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Introduction to Private Equity

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					Seminar: introduction to
    private equity




                           1
                Contact
• Antoine Parmentier:
  – Antoine.parmentier@aig.com
  – +44(0)7809.510.373




                                 2
        Final presentations
• Corporate governance and public debate
  over private equity;
• Private equity in emerging markets;
• FIP, FCPI, defiscalisation;
• Investments in infrastructure;
• Private equity post credit crunch;
• Private equity in retail and consumer
  goods.
                                           3
                          Content
•   Introduction;
•   Why allocate assets to PE?;
•   LBO activity in Europe;
•   European fundraising activity;
•   The measure of perfromance;
•   FoF due diligence: selection of PE managers;
•   The world’s biggest private equity firms;
•   The mega-buyout era;
•   Value creation in private equity;
•   The structure of a leverage buyout deal;
•   The pros and cons of being private;
•   The credit crisis: impact and consequences on PE;
•   Case study: Baneasa

                                                        4
Introduction to Private Equity




                                 5
                   Introduction
• Asset class representing the companies not publicly
  traded (vs. public equity traded on stock exchange);

• Medium to long term investment;

• Venture capital, growth capital, buyout…

• PE funds are raised from pension funds, insurance
  companies, large corporate, HNWI, etc…;

• Investors in PE funds are called “Limited Partners”;

• PE funds are managed by the “General Partners”         6
• Structure of private equity participations


                         Insurance    Pension         Large
LP                        company      fund         corporate
                                                                  HNWI




GP                                         The PE fund                       Manager




Portfolio   Company A   Company B    Company C    Company D     Company E   Company D




                                                                                        7
     The fuel of private equity
• The debt:
  – Acquisitions are made through leveraged buyout
    deals (LBOs);
• The investors:
  – PE funds managers must be disciplined and patient;
• The managers:
  – The success of an investment relies on the
    implementation of the business plan;
• The macro environment:
  – Acquisition multiple arbitrage can be positive in period
    of growth;
                                                           8
     A diversified asset class
• Private equity includes a large number of
  strategies: venture, buyout, distressed,
  secondary…

• Like-minded strategies: mezzanine, clean-
  tech/energy, infrastructure, real assets…



                                              9
           Venture capital (1/2)
• Earlier stage: venture investors provide funds for start-up
  and early expansion;

• Based on innovative business, development of a new
  product, new patent;

• Two sectors: technology or life science;

• Highly skilled professionals and scientists;

• Scalable investments with a lot of failures and few great
  successes;

                                                           10
          Venture capital (2/2)
• Investment from up to €10m and often pre-
  revenues balance-sheet;

• Financing in several rounds (round 1, round 2,
  round 3…) with typically clinical test results as
  threshold for next round;

• Most of the exits are IPO (NASDAQ, Zurich…);

• Examples: Skype, Google, Apple, Atari, Cisco,
  Yahoo, YouTube, LinkedIn, Paypal.
                                                      11
               Buyout (1/3)
• The most important strategy of PE;

• Buyout comes after venture and growth capital;

• Taking control of a company through leveraged
  buyout (LBO);

• Management team of the company is investing
  alongside the PE fund (alignment of interest);
                                                   12
                  Buyout (2/3)
• Development of a business plan over 4 to 6 years in
  order to add value;

• Revenue growth + Margins improvement + deleveraging
  = added value;

• Mature companies with leading market position, active
  management team, strong cash-flow;

• PE funds provide capital for international expansion,
  corporate divestures, succession issues…

                                                          13
              Buyout (3/3)
• Buyout starts at €5 million enterprise value
  (EV);
• At the bottom end: growth/expansion
  capital.
                         Large cap
                     €800 million and above




                         Mid market
                   €100 million to €800 million




                       Lower market
                    €5 million to €100 million

                                                  14
 Distressed / Special situation (1/2)
• Investment in debt-securities or equity of a
  company under financial stress;

• Distressed companies are in default, under
  Chapter 11 (reorganization) or under Chapter 7
  (liquidation=bankruptcy);

• Loans are rated BB and below by S&P based on
  usual ratio (debt/EBITDA, EBITDA interest
  coverage, etc…);

                                                   15
Distressed / Special situation (2/2)
• Distressed debt investors try first to
  influence the process;
• Debt holders have access to confidential
  information;
• Then, as debt holders, they can take the
  control of the company;



                                             16
              Secondary (1/2)
• Purchase of existing (hence secondary) commitments
  in PE funds or portfolios of direct investments;
• LP selling their portfolio = secondary deal;
• Needs in depth valuation and bidding/auction process;
• Specialized investors: Alpinvest, Coller Capital,
  Lexington Partners;
• Booming specialization as most of institutional
  investors are seek cash.



