Transcription

?For Professional Use OnlyConstruction Rules for the Morningstar PitchBook DevelopedMarkets Listed Private Equity Select Index SMMorningstar IndexesAugust 2020OverviewThe Morningstar PitchBook Developed Markets Listed Private Equity Select IndexSM tracks theperformance of public companies with significant private equity exposure. The index consists ofContents1Overview2 Index Construction2.1 Assigning Stocks to the Index2.2 Index Weighting3 Index Maintenance and Calculation3.1 Index Maintenance and CorporateAction Treatment3.2 Index Calculation and Price Data4Methodology Review and IndexCessation Policy5 Data Correction and Precision5.1 Intraday Index Data Corrections5.2 Index-Related Data and DivisorCorrections5.3 Computational and ree FloatSelection ProcessLiquidity-Informed Weighting7About Morningstarsecurities listed on developed-market exchanges that meet certain size and liquidity thresholds.This index does not incorporate Environmental, Social, or Governance (ESG) criteria.Index Inception Date and Performance Inception DateThe inception date of the index is Dec. 20th, 2019, and the performance inception date is Dec. 21, 2012.

Page 2 of 10Construction Rules for the Morningstar PitchBook Developed Markets Listed Private Equity Select Index August 2020Page 2 of 10Index ConstructionMorningstar Eligible UniversePitchBookSecurity SelectionDeveloped MarketsListed Private EquitySelect IndexSM Companies listed on Select securities with privateequity as a primary industry.developed-marketexchanges with more Select securities classified as: Float market cap weightingadjusted for purity score,subject to investment stage,than three active private Venture capitalconcentration, security type,equity deals during the PE/buyoutand geographical andpast 10 years. PE growthliquidity constraints. Mezzanine Select securities with substantialPE investments. Securities must have a totalmarket capitalization of greaterthan 100 million and a threemonth average daily tradedvalue of greater than 250,000.The primary industry and security classification are based on PitchBook’s data.Assigning Stocks to the IndexSelection UniverseAt each reconstitution, securities for the Morningstar PitchBook Developed Markets Listed PrivateEquity Select IndexSM are derived from the eligible universe described below: Exchange: The security must trade on one of the major developed-market exchanges. For details ondeveloped-market countries and exchanges, refer to appendixes 2 and 4 in Construction Rules for theMorningstar Global Markets Index. 2020 Morningstar, Inc. All rights reserved. Morningstar and the Morningstar logo are either trademarks or service marks of Morningstar, Inc.

Page 3 of 10Construction Rules for the Morningstar PitchBook Developed Markets Listed Private Equity Select Index August 2020Page 3 of 10 Security type: The following security types are ineligible for the index: Business development companies, or BDCs Master limited partnerships, or MLPs, listed outside of Canada Special-purpose acquisition vehicles, or SPACs Companies incorporated in the Financial Action Task Force’s gray or blacklist countries Securities that are not compliant with regulation NI 81-102 Private equity deals: The company must have more than three active private equity or venture capitaldeals during the past 10 years.Index Selection Select securities from the eligible universe that satisfy one of the following criteria: The primary industry of the security is private equity. It is classified as one of the following: PE/buyout PE growth/expansion Mezzanine Venture capital It has done substantial private equity or venture capital investments compared to its assets. Securities should have market cap of greater than 100 million and three-month average daily tradedvalue, or ADTV, of greater than 250,000 ( 225,000 for current constituents). If a company has multiple share classes, select the one that is a current index constituent. Otherwise,select the most liquid share class determined by Morningstar Indexes.For more details on selection process, please refer to Appendix 3.Number of StocksThe number of stocks in the index is subject to the selection and eligibility criteria at the time ofreconstitution. As a guideline, the index will aim to have a minimum of 40 securities. If, at the annualreconstitution, the number of securities is less than 40, the selection criteria, such as ADTV, market cap,and so on, could be progressively relaxed to reach the target of 40 securities.Index WeightingThe weight of each security in the index is based on float market capitalization adjusted for purity scoreand subjected to the following constraints: Investment stage: Sum of weights attributed to late-stage, midstage, and early-stageinvestments should not be greater than 80%, 20%, and 10%, respectively. Geography: Sum of weights of all U.S.-listed securities should not be greater than 40%. Max security weight: The weight of a particular security should not be greater than 7.5%.Additionally, the sum of weights of all securities with weights greater than 5% is restricted to40%. 2020 Morningstar, Inc. All rights reserved. Morningstar and the Morningstar logo are either trademarks or service marks of Morningstar, Inc.

