538,888 21,544,835 1.0x 0.9%
HRJ Capital Special Opportunities II Primary Distressed Mar-08 2.3 20,000,000 18,700,000 93.5% 1,300,000 0 19,439,205 20,739,205 1.0x 1.5%
Fisher Lynch Venture Fund II Primary Venture Capital May-08 2.2 20,000,000 5,590,000 28.0% 14,410,000 0 5,122,700 19,532,700 0.9x -8.8%
Landmark Equity Partners XIV Secondary Diversified Sep-08 1.8 30,000,000 2,490,000 8.3% 27,510,000 0 2,745,315 30,255,315 1.1x 6.7%
Oaktree Principal Fund V Direct Distressed Debt Feb-09 1.3 16,000,000 2,800,000 17.5% 13,200,000 139,397 3,033,538 16,233,538 1.1x 12.1%
Lexington Capital Partners VII Secondary Diversified Dec-09 0.6 30,000,000 440,613 1.5% 29,559,387 - 138,767 29,698,154 0.3x NM
Established Portfolio* 3.8 60,000,000 50,818,335 82.7% 9,181,665 15,390,860 35,749,372 44,931,037 1.0x 0.3%
Total Portfolio 2.3 176,000,000 80,838,948 45.9% 95,161,052 15,530,257 66,228,897 161,389,949 1.0x 0.5%
* over three years old
Alternative Inv. subtotals:
Primary Fund of Funds 40,000,000 24,290,000 60.7% 15,710,000 0 24,561,905 40,271,905 1.0x Secondary Fund of Funds 120,000,000 53,748,948 44.8% 66,251,052 15,390,860 38,633,454 104,884,506 1.0x Directs 16,000,000 2,800,000 17.5% 13,200,000 139,397 3,033,538 16,233,538 1.1x
% in Primary Fund of Funds 23% 30% 17% 0% 37% 25%
% in Secondary Fund of Fundsy 68% 66% 70% 99% 58% 65%
% in Directs 9% 3% 14% 1% 5% 10%
% in Private Equity 2.8% 1.3% 1.5% 1.1% 2.6%
Total Fund Value: $6,230,288,745 Long-Term Target 5.0% 5.0% 5.0% 5.0% 5.0%
difference in % -2.2% -3.7% -3.5% -3.9% -2.4%
difference in $ (135,514,437) (230,675,489) (216,353,385) (245,285,540) (150,124,488)
sciences companies. The targeted venture funds are based, chiefly, in the U.S. The Fund targets outstanding returns by adhering to the following objectives: investing with the leading private equity venture capital firms that have demonstrated historically successful investment performances, judicious diversification of the Fund’s portfolio, and by continuing the use of a rigorous investment process.
Investment Review Portfolio Profile
Reported Value $ 5,122,700 # of partnerships: 15
Distributions $ 0
Top 10 Portfolio Investments Vintage Focus
Amount Contributed $ 5,590,000
Original commitment $ 20,000,000 Austin Ventures X, LP 2008 Venture Capital
Remaining to be invested $ 14,410,000 Accel Growth Fund, LP 2008 Venture Capital
Age of fund (in years) 2.2 Lightspeed Venture Partners VIII, LP 2008 Venture Capital
Internal rate of return to date -8.8% Redpoint Ventures III, LP 2006 Venture Capital
Total Value Multiple 0.9X U.S. Venture Partners X, LP 2008 Venture Capital
Percent of capital returned 0% Kleiner Perkins Caufield & Byers XIII 2008 Venture Capital
Time to full payback (in years) no distribs. made Khosla Ventures III 2009 Venture Capital
Versant Venture Capital IV, LP 2008 Venture Capital
Fund Profile New Enterprise Associates 13, LP 2008 Venture Capital
WPERP Initial Investment May-08 Kleiner Perkins Caufield & Byers XII 2006 Venture Capital
Target termination date May-20
Target termination date May-20
General Partner Recent Activity:
Fisher Lynch GP II, LP Called $3.2 million in capital from investors in the second quarter of 2010
Investment strategy Primary (Venture)
Market Value of Partners Capital $ 21,056,029 Partners Capital in Cash $ 776,302 Total capital contributed $ 22,874,082 Total capital commitment target $ 125,000,000 General Partner's contribution (% tot.) 1.0%
WPERP % ownership 16.0%
Portfolio Cash Flows General Partner Compensation
Annual Mgmt. Fee:
1% of aggregate commitments during the investment period thereafter reduced at a rate of 10% per year
Distribution priority:
100% to LPs until return of contributed capital plus 8% preferred return 5% carried interest allocation after achieving 8% IRR
10% carried interest allocation after achieving 20% IRR
‐ 5,000,000 10,000,000 15,000,000 20,000,000 25,000,000 30,000,000
Contributions Fair Value Distributions
as well as having the expertise to pursue more traditional buyout related private equity transactions during more stable periods or periods of growth. These transactions commonly include turnaround-oriented transactions and distressed investments.
Investment Review Portfolio Profile
Reported Value $ 19,439,205 # of partnerships: 9
Distributions $ 0
Top 10 Portfolio Investments Vintage Focus
Amount Contributed $ 18,700,000
Original commitment $ 20,000,000 Avenue Special Situations Fund V, LP 2007 Non-Control
Remaining to be invested $ 1,300,000 Wayzata Opportunities Fund II, LP 2007 Control/Opportunistic
Age of fund (in years) 2.2 Wexford Partners 11, LP 2007 Control/Hard Assets
Internal rate of return to date 1.5% OCM Opportunities Fund VII, LP 2007 Non-Control
Total Value Multiple 1.0X Fortress V, LP 2007 Control/Hard Assets
Percent of capital returned 0% Sun Capital Partners V, LP 2007 Control
Time to full payback (in years) no distribs. made OCM Opportunities Fund VIIb, LP 2007 Non-Control H.I.G Bayside Debt & LBO Fund II 2008 Control
Fund Profile Fortress Co-Investment, LP 2007 Control/Hard Assets
WPERP Initial Investment Mar-08
Target termination date Dec-19
Target termination date Dec-19
General Partner Recent Activity:
CDHRJ SO II GP, L.P. The GP continues explore options to cover any shortfall between capital sources
Investment strategy Primary (distressed) and capital needs as an overcommitment status remains. Negotiations to establishe a debt Market Value of Partners Capital $ 146,362,879 facility were ceased after failing to arrive at acceptable terms combined with the increasing Partners Capital in Cash $ 11,047,702 concern of failing to close which would have resulted in a steep breakup fee.
Total capital contributed $ 141,701,572 Total capital commitments $ 153,976,916 General Partner's contribution (% tot.) 1.0%
WPERP % ownership 13.0%
Portfolio Cash Flows General Partner Compensation
Annual Mgmt. Fee:
0.9% of aggregate commitments
40% of management fees will be deferred during "over-commitment" status Distribution priority:
Distributions can be recycled while an over-commitment status remains.
Then, 100% to LPs. After return of contributions and a 10% preferred return, 100% to GP "catch-up" at 5%. Thereafter, 95% to LPs and 5% to GP
‐ 5,000,000 10,000,000 15,000,000 20,000,000 25,000,000 30,000,000
Contributions Fair Value Distributions