                                                      17
                  Secondary (2/2)


            Secondary       Insurance    Pension         Large
LP           buyer           company      fund         corporate
                                                                     HNWI




GP                                            The PE fund                       Manager




Portfolio      Company A   Company B    Company C    Company D     Company E   Company D




                                                                                           18
             Mezzanine (1/3)
• Debt instrument immediately subordinated to the
  equity;
• The most risky debt instrument = highest yield;
• Returns generated by:
  – cash interest payment: fixed rate or fluctuate along an
    index (e.g. EURIBOR, LIBOR);
  – PIK interest: payment is made by increasing the
    principal borrowed;
  – Ownership: mezzanine financing most of the time
    include equity ownership.
                                                         19
           Mezzanine (2/3)
• Mezzanine suffered before credit crunch
  as senior debt was easy to access;
• Since July 2007 and lack of funding,
  mezzanine is back:
  – As of 30 September 2008, 70% of PE deals
    used mezzanine vs. 48% in 2007;
  – Q3 2008 average spread: E+1,042, versus
    E+979 in Q2 2008;

                                               20
                                                    Mezzanine (3/3)
                                                    Rolling 3-month average spreads of mezzanine
                    Highest in May 2003: E+1,051.5 bps                                                                                                                            September 2008: E+1,042 bps
         1100

         1050

         1000

          950

          900
E+ bps




          850

          800
                                                                                                                            Credit crunch: E+780.5 bps
          750

          700

          650

          600
                         Jul-00
                                  Nov-00


                                                    Jul-01
                                                             Nov-01


                                                                               Jul-02
                                                                                        Nov-02


                                                                                                          Jul-03
                                                                                                                   Nov-03


                                                                                                                                     Jul-04
                                                                                                                                              Nov-04


                                                                                                                                                                Jul-05
                                                                                                                                                                         Nov-05


                                                                                                                                                                                           Jul-06
                                                                                                                                                                                                    Nov-06


                                                                                                                                                                                                                      Jul-07
                                                                                                                                                                                                                               Nov-07


                                                                                                                                                                                                                                                 Jul-08
                Mar-00




                                           Mar-01




                                                                      Mar-02




                                                                                                 Mar-03




                                                                                                                            Mar-04




                                                                                                                                                       Mar-05




                                                                                                                                                                                  Mar-06




                                                                                                                                                                                                             Mar-07




                                                                                                                                                                                                                                        Mar-08
                                                                                                                                                                                                                                                          21
             Infrastructure (1/2)
• Among the newest PE-like asset;
• Global needs for infrastructure assets
• Roads, ports, airports, energy plant, hospitals. Prisons,
  schools, etc…
• Mix of private investors and governments through PPP
  (Public-Private Partnerships);
• Traditional PE funds raised infrastructure funds: KKR,
  CVC, 3i, Macquarie;
• Longer term investment, lower return, steady cash-flow
  with regular yield;
• French highways or Viaduc de Millau are contracted to
  Eiffage/Macquarie;
                                                              22
                                     Infrastructure (2/2)
       • A multi trillion market opportunity:
               – $1 trillion to $3 trillion annually through 2030;
               – US: power industry needs $1.5 trillion
                 between 2010 and 2030;
               – Mexico: a 5-year and $250 billion plan will be
                 funded 50% by private capital;
               – EU: €164 billion to be invested in natural gas
                 infrastructure by 2030 to facilitate import of
                 gas to meet long-term shortfall;
               – China: close to 100 airports will be needed.
                                                                                       23
Source: Global Infrastructure Demand through 2030, CG/LA Infrastructure, March 2008.
        Infrastructure to 2030, volume 2, OECD publication, 2007.
              Real assets (1/2)
• Cash-flow producing asset or pool of assets
  privately originated:
   – Equipment leasing (shipping, aircraft…): the asset is
     purchased and simultaneously leased back to the
     seller;
   – Agricultural finance (forests, timber lands, etc…):
     growing demand from the renewable energy sector;
   – Mines, intellectual property rights, financial assets on
     the secondary market, etc…
• It is usually not asset-backed securities but a
  direct investment in the assets

