TROUBLE WITH CURRENCY: IS HEDGING EFFECTIVE FOR PRIVATE EQUITY?

THE TROUBLE WITH CURRENCY: IS HEDGING EFFECTIVE FOR PRIVATE EQUITY? 1 PERSPECTIVE TorreyCove Capital Partners THE TROUBLE WITH CURRENCY: IS HEDGING EFFECTIVE FOR PRIVATE EQUITY? The numbers indicate that currency risk is unlikely to produce a shock to a portfolio in the way that, say, the 2008 financial crisis did; however, its impact can be material to performance. The unfolding euro crisis has brought to the fore an issue that is typically in the background of investors thoughts, but rarely rises to the level of concrete action: the question of whether or not to hedge currency exposure. The topic is certainly relevant, as the modern institutional investor generally has significant investments denominated in currencies other than its own. Yet most investors tend to pay less attention to the inherent currency risks within their portfolios than they do to risks relating to manager execution, strategy drift, and sector/ geographic concentration; or, if they do think about currency risk at all, tend toward inaction. In this research brief, the matter of currency risk management is explored within a private equity portfolio. We will examine the usual level of exposure to currency volatility, use real world data relating to private equity portfolios to simulate the actual practice of hedging and estimate its potential net benefits, lay out some possible options for the management of currency risk, and ultimately provide our conclusion on the matter. Why Hedge? What are Exposures? The first question that arises is: just how meaningful is currency risk? The numbers indicate that currency risk is unlikely to produce a shock to a portfolio in the way that, say, the 2008 financial crisis did; however, its impact can be material to performance. As an example, assuming typical allocations, a $50 billion US pension plan may have a total exposure (predominantly to the euro) of up to $20 billion in non-us-dollar investments, mostly emanating from its equity holdings, though exposure from private equity may be over $1 billion. Over the past 12 years, the USD/EUR exchange rate has ranged from 84 cents to nearly $1.60. Assuming the entire euro exposure was unhedged over a oneyear period, a relatively conservative estimate of 10% volatility to the dollar/ euro exchange, and a 10% return to the portfolio, the potential currency impact on performance could approximate $200MM over a one-year period. While not

2 TorreyCove Capital Partners AUGUST 2012 capable of devastating the portfolio, the currency impact to investment returns is material enough to warrant attention. Further, the effect on the portfolio in terms of liquidation value is much more substantial, as billions in unrealized losses could be embedded in the non-dollar-denominated segment of the portfolio. Impact of Perfect Hedge In order to determine with more precision the actual impact of currency fluctuations on a portfolio of private equity investments, we analyzed the return streams of a group of euro-denominated funds, taking into account the annual returns generated by the portfolio, in both euros and dollars, over 1-, 3-, 5-, and 10-year horizons (data drawn from Thomson Reuters). The calculations were made using both the industry standard IRR measure, in order to see the actual returns generated under a real world scenario; and a time-weighted IRR ( TWIRR ) measure in order to more effectively isolate the currency impact. The IRR results were generally in line with expectations, indicating that the latest year of the analysis, 2011, indicated significant negative performance (from a dollar perspective) due to the dramatic weakening of the euro. The 3- and 5-year IRRs indicate a moderate impact that diminishes over the longer time period, while the 10-year IRRs indicate a relatively modest impact. This is due primarily to the mechanics of private equity investing, whereby contributions are made and distributions received in any given year, meaning the investor is buying and selling