THE ALTERNATIVES “BASKET”

• Alternatives: a spectrum of opportunities from low risk fixed income substitutes

to high risk/high return equity substitutes

• Diversification properties stem from differentiated return drivers

• Many inherent non-investment risks

Infrastructure Distressed Debt

Hedge FundsPrivate EquityReal EstateReal Assets

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

9.0%

9.5%

10.0%

0% 5% 10% 15% 20%

Ann

ua

lized R

etu

rn

Annualized Volatility

ALTERNATIVES SHIFT THE EFFICIENT FRONTIER

2

Source: Morgan Stanley

Using 15 years of data through 2015

with alternatives

without alternatives

GROWTH IN ASSETS UNDER MANAGEMENT

BY ASSET CLASS

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014H1

Other

Private Equity Infrastructure

Venture Capital

Private Equity Real Estate

Privaty Equity Buyouts

Hedge Funds

3

Source: Preqin, Hedge Fund Research

Alternatives

26%

Equities

35%

Fixed Income

39%

Global AUM 2014

OVERVIEW OF KEY MACRO TRENDS AFFECTING THE

ALTERNATIVE INVESTMENT ECOSYSTEM

4

Macro trends are driving

change in the alternative

investment ecosystem

Capital sources

• Increasing the supply of

capital available to firms

• Increasing demand for

alternative investments

Business models

• Altering the competitive

landscape for GPs

• Driving the creation of new

GP-LP relationship models

Investment opportunities

• Opening large new markets

for firms to invest in

• Potentially larger deals

Technological Disruption

Monetary Policy

Social

System

Sustainab

Emerging Markets

Record levels of

quantitative easing

are:

• Reducing nominal

returns for investors

• Increasing pension

liabilities

• Driving asset prices

to near record levels

Aging in OECD

countries is:

• Increasing pension

liabilities

• Increasing funding

gaps at pension

funds

• Reduced access to

defined benefit plans

The economic rise of

non-OECD countries

is:

• Increasing global

trade

• Increasing share

of non-OECD global

GDP

• Creating large new

pools of capital

● Direct impact on AI

● Secondary impact on AI

RETURN AND RISK EXPECTATIONS

Return

Expectations

Risk*

(Standard Deviation)

Diversification

Potential

Real Estate 5 - 6% 12% Strong

Private Equity 8 - 10% 22% Moderate

Hedge Funds 4 - 5% 6% Variable

Infrastructure 6 – 7% 12% Strong

Global Equity 6 – 7% 17% n/a

US Fixed Income 3.5 – 4% 4% n/a

*alternatives’ volatility modified to reflect other aspects of risk

ALTERNATIVE INDEXES ARE INDEXES IN NAME ONLY

Asset allocation decisions and performance evaluation are complicated

by indexes which:

• Are derived from returns of active investment managers

• Are not fully representative of the universe

• Change in composition as sub-strategies move in and out of favor

• Obscure the true volatility of the asset class

6

“RISK” IN ALTERNATIVE INVESTMENTS

IS A MULTI-DIMENSIONAL ISSUE

IlliquidityCyclicality of

returnsCareer risk

Leverage Fees

Lack of market

pricingTransparency

Basis risk Regulatory Risk

Peer group risk

Currency riskPublic relations

risk

Tax Issues

Surprise factors

Credit riskAdministrative

complexity

GOVERNANCE IS CRITICAL TO SUCCESS

• Taking the right risks√ is the proposed investment aligned with the objectives of the investment program?

• Documenting decisions for posterity√ is the rationale for investing in the alternative asset class clearly articulated in the

fund’s governing documents?

• Staffing√ do we have people with the required skills, knowledge and capacity? Are decision

rights and responsibilities clearly spelled out and allocated to those who have the

knowledge and capacity?

• Processes√ delegate as appropriate; balance influence with accountability. Establish a strong

reporting framework to monitor the program’s progress toward the agreed-upon goals

and objectives.

Real Estate / Real Assets

THE REAL ESTATE/REAL ASSETS

• Income-Producing Commercial Property Investments

- Office

- Industrial

- Retail

- Apartments

• Indirect Real Estate Investments (REITs, REOCs)

• Timber

• Agriculture

• Energy/Commodities

COMMERCIAL REAL ESTATE INVESTMENT SPECTRUMLow Risk Fixed Income Substitute to High Risk Equity Alternative

Risk

Re

turn

Security of Income Growth-Oriented

Value-Added

• Property leasing

strategies

• Property repositioning

strategies

• Recapitalization

• Publicly traded REITs

Opportunistic

• Distressed sellers globally

• Private partnerships

• Recovery capital

• Growth capital

• Emerging property sectors

• New company foundation

• Land development

Core

• Fully-leased

multi-tenant property

• Core diserfied

• Publicly traded REITs

Income

• Triple-net leased

• Investment-grade CMBS

• Mortgage Loans

PRIVATE VS PUBLIC REAL ESTATE INVESTMENTDefining a Role for Real Estate Securities (REITs, REOCs)

• Real estate securities are securities first, real estate second

- Higher volatility than private core real estate

- Higher correlation to public markets

• However, real estate securities can complement a private real estate

portfolio:

