1
Ten Key Questions Facing the Ten Key Questions Facing the Private Equity WorldPrivate Equity World
David RubensteinDavid Rubenstein
Co-founder & Managing Co-founder & Managing Director Director
February 27, 2008 February 27, 2008
3
1. Will Leverage for Buyouts Return 1. Will Leverage for Buyouts Return in Time for PE Investors and in Time for PE Investors and
Professionals to Stay with the Professionals to Stay with the Industry?Industry?
4
189.0
121.5
64.5
47.1
20.111.19.8
22.330.230.8
18.617.8
0
50
100
150
200
Leveraged Loan Volumes Will Leveraged Loan Volumes Will Recover Recover US Leveraged Loan Volumes Bounced Back after US Leveraged Loan Volumes Bounced Back after
the Downturn of 2000-2001the Downturn of 2000-2001
1996 1997 1998 1999 2000 2001 20042003 2005 20062002 2007
US Buyout Leveraged Loan Volume ($Bn)
+ 1,929%
Source: S&P Leveraged Buyout Review Source: S&P Leveraged Buyout Review
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Leveraged Loan Volumes Will Leveraged Loan Volumes Will Recover Recover While European Issuance has Grown Every Year While European Issuance has Grown Every Year
Since 1999Since 1999European Buyout Leveraged Loan Volume (€Bn)
Source: S&P LCDSource: S&P LCD
140.0
115.8102.9
44.4
29.528.424.718.815.3
0
50
100
150
2005 20062001 2002 20072000 20031999 2004
6
But This Will Not Happen But This Will Not Happen Overnight Overnight In the US, it took roughly three years for In the US, it took roughly three years for
leveraged loan volumes to match their previous leveraged loan volumes to match their previous highs after 2000highs after 2000
And those three years were challenging for And those three years were challenging for private equity investorsprivate equity investors In 2001 and 2002, US leveraged loan issuance fell to In 2001 and 2002, US leveraged loan issuance fell to
approximately 1/3 of its 1998 total approximately 1/3 of its 1998 total
But when the recovery came, it exceeded all But when the recovery came, it exceeded all expectationsexpectations Leveraged loan issuance more than doubled between Leveraged loan issuance more than doubled between
2002 and 2004 and again between 2004 and 20062002 and 2004 and again between 2004 and 2006 Issuance jumped 20x between 2001 and 2007Issuance jumped 20x between 2001 and 2007
Source: S&P Leveraged Buyout Review Source: S&P Leveraged Buyout Review
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2. Are There Going to be Major 2. Are There Going to be Major Defaults from Buyouts Completed Defaults from Buyouts Completed
within the "Golden Age"?within the "Golden Age"?
8
Leverage Levels Are at Leverage Levels Are at Historical Highs Historical Highs
5.7x
5.4x
4.7x
4.2x4.1x
4.0x
4.6x4.8x
5.3x5.4x
6.2x
3.0x
4.0x
5.0x
6.0x
19971997 1999199919981998 200220022001200120002000 2007200720062006200520052004200420032003
Average Large LBO Leverage Multiples (Debt/EBITDA)
Source: S&P Leveraged Buyout ReviewSource: S&P Leveraged Buyout ReviewNote: Includes issuers with EBITDA of $50MM or more Note: Includes issuers with EBITDA of $50MM or more
9
And Credit Ratios Are Depressed And Credit Ratios Are Depressed
1.8x 1.8x
2.0x1.9x
2.5x
3.1x2.9x
2.8x
2.1x
2.0x
1.7x
1.0x
2.0x
3.0x
20042004 200520052003200319971997 20062006 2007200719981998 19991999 20002000 20012001 20022002
(EBITDA – Capex) / Cash Interest
Source: S&P Leveraged Buyout Review Source: S&P Leveraged Buyout Review
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1.0%0.6%
1.9%
3.6%2.6%
7.4%
10.0%9.9%
7.0%
4.0%
1.0%1.0%0.0%0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
Default Rates Have Remained Default Rates Have Remained Low Over the Past Three Years Low Over the Past Three Years
Percentage of Outstanding Leveraged Loans in Default or Bankruptcy
Source: S&P LCD Source: S&P LCD
Avg. 3.80%
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And Remain Below Levels Seen And Remain Below Levels Seen During Past Market Downturns During Past Market Downturns Leveraged Loan Default Rates During Recent Leveraged Loan Default Rates During Recent
Market Downturns: Market Downturns:
Historical Correction Year Default Rate
Russian Default / LTCM 1998 1.5%
Tech. / Telecom Meltdown 2000 7.0%
9/11 and Recession 2001 9.9%
Corporate Defaults 2002 10.0%
vs.
