3q09 Nav Report And Outlook 330pm 10-22-09
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GLOBAL PRIVATE MARKETS RESEARCH
ASSET VALUATION REVIEW Historical Enterprise Value to EBITDA Multiples for Information Technology Companies1 EV / EBITDA Multiple
As of Date 12/31/2005 12/31/2006 12/31/2007 12/31/2008 6/30/2009
10.90x 11.10x 10.30x 4.93x 7.32x
Source: Capital IQ, Bloomberg
Historical Enterprise Value to EBITDA Multiples for Industrial Companies5
As of Date
EV / EBITDA Multiple
12/31/2005 12/31/2006 12/31/2007 12/31/2008 6/30/2009
9.75x 9.57x 9.69x 5.23x 6.54x
Source: Capital IQ, Bloomberg
3Q2009 Net Asset Valuation Report and Outlook Venture Funds May Be Significantly Overvalued October 26, 2009 2005-2007 VENTURE FUND NAVs OVERVALUED 40.1%
We estimate that venture funds with 2005-2007 vintages worldwide may have overstated net asset values by approximately 40.1% on average as of June 30, 2009. Our analysis is based on a comparison of the cumulative percentage change in (a) stated net asset values of selected venture funds with 2005-2007 vintages having total capital commitments of approximately $44 billion vs. (b) enterprise value to EBITDA multiples of selected publicly-traded information technology companies having a total market capitalization of approximately $250 billion for the period December 31, 2005 to June 30, 2009. In summary, the venture funds wrote up net asset values approximately 7.28% during the period, while the information technology companies’ enterprise value to EBITDA multiples contracted approximately 32.84%. (Please see Table 1). 2005-2007 BUYOUT FUND NAVs REASONABLY VALUED
If you have any questions regarding the matters discussed in this report, please contact your relationship manager at NYPPEX, or send an email to [email protected]. *
*
*
*
This report is provided by NYPPEX, LLC for research subscribers. It is for informational purposes only and notwww.nyppex.com intended to be construed as investment, legal or tax advice.
We estimate that buyout funds with 2005-2007 vintages worldwide have nominally overstated net asset values by approximately 2.50% on average as of June 30, 2009. Our analysis is based on a comparison of the cumulative percentage change in (a) stated net asset values of selected buyout funds with 2005-2007 vintages having total capital commitments of approximately $318 billion vs. (b) enterprise value to EBITDA multiples of selected publicly-traded industrial companies having a total market capitalization of approximately $449 billion for the period December 31, 2005 to June 30, 2009. In summary, the buyout funds wrote down net asset values approximately 30.35% during the period, while the industrial companies’ enterprise value to EBITDA multiples contracted approximately 32.92%. (Please see Table 2). 1
3Q2009 NET ASSET VALUATION REPORT AND OUTLOOK SECONDARY BIDS MAY DECLINE 23% FOR VENTURE FUNDS DUE TO OVERSTATED NAVs
We believe, the median secondary bid for interests in venture funds worldwide may decline as much as 23% to 49.32 in 2010 vs. 64.12 as of September 30, 2009 (expressed as a percentage of net asset value) due to concerns about overstated net asset values, and therefore, the ability to generate exits in the near term. In turn, we expect greater secondary supply. This process may have begun in the 3Q2009 when Stanford University announced secondary offerings in premier venture names such as Sequoia Capital and Kleiner Perkins. As secondary buyers adjust assumptions that net asset values are overstated 40.1% from 10% (our estimate) for venture funds with 2005-2007 vintages, we expect secondary bids to be adjusted lower for the venture fund sector. In general, secondary bids could be recalculated as follows: 64.12 / [1+ (.40 - .10)] = 49.32. Then, (64.12 – 49.32) / 64.12 = 23% lower prices.
SECONDARY BIDS MAY INCREASE 25% FOR BUYOUT FUNDS AS BUYERS ADJUST FOR FAIRLY VALUED NAVs
We believe, the median secondary bid for interests in buyout funds worldwide may increase 25% to 59.47 in 2010 versus 47.58 as of September 30, 2009 (expressed as a percentage of net asset value) due to higher confidence regarding the accuracy of net asset values, and therefore, the ability to generate exits in the near term. This process appears to have begun with the RailAmerica, Inc. IPO from Fortress Investment Group, which priced on October 13, 2009. As secondary buyers adjust assumptions that net asset values are reasonably valued rather than overstated 20% (our estimate) for buyout funds with 2005-2007 vintages, we expect secondary bids to be adjusted higher for the buyout fund sector. In general, secondary bids could be recalculated as follows: 47.58 / (1 - .20) = 59.47. Then, (59.47 – 47.58) / 47.58 = 25% higher prices.