private equity investments (and the associated currency exposures) in any given year. This has the tendency to substantially mute the directional exposure to currency risk in a stabilized, relatively mature, private equity program. The TWIRR analysis was substantially in agreement with the IRR analysis for all periods, with the important exception of the ten-year range. For that period, the currency effect on TWIRR was over 4%, which is quite meaningful for that length of time. The reason for the difference has to do with the size of cash flows into eurodenominated funds which were larger in later years than they were ten years

THE TROUBLE WITH CURRENCY: IS HEDGING EFFECTIVE FOR PRIVATE EQUITY? 3 ago in 2002. Since the TWIRR gives equal weight to each period s cash flows, it essentially mirrors what would happen if there were substantially even cash flows throughout the analysis period. In that case, the strong appreciation of the euro over the first six years (until 2008) boosted the dollar returns of earlier vintage funds and led to the meaningful currency effect in the ten-year holding period. As most mature institutional programs have built euro exposure to a steady-state allocation, this situation is not likely to recur; however, periods of sustained appreciation/ depreciation in a local currency (in this case, the euro) can be expected to have a meaningful effect on dollar returns, though likely more moderate than what is seen in this TWIRR analysis. It should be noted that the results of these analyses (both time-weighted and cash flow-weighted) were very much in line with TorreyCove composite client performance data, both in terms of direction and magnitude, with respect to the 10-year IRRs and TWIRRs. For the other periods, the currency effect was somewhat more pronounced than our client data, with the exception of the 1-year figure, which showed a smaller impact. The primary point of these analyses is that currency effects in a mature private equity portfolio are typically moderate over the median- and longer-terms, with the possible exception being a sustained movement in one direction over a longer period of time, like what was seen from the early 2000s to 2008 for the euro. FIGURE 1: Effect of Currency Exchange Rate on Performance 1-yr IRR 3-yr IRR 5-yr IRR 10-yr IRR 1-yr TWIRR 3-yr TWIRR 5-yr TWIRR 10-yr TWIRR Total USD Returns: 1.5% 6.4% 1.4% 8.6% Total USD Returns: 1.5% 7.8% 1.8% 3.7% Total EUR Returns: 4.7% 9.1% 2.4% 7.6% Total EUR Returns: 4.7% 10.3% 2.2% 9.2% Gain or Loss: (3.2%) (2.7%) (1.1%) 0.9% Gain or Loss: (3.2%) (2.5%) (0.4%) 4.5% Source: Thomson Reuters European Funds as of 12.31.2011. Notes: Commitments in sample size for IRR table(billions): 1-year - $193.1, 3- through 10-year - $274.9. Commitments in sample size for TWIRR table(billions): 2002 - $54.0, 2003 - $52.0, 2004 - $64.7, 2005 - $89.6, 2006 - $118.7, 2007 - $169.0, 2008 - $211.4, 2009 - $219.1, 2010 - $216.3, 2011 - $192.7.

4 TorreyCove Capital Partners AUGUST 2012 Hedging Alternatives Certain characteristics of private equity investments, such as the less predictable nature of their cash flows, make all hedging instruments, at best, imperfect for managing currency risk vehicles For the private equity investor, there are essentially three options available for dealing with exchange rate risk: hedge at the fund level, hedge at the portfolio level, or remain unhedged. If a hedge is desired, various techniques exist, the most commonly used being forward contracts, futures, options, and swaps. With the development of ETFs focused on currency exchange rates, another option has been added to the mix. Additionally, it should be noted that a certain amount of reduction in currency exchange risk can be achieved through the construction of a well-diversified portfolio of investments, so long as currency exposures are actively monitored and managed. However, in the context of a private equity portfolio, this is easier said than done, as the choice of investments is based on performance and the universe of