                                                            24
          Real assets (2/2)
• Steady and regular cash flow: 10%-15%
  annual cash return;
• Downside protection due to high recovery
  value of the assets: loss of value of the
  asset is unlikely;
• Uncorrelated assets;



                                              25
Why allocate assets to PE ?




                              26
       Portfolio management
• Asset allocation is define by returns, risk
  (measured by standard deviations of
  returns) and correlations;
• Diversification improve returns while
  reducing risk;
• Allocation is determined using public
  information of traditional asset classes
  (equity, bonds, REIT, etc...)
                                                27
   The issue with private equity
• Private market:
     • PE funds invest in private companies = no public
       market to help set the valuation;
     • PE funds are themselves private companies = no
       market to value them and no public disclosure
       required.
• Quarterly valuation:
     • Risk of inconsistency: quarterly marked-to-market
       valuation = significant degree of subjectivity;
     • Risk of stale valuation: quarterly valuation can
       understate the standard deviation and correlation
       to other asset classes.
                                                           28
  The issue with private equity
• Illiquid investments:
     • PE funds are closed-end funds (except secondary
       market);
• Time line too long:
     • PE funds has a 5-year investment period and a 10-
       year life;
• Restricted information disclosure:
     • Only LPs have access to the fund’s performance.

  Private equity is an inefficient market
                                                         29
• However, Allocation to PE increased
  significantly over the last years:

    • Low correlation to pricing trends of
      traditional assets;
    • Diversification thus risk reduction;
    • Good returns over the years: Average
      annual IRR 1986-2005 is 18.3%

                                             30
      Reason to invest in PE
• Adding a risky asset with a low correlation
  of pricing trends compared to traditional
  asset classes can reduce the risk of an
  overall portfolio;

• Relatively good returns of PE over the last
  years.


                                            31
LBO activity in Europe




                         32
                                        Geography

 LBO activity in Europe per value (Q1-Q3 2008)                 LBO activity in Europe per volume (Q1-Q3 2008)
           12%                                                           14%

     2%                                                                                     24%
                                                                                                                UK
3%                                               UK                 3%
                                                                                                                France
 3%                               36%            France         3%                                              Germany
                                                 Germany
                                                                                                                Netherlands
4%                                               Netherlands   3%
                                                                                                                Sweden
                                                 Sweden        3%                                               Norway
5%                                               USA                                              21%
                                                                                                                Belgium
                                                 Norway        4%
                                                                                                                Spain
                                                 Belgium
                                                                                                                Italy
                                                 Other
                                                                    7%                                          Other
     14%
                            21%
                                                                               18%




                                                                                                                33
                                                   Sectors

     LBO value in Europe per sector (Q1-Q3 2008)                         LBO volume in Europe per sector (Q1-Q3 2008)
                             16%                                                                  19%
                                                                              23%
      23%
                                                                                                                Services & Leasing
                                    14%            Manufacturing
                                                                                                                Manufacturing
                                                   Services & Leasing
                                                                                                                Healthcare
                                                   Building Materials                                     18%
                                                                                                                Retail
                                                   Healthcare
                                                                        3%                                      Food & Beverage
                                                   Retail Food & Drug
                                                                                                                Chemicals
5%                                                 Insurance            3%                                      Building Materials
                                                   Chemicals
                                                                                                                Computers & Electronics
                                                   Oil & Gas             5%
 6%                                                                                                             Automotive
                                                   Other
                                   10%                                                                          Other
                                                                              5%
        8%
                                                                                                   10%
                           9%                                                       7%
                9%                                                                       7%




                                                                                                                             34
          European buyout value

European buyout value: €72 billion in Q1-Q3 2008




                                                   35
   European buyout by region
                      European LBO volume by region (€ billion)

        1998   1999    2000     2001   2002   2003   2004      2005    2006   2007   Jan-Sep 08

€ 140

€ 120

€ 100

 € 80

 € 60

 € 40

 € 20

  €0
         UK            France          Germany         Italy          Nordic Region Western Europe


                                                                                                     36
     PE as a percentage of GDP
• Nordic countries have the most important PE activity;
• Benelux figures are impacted by few mega deals.
                  Nordic countries             German speaking countries    Benelux
                  Southern Europe              France                       UK
                  Others