- Assist in maintaining a fully invested real estate allocation

- Facilitate tactical or strategic shifts in the overall real estate allocation

- Allow short term tilts in property type or geographic concentration

REAL ESTATE RISKS

• Lack of liquidity

• Long lead time for new development

• Changing demographics

• Obsolescence

• Environmental issues

• Cost and availability of capital

• Leverage

• Unexpected inflation

13

TIMBER INVESTMENTS

•Young trees; < 10 years old

•Physical growth of 10 – 15% per year

•Limited liquidity (too small for economical

harvesting)

•Price volatility is low Emerging Growth Established GrowthAGE

PULPWOOD CHIP-N-SAW SAWTIMBER

Gro

wth

Mature

•Older than 20 years

•Physical growth < 2% per year

•Chief by-product is lumber used in housing

•Liquidity is significantly higher

•Prices are more volatile.

•10 to 20 years old

•Physical growth of 8 – 10% per year

•Sold for dimensional lumber, paper and plywood

•Liquidity is significantly enhanced at this stage due to the

greater range of end-uses and more efficient harvestability.

Source: Evergreen Timber

Private Equity

PRIVATE EQUITYLong term equity investments in non-publicly traded companies

Stage Start-Up Expansion Pre-IPO Public Buyout

Seed/First Stage

2nd

Round

3rd

Round

4th

Round

IPO

MBO

Rev

enu

es

Venture Capital Private Equity

Principal

Risks

Product

Development

Market

Development

Managing

Growth

Market Price & Debt

Service

SECONDARIES

THE PRIVATE EQUITY PYRAMID

Plan Sponsor

GatekeeperDiscretionary Separate Account

orFund-of-Funds

IWP V

(Early Stage Venture)

Company 1 Company 2

Company 3

SV VI(Late Stage Venture)

Company 4 Company 5

Company 6

BC VII

(Mezzanine)

Company 7 Company 8

Company 9

CEP II

(Buyout)

Company 11 Company 12

Company 13

LIFE CYCLE OF A PRIVATE EQUITY FUND

18

93

207

349

538

666 681

318299

352

405

547 555527

0

200

400

600

800

2003 04 05 06 07 08 09 10 11 12 13 14 15

PRIVATE EQUITY CAPITAL-RAISING TRENDSGlobal PE Capital Raised (by Fund Type)

19

Notes: Includes funds with final close and represents year funds held their final close; distressed PE includes distressed

debt, special situation and turnaround funds; other includes PIPE and hybrid funds

Source: Bain and Company

Total Value

CAGR

(10-15)

12%

CAGR

(14-15)

-5%

■ Other 18% 70%

■ Mezzanine 21% 118%

■ FoFunds 2% 14%

■ Nat.Res 26% 44%

■ Distressed 5% -5%

■ Secondaries 11% -32%

■ Growth -2% -30%

■ Infrastruct. 1% -16%

■ Venture 13% -2%

■ Real Estate 17% -2%

■ Buyout 16% -11%

ACQUISITION VALUATIONS CONTINUE TO CLIMB

20

5 5.5 5.16.3 5.7 5.8 5.5

3.94.1

3.7

3.94.3 4.5

5.8

8.99.6

8.8

10.3 10 10.3

11.3

0

2

4

6

8

10

12

0

2

4

6

8

10

12

2010 2011 2012 2013 2014 2015 2016

Debt/EBITDA Equity/EBITDA Valuation/EBITDA

US PRIVATE EQUITY AND VENTURE CAPITAL INDEX

RETURNSPeriods Ended June 30, 2016 • USD Terms • Percent (%)

21

QTR YTD 1 YR 3 YR 5 YR 10 YR 15 YR 20 YR 25 YR

CA US Private Equity 4.0 4.2 3.0 11.8 11.7 10.7 11.3 12.5 13.3

Nasdaq Constructed mPME -0.2 -2.7 -1.8 15.3 13.8 10.4 8.8 8.9 9.7

Russell 2000® mPME 3.8 2.2 -6.9 8.1 9.1 7.5 8.0 8.1 8.7

S&P 500 mPME 2.5 3.8 3.8 12.3 12.6 8.3 7.3 7.7 8.2

CA US Venture Capital 0.7 -2.6 -1.4 18.1 13.2 10.2 5.3 26.1 25.8

Ex-US Developed Mkts Private

Equity & Venture Capital Index

1.29 5.79 7.01 10.56 7.19 8.77 12.92 13.19 13.19

MSCI World Ex-US Index (net) -1.05 -2.98 -9.84 1.88 1.23 1.63 4.47 4.16 5.27

Sources: Cambridge Associates LLC, Frank Russell Company, Standard & Poor’s, and Thompson Reuters Datastream

DISPERSION IN MANAGER RETURNS

22

920

bps235

bps

PRIVATE EQUITY RISKS

• Limited liquidity

• The J-curve

• Returns can be highly dependent on entry point

• Lack of transparency

• Constant struggle to reach allocation target

• Timing: Opportunity vs. Process

• Sub-optimal investment selection

• Overhang of uninvested capital could lead to disappointing returns

INFRASTRUCTURE INVESTMENTSThe Indicative Risk Premium and Timeline Varies by Project Phase