Page 4 of 10Construction Rules for the Morningstar PitchBook Developed Markets Listed Private Equity Select Index August 2020Page 4 of 10 Security type: Sum of weights of securities classified as common stock, real estateinvestment trusts, depository receipts, and master limited partnerships should be at least80%. Also, the sum of weights of securities classified as REITs, master limited partnerships,and depository receipts should not be greater than 25%.π‘ƒπ‘’π‘Ÿπ‘–π‘‘π‘¦ π‘ π‘π‘œπ‘Ÿπ‘’π‘– π‘Šπ‘’π‘–π‘”β„Žπ‘‘π‘– 𝑃𝐸 π‘œπ‘Ÿ 𝑉𝐢 π‘–π‘›π‘£π‘’π‘ π‘‘π‘šπ‘’π‘›π‘‘π‘  π‘‘π‘œπ‘›π‘’ 𝑏𝑦 π‘‘β„Žπ‘’ π‘“π‘–π‘Ÿπ‘šπ‘‚π‘£π‘’π‘Ÿπ‘Žπ‘™π‘™ π‘–π‘›π‘£π‘’π‘ π‘‘π‘šπ‘’π‘›π‘‘π‘  π‘‘π‘œπ‘›π‘’ 𝑏𝑦 π‘‘β„Žπ‘’ π‘“π‘–π‘Ÿπ‘šπ‘ƒπ‘’π‘Ÿπ‘–π‘‘π‘¦ π‘ π‘π‘œπ‘Ÿπ‘’π‘– πΉπ‘™π‘œπ‘Žπ‘‘ π‘€π‘Žπ‘Ÿπ‘˜π‘’π‘‘ πΆπ‘Žπ‘π‘– 𝑛𝑖(π‘ƒπ‘’π‘Ÿπ‘–π‘‘π‘¦ π‘ π‘π‘œπ‘Ÿπ‘’π‘– πΉπ‘™π‘œπ‘Žπ‘‘ π‘€π‘Žπ‘Ÿπ‘˜π‘’π‘‘ πΆπ‘Žπ‘π‘– )Liquidity-Informed Weighting The security weights are adjusted based on their liquidity such that: 𝑀𝑖 𝑐𝑀𝑖 π·π‘Žπ‘¦π‘  π‘‘π‘œ π‘‘π‘Ÿπ‘Žπ‘‘π‘’ 𝐴𝐷𝑇𝑉𝑖 % 𝐴𝐷𝑇𝑉 𝑏𝑒𝑖𝑛𝑔 π‘‘π‘Ÿπ‘Žπ‘‘π‘’π‘‘ 𝑖𝑛 1 π‘‘π‘Žπ‘¦π΄π‘ˆπ‘€Where:cwi current weight of the ith security in the indexADTVi average daily trading value of the ith securityDays to trade 2%ADTV being 20%traded in onedayAUM USD 200 millionFor additions, the current weight in the portfolio cwi is 0. The residual weights are redistributed to remaining liquid securities. For more details on liquidity-informed weighting, please refer to Appendix 4.For more details on the index calculation methodology, refer to the Morningstar Indexes CalculationMethodology rulebook. 2020 Morningstar, Inc. All rights reserved. Morningstar and the Morningstar logo are either trademarks or service marks of Morningstar, Inc.