        4.5%

        4.0%

        3.5%

        3.0%

        2.5%

        2.0%

        1.5%

        1.0%

        0.5%

        0.0%
               1997    1998      1999   2000      2001     2002      2003    2004     2005   2006


                                                                                                    37
European fundraising activity




                                38
Funds on the market




                      39
Seeking capital is becoming difficult


• Number of vehicles seeking capital keep
  on increasing;
• But the number of final closing and the
  path investors deploy capital has slowed
  down dramatically;
• Investors (LPs) are hesitant and
  sometimes face liquidity issues;
                                             40
• Distributions are expected to decrease as
  well: this won’t ease the fundraising
  processes;
• Average fundraising:
  – 2008: 14.2 months;
  – 2007: 12 months;
  – 2006: 11.1 months


                                              41
Average fundraising




                      42
            State of the market
• Aggregate PE commitments globally are close to
  $2,000 billion (vs. $1,000 billion in 2003 and an
  expected $5,000 billion within 5 to 7 years);

• Globally: app. 1,200 funds are currently seeking
  $713 billion including:
  –   Buyout: 290 funds seeking $320 billion;
  –   Venture: 470 funds seeking $85 billion;
  –   Mezzanine: 25 funds seeking $10 billion;
  –   FoF: 205 funds seeking $220 billion.

                                                 43
          Funds of the market
•   Permira:         €13.5 billion;
•   CVC:             €13.7 billion;
•   Apax Partners:   €11.4 billion;
•   Cinven:          €8.2 billion;
•   Charterhouse:    €7.4 billion;
•   PAI Partners:    €5.5 billion.


                                      44
                    Outlook
• PE is set to enter its most challenging time;
• Increasing pressure and difficulties for managers
  seeking capital;
• Fundraising take more time;
• Less deals are being signed so there’s no rush to
  raise;
• Historical performances and focus strategies will
  become key factors in the future: some GPs won’t
  survive;
• Some LPs will need to free up some capital and
  clean up their portfolio: increase in secondary
  transactions.                                     45
                    Outlook
• PE AUM has grown steadily since 1996:
     • 60% of LPs are expected to increase their
       allocation to PE;
• Sovereign wealth funds are a huge source
  of capital:
     • Represent today $3,000 of assets and are
       expected to reach $7,900 billion by 2011;
• Europe accounts for 19% ($580 billion) of
  SW funds capital;
                                                   46
Fundraising sources




                      47
• LPs usually invest in home-based funds;




                                            48
• Globally, US is the single largest investor;
• In Europe, UK is ahead of anybody;




                                                 49
Profile of the LPs




                     50
The measure of performance




                             51
                                                          Track record

Napoca Fund II
                                                              Initial
                                                                                                  Realized           Unrealized                   Multiple of
       As of 30 December 2007 - $ million     Country      investment   Exit        Cost                                           Total value                   Gross IRR
                                                                                                   value               value                        cost
                                                               date
Realized investments
Beverage Plus Holdings, LLC                 US            Feb-04          Mar-07           23.3         49.6                 0.0           49.6           2.1x        38.0%
Dear Lagoon                                 UK            Feb-05           Jul-06          65.6        151.0                 0.0          151.0           2.3x        43.0%
Sport Management Arizona                    US            Jun-06          Apr-08           97.7        164.2                 0.0          387.7           4.0x        96.0%
Napoca Distressed Credit                    Other         Jul-05          Jan-08           14.6         12.1                 0.0           12.1           0.8x            -
Total realized investments                                                             201.2           376.9                 0.0         376.9           1.9x
Unrealized investments
Fenchurch Street Insurance                  Bermuda       Dec-06                -      130.0                     -         131.7          131.7           1.0x            -
Alketechnic                                 Germany       Jun-06                -       48.2                     -          55.6           55.6           1.2x         5.3%
OutSpace Clothing                           Switzerland   Apr-06                -       38.0                     -          52.8           52.8           1.4x        26.1%
Avi Construction                            France        Apr-06                -       49.7                     -          55.8           55.8           1.1x         5.1%
Hospital Management Holdings                US            Feb-06                -       46.2                     -          46.2           46.2           1.0x            -
Pack4Life                                   Belgium       Mar-08                -       72.2                     -          72.2           72.2           1.0x            -
Foxtruck Finance                            US            Mar-08                -      150.0                     -         150.0          150.0           1.0x            -
Total unrealized investments                                                           534.3                 -             564.3         564.3            1.1x           -
                                                 Total Napoca Fund II                  735.5           376.9               564.3          941.2           1.3x         5.3%




