Absolute Return Strategies Presentation

Cliffwater Quarterly Outlook Guides Research & Selection U.S. Large Buyout U.S. Mid/Small Buyout Distressed Private Debt Venture Europe Asia Latin America Energy Infrastructure Natural Resources Real Estate - Equity Real Estate - Debt High valuations, ample amounts of leverage, and heavy competition for deals persist, as managers seek to deploy a significant amount of unfunded capital. On the positive side, distributions and recapitalizations continue. Competition and pricing pressure in the middle market has increased, as firms raise more capital and large cap funds seek value in smaller deals. Greater opportunities for outperformance exist for investors with competitive advantages in value creation and focused strategies. High issuance of lower-rated credit, looser underwriting standards and rising interest rates suggest the potential for large volume of distressed opportunities, but timing is unclear. Large amount of dry powder suggests caution. Private debt continues to generate strong relative value with an attractive spread between public and private yields. "Covenant lite" terms and EBITDA adjustments are becoming more common for larger direct lending deals. Strategic and sovereign wealth investors continue to aggressively invest capital pressuring valuations and holding periods. Innovation across multiple sectors has led to accelerating growth and selected strong exits. A gradual economic recovery has increased buyer and seller confidence. As in the U.S., strong competition and high prices persist, reducing value opportunities. Managers with strong sourcing capabilities, a consistent approach, and multiple levers to improve and grow companies are best positioned. A focus on high-quality growth and financial sector health suggests rational and steady sector-based growth in China; however, the threat of a trade wars with the U.S. is generating uncertainty, particularly for export-oriented businesses. Economic growth and positive market sentiment in Brazil continue to improve private equity deal activity and debt availability. Upcoming presidential elections, particularly in Mexico, are generating uncertainty in the market, limiting new deal activity and realizations. Energy market transaction activity remains low and is dominated by private equity investors. Despite increasing U.S. shale production, crude oil prices are resilient with OPECs adherence to production limits. Several firms have launched super-core funds targeting lower returning assets with very low risk. The substantial amount of dry powder chasing a limited amount of transactions may be driving the new fund strategies allowing the investors to compete for the lower risk assets. Corn and soybean prices continue to be pressured by overproduction; permanent crops offer strong pricing and consumer demand. New precious metal resources continue to decline and offer investment opportunities for new mines. Downward pressure on values may result from recent rapid increases in interest rates despite overall market strength. Rising debt service and decreased NOI of value-add and opportunistic properties may follow, along with more limited refinancing options for stabilized assets. Defensive, core plus opportunities remain attractive. Increases in CRE floating rates have accompanied economic growth, while overall leverage levels remain at moderate and sustainable levels. Underweight Neutral Neutral Overweight Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Overweight 20 20 The information on this page contains Cliffwater's Q2 2018 views, projections regarding future events, and forecasts regarding the strategies described herein. There is no assurance that such events or forecasts will be achieved, and may be significantly different from that shown here. CLIFFWATERLC |

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