Credit Crunch Current 1.0%
Source: Morgan Stanley Source: Morgan Stanley
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But the Trading Levels of Many But the Trading Levels of Many LBO Debt Deals Suggest LBO Debt Deals Suggest Defaults are Likely Defaults are Likely A Spread vs. Treasuries of Above 1,000 Indicates A Spread vs. Treasuries of Above 1,000 Indicates
Significant Distress Significant Distress
Source: Merrill Lynch High Yield Master II Source: Merrill Lynch High Yield Master II Index Index
Bond Face Value ($MM) Type Price Spread G 2,500 senior 92.90 T+1,002
G 2,000 senior 86.71 T+1,045
R 1,700 senior 70.25 T+1,587
F 1,598 sub 70.75 T+1,303
U 1,500 senior 70.50 T+1,389
H 1,000 senior 60.25 T+1,134
C 825 senior 81.00 T+1,222
A 800 senior 80.00 T+1,057
M 750 senior 86.00 T+1,004
D 725 sub 81.75 T+1,208
I 700 senior 64.25 T+1,342
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3. What is Going to Happen to All of 3. What is Going to Happen to All of the Buyout Debt Still Held by the the Buyout Debt Still Held by the
Major Syndicating Banks?Major Syndicating Banks?
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Bank Exposure
Bear Stearns $2.5 billion
Goldman Sachs $26.0 billion
Lehman Brothers $23.8 billion
Merrill Lynch $19.0 billion
Morgan Stanley $20.0 billion
Citigroup $43.0 billion
J.P. Morgan $26.4 billion
Bank of America $12.0 billion
UBS $11.4 billion
Wachovia $9.1 billion
A Massive Backlog Remains A Massive Backlog Remains
Approximately $200 billion of leveraged loans are Approximately $200 billion of leveraged loans are still sitting on banks’ balance sheets still sitting on banks’ balance sheets This represents a decrease of only $75 billion from last This represents a decrease of only $75 billion from last
year’s peak year’s peak
Every bank is affectedEvery bank is affected
Sources: The Wall Street Journal, Morgan Stanley Sources: The Wall Street Journal, Morgan Stanley
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4. What Areas Will PE Firms Pursue 4. What Areas Will PE Firms Pursue to Achieve the Types of Returns to Achieve the Types of Returns
Sought by Their Investors?Sought by Their Investors?
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PE Firms Will Invest More in PE Firms Will Invest More in Emerging Markets Emerging Markets
Emerging Market Fundraising Has Grown Emerging Market Fundraising Has Grown
Exponentially Exponentially
2007200620042003 2005
2.2 2.8
15.519.4
28.7Emerging Asia ($Bn)
200520042003 2006 2007
0.5 0.82.9 3.3
14.6CEE/Russia ($Bn)
20062003 2004 2005 2007
0.4 0.71.3
2.7
4.4Latin America ($Bn)
2003 2004 2005 2006 2007
1.4 1.7 2.7
7.9
11.4Middle East & Africa
($Bn)
Source: EMPEASource: EMPEA
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PE Firms Will Invest More in PE Firms Will Invest More in Emerging Markets Emerging Markets
As Has Deal Volume As Has Deal Volume
Emerging Asia ($Bn) CEE/Russia ($Bn)
Latin America ($Bn) Middle East & Africa ($Bn)
Source: Morgan Stanley, Thomson Source: Morgan Stanley, Thomson
21.411.19.0 27.3
51.1
27.3
2003 2004 2005 2006
54.5
1H 2007
2.6 2.2 1.6
4.0
5.3
5.3
10.5
1H 2007
2003 2004 2005 2006
2.9
4.1
0.60.20.1
2.9
2003 2004 2005 2007
5.9
2006
16.11.9 2.9
9.6
24.916.1
2003
32.2
2005 2006 20072004
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PE Firms Will Invest More in PE Firms Will Invest More in Emerging Markets Emerging Markets A growing percentage of global private equity A growing percentage of global private equity
activity is dedicated to Emerging Markets activity is dedicated to Emerging Markets
In 2001, they accounted for 4.5% of private In 2001, they accounted for 4.5% of private equity fundraising and 3.3% of deal volume equity fundraising and 3.3% of deal volume In 2007, they accounted for 15.9% of fundraising In 2007, they accounted for 15.9% of fundraising In the first half of 2007, they accounted for 7.0% of In the first half of 2007, they accounted for 7.0% of
global LBO deal volume global LBO deal volume
Source: Morgan Stanley, Thomson Source: Morgan Stanley, Thomson