                                                                                                                                                                 52
     Measures of performance
• Multiple of cost:
     • Also called Total Value over Paid-In capital (TVPI);
     • (Cash distributions + Unrealized value)/capital
       invested;
     • Cash returned regardless of timing (total return).
• Internal Rate of Return (IRR):
     • Discount rate that makes NPV of all cash flows
       equal zero;
     • Linked to timing: Quick flip = high IRR.

                                                         53
                          The J-curve
• In the early years, low or negative
  valuation due to:
     • Management fees drawn from committed capital;
     • Initial investments to identify and improve
       inefficiencies;
                                         The J-curve effect

                   20                                         Actual returns

                   15
                        Investments valued below
                   10
           Value




                        its cost:
                        - Management fees;
                   5    - Initial investments.

                   0

                   -5
                                                   Years
                                                                               54
               The J-curve
• Fees are charged based on the fund’s
  entire committed capital;
• Example:
    • Fund size: €100 million;
    • Management fee: annual 2% committed capital;
    • Organizational expenses: €300,000

    → €2,300,000 expenses/fees called regardless of
     any investment made.

                                                      55
                            The J-curve
• If 5 investments are made the first year for €3 million
  each:
        • 5 x €3 million = €15 million;
• If 20% of committed capital is called the first year: €20
  million;
  Capital contributed   €20 million (20% of committed capital)
  Assets:
  Investments           €15 million (5 investments at €3 million each, held at cost)
  Remaining cash        €2.7 million (20-15-2.3 = €2.7 million)
  Total assets          €17.7 million (= 0.89x the 20 million contributed by LPs)



• Interim value is thus: €17.7 million or 0.89x contributed
  capital;
                                                                                       56
                                      The J-curve
     • Underperforming investments tend to be written down
       more quickly than successful companies develop;
     • Example 2nd year:
                 •   Another 20% of committed capital : €20 million;
                 •   Five new deals at €3 million each: €15 million;
                 •   Two first-year investments are written down/off;
                 •   Annual management fee: €2 million.

Capital contributed      €40 million (40% of committed capital)
Assets:
First-year investments   €10.5 million (original 5 investments, one written off, one written down to half its value)
2nd-year investments     €15 million (another five investments at €3 million each, held at cost)
Cash on hand             €5.7 (cash after €4.3 million of expenses(2+2+0.3) and €30 million of investments)
Total assets             €31.2 million (=0.78x the €40 million)


                                                                                                                 57
                   The J-curve
• Companies performing well, held at cost or conservative
  valuation, understate the value of the portfolio;
• Interim is thus often misleading;
• NAV + cumulative distributions track over time relative to
  contributed capital:




                                                           58
Fund of Funds due diligence:
the selection of PE managers




                               59
         Due diligence focus
• Quantitative analysis:
  – Past investments and track record;
  – Leverage and debt;
  – Sources of proceeds.

• Qualitative analysis:
  – Team;
  – Strategy;
  – Market opportunity
                                         60
  Critical items of due diligence
• Track record: what’s behind a bad investment?;
• Unrealized portfolio: lack of recent track record
  and ability of current team – look at current
  valuation carefully.
• Organization: fund size, multi or single office,
  Pan-European, domestic or transatlantic, risk of
  spin-off, autocratic management, etc;
• Team: number of Partners, Principles and
  Associates, carry split, staff retention and
  turnover, motivation in case of large distribution
  under previous funds, key man clause,
  succession issues.
                                                       61
             Reasons to invest
•   Attractive track record;
•   Experienced investment team;
•   Differentiated investment strategy;
•   Proprietary deal flow;
•   Sector/geographic focus.