Page 5 of 10Construction Rules for the Morningstar PitchBook Developed Markets Listed Private Equity Select Index August 2020Page 5 of 10Index Maintenance and CalculationScheduled MaintenanceThe index is reconstituted annually and implemented after the close of business on the third Friday ofDecember and is effective the following Monday. If Monday is a holiday, reconstitution is effective on theimmediate following business day. The index is rebalanced quarterly and implemented after the close ofbusiness on the third Friday of March, June, September, and December and is effective the followingMonday. If Monday is a holiday, rebalance is effective on the immediate following business day. Themarket data used for determining the private equity exposure of a security is as of the last trading day ofOctober. Other market data used for the reconstitution and rebalancing is as of the last trading day of theFebruary, May, August, and November. The weighting constraints are applied at the annual indexreconstitution and at the quarterly rebalancing.Refer to Appendix 1 for details on reconstitution and rebalancing.Corporate ActionThe treatment of corporate actions can be found in the Morningstar Indexes Corporate ActionsMethodology rulebook.Index Calculation and Price DataDetails about index calculations and price data can be found in their respective rulebooks: MorningstarIndexes Calculation Methodology and Equity Closing Prices Used for Index Calculation.Methodology Review and Index Cessation PolicyThe index methodology is continually reviewed to ensure it achieves all stated objectives. These reviewstake into account corporate action treatment, selection, and maintenance procedures. Subscribers to theindex will be notified before any methodology changes are made. For more details, refer to theMorningstar Index Methodology Change Process.Morningstar also notifies all subscribers and stakeholders of the index that circumstances might arisethat require a material change to the index, or a possible cessation of the index. Circumstances thatcould lead to an index cessation include, but are not limited to, market structure change, productdefinition change, inadequate supply of data, insufficient revenue associated with the index, insufficientnumber of clients using the index, and/or other external factors beyond the control of the MorningstarIndex Committee.Because the cessation of the index or benchmark index could disrupt subscriber products that referencethis index, all subscribers are encouraged to have robust fallback procedures if an index is terminated.For more details, refer to the Morningstar Index Cessation Process.Data Correction and Precision 2020 Morningstar, Inc. All rights reserved. Morningstar and the Morningstar logo are either trademarks or service marks of Morningstar, Inc.

Page 6 of 10Construction Rules for the Morningstar PitchBook Developed Markets Listed Private Equity Select Index August 2020Page 6 of 10Intraday Index Data CorrectionsCommercially reasonable efforts are made to ensure the accuracy of data used in real-time indexcalculations. If incorrect price or corporate action data affect index daily highs or lows, they are correctedretroactively as soon as is feasible.Index-Related Data and Divisor CorrectionsIncorrect pricing and corporate action data for individual issues in the database will be corrected upondetection. In addition, an incorrect divisor of an index, if discovered within five days of its occurrence, willalways be fixed retroactively on the day it is discovered to prevent an error from being carried forward.Commercially reasonable efforts are made to correct an older error subject to its significance andfeasibility.For more details, refer to the Recalculation Guidelines.Computational and Reporting PrecisionFor reporting purposes, index values are rounded to two decimal places and divisors are rounded toappropriate decimal places. 2020 Morningstar, Inc. All rights reserved. Morningstar and the Morningstar logo are either trademarks or service marks of Morningstar, Inc.

Page 7 of 10Construction Rules for the Morningstar PitchBook Developed Markets Listed Private Equity Select Index August 2020Page 7 of 10AppendixesAppendix 1: GlossaryTermsDescriptionReconstitutionDuring each reconstitution, the steps mentioned in the index construction process are performed,resulting in membership reset.RebalanceDuring each rebalancing, the weights are adjusted for updated free-float and shares outstanding data.Appendix 2: Free FloatMorningstar defines free float as the number of shares (or percentage of shares) that are, theoretically,available for the public to purchase. In general, the shareholdings can be classified in two broadcategories of holders: institutional holders and declarable stakeholders. The latter hold shares for varioustactical or speculative reasons (other than those that might typify why an institutional investor wouldown the shares). As a result, the shares held by declarable stakeholders are, theoretically, unavailable tothe public and therefore excluded from free float.The formula for calculating free float is:Free float (total shares outstanding) – (total declarable stakeholder shares)The following are typically classified as declarable stakeholders: Officer/director Joint venture Private company Private equity fund/alternative investment Public company stake Employee stock ownership fund Holding company Government Sovereign wealth fund Subsidiary Trust/trustee Venture capital fund 2020 Morningstar, Inc. All rights reserved. Morningstar and the Morningstar logo are either trademarks or service marks of Morningstar, Inc.