NAVs TO IMPACT EXIT OPPORTUNITIES
In general, we believe venture funds with 2005-2007 vintages will continue to experience difficulty generating exits and distributions. However, the primary reason will increasingly be due to overvalued portfolio companies based on enterprise value to EBITDA multiples, as opposed to weak IPO or M&A market conditions. Of note, in 2008, our selected venture funds with 2005-2007 vintages wrote down asset values only 8.28% on average, while our selected information technology companies’ enterprise value to EBITDA multiples contracted 52.1%. In contrast, buyout funds with 2005-2007 vintages in general responded to public criticism in the 4Q2008 and 1Q2009 regarding overstated net asset values. Today, we believe buyout funds with 2005-2007 vintages are carrying portfolio companies at reasonable valuations based on enterprise value to EBITDA multiples, and are well positioned to generate distributions and exits. Of note, in the first half of 2009, our selected buyout funds with 2005-2007 vintages wrote down asset values by 4.50% on average, despite the fact that our selected industrial companies’ enterprise value to EBITDA multiples expanded 25.05%. There are three instances where our view regarding exits for venture funds with 2005-2007 vintages may not be applicable: 1) a venture-backed portfolio company is not in the information technology sector, which is the benchmark sector utilized for this Report; 2) a venture-backed portfolio company’s valuation at exit is based on a revenue multiple or valuation method other than enterprise value to EBITDA, which is the benchmark valuation methodology utilized for this Report; and 3) a 2006 or 2007 venture fund made new investments at lower enterprise value to EBITDA valuation multiples than the multiples utilized for new investments made in 2005, which was the base year for this Report. CONFIDENTIAL INFORMATION
2
10.90x
11.10x
10.30x
4.93x
7.32x
As of Date
12/31/2005
12/31/2006
12/31/2007
12/31/2008
6/30/2009
672
452
945
1018
1000
+48.48%
-52.14%
-7.21%
+1.83%
N/A
YOY Percentage Change
+5.91%
-8.28%
+10.42%
+0.02%
N/A
Venture Funds Profile As of Date Vintages Total Capital Commitments Number of Funds Regions United States Europe Rest of World
1073
1013
1104
1000
1000
CONFIDENTIAL INFORMATION
Source: NYPPEX, Capital IQ, Bloomberg, Preqin, Venture Economics
-32.84%
-54.77%
-5.50%
+1.83%
N/A
Cumulative Percentage Change
(F)
YOY Percentage Change in NAV4
(E) (D)
NYPPEX Venture Fund Index3
(C)
(B)
NYPPEX IT Sector EV / EBITDA Index2
Information Technology Company Sector Profile As of Date Oct. 12, 2009 Number of Exchanges 37 Total Market Capitalization $250 billion Number of Companies 750 Regions United States 34.09% Europe 15.91% Rest of World 50.00%
IT Sector EV / EBITDA Multiples1
(A)
Venture Funds (G)
+40.13%
+56.07%
+15.95%
-1.81%
N/A
(G-D)
Cumulative Percentage NAV Overvalued (Undervalued)
80.80% 6.11% 13.09%
June 30, 2009 2005 to 2007 $44 billion 98
+7.28%
+1.30%
+10.44%
+0.02%
N/A
Cumulative Percentage Change in NAV
(H)
Historical Enterprise Value to EBITDA Multiples for Selected Information Technology Companies vs. Net Asset Values of Selected 2005-2007 Venture Funds
Information Technology Company Sector
TABLE 1
3
3Q2009 NET ASSET VALUATION REPORT AND OUTLOOK
9.75x
9.57x
9.69x
5.23x
6.54x
As of Date
12/31/2005
12/31/2006
12/31/2007
12/31/2008
6/30/2009
(G)
671
536
994
982
1000
+25.05%
-46.03%
+1.25%
-1.85%
N/A
-4.50%
-40.58%
+12.99%
+8.63%
CONFIDENTIAL INFORMATION
N/A
YOY Percentage Change in NAV4
+2.57%
+19.29%
+23.36%
+10.48%
N/A
(G-D)
63.51% 30.25% 6.26%
June 30, 2009 2005 to 2007 $318 billion 106
-30.35%
-27.07%
+22.74%
+8.63%
N/A
Cumulative Percentage Change in NAV
Buyout Funds Profile As of Date Vintages Total Capital Commitments Number of Funds Regions United States Europe Rest of World
697
729
1227
1086
1000
NYPPEX Buyout Fund Index7
Source: NYPPEX, Capital IQ, Bloomberg, Preqin, Venture Economics
-32.92%
-46.36%
-0.62%
-1.85%
N/A
(D)
Cumulative Percentage Change
(C)
YOY Percentage Change
(H) (F)
Cumulative Percentage NAV Overvalued (Undervalued)
(E)
(B)
NYPPEX Industrial Sector EV / EBITDA Index6
Buyout Funds
Historical Enterprise Value to EBITDA Multiples for Selected Industrial Companies vs. Net Asset Values of Selected 2005-2007 Buyout Funds
Industrial Company Sector Profile As of Date Oct. 12, 2009 Number of Exchanges 56 Total Market Capitalization $449 billion Number of Companies 1,201 Regions United States 26.35% Europe 21.99% Rest of World 51.67%
Industrial Sector EV / EBITDA Multiples5
(A)
Industrial Company Sector
TABLE 2
4
3Q2009 NET ASSET VALUATION REPORT AND OUTLOOK
3Q2009 NET ASSET VALUATION REPORT AND OUTLOOK
TABLE 3
Historical Information Technology Company Sector Enterprise Value to EBITDA Multiples vs. S&P 500 Index Returns Information Technology Company Sector
S&P 500 Index
(A)
(B)
(C)
(E)
(F)
As of Date
IT Sector EV / EBITDA Multiples
YOY Percentage Change
Cumulative Percentage Change
S&P 500 Index