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Private Equity Firms Will Make Private Equity Firms Will Make More Minority Investments More Minority Investments Private equity firms have increased their Private equity firms have increased their
commitments to non-control investments: commitments to non-control investments:
Source: Dealogic Source: Dealogic
Period # of Deals Deal Volume ($Bn)
1H 2007 252 25.0
2H 2007 289 31.0
Year-to-Date 84 5.8
In the past six months, private equity firms have In the past six months, private equity firms have made large minority investments in companies made large minority investments in companies includingincluding Sprint Nextel, NC Numericable, MBIA, Global Hyatt, Sprint Nextel, NC Numericable, MBIA, Global Hyatt,
Antero Resources, Galaxy Entertainments, MoneyGram Antero Resources, Galaxy Entertainments, MoneyGram International, Legacy Hospital Partners, and Bharti International, Legacy Hospital Partners, and Bharti Infratel Infratel
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And They Will Commit More And They Will Commit More Capital to Distressed Capital to Distressed Investments Investments
$0
$5
$10
$15
$20
$25
'02 '04 '06 1H07 '08 '10
($ B
of Dis
tress
ed F
undra
isin
g)
$25
$75
$125
$175
$225
($ B
of Debt
Mat
uri
ng)
Distressed Debt / Restructuring Fundraising
Below Investment Grade Debt
Distressed Debt Fundraising Anticipating Debt Distressed Debt Fundraising Anticipating Debt Maturity Schedule:Maturity Schedule:
Source: Private Equity Analyst,Source: Private Equity Analyst, data as of 6/30/07; Fitch Ratings, data as of July 2007 data as of 6/30/07; Fitch Ratings, data as of July 2007
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5. Should Investors in PE Expect 5. Should Investors in PE Expect Higher or Lower Rates of Return?Higher or Lower Rates of Return?
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Top Quartile PE Returns Are Top Quartile PE Returns Are Unrivalled Unrivalled
Source: Thomson Venture EconomicsSource: Thomson Venture EconomicsNote: PE data as of 30 June 2007; Bloomberg, market data as of 30 June 2007Note: PE data as of 30 June 2007; Bloomberg, market data as of 30 June 2007
Top Quartile US Buyout Returns
IRR %IRR %
6.1%
5.7%
5.4%
18.2%
21.8%
12.2%
7.7%
8.7%
22.1%
20.4%
19.9%
20.3%
18.4%
28.5%
32.1%
0% 10% 20% 30% 40%
NASDAQ
DJIA
S&P 500
Top Quartile >$2Bn
Top Quartile U.S.
Buyout
10-year 5-year 1-year
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Top Quartile PE Returns Are Top Quartile PE Returns Are Unrivalled Unrivalled
Source: Thomson Venture EconomicsSource: Thomson Venture EconomicsNote: PE data as of 30 June 2007; Bloomberg, market data as of 30 June 2007Note: PE data as of 30 June 2007; Bloomberg, market data as of 30 June 2007
Top Quartile European Buyout Returns
78.6%
13.0%
32.5%
27.6%
7.3%
10.4%
37.0%
3.5%
7.6%
1-year 10-year5-year
Top Quartile Eu. Buyout
FTSE 100
CAC-40
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6. Is Now the Right Time for 6. Is Now the Right Time for Investors to Pursue Private Equity Investors to Pursue Private Equity
Investments?Investments?
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PE Funds Raised During Times of PE Funds Raised During Times of Market Distress Generally Market Distress Generally Perform WellPerform Well Private equity investments have produced Private equity investments have produced
healthy returns during each of the three most healthy returns during each of the three most recent global economic slowdowns recent global economic slowdowns
Top Quartile Private Equity IRRs by Vintage
United States Europe
1980 21.6% 11.3%1981 14.8% 9.2%1982 9.1% 15.1%
1990 19.5% 18.8%1991 25.5% 17.4%
2001 15.3% 3.4%2002 16.0% 13.5%
Source: Thomson Venture ExpertSource: Thomson Venture ExpertNote: IRRs are cumulative and are calculated from inception to 9/30/07 Note: IRRs are cumulative and are calculated from inception to 9/30/07
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7. Will Regulators and Legislators 7. Will Regulators and Legislators Continue to Seek Changes in PE Continue to Seek Changes in PE
Regulation, Oversight and Taxation?Regulation, Oversight and Taxation?