potential attractive investments in various currencies will not be predictable and will often not be deep. So we confine our comments to direct hedging methodologies for the purposes of this discussion. While each hedging method has particular attributes that make it more appropriate for different purposes, all methods can be effective in providing investors some protection from the financial impact of exchange rate movements. They also have the advantage of being relatively simple to understand and execute. Further, futures, options, and ETFs are traded on organized exchanges, providing for a high level of liquidity, reduced transaction costs, and much lower counterparty risk. Of course, the primary disadvantages of these hedging methods are their cost, especially in the case of options, which can become quite expensive in periods of high volatility and uncertainty in the market, and, in the case of futures and ETFs, the impact on portfolio return that can arise from imprecise hedging. Certain characteristics of private equity investments, such as the less predictable nature of their cash flows, make all of these instruments, at best, imperfect hedging vehicles. As an illustration of these dynamics, we constructed the following theoretical hedging scenario using actual cash flow and performance data drawn from our client portfolios. The analysis is done at the overall private equity portfolio level, as a hedge at the portfolio level is likely to be a superior fit to one set at the level of any given fund within the portfolio. The estimated cash flows from a larger, diversified portfolio can be expected to show less volatility than those from a single fund, which includes non-diversified elements that impact its actual cash flows. This scenario highlights the major hurdle in setting effective hedges for a private equity portfolio: the inability to estimate with any precision the timing or magnitude of cash distributions. Obviously, hedging works best with a discrete cash flow that is of a known quantity and is expected to be received within a relatively narrow time frame in the future (i.e., payment for goods delivered overseas). Private equity investments almost never satisfy these conditions, due to the fact that fund

THE TROUBLE WITH CURRENCY: IS HEDGING EFFECTIVE FOR PRIVATE EQUITY? 5 managers have discretion over investment and distribution timing, market factors often impact the timing of exits (and resulting distributions), and the gain/loss on an investment has a good degree of variability. From a practical point of view, an investor must forecast the approximate time frame of inflows and outflows from the private equity portfolio, as well as the associated gain/loss embedded in the portfolio. As seen in the nearby graphic, this tends to be a dicey business at best. Of the six years under review (2006-2011), the error of the projected net cash flow in comparison to the actual ranged from a low of 3% to a high of 95%, with an average of over 35%. Thus, the portfolio at most times would be meaningfully over- or under- hedged. So, even though we can make educated estimates of what we expect the cash flow characteristics of a private equity investment to be, we will often be incorrect. Therefore, hedging in a private equity context will always exhibit a good deal of error, compared to hedging for more liquid, tradable securities. We next constructed a hedge based on the projected cash flows in this scenario, assuming that futures contracts were used as the hedging security (and ignoring mismatches between standard contract size and total amount to be hedged). We excluded direct hedging costs from the analysis for simplicity and since such costs will not have a major impact on the results of the strategy. In one case, we set a hedge only on the projected net cash flows and in another case we hedged both cash flows and the underlying fair market value of the portfolio. FIGURE 2 Cashflow Projections verus Actuals for a Sample EUR Portfolio 200 150 100 Projected Contributions Projected Distributions Projected Net Cash Flow Actual Contributions Actual Distributions Actual Net Cash Flow 50 0-50 -100-150 -200-250 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Base assumptions for pacing: Annual assumed net growth rate: 12%; Contribution rate (as % of unfunded commitment): Year 1: 15%, Year 2: 25%, Year 3: 45%, Bow (for distributions): 2; Effective Term of Partnerships: 12 years; Commitments to underlying EUR-denominated funds at a pace of an actual institutional investor as follows: Year 1: 308.3, Year 2: 85.9, Year 3: 414.0, Year 4: 380.0, Year 5: 0, Year 6: 15.5, Year 7: 282.0