24

1,000

0

100

200

300

400

500

600

700

800

900

Duration of Project Phases, Years

Ind

ica

tive

Eq

uit

y-R

isk

Pre

miu

m (

bp

s)

■ Development

■ Construction

■ Transition

■ Operation

Source: McKinsey

INFRASTRUCTURE RISKS

• Failure to complete a new project

• Extended delays and / or cost overruns

• Regulatory risk

• Political risk

• Deteriorating economics if government subsidies are withdrawn

• Environmental issues

• Displacement by a new technology

• Changes in commodity prices which limit a project’s viability

25

Hedge Funds

HEDGE FUND STRATEGIES

Directional Non-Directional

Event Driven

Distressed

Merger Arbitrage

Strategic/Activist

Trade Claims

Equity

Long/Short

Domestic

International

Emerging Markets

Sector Specialists

Dedicated Short Sellers

Relative Value

Fixed Income Arbitrage

Capital Structure Arb

Convertible Arbitrage

Equity Market Neutral

Pairs Trading

Commodity Arbitrage

Other

Macro

Option Volatility Trading

Catastrophe Bonds

SHIFTING STRATEGY COMPOSITION

28

10 14

39

37

1990

26

2719

28

2015

26

24 20

30

2010

Source: Hedge Fund Research

ANALYZING RISK AND RETURNA TWO DIMENSIONAL FRAMEWORK

Source: Morningstar

Hedge Fund Sub-Strategy

Average Correlations to S&P 500

Index, Aug 2008 to Mar 2016

Aggregate 0.78

Managed Futures 0.01

Global Macro 0.43

Fixed Income Arb 0.58

Convert Arb 0.56

Event Driven 0.76

Market Neutral 0.60

Equity L/S 0.85

Source: CreditSuisse Dow Jones

Hedge Fund Indexes

THE NON-QUANTIFIABLE RISKS

Complexity

Derivatives

IntegralLeverage

Correlation to

S&P

Equity Strategies

Equity hedge Low No Low Moderate

Short selling Low No Low High neg

Emerging markets Low No Low Moderate

Event Driven Strategies

Merger arb Moderate Yes Moderate Moderate

Distressed secs Moderate No Low Moderate

Event-driven Moderate No Low Moderate

Relative Value Strategies

Fixed income arb High Yes High Low

Market neutral High No Moderate Moderate

Convertible arb Moderate Yes Moderate Low

Macro investing Moderate/High Yes Moderate Low

Implementation and Monitoring

BUILD OR BUY

Non-Discretionary

Consulting

Relationship

Discretionary

Gatekeeper

Fund of

Funds

Governance Capacity Required high moderate moderate

Flexibility to customize

investment guidelineshigh high

moderate

/low

Access to superior partnerships moderate moderate/high high

Diversification moderate moderate high

Advisor accountability moderate high high

Liquidity – ability to terminate

advisormoderate moderate low

Fees and costs moderate high high

HIGH COST OF IMPLEMENTING AN ALTERNATIVE

INVESTMENT PROGRAM

Real Estate Private Equity Hedge Funds

Acquisition Fees 50 bpsDue diligence costs

Transaction fees

Investment Management

Base Fees

6% - 8% of net income or

50 to 75 bps on assets

1.5% to 2% of committed

capital 1% to 2% of assets

Gatekeeper Fee n/a 0.75% to 1.4% 0.75% to 1.5%

Incentive Fees

(on profits)10% to 20%

Underlying manager:

20%

Gatekeeper: 0% to 10%

Underlying manager:

15% to 20%

Gatekeeper: 0% to 10%

Hurdle rate

Typically payable only on

profits above a hurdle

rate

Profit distributions

subject to clawback

Subject to highwater

mark. Some subject to a

hurdle rate.

Other Fees and

Expenses

Property/asset

management fees

Myriad costs may or may not be passed through to

the LPs. Read documents carefully

PERFORMANCE EVALUATION REQUIRES FLEXIBILITY

• Returns are presented as internal rates of return, and are not easily

rolled up into total fund reporting which uses time-weighted returns

• Reporting is lagged, further complicating the reporting of total fund

performance

• Benchmarks are ambiguous

- there is no universally accepted “market” benchmark

- you need to make sure you are comparing apples to apples

- the universe of comparators is limited

• Many of the standard performance measures assume normal

distributions of return

ALTERNATIVE INVESTMENT PERFORMANCE

EVALUATION

• Private Equity (IRR)

- Vintage year quartile rankings

- MOIC – Multiple of invested

capital

- PME – public market

equivalent

• Real Estate (IRR and TWR)

- Cash on cash

• Hedge Funds (IRR)

- Up-capture/down-capture

- Max drawdown/drawdown

duration

- Sortino

- Omega

35

Many Alternative Investment Performance Measures – which one to use?

36

ALTERNATIVE

INVESTMENTS –

ARE YOU READY

TO TAKE THE

PLUNGE?