YOY Percentage Change
Cumulative Percentage Change
12/31/2005
10.90x
0.00%
0.00%
1254.42
+0.00%
+0.00%
12/31/2006
11.10x
+1.83%
+1.83%
1418.30
+13.06%
+13.06%
12/31/2007
10.30x
-7.21%
-5.50%
1468.36
+3.53%
+17.05%
12/31/2008
4.93x
-52.14%
-54.77%
903.25
-38.49%
-27.99%
6/30/2009
7.32x
+48.48%
-32.84%
919.32
+1.78%
-26.71%
(D)
Source: NYPPEX, Capital IQ, Bloomberg
TABLE 4
Historical Industrial Company Sector Enterprise Value to EBITDA Multiples vs. S&P 500 Index Returns S&P 500 Index
Industrial Company Sector (A)
(B)
(C)
As of Date
Industrial EV / EBITDA Multiples
YOY Percentage Change
Cumulative Percentage Change
(E)
(F)
S&P 500 Index
YOY Percentage Change
Cumulative Percentage Change
12/31/2005
9.75x
0.00%
0.00%
1254.42
+0.00%
+0.00%
12/31/2006
9.57x
-1.85%
-1.85%
1418.30
+13.06%
+13.06%
12/31/2007
9.69x
+1.25%
-0.62%
1468.36
+3.53%
+17.05%
12/31/2008
5.23x
-46.03%
-46.36%
903.25
-38.49%
-27.99%
6/30/2009
6.54x
+25.05%
-32.92%
919.32
+1.78%
-26.71%
(D)
Source: NYPPEX, Capital IQ, Bloomberg
CONFIDENTIAL INFORMATION
5
1.29x
1.19x
0.49x
0.66x
12/31/2006
12/31/2007
12/31/2008
6/30/2009
498
374
902
977
1000
+33.00%
-58.49%
-7.75%
-2.27%
N/A
YOY Percentage Change
+5.91%
-8.28%
+10.42%
+0.02%
N/A
Venture Funds Profile As of Date Vintages Total Capital Commitments Number of Funds Regions United States Europe Rest of World
1073
1013
1104
1000
1000
CONFIDENTIAL INFORMATION
Source: NYPPEX, Capital IQ, Bloomberg, Preqin, Venture Economics
-50.23%
-62.58%
-9.85%
-2.27%
N/A
Cumulative Percentage Change
(F)
YOY Percentage Change in NAV4
(E) (D)
NYPPEX Venture Fund Index3
(C)
(B)
NYPPEX IT Sector EV / Revenue Index9
Information Technology Company Sector Profile As of Date Oct. 22, 2009 Number of Exchanges 47 Total Market Capitalization $282 billion Number of Companies 1,626 Regions United States 38.00% Europe 21.28% Rest of World 40.72%
1.32x
12/31/2005
As of Date
IT Sector EV / Revenue Multiples8
(A)
Venture Funds (G)
+57.51%
+63.87%
+20.29%
+2.29%
N/A
(G-D)
80.80% 6.11% 13.09%
June 30, 2009 2005 to 2007 $44 billion 98
+7.28%
+1.30%
+10.44%
+0.02%
N/A
Cumulative Percentage Change in NAV
Cumulative Percentage NAV Overvalued (Undervalued)
(H)
Historical Enterprise Value to Revenue Multiples for Selected Information Technology Companies vs. Net Asset Values of Selected 2005-2007 Venture Funds
Information Technology Company Sector
TABLE 5
6
3Q2009 NET ASSET VALUATION REPORT AND OUTLOOK
3Q2009 NET ASSET VALUATION REPORT AND OUTLOOK
Footnotes 1.
2.
3.
4. 5.
6. 7.
8.
9.
Enterprise Value to EBITDA multiples for approximately 750 publicly-traded companies worldwide having a Global Industry Classification Standard Code of “Information Technology” and an aggregate market capitalization of approximately $250 billion as of October 12, 2009 (the “Information Technology Sector”). Source: Capital IQ, Bloomberg. The NYPPEX Information Technology Sector EV/EBITDA Index estimates the cumulative percentage change over time in enterprise value to EBITDA multiples of companies comprising the Information Technology Sector. Source: Capital IQ, Bloomberg. The NYPPEX Venture Fund Index estimates the cumulative percentage change in net asset values stated by selected venture funds worldwide having 2005, 2006 and 2007 vintages and total capital commitments of approximately $44 billion as of June 30, 2009. Source: Preqin, Venture Economics. Percentage change in net asset values were adjusted to offset the effect of capital calls and distributions. During the period, capital calls were deducted and distributions were added to the funds’ ending net asset values. Enterprise Value to EBITDA multiples for approximately 1,201 publicly-traded companies worldwide having a Global Industry Classification Standard Code of “Industrials” and an aggregate market capitalization of approximately $449 billion as of October 12, 2009 (the “Industrial Sector”). Source: Capital IQ, Bloomberg. The NYPPEX Industrial Sector EV/EBITDA Index estimates the cumulative percentage change over time in enterprise value to EBITDA multiples of companies comprising the Industrial Sector. Source: Capital IQ, Bloomberg. The NYPPEX Buyout Fund Index estimates the cumulative percentage change in net asset values stated by selected buyout funds worldwide with 2005, 2006 and 2007 vintages and total capital commitments of approximately $318 billion as of June 30, 2009. Source: Preqin, Venture Economics. Enterprise Value to Revenue multiples for approximately 1,626 publicly-traded companies worldwide having a Global Industry Classification Standard Code of “Information Technology” and an aggregate market capitalization of approximately $282 billion as of October 26, 2009 (the “Information Technology Revenue Sector”). Source: Capital IQ, Bloomberg. The NYPPEX Information Technology Sector EV/Revenue Index estimates the cumulative percentage change over time in enterprise value to revenue multiples of companies comprising the Information Technology Revenue Sector. Source: Capital IQ, Bloomberg.