6 TorreyCove Capital Partners AUGUST 2012 FIGURE 3 Hypothetical Currency Hedge Cashflow Summary 2006 2007 2008 2009 2010 2011 Projected Contributions (78.8) (159.2) (214.2) (227.8) (187.5) (156.7) Projected Distributions 2.8 6.7 18.9 44.6 91.0 158.3 Projected Net Cash Flow (75.9) (152.6) (195.3) (183.3) (96.5) 1.6 Actuals Actual Contributions (109.7) (223.3) (204.8) (118.4) (188.0) (163.7) Actual Distributions 52.1 47.7 15.8 49.2 119.8 123.0 Actual Net Cash Flow (57.7) (175.6) (189.0) (69.2) (68.3) (40.8) FMV - Projected 137.7 306.6 538.7 786.6 977.5 1,093.2 FMV - Actual 152.8 358.1 403.8 567.4 739.6 807.9 TWIRR - Actual (EUR) 23.6% 7.9% (25.5%) 18.1% 13.8% 3.0% USD Summary Table Average StandardDeviation 9.0% 15.5% 10.9% 18.6% 3.2% 15.4% «TWIRR - Actual (USD) 30.9% 15.0% (28.0%) 20.6% 7.7% 0.3% TWIRR - Hedged (EUR) - Cashflow only 27.9% 11.5% (26.7%) 19.9% 13.1% 3.0% TWIRR - Hedged (USD) - Cashflow only 35.5% 18.9% (29.2%) 22.4% 7.1% 0.3% TWIRR - Hedged (EUR) - Cashflow & FMV 20.1% 4.3% (23.2%) 12.2% 20.1& 5.1% TWIRR - Hedged (USD) - Cashflow & FMV 27.2% 11.1% (25.9%) 14.5% 13.6% 2.3% Hedging Cashflows Only Hedge Amount in mm EUR 75.9 152.5 195.3 183.3 96.5 (1.6) Gain (Loss on Hedge in mm EUR) 7.1 13.5 (7.1) 9.4 (5.2) 0.0 What Should have Been Hedged 57.7 175.6 189.0 69.2 68.3 40.8 Overexposure to Currency Due to Hedging 18.2 (23.1) 6.2 114.1 28.2 (42.4) Relative Overexposure as % of Hedge Amount 24.0% (15.2%) 3.2% 62.2% 29.2% 100.0%+ Gain (Loss Due to Hedging the Wrong Amount) 1.7 (2.1) (0.2) 5.8 (1.5) 0.7 Hedging FMV & Cashflows Hedge Amount in mm EUR (61.7) (154.2) (343.4) (603.4) (881.0) (1,094.8) Gain (Loss on Hedge in mm EUR) (5.8) (13.7) 12.5 (30.9) 47.5 18.8 What Should have Been Hedged (95.1) (182.5) (214.7) (498.2) (671.3) (767.1) Overexposure to Currency Due to Hedging 33.4 28.3 (128.7) (105.2) (209.7) (327.7) Relative Overexposure as % of Hedge Amount (54.1%) (18.4%) 37.5% 17.4% 23.8% 29.9% Gain (Loss Due to Hedging the Wrong Amount) 3.1 2.5 4.7 (5.4) 11.3 5.6 Source: TorreyCove client data. Note: The above summary is based on 10-year data, of which only 6-years appears here; therefore, the numbers will not average if calculated by hand.

THE TROUBLE WITH CURRENCY: IS HEDGING EFFECTIVE FOR PRIVATE EQUITY? 7 The analysis indicated the following: The volatility of US dollar returns was not significantly reduced in either scenario; in fact, the strategy to hedge only the net cash flow actually increased volatility of US dollar returns somewhat, as a result of the significant projection error throughout the sample. The strategy involving hedging both net cash flow and fair market value exhibited the same volatility as the unhedged dollar return and so more closely approximated the local currency (euro) return; however, this strategy also underperformed in terms of return. Significant exposure to hedging instruments is required in order to properly implement either hedging strategy. In the case of the net cash flow hedge, maximum exposure reached $183 million, but the net cash flow and fair market value hedge requires much greater exposure in this case peaking at over $1 billion. Making this type of discretionary decision may not be within the expertise or comfort zone of institutional plan managers. Large hedge positions expose the portfolio to potentially larger mark-tomarket losses which must be satisfied in cash on a daily basis. The maximum loss associated with the net cash flow hedge