Investment Opportunities in
Private Markets
2017 NCPERS Annual Conference
and Exhibition
May 22, 2017
For institutional investor use only. Not for use with or distribution to the public.
The mighty middle market
U.S. middle market defined
Nearly
200,000 firms
in all industry segment and geographies
Representing
3.0%
of all U.S. companies
Annual revenue ranging from
$10mm to $1bn
U.S. middle market impact
3rd largest
1/3
global economy
of U.S. jobs
(~48 million)
33%
+2.3mm
of private sector
GDP
new jobs in 2014
More than
+1.1mm
$10 trillion
new jobs in 2013
in annual revenue
Source: National Center for the Middle Market, as of Q4 2016
For institutional investor use only. Not for use with or distribution to the public.
3
US non-investment grade corporate debt market
EBITDA of $10MM
EBITDA of $100MM
Credit Facility of $350MM
Senior
Small + Senior
=
Middle Market Senior Loans
Large + Senior
=
Broadly Syndicated Loans
Market participants: Limited Number
of Lenders… the "Club”
CPP Antares, Madison Capital,
Churchill, etc.
Market participants: CLOs, Mutual Funds,
Insurance Companies, Asset Managers
Yields = 4% to 5%, Floating Rate
Yields = 6% to 8%, Floating Rate
Seniority
Small + Junior
=
Mezzanine + Second Lien
Large + Junior
=
High Yield Bonds
Market participants: Mezzanine Funds,
BDCs, Credit Opportunities Funds
Market participants: Mutual Funds,
Insurance Companies, Asset Managers
Yields = 9%+, Typically Fixed Rate
Yields = 6% to 7%, Fixed Rate
Junior
Small
For institutional investor use only. Not for use with or distribution to the public.
Size
Large
4
How do we define the middle market?
Middle market
Broadly syndicated
Size of credit facility
$25 to $350 million
>$350 million
Company EBITDA
$10 to $100 million
$100+ million
Lenders per facility
2 to 15
15 to 100+
Spread/LIBOR floor
400 to 600 bps/100
300 to 400 bps/100
Upfront fees
Up to 2.0%
Up to 0.5%
Covenants
Traditional
Covenant-lite
Sourcing
Club/origination
Buyer model
Liquidity
Relatively illiquid
Liquid
Extensive primary due diligence
Less due diligence
Level of diligence
For institutional investor use only. Not for use with or distribution to the public.
5
Banking Consolidation Drives Opportunity
Declining middle market senior loan supply driven initially by consolidation of regional banks
who were active lenders to the middle market historically
1990-1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
TRAVELERS GROUP
CITICORP
CITIGROUP
EUROPEAN AMERICAN BANK
BANAMEX
BANK ONE
JP MORGAN
JP MORGAN CHASE
CHASE MANHATTAN
CHASE MANHATTAN
CHEMICAL BANKING
CONTINENTAL BANK
BANK OF AMERICA
FLEET FINANCIAL GROUP
BANKBOSTON
FLEETBOSTON FINANCIAL
SUMMIT BANCORP
SOUTHTRUST
WACHOVIA
WACHOVIA
CORESTATES FINANCIAL
FIRST UNION
WACHOVIA
FIRST UNION
Source: Federal Reserve; GAO
For institutional investor use only. Not for use with or distribution to the public.
6
2007
2008
2009
Yield and credit risk
 Despite lower credit risk, middle market loans offered a higher current yield, 6.82%, compared to broadly
syndicated loans, 5.73%, because they are relatively illiquid
 Middle market loans offered a significantly lower default rate, 3.42%, compared to broadly syndicated
loans, 4.93%, and high-yield bonds, 4.45%
 Middle market loans had lower loss rates and higher recovery rates than broadly syndicated loans due to
more conservative structuring and other protections
Investment performance and correlations
Yield
1998-2015
(1998-2015)
Default
rate
Loss
rate
Recovery
rate
6.82%
7.47%
3.42%
0.67%
80.39%
Broadly syndicated loans3
5.73%
6.25%
4.93%
1.18%
76.05%
High-yield debt4
7.61%
9.43%
4.45%
2.84%
42.24%
Current1
Middle market loans2
Asset class
Historical
1 As
of June 30, 2016.
as loans of $200 million or less, based on S&P LSTA Leveraged Loan Index.
