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Page 4 FOURTH QUARTER 2012 way. Private debt in the form of mezzanine lending to middle market credits remains reasonably attractive, although total return expectations may trend lower. Real Assets Outlook Real assets strategies performed well in 2012 and appear poised to continue this trend. Investors added inflation protection strategies in many forms to their portfolios. Looking forward, inflation hedging strategies remain attractive in the face of loose monetary policy around the globe. Real estate continued to rebound in 2012, posting returns in public and private markets. Stabilized properties in core markets are now priced near prior peaks. Opportunities remain in stressed, messy, small- to medium-sized properties, those generally located in less-than-glamorous locations, and in some niche markets. Within the energy sector, oil prices reacted to economic and political activity during the year. Crude oil prices ranged from over $100 per barrel early in the year, into the $80s midyear, to ending the year at $92. 14 Natural gas prices were driven by domestic production and demand. Prices appear to have bottomed mid-year before trending up to a five-year high of $3.35/mmbtu at year-end. 15 Ongoing development of the North American energy industry offers a range of investment opportunities in public and private strategies. We continue to purse investments in direct ownership of producing assets, energy buyouts, and publicly traded master limited partnerships (MLPs). In other real assets strategies, timber produced a 7.8% return in 2012, trending up from five years of lackluster returns and activity. 16 We remain unenthusiastic about timber, choosing higher-returning strategies for locked-up capital, but expect timber to continue to benefit from the rebound in housing. Similar to timber, agriculture and other commodities can also provide diversification and modest returns to a globally diversified portfolio. In Summary Performance Summary Through 9/30/2012 Quarter 1 Year 3 Year* 5 Year* 10 Year* 20 Year* Global Private Equity 3.8% 7.2% 4.2% 0.8% 3.7% 15.8% U.S. Venture Capital 0.6% 7.2% 6.1% 1.8% 4.6% 19.6% U.S. Buyouts 4.5% 15.1% 12.4% 4.7% 10.0% 9.9% Distressed Bonds/Loans -1.1% 4.1% 10.5% -1.0% 8.1% n/a Private Core Real Estate 5.1% 11.0% 10.9% 2.3% 8.3% 8.6% Timber 1.4% 2.2% -0.5% 3.3% 7.6% 9.7% S&P 500 Index 3.4% 30.2% 13.2% 1.1% 8.0% 8.5% NASDAQ Composite 0.8% 29.0% 13.7% 2.9% 10.3% 8.7% MSCI World Index 1.6% 22.3% 8.1% -1.6% 8.6% 7.2% Inflation (CPI) + 5% 5.9% 6.9% 7.3% 7.1% 7.5% 7.5% Through 12/31/2012 Quarter 1 Year 3 Year* 5 Year* 10 Year* 20 Year* Distressed Bonds/Loans 2.7% 6.4% 7.2% 0.2% 7.8% n.a. Private Core Real Estate 2.5% 10.5% 12.6% 2.1% 8.4% 8.8% Timber 5.9% 7.8% 3.0% 2.7% 8.2% 8.9% S&P 500 Index -0.4% 16.0% 10.9% 1.7% 7.1% 8.2% NASDAQ Composite -3.1% 15.9% 10.0% 2.6% 8.5% 7.8% MSCI World Index 2.6% 16.5% 7.5% -0.6% 8.1% 7.4% Inflation (CPI) + 5% -0.2% 1.6% 2.0% 1.8% 2.4% 2.4% Sources: Thomson Reuters, NCREIF (w w w .ncreif.org), Fund Evaluation Group, LLC * Annualized We see select investments across private equity, private debt, and real assets strategies continuing to provide interesting opportunities for generating returns in 2013. These ideas have not changed materially with the turn to a new year. We expect the credit cycle to wane while equity (primary and secondary) and energy strategies dominate. A healthy pipeline of U.S. private equity funds are expected to benefit from improvements in the relative cost position and innovation in North America. These trends also will continue to pull real estate out of cyclical lows. © 2013 Fund Evaluation Group, LLC
We Appreciate Your Feedback Page 5 FOURTH QUARTER 2012 You will soon receive a survey from us on the topic of our regular communications to you, including the quarterly commentaries and Research Reviews. We’ve been publishing our commentary for more than five years, and our Research Review for more than ten years, and we would like to solicit feedback from our readers about these publications. As we celebrate our twenty-fifth anniversary this year, we are reminded that our clients and readers are our most important asset. We would sincerely appreciate your participation in this survey, so that we may continue to serve your best interests. 1 Preqin, Private Equity Fundraising 4Q12 2 Preqin, www.preqin.com; Comparable fundraising was $330 million in 2011 and $310 million in 2012 3 We Have Met the Enemy…and He Is Us, Ewing Marion Kauffman Foundation, May 2012 4 Thomson Reuters Private Equity Performance Index (PEPI) as of September 30, 2012 5 International Monetary Fund, World Economic Outlook Database 6-7 Tan, Kopin, Made in America The Next Boom, Barron’s, January 28, 2013. In 2012, U.S. energy production was over 20million BOE/day versus imports of less than 8million BOE/day; Natural gas cost $3.55/mmbtu in the U.S. versus approximately $12 in Europe and $16 in Japan. 8 Capital International Private Equity, View From the Field, presentation to investors, Beijing, October 2012 9 Tan, Kopin, Made in America The Next Boom, Barron’s, January 28, 2013 10 Robots versus Job Growth, CBS News60 Minutes, January 14, 2013 11 Markit ABX.HE 2007-1 AAA, Markit ABX.HE 2006-2 AAA, and Markit ABX.HE 2006-1 AA 12 Global Credit & Distressed Markets: Current State and Outlook, Quarterly Market Call, SVP Global, January 31, 2013 13 Dai, Shasha, Risky Business? PE’s Div Recap Gold Rush, Dow Jones Private Equity Analyst, January 2013 14-15 Energy Information Agency, www.eia.gov 16 NCREIF Timberland Index, www.ncreif.com © 2013 Fund Evaluation Group, LLC
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