Methodology for this Report Our quarterly approach to analyzing the reasonableness of net asset values stated by venture and buyout funds is based on comparisons to the cumulative percentage change in enterprise value to EBITDA multiples of selected publicly-traded companies in comparable sectors for a specified period of time. We believe, this approach is appropriate given that enterprise value to EBITDA is the standard valuation approach typically utilized by venture and buyout funds when making new investments in private companies. We believe, S&P 500 Index returns should not be utilized when analyzing the reasonableness of net asset values stated by venture and buyout funds, primarily for two reasons: (a) during periods when S&P 500 Index returns are positive as a result of higher corporate earnings year over year, and price to earnings multiples remain unchanged, one may incorrectly conclude that the net asset values of venture and buyout funds should be written up; and (b) the S&P 500 Index is comprised of companies whose market capitalizations are based typically on earnings multiples, whereas venture and buyout funds estimate fair values of private company holdings based typically on EBITDA multiples, and then make adjustments for the cash balances and long-term debt of such companies. However, for comparative purposes, we have included historical S&P 500 Index returns vs. the percentage changes in enterprise value to EBITDA multiples for the Information Technology Sector and Industrial Sector in this Report. (Please see Tables 3 and 4). Further, we believe, when analyzing the reasonableness of net asset values stated by venture funds, it may be appropriate to also consider a comparison to the cumulative percentage change in enterprise value to revenue multiples of selected publicly-traded information technology companies. To view our analysis utilizing this approach, please see Table 5. CONFIDENTIAL INFORMATION
7
3Q2009 NET ASSET VALUATION REPORT AND OUTLOOK
Important Disclaimer The NYPPEX Buyout Fund Index and the NYPPEX Venture Fund Index were created to provide a general barometer for the level of reasonableness of net asset values stated by venture and buyout funds. However, we recognize that this approach has certain limitations. The methodology used in this Report is not intended to imply that buyout funds only hold portfolio companies in the Industrials sector or that venture funds only hold portfolio companies in the Information Technology sector. We believe, such sectors are merely benchmarks for analyzing the reasonableness of net asset values in general, as stated by venture and buyout funds. Additionally, the results in this Report are not intended to imply that all 2005, 2006 and 2007 buyout funds are reasonably valued or that all 2005, 2006 and 2007 venture funds are overvalued. The information contained herein is intended for the exclusive use of the addressee and is strictly confidential (the "Information"). If you are not the named addressee please notify the sender immediately and delete this e-mail or facsimile. The Information contained herein is illustrative only and is not intended to predict actual results. It is based on certain assumptions and such assumptions may prove to be incorrect. In accordance with FINRA Rule 2711 (a) (9), this report (the “Report”) is a commentary on economic, political and/or market conditions as they relate to the secondary private markets and as such is not considered to be a Research Report. NYPPEX does not serve as a fiduciary to any party. NYPPEX merely matches buy orders and sell orders without regard to either party's investment objectives or risk profile. NYPPEX has made no effort to independently verify any of the information contained herein. Opinions expressed herein are intended solely as general market commentary and do not constitute investment advice or a guarantee of returns. 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8
3Q2009 NET ASSET VALUATION REPORT AND OUTLOOK memorandum or prospectus. We do not offer or give advice to our clients or other broker-dealers as to whether to purchase any particular security. You should disregard any Information that you receive from NYPPEX or through our website, fax, email, or verbally that conflicts with the Information provided in the PPM or prospectus or a subsequently dated supplement to the PPM or prospectus. The PPM or prospectus and any supplement contain the issuer's definitive disclosure of Information related to the offering. NYPPEX, LLC, its subsidiaries and its affiliates, and their respective employees and officers (together as the "NYPPEX", "We" or "Our") hereby expressly disclaims any and all warranties, guaranties, conditions, covenants, and representations relating to this Information, whether express or implied (in law or in fact), oral or written, or from a course of dealing or usage of trade. This Information is being provided with all faults and the entire risk as to satisfactory quality, performance, and accuracy regarding the Information is with you. NYPPEX shall not have any responsibility and/or liability for any loss, cost, claim or damage (including but not limited to direct, indirect, or consequential damages or lost profits) arising out of or otherwise relating to your access to any of this Information, any use thereof or any omission or failure of any of this Information and its content. NYPPEX, its affiliated companies and their respective employees, contractors, and agents may have positions and/or engage in transactions in the security(s) referred to herein during such period while you are evaluating, selling, or buying such security(s); and such positions or transactions may be adverse to your objectives. We may receive compensation from this issuer of the security(s) for serving in the capacity of broker/dealer, advisor, board member, or in other similar positions. Any use, disclosure, or distribution of any part of this Information is a violation of this confidentiality agreement and is strictly prohibited. Your consideration is the right to access this confidential Information to help you achieve your investment objectives. This Information is confidential and copyrighted by NYPPEX, LLC, and may not be copied, distributed, or disclosed to a third party in whole or in part, without NYPPEX's express written consent. Online transmission is not guaranteed to be secure. When securities are offered, it is through NYPPEX, LLC, member FINRA, SIPC, a wholly-owned broker-dealer subsidiary of NYPPEX Holdings, LLC. Private placements may contain a high degree of risk. Copyright © 2009 NYPPEX Holdings, LLC. All rights reserved. Usage will be monitored. For further information, please contact [email protected].
Certifications The members of the NYPPEX research team that have authored this Report (the “Authors”) hereby certify that the views expressed in the report reflect their personal views about the subjects, prices, securities, issuers and markets. The Authors hereby certify that they have not, are not and will not receive, directly or indirectly, compensation in exchange for expressing the specific recommendations or views herein.