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The PE Industry Faces Various The PE Industry Faces Various Legislative and Regulatory Legislative and Regulatory Proposals Proposals Several countries are considering or have Several countries are considering or have
introduced changes to the way that private introduced changes to the way that private equity returns are taxedequity returns are taxed
The industry is under pressure to increase The industry is under pressure to increase disclosure and transparencydisclosure and transparency
In some markets, foreign private equity firms are In some markets, foreign private equity firms are subject to limitations on their investment activitysubject to limitations on their investment activity
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8. Will Sovereign Wealth Funds 8. Will Sovereign Wealth Funds Replace PE Firms as Principal Replace PE Firms as Principal
Sources of Capital for Sources of Capital for Corporations/Sellers Seeking New Corporations/Sellers Seeking New
Capital?Capital?
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PE Firms Pale in Comparison to PE Firms Pale in Comparison to the Largest Sovereign Wealth the Largest Sovereign Wealth Funds Funds
Rank Country Fund Assets ($Bn) Active Investment Strategy?
#1 UAE Abu Dhabi Investment AuthorityAbu Dhabi Investment Council
875 X
#2 Norway Government Pension Fund 328
#3 Saudi Arabia No Designated Name > 300
#4 Kuwait Kuwait Investment AuthorityGeneral Reserve FundFuture Generations Fund
300
#5 Singapore Government Investment Corp.Temasek Holdings
> 200 X
#6 China China Investment Corp. 200 X
#7 Russia Oil Stabalization Fund 141
#8 Hong Kong Monetary Exchange Fund 140
#9 Qatar Qatar Investment Authority 60 X
#10 Australia Australian Future Fund 60
Top Sovereign Wealth Funds
Source: CitigroupSource: Citigroup
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Sovereign Wealth Fund Sovereign Wealth Fund Investment Activity Has Investment Activity Has Increased Dramatically Increased Dramatically
69.8
44.2
16.8
7.15.67.613.0
9.46.811.011.4
0
10
20
30
40
50
60
70
80
0
50
100
150
200
250
300
Value of Deals
2007
Number of Deals
2006
Deal Volume ($Bn) # of Deals
1997 1998 1999 2000 2001 2002 20042003 2005
+ 1,151%
Sovereign Wealth Fund Deal Volume
Sources: World Economic Forum, Thomson Financial Sources: World Economic Forum, Thomson Financial
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But These Investments Still But These Investments Still Represent A Tiny Proportion of Represent A Tiny Proportion of Total M&A ActivityTotal M&A Activity
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
20022001200019991998 200720062005200420031997
Sovereign Wealth Funds StrategicPrivate Equity
Breakdown of Global M&A Activity ($Bn)
Sources: World Economic Forum, Thomson Financial Sources: World Economic Forum, Thomson Financial
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Sovereign Wealth Funds and PE Sovereign Wealth Funds and PE Firms Are Forming a Productive Firms Are Forming a Productive Partnership Partnership Sovereign wealth funds have purchased Sovereign wealth funds have purchased
substantial equity stakes in several alternative substantial equity stakes in several alternative asset managersasset managers China Investment Corp. invested $3 billion in BlackstoneChina Investment Corp. invested $3 billion in Blackstone Abu Dhabi’s Mubadala invested $1.4 billion in Carlyle Abu Dhabi’s Mubadala invested $1.4 billion in Carlyle Dubai International Capital invested 1.3 billion in Och-Dubai International Capital invested 1.3 billion in Och-
ZiffZiff
They are among the private equity industry’s They are among the private equity industry’s largest individual investors largest individual investors
In the future, sovereign wealth funds and private In the future, sovereign wealth funds and private equity firms are likely to pursue large investment equity firms are likely to pursue large investment opportunities through joint ventures opportunities through joint ventures Sovereign wealth funds will benefit from PE firms’ deep Sovereign wealth funds will benefit from PE firms’ deep
pools of investment talent and deal expertise pools of investment talent and deal expertise
33
9. Can the PE Industry Improve its 9. Can the PE Industry Improve its Image with the Public, Media, Image with the Public, Media,
Governments, Unions, Environmental Governments, Unions, Environmental and Consumer Groups?and Consumer Groups?