comes in at $7 million, while the maximum gain is $14 million. These swings are reasonably manageable for a large private equity program. However, the gain/loss related to hedging both the net cash flows and fair market value lead to more dramatic swings due to the larger hedging positions that must be taken - in this case, a maximum loss of $31 million and a maximum gain of $48 million. While these fluctuations tend to net out in large part over time, and in any event will be largely offset by the corresponding fluctuations in the portfolio, a problem arises with respect to timing. The illiquidity of the private equity portfolio leads to the prospect that an investor will have to satisfy a large loss on a currency futures contract in cash as it occurs, while gains in this case are locked in to an illiquid portfolio and cannot be accessed until some later and uncertain date. Funding short-term losses in this manner will tend to test the nerve of most investors and some institutions may find it difficult to maintain discipline in implementing the program. Futures contracts, though relatively inexpensive in terms of transaction costs, have the above-noted drawback of requiring daily settling of mark-to-market gains and losses and the associated cash calls on the investor. In order to avoid this problem, options (calls/puts) could be utilized to effect a hedge, as they have the advantage of not requiring mark-to-market adjustments. They can best be viewed as insurance policies against major losses that expire unused if those losses do not materialize. The primary drawback of an option is the premium expense that must be paid to purchase them ranging from less than 2% to much higher, depending on a variety of factors (especially volatility). A recent example: the premium for a one-year euro/dollar exchange rate put with a strike price at the current spot rate was over 4.5% of the contract amount ( 1,000,000). The

8 TorreyCove Capital Partners AUGUST 2012 unsurprising thing about options is that they become much more expensive just when everyone decides they need some insurance. Other considerations: hedging within the portfolio - To the extent that investment managers hedge currency exchange as part of their strategy, hedging at the portfolio level may be redundant; however, the available data indicates that, with respect to private equity, hedging by managers is quite unusual, due to the same difficulties as outlined in this paper. - There is some difficulty in ascertaining exactly how much currency exchange exposure exists in a private equity portfolio, as funds may invest in companies that do business in various currencies, which may provide a certain amount of cross-currency hedging. For instance, if a euro-denominated fund invests in a Turkish company, it will have lira exposure, which may provide a partial hedge, as the respective currencies have differing correlations to other currencies (i.e., the USD). The global nature of commerce means that any company doing business in multiple currency zones (especially exporters) will have a certain amount of currency diversification that may dampen volatility at the company level. - In the case of buyout transactions, the leverage taken out on acquisition targets may act as an inherent hedge at the company level, as the impact of the weakening of the local currency on earnings may be partially offset by the reduction in value of debt denominated in the same local currency. - Because these factors are quite dynamic and difficult to track, our analysis in this paper is restricted to hedging at the portfolio level; however, for organizations that have the wherewithal, a closer investigation of the impact of these factors on currency exchange risk is in order. Recommendations Though the meaningful emergence of non-us-dollar funds in US institutional portfolios occurred primarily over the last 10 to 12 years, our analysis of currency and hedging dynamics leads to some important insights, as follows: Usually the optimal strategy for dealing with currency