# # # # ##
3QNAV152010212009
CONFIDENTIAL INFORMATION
9
GLOBAL PRIVATE MARKETS RESEARCH
ASSET VALUATION REVIEW Historical Enterprise Value to EBITDA Multiples for Information Technology Companies1 EV / EBITDA Multiple
As of Date 12/31/2005 12/31/2006 12/31/2007 12/31/2008 6/30/2009
10.90x 11.10x 10.30x 4.93x 7.32x
Source: Capital IQ, Bloomberg
Historical Enterprise Value to EBITDA Multiples for Industrial Companies5
As of Date
EV / EBITDA Multiple
12/31/2005 12/31/2006 12/31/2007 12/31/2008 6/30/2009
9.75x 9.57x 9.69x 5.23x 6.54x
Source: Capital IQ, Bloomberg
3Q2009 Net Asset Valuation Report and Outlook Venture Funds May Be Significantly Overvalued October 26, 2009 2005-2007 VENTURE FUND NAVs OVERVALUED 40.1%
We estimate that venture funds with 2005-2007 vintages worldwide may have overstated net asset values by approximately 40.1% on average as of June 30, 2009. Our analysis is based on a comparison of the cumulative percentage change in (a) stated net asset values of selected venture funds with 2005-2007 vintages having total capital commitments of approximately $44 billion vs. (b) enterprise value to EBITDA multiples of selected publicly-traded information technology companies having a total market capitalization of approximately $250 billion for the period December 31, 2005 to June 30, 2009. In summary, the venture funds wrote up net asset values approximately 7.28% during the period, while the information technology companies’ enterprise value to EBITDA multiples contracted approximately 32.84%. (Please see Table 1). 2005-2007 BUYOUT FUND NAVs REASONABLY VALUED
If you have any questions regarding the matters discussed in this report, please contact your relationship manager at NYPPEX, or send an email to [email protected]. *
*
*
*
This report is provided by NYPPEX, LLC for research subscribers. It is for informational purposes only and notwww.nyppex.com intended to be construed as investment, legal or tax advice.
We estimate that buyout funds with 2005-2007 vintages worldwide have nominally overstated net asset values by approximately 2.50% on average as of June 30, 2009. Our analysis is based on a comparison of the cumulative percentage change in (a) stated net asset values of selected buyout funds with 2005-2007 vintages having total capital commitments of approximately $318 billion vs. (b) enterprise value to EBITDA multiples of selected publicly-traded industrial companies having a total market capitalization of approximately $449 billion for the period December 31, 2005 to June 30, 2009. In summary, the buyout funds wrote down net asset values approximately 30.35% during the period, while the industrial companies’ enterprise value to EBITDA multiples contracted approximately 32.92%. (Please see Table 2). 1
3Q2009 NET ASSET VALUATION REPORT AND OUTLOOK SECONDARY BIDS MAY DECLINE 23% FOR VENTURE FUNDS DUE TO OVERSTATED NAVs
We believe, the median secondary bid for interests in venture funds worldwide may decline as much as 23% to 49.32 in 2010 vs. 64.12 as of September 30, 2009 (expressed as a percentage of net asset value) due to concerns about overstated net asset values, and therefore, the ability to generate exits in the near term. In turn, we expect greater secondary supply. This process may have begun in the 3Q2009 when Stanford University announced secondary offerings in premier venture names such as Sequoia Capital and Kleiner Perkins. As secondary buyers adjust assumptions that net asset values are overstated 40.1% from 10% (our estimate) for venture funds with 2005-2007 vintages, we expect secondary bids to be adjusted lower for the venture fund sector. In general, secondary bids could be recalculated as follows: 64.12 / [1+ (.40 - .10)] = 49.32. Then, (64.12 – 49.32) / 64.12 = 23% lower prices.
SECONDARY BIDS MAY INCREASE 25% FOR BUYOUT FUNDS AS BUYERS ADJUST FOR FAIRLY VALUED NAVs
We believe, the median secondary bid for interests in buyout funds worldwide may increase 25% to 59.47 in 2010 versus 47.58 as of September 30, 2009 (expressed as a percentage of net asset value) due to higher confidence regarding the accuracy of net asset values, and therefore, the ability to generate exits in the near term. This process appears to have begun with the RailAmerica, Inc. IPO from Fortress Investment Group, which priced on October 13, 2009. As secondary buyers adjust assumptions that net asset values are reasonably valued rather than overstated 20% (our estimate) for buyout funds with 2005-2007 vintages, we expect secondary bids to be adjusted higher for the buyout fund sector. In general, secondary bids could be recalculated as follows: 47.58 / (1 - .20) = 59.47. Then, (59.47 – 47.58) / 47.58 = 25% higher prices.