3 Defined as loans greater than or equal to $200 million, based on S&P LSTA Leveraged Loan Index. High-yield debt based on BoA Merrill Lynch US
High Yield Index.
4 High-yield debt based on BoA Merrill Lynch US High Yield Index.
Average default, loss, and recovery rates are based on trailing 12-month time frames.
Sources: S&P LCD, S&P Credit Pro, BoA Merrill Lynch.
The sector performance described above does not reflect portfolio or product performance, and does not consider transactions costs or investment
management fees.
2 Defined
For institutional investor use only. Not for use with or distribution to the public.
7
Historical and relative credit performance
 Middle market loans are generally structured more conservatively than broadly syndicated loans
– Lower leverage multiples, higher interest coverage and tighter covenant packages
 Middle market loans consistently outperform broadly syndicated loans in key credit metrics
Average credit statistics, 2001 – 2016*
Investment
Senior
debt/EBITDA
Total
debt/EBITDA
EBITDA/
Cash int.
Middle
market LBO
3.68x
4.33x
3.43x
Large LBO
4.42x
5.05x
2.96x
* Source: S&P LCD, period from 1/1/01 to 12/31/16; represents unadjusted EBITDA
** Source: S&P LCD, S&P Credit Pro.; Middle market loans include total facility sizes of
less than $200 million and broadly syndicated loans denote total facility sizes of greater
than or equal to $200 million
The sector performance described above does not reflect portfolio or product
performance, and does not consider transactions costs or investment management
fees.
For institutional investor use only. Not for use with or distribution to the public.
8
Middle market private credit options
 Investment structures include funds, business development companies, and middle market CLOs
 The use of modest leverage leads to potentially enhanced returns
For illustrative purposes only, based on historical yield experience.
Net yield reflects impact of leverage, financing costs and investment management fees. Actual investment performance will differ
based on ultimate realizations, and will be reduced by impairments and defaults.
1
2
For institutional investor use only. Not for use with or distribution to the public.
9
Where is the allocation coming from?
Private credit
allocation
Part of
private equity
allocation
Part of
opportunistic
investments
allocation
General
alternatives
allocation
Other
Part of more
than one specific
allocation
Part of
fixed income
allocation
Source: Prequin
For institutional investor use only. Not for use with or distribution to the public.
10
Nuveen TIAA
730 Third Avenue
New York, NY 10017-3206
nuveen.com / TGAM.com
Please note investments in middle market loans are subject to certain risks. Please consider all risks carefully prior to investing in any particular
strategy. These investments are subject to credit risk and potentially limited liquidity, as well as interest rate risk, currency risk, prepayment and
extension risk, and inflation risk.
Churchill Asset Management is a registered investment advisor and majority-owned, indirect subsidiary of Teachers Insurance and Annuity
Association of America.
This material is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy or sell securities, and is not
provided in a fiduciary capacity. The information provided does not take into account the specific objectives or circumstances of any particular
investor, or suggest any specific course of action. Financial professionals should independently evaluate the risks associated with products or
services and exercise independent judgment with respect to their clients.
Nuveen, LLC, formerly known as TIAA Global Asset Management, delivers the expertise of TIAA Investments and its independent investment affiliates.
© 2017 Teachers Insurance and Annuity Association-College Retirement Equities Fund, 730 Third Avenue, New York, NY 10017
156146-INST-O12/17
11
NCPERS
2017 Annual Conference & Exhibition
INNOVATIVE.
INTELLIGENT.
For institutional
investor use INVESTMENTS
only. Not for use with or distribution to the public.
May 2017
The Investable Universe
The investable universe is wide but private equity investment trails
relative to other more efficient asset classes.