risk in a private equity portfolio will be to take no action. While our analysis indicates that there are periods where currency impacts can be material, these tend to be difficult to predict with any accuracy. Further, the operation of a well-developed private equity investment program tends to cancel out much of the underlying currency fluctuation, as investors are making both contributions (going long) and receiving distributions (going short) at a portfolio level. So, over time, movements in the local currency tend to be dampened by this automatic hedging effect. Also, currency exchange rates tend to fluctuate up and down over time, which also leads to the canceling out of gains and losses in the context of a stabilized private equity portfolio, which by its nature is relatively long term. The difficulty of determining the timing and amount of cash flows (as well

THE TROUBLE WITH CURRENCY: IS HEDGING EFFECTIVE FOR PRIVATE EQUITY? 9 as the fair market value) of a private equity portfolio is the most important drawback to implementing an effective hedging program. In fact, this drawback is often fatal, as errors in projecting these variables (if large enough) can perversely lead to increased risk in the portfolio. The exception to this rule would be the case where an investor has a strong point of view on the direction of exchange rates in relation to a currency in which it has material exposure. In practical terms, hedging would only be indicated where the local currency was expected to go into a secular decline over several years. In fact, the position of the euro today may be just such a real world case, and if there was ever a time for a private equity investor to consider hedging euro exposure, this would be it. However, due to the noted difficulties of hedging private equity, it may be reasonable to conclude that hedging effectiveness will not be sufficient to justify the costs. If the decision is made to hedge currency exposure associated with private equity, our analysis suggests certain practices that should be employed: - Hedge at the portfolio level rather than at the level of individual funds, as the cash flows of the former will tend to have less variability than the latter. - Hedges that use the fair market value of the portfolio as well as the expected net cash flows are likely to be a better fit than hedges focused only on expected net cash flows. - In spite of their higher cost, puts may be the most effective way to hedge, as they can insure against major currency movements as well as eliminate the need to satisfy mark-to-market cash calls associated with futures. - Reviewing and resetting hedge positions should be undertaken regularly (intervals of one year or less), as projected portfolio cash flows and fair market value can shift meaningfully, requiring a dynamic hedge. - Maintain consistency and discipline in the implementation of the hedging program, especially when the hedge position is showing a loss. If there was ever a time for a private equity investor to consider hedging euro exposure, this would be it. Our recommendation relating to hedging currency exchange risk in a private equity portfolio is that it usually does not operate efficiently enough to provide adequate protection and justify any additional cost. In the normal course, the most appropriate action will typically be to remain unhedged. An exception can, and perhaps should, be made when an investor has a strong, well-thought-out point of view that there is likely to be a substantial decline in the local currency over a long time period (eight years or more). In such a case, attempting to hedge currency risk across the board within a portfolio would likely be the prudent course of action. In any event, when hedging is desired, it will often be much more impactful and easier to execute effectively within other asset classes (most importantly equities) as these are more liquid than private equity and have more readily ascertained values at a given point in time. Further, with respect to these more liquid asset classes, the investor usually has control or strong influence over the exit timing, or is at least able to estimate cash flows with more accuracy. Another option for managing currency risk would be to develop a dedicated currency trading portion of the portfolio. This allocation could be structured so as to provide a hedge for all or most of the total portfolio, and should be actively managed by experts in currency trading that may already reside in the investor s portfolio.