NAVs TO IMPACT EXIT OPPORTUNITIES
In general, we believe venture funds with 2005-2007 vintages will continue to experience difficulty generating exits and distributions. However, the primary reason will increasingly be due to overvalued portfolio companies based on enterprise value to EBITDA multiples, as opposed to weak IPO or M&A market conditions. Of note, in 2008, our selected venture funds with 2005-2007 vintages wrote down asset values only 8.28% on average, while our selected information technology companies’ enterprise value to EBITDA multiples contracted 52.1%. In contrast, buyout funds with 2005-2007 vintages in general responded to public criticism in the 4Q2008 and 1Q2009 regarding overstated net asset values. Today, we believe buyout funds with 2005-2007 vintages are carrying portfolio companies at reasonable valuations based on enterprise value to EBITDA multiples, and are well positioned to generate distributions and exits. Of note, in the first half of 2009, our selected buyout funds with 2005-2007 vintages wrote down asset values by 4.50% on average, despite the fact that our selected industrial companies’ enterprise value to EBITDA multiples expanded 25.05%. There are three instances where our view regarding exits for venture funds with 2005-2007 vintages may not be applicable: 1) a venture-backed portfolio company is not in the information technology sector, which is the benchmark sector utilized for this Report; 2) a venture-backed portfolio company’s valuation at exit is based on a revenue multiple or valuation method other than enterprise value to EBITDA, which is the benchmark valuation methodology utilized for this Report; and 3) a 2006 or 2007 venture fund made new investments at lower enterprise value to EBITDA valuation multiples than the multiples utilized for new investments made in 2005, which was the base year for this Report. CONFIDENTIAL INFORMATION
2
10.90x
11.10x
10.30x
4.93x
7.32x
As of Date
12/31/2005
12/31/2006
12/31/2007
12/31/2008
6/30/2009
672
452
945
1018
1000
+48.48%
-52.14%
-7.21%
+1.83%
N/A
YOY Percentage Change
+5.91%
-8.28%
+10.42%
+0.02%
N/A
Venture Funds Profile As of Date Vintages Total Capital Commitments Number of Funds Regions United States Europe Rest of World
1073
1013
1104
1000
1000
CONFIDENTIAL INFORMATION
Source: NYPPEX, Capital IQ, Bloomberg, Preqin, Venture Economics
-32.84%
-54.77%
-5.50%
+1.83%
N/A
Cumulative Percentage Change
(F)
YOY Percentage Change in NAV4
(E) (D)
NYPPEX Venture Fund Index3
(C)
(B)
NYPPEX IT Sector EV / EBITDA Index2
Information Technology Company Sector Profile As of Date Oct. 12, 2009 Number of Exchanges 37 Total Market Capitalization $250 billion Number of Companies 750 Regions United States 34.09% Europe 15.91% Rest of World 50.00%
IT Sector EV / EBITDA Multiples1
(A)
Venture Funds (G)
+40.13%
+56.07%
+15.95%
-1.81%
N/A
(G-D)
Cumulative Percentage NAV Overvalued (Undervalued)
80.80% 6.11% 13.09%
June 30, 2009 2005 to 2007 $44 billion 98
+7.28%
+1.30%
+10.44%
+0.02%
N/A
Cumulative Percentage Change in NAV
(H)
Historical Enterprise Value to EBITDA Multiples for Selected Information Technology Companies vs. Net Asset Values of Selected 2005-2007 Venture Funds
Information Technology Company Sector
TABLE 1
3
3Q2009 NET ASSET VALUATION REPORT AND OUTLOOK
9.75x
9.57x
9.69x
5.23x
6.54x
As of Date
12/31/2005
12/31/2006
12/31/2007
12/31/2008
6/30/2009
(G)
671
536
994
982
1000
+25.05%
-46.03%
+1.25%
-1.85%
N/A
-4.50%
-40.58%
+12.99%
+8.63%
CONFIDENTIAL INFORMATION
N/A
YOY Percentage Change in NAV4
+2.57%
+19.29%
+23.36%
+10.48%
N/A
(G-D)
63.51% 30.25% 6.26%
June 30, 2009 2005 to 2007 $318 billion 106
-30.35%
-27.07%
+22.74%
+8.63%
N/A
Cumulative Percentage Change in NAV
Buyout Funds Profile As of Date Vintages Total Capital Commitments Number of Funds Regions United States Europe Rest of World
697
729
1227
1086
1000
NYPPEX Buyout Fund Index7
Source: NYPPEX, Capital IQ, Bloomberg, Preqin, Venture Economics
-32.92%
-46.36%
-0.62%
-1.85%
N/A
(D)
Cumulative Percentage Change
(C)
YOY Percentage Change
(H) (F)
Cumulative Percentage NAV Overvalued (Undervalued)
(E)
(B)
NYPPEX Industrial Sector EV / EBITDA Index6
Buyout Funds
Historical Enterprise Value to EBITDA Multiples for Selected Industrial Companies vs. Net Asset Values of Selected 2005-2007 Buyout Funds
Industrial Company Sector Profile As of Date Oct. 12, 2009 Number of Exchanges 56 Total Market Capitalization $449 billion Number of Companies 1,201 Regions United States 26.35% Europe 21.99% Rest of World 51.67%
Industrial Sector EV / EBITDA Multiples5
(A)
Industrial Company Sector
TABLE 2
4
3Q2009 NET ASSET VALUATION REPORT AND OUTLOOK
3Q2009 NET ASSET VALUATION REPORT AND OUTLOOK
TABLE 3
Historical Information Technology Company Sector Enterprise Value to EBITDA Multiples vs. S&P 500 Index Returns Information Technology Company Sector
S&P 500 Index
(A)
(B)
(C)
(E)
(F)
As of Date
IT Sector EV / EBITDA Multiples
YOY Percentage Change
Cumulative Percentage Change
S&P 500 Index