34
Private Equity’s Image Could be Private Equity’s Image Could be Better Better
Gluttons at the GatePrivate equity are using slick new tricks to gorge on corporate assets. A story of excess
– Business Week
A Backlash Against Private EquityGrumbling by unions over post-deal job cuts has escalated into a public outcry
– Business Week
35
10. Is PE's Future Going to Be Better, 10. Is PE's Future Going to Be Better, Bigger, and Stronger than Before, Or Bigger, and Stronger than Before, Or
Have We Already Seen the High-Have We Already Seen the High-water Mark?water Mark?
36
It’s Always Darkest Just Before It’s Always Darkest Just Before Dawn Dawn As before, deal volume will rebound and As before, deal volume will rebound and
yesterday’s records will be left far behind yesterday’s records will be left far behind
543128
715670
291247
14211065
10211265
0
100
200
300
400
500
600
700
800
0
500
1,000
1,500
2,000
2,500
2007200620052004200320022001200019991998
# of DealsDeal Volume ($Bn)
1997
Deal Volume
# of Deals
19961995
Global LBO Activity
Source: DealogicSource: Dealogic
CAGR: 31%
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What I Was Supposed to Talk About: What I Was Supposed to Talk About:
“Giving Private Equity a Positive “Giving Private Equity a Positive Image: Why is there such Disparity Image: Why is there such Disparity Between the Public’s Perception of Between the Public’s Perception of the Industry and the Industry’s the Industry and the Industry’s Perception of Itself, and What can be Perception of Itself, and What can be done to bring these Views into done to bring these Views into Alignment” Alignment”
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The Current Situation The Current Situation
Perception of the Industry Perception of the Industry outside the Industryoutside the Industry
Destroyed JobsDestroyed Jobs
Relocated Facilities OverseasRelocated Facilities Overseas
Focused Only on Short-Term Focused Only on Short-Term ProfitsProfits
Left Companies in Worse ShapeLeft Companies in Worse Shape
Made Too Much Money for PE Made Too Much Money for PE ProfessionalsProfessionals
Insufficient Level of Taxes PaidInsufficient Level of Taxes Paid
Perception of the Industry Perception of the Industry within the Industrywithin the Industry
Improved operation of Improved operation of companiescompanies
Prevented job losses; created Prevented job losses; created jobsjobs
Improved EconomiesImproved Economies
Created High Returns for Created High Returns for Investors/Pension FundsInvestors/Pension Funds
Paid Large Amount of TaxesPaid Large Amount of Taxes
Created an IndustryCreated an Industry
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Why the Disparity in Why the Disparity in Perceptions? Perceptions? Industry Focused for Long Time Principally on Industry Focused for Long Time Principally on
ReturnsReturns
Industry Spent Little Time Explaining its Actions Industry Spent Little Time Explaining its Actions to those Outside of Investor Baseto those Outside of Investor Base
Industry Lacked Data to Support its ViewsIndustry Lacked Data to Support its Views
No Industry Vehicle for Long TimeNo Industry Vehicle for Long Time
Other Problems of Industry Critics/Convenient Other Problems of Industry Critics/Convenient and Attractive Targetand Attractive Target
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What Can the Industry Do to What Can the Industry Do to Improve Its Image? Improve Its Image? Continue to Produce Hard DataContinue to Produce Hard Data
Engage Industry Critics in Debate/Discussion Engage Industry Critics in Debate/Discussion
Consider Factors Other than Just Returns When Consider Factors Other than Just Returns When Assessing/Overseeing InvestmentsAssessing/Overseeing Investments
Involve Portfolio Companies Directly in the EffortInvolve Portfolio Companies Directly in the Effort
Enhance Transparency/Public FocusEnhance Transparency/Public Focus
Recognize that Some Changes Can and Should Recognize that Some Changes Can and Should OccurOccur
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Ten Leading Questions Facing Ten Leading Questions Facing the Private Equity Worldthe Private Equity World
David RubensteinDavid Rubenstein
Co-founder & Managing Co-founder & Managing Director Director
February 27, 2008 February 27, 2008
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