10 TorreyCove Capital Partners AUGUST 2012 Appendix FIGURE 1 Thomson Reuters TWIRR Table VintageYear- Close Date USD EUR Gain or Loss From Not Hedging 1-yr 3-yr 5-yr 7-yr 10-yr 1-yr 3-yr 5-yr 7-yr 10-yr 1-yr 3-yr 5-yr 7-yr 10-yr 2000 (12.0%) 6.5% 3.4% 9.4% 12.7% (10.8%) 8.9% 3.7% 10.1% 8.4% (1.2%) (2.4%) (0.3%) (0.7%) 4.3% 2001 (12.5%) (5.0%) (3.3%) 13.4% 13.9% (12.9%) (3.5%) (3.5%) 13.7% 9.1% 0.4% (1.5%) 0.2% (0.3%) 4.8% 2002 (2.8%) 8.6% 2.6% 13.3% 15.0% (0.2%) 11.1% 2.6% 13.8% 9.4% (2.6%) (2.5%) (0.1%) (0.6%) 5.6% 2003 (5.7%) 7.8% 6.1% 10.5% (5.5%) 9.9% 5.8% 10.7% (0.3%) (2.2%) 0.3% (0.2%) 2004 (8.5%) 2.9% 9.3% 16.6% (5.9%) 5.3% 9.8% 17.4% (2.6%) (2.4%) (0.4%) (0.7%) 2005 (1.6%) 5.1% (0.5%) (0.6%) 0.7% 7.4% (0.2%) (0.7%) (2.3%) (2.4%) (0.3%) 0.1% 2006 10.0% 12.3% (2.7%) 13.5% 14.7% (2.6%) (3.5%) (2.4%) (0.1%) 2007 0.5% 12.0% (5.0%) 4.9% 15.0% (4.6%) (4.4%) (3.0%) (0.4%) 2008 (1.7%) 7.9% 3.3% 10.3% (5.0%) (2.4%) 2009 33.6% 13.3% 41.4% 14.9% (7.8%) (1.6%) 2010 (24.9%) (20.0%) (4.9%) Grand Totals 1.5% 7.8% 1.8% 11.5% 13.7% 4.7% 10.3% 2.2% 12.2% 9.2% (3.2%) (2.5%) (0.4%) (0.8%) 4.5% FIGURE 2 Thomson Reuters IRR Table VintageYear- Close Date USD EUR Gain or Loss From Not Hedging 1-yr 3-yr 5-yr 7-yr 10-yr 1-yr 3-yr 5-yr 7-yr 10-yr 1-yr 3-yr 5-yr 7-yr 10-yr 2000 (12.0%) 5.3% 4.0% 10.1% 14.4% (10.8%) 7.7% 3.3% 11.2% 8.4% (1.2%) (2.4%) 0.6% (1.1%) 6.0% 2001 (12.5%) (2.8%) 2.1% 30.0% 24.6% (12.9%) (1.0%) 0.8% 32.3% 18.5% 0.4% (1.8%) 1.3% (2.3%) 6.1% 2002 (2.8%) 7.7% 4.0% 22.5% 21.9% (0.2%) 10.3% 3.1% 22.8% 17.7% (2.6%) (2.6%) 0.9% (0.4%) 4.2% 2003 (5.7%) 5.5% 7.3% 9.8% (5.5%) 7.9% 6.6% 9.2% (0.3%) (2.4%) 0.7% 0.6% 2004 (8.5%) 1.2% 10.9% 19.0% (5.9%) 3.6% 10.0% 18.1% (2.6%) (2.4%) 0.9% 0.9% 2005 (1.6%) 5.9% (1.0%) 0.7% 0.7% 8.4% 0.0% 1.1% (2.3%) (2.5%) (1.0%) (0.4%) 2006 10.0% 11.1% (0.2%) (0.2%) 13.5% 13.8% 1.7% 1.5% (3.5%) (2.7%) (1.9%) (1.7%) 2007 0.5% 8.3% 0.3% 4.9% 11.7% 3.5% (4.4%) (3.5%) (3.2%) 2008 (1.7%) 0.7% (1.9%) 3.3% 3.8% 1.4% (5.0%) (3.1%) (3.2%) 2009 33.6% 25.1% 41.4% 29.9% (7.8%) (4.9%) Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding whether investment is appropriate, nor a solicitation of any type. The (20.0%) general information contained herein should not be acted (4.9%) upon 2010 (24.9%) with- Grand Totals out 1.5% obtaining 6.4% specific legal, 1.4% tax and investment 7.0% advice 8.6% from a 4.7% licensed professional. 9.1% Generally, 2.4% alternative 8.2% investments 7.6% involve (3.2%) a high (2.7%) (1.1%) (1.3%) 0.9% degree of risk, including potential loss of principal, can be highly illiquid and can charge higher fees than other investments. Private Source: Thomson Reuters European Funds as of 12.31.2011. equity investments are generally not subject to the same regulatory requirements as registered investment options. Past performance Notes: Commitments in sample size for IRR table(billions): 1-year - $193.1, 3- through 10-year - $274.9. Commitments in sample size for TWIRR table(billions): 2002 - $54.0, 2003 - $52.0, 2004 - $64.7, 2005 - $89.6, 2006 - $118.7, may 2007 not be - $169.0, indicative 2008 of - future $211.4, results. 2009 - $219.1, 2010 - $216.3, 2011 - $192.7. TorreyCove Capital Partners is a global alternative investments specialist, currently overseeing approximately $19 billion of private equity assets. As a client-oriented firm, we create value through a combination of private equity market intelligence, objective advice, insightful investment guidance and selection, and innovative investment products.. To find out more about our firm, please visit: WWW.TORREYCOVE.COM