YOY Percentage Change
Cumulative Percentage Change
12/31/2005
10.90x
0.00%
0.00%
1254.42
+0.00%
+0.00%
12/31/2006
11.10x
+1.83%
+1.83%
1418.30
+13.06%
+13.06%
12/31/2007
10.30x
-7.21%
-5.50%
1468.36
+3.53%
+17.05%
12/31/2008
4.93x
-52.14%
-54.77%
903.25
-38.49%
-27.99%
6/30/2009
7.32x
+48.48%
-32.84%
919.32
+1.78%
-26.71%
(D)
Source: NYPPEX, Capital IQ, Bloomberg
TABLE 4
Historical Industrial Company Sector Enterprise Value to EBITDA Multiples vs. S&P 500 Index Returns S&P 500 Index
Industrial Company Sector (A)
(B)
(C)
As of Date
Industrial EV / EBITDA Multiples
YOY Percentage Change
Cumulative Percentage Change
(E)
(F)
S&P 500 Index
YOY Percentage Change
Cumulative Percentage Change
12/31/2005
9.75x
0.00%
0.00%
1254.42
+0.00%
+0.00%
12/31/2006
9.57x
-1.85%
-1.85%
1418.30
+13.06%
+13.06%
12/31/2007
9.69x
+1.25%
-0.62%
1468.36
+3.53%
+17.05%
12/31/2008
5.23x
-46.03%
-46.36%
903.25
-38.49%
-27.99%
6/30/2009
6.54x
+25.05%
-32.92%
919.32
+1.78%
-26.71%
(D)
Source: NYPPEX, Capital IQ, Bloomberg
CONFIDENTIAL INFORMATION
5
1.29x
1.19x
0.49x
0.66x
12/31/2006
12/31/2007
12/31/2008
6/30/2009
498
374
902
977
1000
+33.00%
-58.49%
-7.75%
-2.27%
N/A
YOY Percentage Change
+5.91%
-8.28%
+10.42%
+0.02%
N/A
Venture Funds Profile As of Date Vintages Total Capital Commitments Number of Funds Regions United States Europe Rest of World
1073
1013
1104
1000
1000
CONFIDENTIAL INFORMATION
Source: NYPPEX, Capital IQ, Bloomberg, Preqin, Venture Economics
-50.23%
-62.58%
-9.85%
-2.27%
N/A
Cumulative Percentage Change
(F)
YOY Percentage Change in NAV4
(E) (D)
NYPPEX Venture Fund Index3
(C)
(B)
NYPPEX IT Sector EV / Revenue Index9
Information Technology Company Sector Profile As of Date Oct. 22, 2009 Number of Exchanges 47 Total Market Capitalization $282 billion Number of Companies 1,626 Regions United States 38.00% Europe 21.28% Rest of World 40.72%
1.32x
12/31/2005
As of Date
IT Sector EV / Revenue Multiples8
(A)
Venture Funds (G)
+57.51%
+63.87%
+20.29%
+2.29%
N/A
(G-D)
80.80% 6.11% 13.09%
June 30, 2009 2005 to 2007 $44 billion 98
+7.28%
+1.30%
+10.44%
+0.02%
N/A
Cumulative Percentage Change in NAV
Cumulative Percentage NAV Overvalued (Undervalued)
(H)
Historical Enterprise Value to Revenue Multiples for Selected Information Technology Companies vs. Net Asset Values of Selected 2005-2007 Venture Funds
Information Technology Company Sector
TABLE 5
6
3Q2009 NET ASSET VALUATION REPORT AND OUTLOOK
3Q2009 NET ASSET VALUATION REPORT AND OUTLOOK
Footnotes 1.
2.
3.
4. 5.
6. 7.
8.
9.
Enterprise Value to EBITDA multiples for approximately 750 publicly-traded companies worldwide having a Global Industry Classification Standard Code of “Information Technology” and an aggregate market capitalization of approximately $250 billion as of October 12, 2009 (the “Information Technology Sector”). Source: Capital IQ, Bloomberg. The NYPPEX Information Technology Sector EV/EBITDA Index estimates the cumulative percentage change over time in enterprise value to EBITDA multiples of companies comprising the Information Technology Sector. Source: Capital IQ, Bloomberg. The NYPPEX Venture Fund Index estimates the cumulative percentage change in net asset values stated by selected venture funds worldwide having 2005, 2006 and 2007 vintages and total capital commitments of approximately $44 billion as of June 30, 2009. Source: Preqin, Venture Economics. Percentage change in net asset values were adjusted to offset the effect of capital calls and distributions. During the period, capital calls were deducted and distributions were added to the funds’ ending net asset values. Enterprise Value to EBITDA multiples for approximately 1,201 publicly-traded companies worldwide having a Global Industry Classification Standard Code of “Industrials” and an aggregate market capitalization of approximately $449 billion as of October 12, 2009 (the “Industrial Sector”). Source: Capital IQ, Bloomberg. The NYPPEX Industrial Sector EV/EBITDA Index estimates the cumulative percentage change over time in enterprise value to EBITDA multiples of companies comprising the Industrial Sector. Source: Capital IQ, Bloomberg. The NYPPEX Buyout Fund Index estimates the cumulative percentage change in net asset values stated by selected buyout funds worldwide with 2005, 2006 and 2007 vintages and total capital commitments of approximately $318 billion as of June 30, 2009. Source: Preqin, Venture Economics. Enterprise Value to Revenue multiples for approximately 1,626 publicly-traded companies worldwide having a Global Industry Classification Standard Code of “Information Technology” and an aggregate market capitalization of approximately $282 billion as of October 26, 2009 (the “Information Technology Revenue Sector”). Source: Capital IQ, Bloomberg. The NYPPEX Information Technology Sector EV/Revenue Index estimates the cumulative percentage change over time in enterprise value to revenue multiples of companies comprising the Information Technology Revenue Sector. Source: Capital IQ, Bloomberg.
