Private Equity Search Process and Recommendations May 19-20, 2016 - PowerPoint PPT Presentation

Private Equity Search Process and Recommendations May 19-20, 2016 Chris Schelling, Director of Private Equity Chris Tindell, Investment Analyst, Private Equity StepStone Group

Agenda I. Private Equity Search Process Timeline & Allocation Objectives II. Manager Search Process III. Portfolio Construction IV. Manager Selection & Recommendations* V. Requested Board Action *Names used in throughout this presentation are the shortened version that is used for ease of communication purposes throughout this document. The formal recommendations to the Board on the last page of this presentation reflect the full legal name of the investment. 2

I. Private Equity Search Process Timeline & Allocation Objectives

Private Equity Search Process Timeline Q2 • Conduct manager reviews through a multi-phase evaluation process for all candidates. 2015 – • Multiple conference calls with StepStone to score and determine best candidates for TMRS, as well Ongoing as incorporate their sourcing and due diligence. • TMRS staff presented the 2016 Private Equity Pacing Plan recommending a commitment of up to Dec $600 million of Private Equity exposure. 2015 • Board approved manager searches during 2016 totaling up to $600 million. • TMRS Staff formally launched the 2016 search process, in concert with StepStone. Dec 2015 • February 2016: The Board approved one manager recommendation for the Private Equity Asset Q1 Class for $75 million. 2016 • Legal negotiations ongoing. • May 2016: Staff and StepStone currently presenting four manager recommendations for the Private Q2 Equity Asset Class for $185 million. 2016 4

Private Equity Search Process Objectives • Excess Return Potential • Expected excess return consistent with TMRS’ overall objective for Private Equity asset class: Russell 3000 + 3.00%. • Identify best in class managers currently in fundraising. • Portfolio Diversification • Balance concentration and diversification across managers. • Ensure sufficient strategy diversification, consistent with policy guidelines, and whenever possible incorporate tactical and opportunistic considerations into manager selection. • Targeted Commitment Level • Per the December 2015 Board approval, the targeted Private Equity Pacing Plan for 2016 is up to $600 million. 5

II. Manager Search Process

Manager Search Process Manager Screen & Universe Analysis Scoring Scoring Category Score / Outcome Manager Screen Yes - Take Meeting; No - Don't Take - Is vehicle consistent w/ TMRS' Sourcing Meeting objectives? (Y/N) Manager Analysis - Does vehicle have 1 - Advance; 2 - Stop adequate capacity and Research Preliminary Due Diligence timeline? - PPPPT* Preliminary Review (1/2) Semi-Finalist Scoring Matrix Scoring Category Score Prioritization Finalist Manager Review (A,B,C) - Questionnaire Review A - Prioritize for Final Due - Detailed PPPPT* Review Diligence - In-depth Manager Qualifications Comprehensive Due B - Perform More Research Diligence Review C - Stop Research / Manager - Compliance with TMRS IPS (Score) not Selected - Verification of Research, References, Further Market Research Staff Final Due Diligence Scoring Matrix Recommendation Scoring Category Possible Points People (Firm & Team) 0 - 40 points Philosophy (Attractiveness of Opportunity / Portfolio Fit) 0 - 20 points Board Process (Sourcing, Underwriting and Managing) 0 - 40 points Approval Performance (Historical / Expected) 0 - 40 points Terms (Fees, Liquidity, etc.) 0 - 20 points Total 100† *PPPPT – People, Philosophy, Process, Performance, Terms 7 †Selected managers standardized to a score of 100 to allow comparability among selected managers.

