#1Small Business Capital Formation Advisory Committee Expanding Retail Access to Private Markets November 2019 Presented by: John Finley, Senior Managing Director & Chief Legal Officer, Blackstone#2Expanding Retail Investor Access to Private Markets PE Performance vs. S&P 500 Private Equity has higher returns and lower volatility than Public Markets over past two decades 8% S&P 500 Avg. Return PE Performance vs. S&P 500 (1996-2016) 12% PE Avg. Return Source: Committee on Capital Markets Regulation and Voya Investment Management (October 2017). 17.2% 14.5% S&P 500 Avg. Standard PE Avg. Standard Deviation Deviation 2#3Expanding Retail Investor Access to Private Markets Private Capital Net IRRS Private Capital median net IRRs have, on average, exceeded 10% (Excluding Natural Resources) Median Net IRR since Inception 25% 20% 15% 10% 5% 0% Private Capital: Median Net IRRs by Strategy and Vintage Year (Most Up to Date) Pre-2006 2006 Private Equity 2007 2008 Private Debt 2009 2010 Vintage Year Real Estate 2011 2012 Infrastructure 2013 2014 Natural Resources* Source: Preqin, "The Future of Alternatives Report" (October 2018). *Natural Resources includes Natural Resources and Timberland funds only to avoid double counting. 2015 3#4Expanding Retail Investor Access to Private Markets Retail Access to Private Markets - Why Now? ► The SEC is exploring how to increase access for retail investors to private companies Currently, retail investors have a limited ability to access the complete U.S. equity market ● • The SEC's recent concept release recognizes the key role that pooled investment vehicles, including private and regulated funds, can play in providing a more level playing field for retail investors ► Retail investors remain under-allocated to alternative asset classes Private markets provide opportunities for excess or uncorrelated returns • Given the decline in the number of public companies, achieving true diversification without an allocation to private markets is difficult ● 4#5Expanding Retail Investor Access to Private Markets The SEC's Focus on Retail Investor Access to Private Companies "When retail investors participate in our markets, how broad a spectrum of investments do they have? I think that spectrum has been getting relatively smaller. Because we have fewer public companies, companies are waiting much longer in their life cycle to go public, which by definition means that retail investors have less access to the market as a whole. And I fear, less access to companies that are well-established, but still growing." - Jay Clayton, Chairman of the SEC Billions $500 $400 $300 $200 $100 $0 Number and Total Value of Private U.S. Startup Companies Valued at $1B or More 2013 |||| H 2016 2014 2015 2017 Apr-18 Total Value of US Startup Companies Valued at $1B or More Number of Private U.S. Startup Companies Valued at $1B or More 120 100 80 60 40 20 0 As of April 2018 there were 103 privately held U.S. start-ups with valuations of over $1 billion and a total value of $385 billion Less access to private companies means retail investors are missing out on the opportunity for excess or uncorrelated returns Source: Dow Jones Venture Source and the Wall Street Journal, https://www.wsj.com/graphics/billion-dollar-club/, as of April 2018. 5#6Expanding Retail Investor Access to Private Markets U.S. Listed Companies and Market Capitalization Number of Listed Companies decreased -39% in past 25 years, while Market Cap increased by 492% 8,500 $35 No. of Listed Firms 7,500 6,500 5,500 4,500 3,500 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Aggregate Mkt Cap Source: World Bank, as of December 31, 2018. Market capitalization and number of listed companies are for listed domestic companies. Listed domestic companies, including foreign companies which are exclusively listed, are those which have shares listed on an exchange at the end of the year. Investment funds, unit trusts, and companies whose only business goal is to hold shares of other listed companies, such as holding companies and investment companies, regardless of their legal status, are excluded. A company with several classes of shares is counted once. Only companies admitted to listing on the exchange are included. -Number of Listed Firms $30 $25 $20 $15 $10 $5 $0 Market Cap ($ in Trillions) 6#7Expanding Retail Investor Access to Private Markets Global Individual Wealth Global individual investable wealth is growing, remains under-allocated to alternatives Global Individual Investable Assets $70T 2018 $106T 2025 Average Allocation to Alternatives 29% 11. <5% Endowments 27% Pensions Sources: For investable assets, 2018 CapGemini World Wealth Report. For allocations: 2016 Willis Towers Watson Global Pension Assets Study; 2016 National Association of College and University Business Officers; Money Management Institute, "Distribution of Alternative Investments through Wirehouses." Allocations shown are for U.S. Pensions and U.S. University Endowments. Individual Investors 7#8Expanding Retail Investor Access to Private Markets PE Funds Facilitate Access to Private Companies Private equity funds provide access to companies that are not public. Retail investors are increasingly looking for opportunities to outperform the public market, including through investment in private companies. ● Studies by Harris et al. show that private equity buyout funds have generally outperformed public markets. This has major implications for the potential returns to retail investors and retirees from private equity funds. ● Studies of private equity performance consistently find that private equity funds outperform public market alternatives, while providing diversification, lower volatility and protection in times of market stress ● For example, $10,000 in a retirement fund that earned 7% annually from the S&P 500 over 30 years would result in an ending balance of $76,123 Alternatively, if the $10,000 had been invested in an average private equity buyout fund, which earns 3.7% above the S&P 500 annually, then the ending balance would be $211,071 $250,000 $200,000 $150,000 $100,000 $50,000 $0 Growth of $10,000 Investment S&P 500 (Historical Avg. 1932-2017) Source: Harris, Jenkinson & Kaplan, "Private Equity Performance: What Do We Know?," Journal of Finance (October 2014). Avg. PE Returns (Harris et al. 2014) 8#9Expanding Retail Investor Access to Private Markets Blackstone's Platform for Retail Invested heavily to build powerful platform advantage Institutional quality performance Bespoke product offerings ✓ Diversified alternatives Proprietary system ✓ 250K+ advisor profiles ✓ Opportunity ranking model Solutions Provider Leader Education Blackstone Expansive Analytics Unmatched Scale ✓ Blackstone University ✓ Investing insights Scalable digital platform 130 employees globally ✓ Channelized sales ✓ Dedicated service platform 9