Global Assets under management, $ trillion
$60
Public Markets
$57 Private Markets
$50
$46 Assets
$40
Global
Equities
$38 $37 2005-2013
CAGR Trends
$30
Global
Bonds
Private
Debt
Real
Assets
Private
Equity
Hedge
Funds
Buyouts
Traditional Investment: +5%
Real Assets & Hedge Funds: +11%
$20
Private Equity: +9%
Venture
Capital
$10
$1 $1 $1 $2 $2 $1 $2 $2 $2 $2 $2 2011
2013
$3 Growth
Equity
$0
2005
2008
Time Period
Special
Situations
Public Markets
INNOVATIVE. INTELLIGENT. INVESTMENTS
Real Assets
Private Equity
Hedge Funds
1
What Is Venture Capital (Venture Or VC)?
KEY VALUE CREATION LEVERS
Type of private equity capital
for investing in high potential
return, early-stage, and newer
growth companies
 Assist in the development of new products
and services
 Provide managerial and technical
expertise
 Add value to the company through active
participation
Can generate a return through
an eventual realization event
such as an IPO or sale of the
company
INVESTMENT IMPLICATIONS
 Take higher risks with the expectation of
higher rewards
 Have a long-term orientation (three to ten
years, depending on the type of investment)
INNOVATIVE. INTELLIGENT. INVESTMENTS
2
Venture Capital Is The Catalyst Of Innovation
The growth of many of today’s top technology companies was catalyzed by VC
U.S. Venture Fundraising
U.S VC Backed Exits
$50
$1,000
$40
$800
$30
$600
$20
$400
$10
$200
$0
$0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
INNOVATIVE. INTELLIGENT. INVESTMENTS
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
3
Venture Capital State Of The Market
01
Venture capital valuations have moderated and Fairview expects
liquidity in the industry to increase given high public market valuations
02
Experienced GPs are adjusting in a number of ways
03
LP venture capital co-investments are on the rise
04
Rise of highly successful, specialty venture capital investment
firms who have become established franchises
05
Innovation continues unabated
INNOVATIVE. INTELLIGENT. INVESTMENTS
4
Why Venture?
Long-term results often exceed other asset classes and exposure
to venture capital adds a layer of diversification.
Private Equity
60%
Lower correlations to public
markets and the reduction
of systematic risk are
advantages to venture
capital investing.
55%
50%
Returns
40%
30%
Public Equities
26%
20%
17%
15%
14%
11%
10%
11%
12%
10%
2%
1%
10%
15%
15%
14%
11%
12%
9%
9%
8%
15%
14%
16%
7% 8%
7% 8%
1%
0%
U.S. Venture Capital
Index
U.S. Early Stage
U.S. Late & Expansion
U.S. Private Equity
Index
Nasdaq
Dow Jones Industrial
Average
S&P 500
Asset Class
1‐Year
INNOVATIVE. INTELLIGENT. INVESTMENTS
5‐Year
10‐Year
20‐Year
5
Venture Capital Case Study: Twitter’s Fund Raising Timeline
Seed/Early Stage
Expansion Stage
Later Stage
$16,000.0
$14,160.0 $14,000.0
Venture Capital
Public Equities
$12,000.0
$10,180.0 $9,700.0 $10,000.0
$8,851.5 $8,000.0
$6,000.0
$3,434.4 $4,000.0
$2,000.0
$0.1 $5.6 $23.0 $0.1 $29.8 $86.5 Seed
2007
Series A
2007
Series B
2008
$58.0 $250.4 $1,078.8 $160.4 $365.5 Series C
2009
Series D
2009
Series E
2010
$765.5 $1,065.5 $1,067.3 $1,067.3 Pre‐IPO
2011
IPO
2013
2017
More than 15
institutional
investors prior
to IPO
Over 18 million
shares traded
daily
$‐
Valuation
Selected
Round
Participants:
INNOVATIVE. INTELLIGENT. INVESTMENTS
Series F
2011
Cumulative Capital Raised
6
Institutional Investors Can Access VC in Multiple Ways
01
02
03
Invest directly in
portfolio companies
Invest directly in
VC funds
Invest through an intermediary
such as a fund of funds
Elements of a Successful Venture Capital Investment Program
Diversification by stage,
sector and vintage year
INNOVATIVE. INTELLIGENT. INVESTMENTS
Access to top quartile
funds with appropriate
allocations
Mix of established next
generation venture
managers
7
Thank You
Any Questions?
INNOVATIVE. INTELLIGENT. INVESTMENTS
8