The Future: Where is the venture industry headed next

1
The Future Where is the venture industry headed
next?

• Rick Hayes
• Senior Investment Officer
• CalPERS

2
Background on CalPERS

• Headquarters Sacramento, California
• Retirement system for 1.2 million members
• 160 billion in assets
• Four Primary Asset Classes
• Global Public Equities
• Global Fixed Income
• Real Estate
• Private Equity (AIM Program)

3
Todays Presentation

• Learning From Past Cycles
• The Current Investment Environment
• Thoughts On The Future

4
Investing was EasyDow Industrials 70 years
5
Bubblemania
6
US Venture Capital Total Raised versus
Invested
1990 to 2000 Raised 243B Invested 240B
7
Todays Presentation

• Learning From Past Cycles
• The Current Investment Environment
• Thoughts On The Future

8
The Bubble is Over
9
General Market Conditions

• Overall economic weakness and declining/volatile
  public markets have impacted portfolio
  performance
• Decreasing valuations over the last three years
  have led to declining private equity returns
• Exiting investments remains difficult
• Minimal IPO activity
• Corporate acquirers are on the sidelines
• New fundraising remains challenging
• Expect a shake-out of weaker firms
• Recent recovery of the public markets may signal
  economic rebound however, strength or longevity
  of rebound is uncertain

10
Venture Capital Market Overview

• Capital overhang is an issue
• Improved pricing, but a lot of competition
• Portfolio company performance improving
  gradually, but growing strength not yet appearing
  in fund performance numbers
• Focus is back on building successful businesses
  for the long term, not for a near term exit
• IPO window gradually opening to strong companies

11
Venture Capital Market Overview
Whats the next catalyst?
Total Venture-Backed IPO by Value
Technology/ Internet
E-Commerce/Telecom
Broadbased
PC
Life Sciences
20.00
15.00
in Billions
10.00
5.00
0.00
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
Source Venture Economics
12
Evolution of AIM Program

• AIM Program made its first investment in 1990
• Target asset allocation to AIM is currently 7
• Well diversified portfolio with over 350 active
  investments
• Portfolio positioned to benefit from current
  attractive buying opportunities (7.5 billion to
  be invested in the next 3-5 years)
• The age of the portfolio is young (avg age of 4.3
  years), but has generated strong performance
• over 5 billion of cash profits
• IRR on fully realized investments to date --
  19.3
• portfolio IRR exceeding benchmark

A
13
AIM Program Investment Focus
Higher
Plus co-manage joint ARRS and AIM/ real
estate programs
Lower
14
AIM Portfolio Programs

• 475 million in commitments to 10 private equity
  firms focused on opportunities in CA underserved
  markets
• 1.5 billion in commitments to 32 private equity
  firms focused on all sectors in the life sciences
  industry
• 2.8 billion in commitments to California
  Emerging Ventures (managed by Grove Street
  Advisors) for smaller fund relationships
• Absolute Risk/Return Strategies co-managed with
  Public Equity Unit
• Global Innovation Partners co-managed with Real
  Estate Unit

California Initiative
Biotechnology Strategy
California Emerging Ventures
Joint Programs w/Public Equity and Real Estate
Strategic Relationships
A
15
AIM Organizational Strategy
Organization

• Strong team-based approach to managing
  investments and advisors
• Small internal team
• Staff leverages resources of 7 external advisory
  firms to assist with portfolio management
• Apprenticeship model new hires and interns
  mentored by senior team members
• Ongoing, focused training sessions provided by
  partners and advisors

Capacity/ Resources
Training/ Education
A
16
AIM Organizational Chart
Senior Investment Officer Rick Hayes
Portfolio Manager Panda Hershey
Sr Principal Inv Officer Leon Shahinian
Portfolio Manager Joncarlo Mark
Investment Officer II Sarah Corr
Asst. Investment Officer Jesus Arguelles
Asst. Investment Officer Colleen Herin
Investment Officer I William Chu
Investment Officer I Dave Merwin
Executive Secretary II Milene Fong
Staff Svc Analyst Susan Sutter
Office Technician Sandra Avila
AIM Team Roster (12) Partner Team (5) Analyst
Team (4) Administrative Team (3) Rick
Hayes Jesus Arguelles Milene Fong Leon
Shahinian Colleen Herin Susan Sutter Joncarlo
Mark William Chu Sandra Avila Panda Hershey
Dave Merwin Sarah Corr
17
Todays Presentation

• Learning From Past Cycles
• The Current Investment Environment
• Thoughts On The Future

18
Investor Alignment Will Improve
Current Key Partnership Terms

• Term of Fund 10 years (with optional one year
  extensions)
• Investment Period 5 to 6 years from closing
• Management Fees 1 to 2.5 of committed capital,
  with stepdowns after the end of investment period
• Carried Interest 20 share of total fund
  profits
• Distribution Waterfall 1) Return of Capital
  (including management fees and partnership
  expenses) 2) any losses on previous investments,
  3) 8-10 preferred return and 4) split of profits
  80/20
• No Fault Divorce Vote of LPs to dissolve
  partnership
• Key Person Language Protects LPs if GP team
  breaks up
• Alignment of Interests GP commitment to fund,
  fee offsets, etc.

19
Investors Will Change
Source Venture Economics
20
Investor Communication Will Improve

• Founded in the early 1990s as an informal
  networking club
• Began with 15-20 members, meeting semiannually
• Core activities included networking, information
  sharing, and education

ILPA
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ILPA Today

• Only organization dedicated to the interests of
  institutional limited partners in private equity
• 100 organizations (and growing)
• Public pensions
• Corporate pensions
• Endowments and foundations
• Insurance companies and others
• International representation from Europe, Asia,
  and the Middle East
• Most large investors in alternative investments
  are members over 60 Billion in Private Equity
  Investments

ILPA
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ILPAS Mission

• The ILPA is a non-profit organization committed
  to advancing the interests of limited partners in
  the global private equity industry by providing a
  forum for
• Facilitating value-added communication
• Enhancing education in the asset class, and
• Promoting research and standards in the private
  equity industry

23
A Changing Asset Class
24
CalPERS The Future

• More of the same
• Controlled, limited portfolio growth
• Focus on maximizing investment performance
• Relentless pursuit of enhancing the team
• Industry leadership on simplifying and improving
  the asset class working with other investors

25
The Future Where is the venture industry headed
next?

• Rick Hayes
• Senior Investment Officer
• CalPERS