Manager Search Process Sourcing (Y/N) 73 distinct growth managers sourced Preliminary Due Diligence (1/2) 33 distinct growth managers meetings (45.2%) Prioritization (A,B,C) 12 on-site growth manager Comprehensive Due meetings (16.4%) Diligence (Score) 4 growth manager Staff recommendations (5.4%) Recommendation Board Approval 8

Final Selected Managers Scoring Matrix Final Due Diligence Scoring Matrix - Aggregated Results* Comparable Comparable Recommended Manager/Fund Manager Score† Mgr. 1 Score Mgr. 2 Score Providence 100 93.0 81.0 Updata 92.0 83.0 100 Mercato 96.0 81.0 100 Foundry 81.5 75.0 100 *Scoring matrices utilize difference calibrations depending on the strategy being utilized. †Selected managers standardized to a score of 100 to allow comparability among selected managers. 9

III. Portfolio Construction

Manager Selection Portfolio Considerations Strategy Diversification Figure 2 : Private Equity Strategy Diversification by Commitment 20.3% Strategy considerations: Buy-out (40.0% to 75.0%) 47.7% Growth (5.0% to 2015: Overweight special situations 25.0%) early for J-Curve mitigation, efficiency Special Situations 32.1% of capital deployment, and tactical (10.0% to 35.0%) opportunities. Figure 3 : Private Equity Target 2016: Focus on growth opportunity set Diversification and continue to add buy-out exposure. 9.9% Buy-out (40.0% 2017: Round out buy-out portfolio, and to 75.0%) Growth (5.0% to opportunistically add to growth and 15.7% 25.0%) credit. Special Situations 51.1% (10.0% to 35.0%) Un-allocated 23.3% 11

Manager Selection Portfolio Considerations Manager Implementation Figure 4: Private Equity Manager Diversification by Commitment 3.5% TPG 13.0% 6.1% GSO The overall goal remains identifying top 6.9% Carlyle H.I.G. 13.0% quartile performers to partner with. Providence 8.1% Tritium Updata 8.7% 11.3% Searchlight Position sizing considerations: Mercato 8.7% Foundry 10.4% Harvest 10.4% Continue to reduce the unallocated portion of the private equity portfolio Figure 5 : Private Equity Target Manager while sensibly balancing the trade-off Diversification between diversification and concentration. TPG 6.4% GSO 6.4% Carlyle Areas of focus are enhancing manager 5.5% H.I.G. diversification, and building strategic Providence 5.1% Tritium relationships where possible/appropriate. 5.1% Updata 51.1% Searchlight 4.2% Mercato Foundry 4.2% Harvest 4.0% Un-allocated 3.4% 1.7% 3.0% 12

Manager Selection Portfolio Considerations Geographic Diversification TMRS is focused on taking a measured approach to global geographic diversification. Figure 6 : Private Equity Geographic Figure 7 : Private Equity Target Geographic Diversification by Commitment Diversification 14.0% U.S.A. U.S.A. International International Un-Allocated 51.1% 42.1% 86.0% 6.8% The Target Portfolio keeps a conservative stance on international exposure. 13

Manager Selection Portfolio Considerations Growth Risk and Return Development Risk and Portfolio Construction Execution Risk Business Continuity Business Model Risk Technology Risk Market Risk Early Stage Late Stage Growth Angel/Seed Buy-Out VC VC Equity $35 million $40 million $50 million $60 million Foundry Mercato Updata Providence 14

Manager Selection Portfolio Considerations Growth Risk and Return 15

Manager Selection Portfolio Considerations Growth Risk and Return Average TVM 3.5 3.1 2.7 3.0 2.6 2.5 2.0 1.5 1.0 0.5 0.0 VC Growth Buy-Out 16

IV. Manager Selection & Recommendations

Executive Summary of Manager Recommendation Summary of Recommendations Strategy Recommended Recommended Manager/Fund Target Return Classification Amount Providence Growth Equity $60 million 20% / 2.5X Updata Growth Equity $50 million 20% / 2.5X Mercato Growth Equity $40 million 20% / 2.5X Foundry Venture Capital $35 million 25% / 3.0X Total Net Recommendations: $185 million Private Equity Pacing model as approved by the TMRS Board of Trustees in December 2015 established an amount up to $600 million as the targeted level of commitments for 2016. 18