Methodology for this Report Our quarterly approach to analyzing the reasonableness of net asset values stated by venture and buyout funds is based on comparisons to the cumulative percentage change in enterprise value to EBITDA multiples of selected publicly-traded companies in comparable sectors for a specified period of time. We believe, this approach is appropriate given that enterprise value to EBITDA is the standard valuation approach typically utilized by venture and buyout funds when making new investments in private companies. We believe, S&P 500 Index returns should not be utilized when analyzing the reasonableness of net asset values stated by venture and buyout funds, primarily for two reasons: (a) during periods when S&P 500 Index returns are positive as a result of higher corporate earnings year over year, and price to earnings multiples remain unchanged, one may incorrectly conclude that the net asset values of venture and buyout funds should be written up; and (b) the S&P 500 Index is comprised of companies whose market capitalizations are based typically on earnings multiples, whereas venture and buyout funds estimate fair values of private company holdings based typically on EBITDA multiples, and then make adjustments for the cash balances and long-term debt of such companies. However, for comparative purposes, we have included historical S&P 500 Index returns vs. the percentage changes in enterprise value to EBITDA multiples for the Information Technology Sector and Industrial Sector in this Report. (Please see Tables 3 and 4). Further, we believe, when analyzing the reasonableness of net asset values stated by venture funds, it may be appropriate to also consider a comparison to the cumulative percentage change in enterprise value to revenue multiples of selected publicly-traded information technology companies. To view our analysis utilizing this approach, please see Table 5. CONFIDENTIAL INFORMATION
7
3Q2009 NET ASSET VALUATION REPORT AND OUTLOOK
Important Disclaimer The NYPPEX Buyout Fund Index and the NYPPEX Venture Fund Index were created to provide a general barometer for the level of reasonableness of net asset values stated by venture and buyout funds. However, we recognize that this approach has certain limitations. The methodology used in this Report is not intended to imply that buyout funds only hold portfolio companies in the Industrials sector or that venture funds only hold portfolio companies in the Information Technology sector. We believe, such sectors are merely benchmarks for analyzing the reasonableness of net asset values in general, as stated by venture and buyout funds. Additionally, the results in this Report are not intended to imply that all 2005, 2006 and 2007 buyout funds are reasonably valued or that all 2005, 2006 and 2007 venture funds are overvalued. The information contained herein is intended for the exclusive use of the addressee and is strictly confidential (the "Information"). If you are not the named addressee please notify the sender immediately and delete this e-mail or facsimile. The Information contained herein is illustrative only and is not intended to predict actual results. It is based on certain assumptions and such assumptions may prove to be incorrect. In accordance with FINRA Rule 2711 (a) (9), this report (the “Report”) is a commentary on economic, political and/or market conditions as they relate to the secondary private markets and as such is not considered to be a Research Report. NYPPEX does not serve as a fiduciary to any party. NYPPEX merely matches buy orders and sell orders without regard to either party's investment objectives or risk profile. NYPPEX has made no effort to independently verify any of the information contained herein. Opinions expressed herein are intended solely as general market commentary and do not constitute investment advice or a guarantee of returns. No part of the Information should form a material part of your decision making. NYPPEX seeks to act as advisor and agent to the parties, and thus, may have a biased opinion and the potential for conflicts of interests with its research. This Information may be considered marketing literature, as NYPPEX will receive a fee if the securities mentioned herein are transacted. This Information does not constitute a research report. The Information and the data underlying it has been obtained from sources deemed reliable but we do not guarantee its accuracy or projections based thereon. Due to the inherent uncertainty of valuation, the stated value may differ significantly from the value that would have been used had a ready market existed for all of the securities stated herein, and the difference could be material. 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You must determine if this Information is appropriate for you. You agree that when you submit a sell or buy order to us, that order shall be incontrovertible evidence that you have made the decision that the order is suitable for you. Online, voicemail, faxed or other orders are not considered received by NYPPEX until we acknowledge receipt in writing to you. Orders are not executed by NYPPEX until we confirm the trade in writing to you. We are not obligated to make a market in any of the securities mentioned herein. Prices are indications only and may not be relied upon as bids or offers for the securities mentioned herein. Although we may furnish Information either verbally or in writing, such Information is subject to the disclosures in the issuer's private placement memorandum or prospectus, and you agree to make your purchase decision based on the issuer's private placement CONFIDENTIAL INFORMATION
8
3Q2009 NET ASSET VALUATION REPORT AND OUTLOOK memorandum or prospectus. We do not offer or give advice to our clients or other broker-dealers as to whether to purchase any particular security. You should disregard any Information that you receive from NYPPEX or through our website, fax, email, or verbally that conflicts with the Information provided in the PPM or prospectus or a subsequently dated supplement to the PPM or prospectus. The PPM or prospectus and any supplement contain the issuer's definitive disclosure of Information related to the offering. NYPPEX, LLC, its subsidiaries and its affiliates, and their respective employees and officers (together as the "NYPPEX", "We" or "Our") hereby expressly disclaims any and all warranties, guaranties, conditions, covenants, and representations relating to this Information, whether express or implied (in law or in fact), oral or written, or from a course of dealing or usage of trade. This Information is being provided with all faults and the entire risk as to satisfactory quality, performance, and accuracy regarding the Information is with you. NYPPEX shall not have any responsibility and/or liability for any loss, cost, claim or damage (including but not limited to direct, indirect, or consequential damages or lost profits) arising out of or otherwise relating to your access to any of this Information, any use thereof or any omission or failure of any of this Information and its content. NYPPEX, its affiliated companies and their respective employees, contractors, and agents may have positions and/or engage in transactions in the security(s) referred to herein during such period while you are evaluating, selling, or buying such security(s); and such positions or transactions may be adverse to your objectives. We may receive compensation from this issuer of the security(s) for serving in the capacity of broker/dealer, advisor, board member, or in other similar positions. Any use, disclosure, or distribution of any part of this Information is a violation of this confidentiality agreement and is strictly prohibited. Your consideration is the right to access this confidential Information to help you achieve your investment objectives. This Information is confidential and copyrighted by NYPPEX, LLC, and may not be copied, distributed, or disclosed to a third party in whole or in part, without NYPPEX's express written consent. Online transmission is not guaranteed to be secure. When securities are offered, it is through NYPPEX, LLC, member FINRA, SIPC, a wholly-owned broker-dealer subsidiary of NYPPEX Holdings, LLC. Private placements may contain a high degree of risk. Copyright © 2009 NYPPEX Holdings, LLC. All rights reserved. Usage will be monitored. For further information, please contact [email protected].
Certifications The members of the NYPPEX research team that have authored this Report (the “Authors”) hereby certify that the views expressed in the report reflect their personal views about the subjects, prices, securities, issuers and markets. The Authors hereby certify that they have not, are not and will not receive, directly or indirectly, compensation in exchange for expressing the specific recommendations or views herein.
# # # # ##
3QNAV152010212009
CONFIDENTIAL INFORMATION
9
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