Page 8 of 10Construction Rules for the Morningstar PitchBook Developed Markets Listed Private Equity Select Index August 2020Page 8 of 10Appendix 3: Selection ProcessThe following definitions are used as a guideline to classify companies as PE/buyout, growth, mezzanine,and venture capital in the selection process: PE/buyout: An investor that specializes in purchasing mainly a controlling interest of an establishedcompany (in a leveraged buyout). Growth/expansion: A sector of PE focusing on investing in minority stakes in already-establishedbusinesses to fund growth. Mezzanine: An investor that provides both equity and debt. Investments typically come in the form ofsubordinated debt and minority equity. Venture capital: Financing source for new businesses or turnaround ventures that usually combine riskwith the potential for high return.Investors, limited partners, and service providers are considered to have substantial PE investments iftheir PE investments are greater than 50% of their assets. A buffer of 10% is given to existingconstituentsβ€”that is, for existing constituents, PE investments should be greater than 40% of the assets.Commercial and investment banks are excluded from the selection process. Private equity investmentsinclude investments done by the firm in private companies through buyout/LBO, PE growth, mezzanine,and venture capital deals. While calculating private equity investments, investments in buildings andproperty are ignored. Overall investment is based on the financial investments done by the firm in theinvestee companies.Appendix 4: Liquidity-Informed WeightingThe security weights are adjusted based on their liquidity only for quarterly rebalancing and at theannual index reconstitution, not at the inception of the index. If a security does not pass the selectioncriteria, the same would be deleted from the index, irrespective of its liquidity. Also, the maximumsecurity weight constraint takes precedence over liquidity-informed weighting if there is a conflictbetween the two. Finally, liquidity-informed weighting will be relaxed if a feasible solution is notobtained. 2020 Morningstar, Inc. All rights reserved. Morningstar and the Morningstar logo are either trademarks or service marks of Morningstar, Inc.

Page 9 of 10Construction Rules for the Morningstar PitchBook Developed Markets Listed Private Equity Select Index August 2020Page 9 of 10About Morningstar, Inc.Morningstar, Inc. is a leading provider of independent investment research in North America, Europe,Australia, and Asia. Morningstar offers an extensive line of products and services for individual investors,financial advisors, asset managers, and retirement plan providers and sponsors. Morningstar providesdata on approximately 510,000 investment offerings, including stocks, mutual funds, and similar vehicles,along with real-time global market data on more than 17 million equities, indexes, futures, options,commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstaralso offers investment management services through its investment advisory subsidiaries.About Morningstar IndexesMorningstar Indexes combine the science and art of indexing to give investors a clearer view into theworld’s financial markets. Our indexes are based on transparent, rules-based methodologies that arethoroughly back-tested and supported by original research. Covering all major asset classes, our indexesoriginate from the Morningstar Investment Research Ecosystemβ€”our network of accomplished analystsand researchers working to interpret and improve the investment landscape. Clients such as exchangetraded fund providers and other asset management firms work with our team of experts to createdistinct, investor-focused products based on our indexes. Morningstar Indexes also serve as a precisebenchmarking resource.Morningstar Index Product CommitteeThe Morningstar Index Product Committee is comprised of members who possess a wide array ofknowledge in relation to Indexes. The Product Committee is responsible for the governance over thecreation and maintenance of all Morningstar branded Indexes, ensuring the highest standards arecontinuously met. Any matters arising from exceptional or undocumented events will be resolved at thediscretion of the Morningstar Index Product Committee.Morningstar Index Oversight CommitteeThe Morningstar Index Oversight Committee is comprised of informed and qualified professionals whoare responsible for the process governance of Morningstar branded Indexes. The Oversight Committeeassesses and where appropriate challenges the decisions of Morningstar Indexes with regards tobenchmark decisions.For More InformationFor any queries, reach out to us via our communication page.?22 West Washington StreetChicago, IL 60602 USA 2020 Morningstar, Inc. All rights reserved. Morningstar and the Morningstar logo are either trademarks or service marks of Morningstar, Inc.

Page 10 of 10Construction Rules for the Morningstar PitchBook Developed Markets Listed Private Equity Select Index August 2020Page 10 of 10 2020 Morningstar. All Rights Reserved.The information in this document is the property of Morningstar, Inc. Reproduction or transcription by any means, in whole or part,without the prior written consent of Morningstar, Inc., is prohibited. While data contained in this report are gathered from reliablesources, accuracy and completeness cannot be guaranteed. All data, information, and opinions are subject to change withoutnotice. This document may contain back-tested or simulated performances and the subsequent results achieved by the investmentstrategy may be materially different. 2020 Morningstar, Inc. All rights reserved. Morningstar and the Morningstar logo are either trademarks or service marks of Morningstar, Inc.

The Morningstar PitchBook Developed Markets Listed Private Equity Select IndexSM tracks the performance of public companies with significant private equity exposure. The index consists of securities listed on developed-market e