• Must be combined with FoF portfolio
  management and exposure > seek
  diversification.
                                          62
                                                          Track record
• Entry and exit date;
• Realized and unrealized value (part sell off or
  recapitalization);
• Multiples of cost and IRR.
Napoca Fund II
                                                              Initial
                                                                                                  Realized           Unrealized                   Multiple of
       As of 30 December 2007 - $ million     Country      investment   Exit        Cost                                           Total value                   Gross IRR
                                                                                                   value               value                        cost
                                                               date
Realized investments
Beverage Plus Holdings, LLC                 US            Feb-04          Mar-07           23.3         49.6                 0.0           49.6           2.1x        38.0%
Dear Lagoon                                 UK            Feb-05           Jul-06          65.6        151.0                 0.0          151.0           2.3x        43.0%
Sport Management Arizona                    US            Jun-06          Apr-08           97.7        164.2                 0.0          387.7           4.0x        96.0%
Napoca Distressed Credit                    Other         Jul-05          Jan-08           14.6         12.1                 0.0           12.1           0.8x            -
Total partially realized investments                                                   201.2           376.9                 0.0         376.9           1.9x
Unrealized investments
Fenchurch Street Insurance                  Bermuda       Dec-06                -      130.0                     -         131.7          131.7           1.0x            -
Alketechnic                                 Germany       Jun-06                -       48.2                     -          55.6           55.6           1.2x         5.3%
OutSpace Clothing                           Switzerland   Apr-06                -       38.0                     -          52.8           52.8           1.4x        26.1%
Avi Construction                            France        Apr-06                -       49.7                     -          55.8           55.8           1.1x         5.1%
Hospital Management Holdings                US            Feb-06                -       46.2                     -          46.2           46.2           1.0x            -
Pack4Life                                   Belgium       Mar-08                -       72.2                     -          72.2           72.2           1.0x            -
Foxtruck Finance                            US            Mar-08                -      150.0                     -         150.0          150.0           1.0x            -
Total unrealized investments                                                           534.3                 -             564.3         564.3            1.1x           -
                                                 Total Napoca Fund II                  735.5           376.9               564.3          941.2           1.3x         5.3%
                                                                                                                                                                       63
          Benchmark analysis
                             Venture Economics Benchmark Comparison (as of 30 September 2007)

• DPI: Distributed Paid In               Fund by fund basis             Napoca Fund I               Napoca Fund II

                             Vintage Year                                     2001                           2005
  > Proceeds distributed,    Fund Size
                             Contributed capital
                                                                             $714.0
                                                                             $713.8
                                                                                                           $1,305.0
                                                                                                            $611.3
                             Distributions                                  $2,518.5                        $303.4
  only realized deals;       Residual value
                             Total Value
                                                                              $67.4                         $333.7

                                                                            $2,585.9                        $637.1
                             Gross IRR
                                                                            55.6%                           5.3%
                             Net IRR

• RVPI: Residual Value
                             Napoca                                         42.3%                        Too immature
                                                                   Europe               US      Europe                  US
                             Lower boundary of Upper Quartile       17.8%              16.7%     9.7%                   9.9%
                             Quartile                                1st                1st
  Paid In > Unrealized       DPI
                             Napoca                                          3.53x                          0.50x
                                                                   Europe               US      Europe                  US
  value;                     Lower boundary of Upper Quartile
                             Quartile
                                                                    1.04x
                                                                     1st
                                                                                       0.94x
                                                                                        1st
                                                                                                 0.18x
                                                                                                  1st
                                                                                                                        0.11x
                                                                                                                         1st
                             RVPI
                             Napoca                                          0.09x                          0.55x
                                                                   Europe               US      Europe                  US
                             Lower boundary of Upper Quartile        NA                0.83x     NA                     1.03x

• TVPI: Total Value Paid     Quartile
                             TVPI
                             Napoca                                          3.62x
                                                                                        4st

                                                                                                            1.04x
                                                                                                                         4th


                                                                   Europe               US      Europe                  US
  In: Realized and           Lower boundary of Upper Quartile
                             Quartile
                                                                    1.04x
                                                                     1st
                                                                                       1.52x
                                                                                        1st
                                                                                                 0.18x
                                                                                                  1st
                                                                                                                        1.15x
                                                                                                                         3rd

  Unrealized value.

                                                                                                                      64
                Vintage year performance
Cumulative Vintage Year Performance (Thomson Venture Xpert - as of 30 June 2008)

              Number of                   Capital                                   Lower        Lower        Lower
   Vintage                                              Pooled
                 funds     Average       Weighted                   Maximum      boundary of boundary of boundary of        Minimum
    Year                                               Average
               included                  Average                                 1st Quartile 2nd Quartile 3rd Quartile
       1989          12          5.20         10.60          9.30        23.30          14.30          8.70        -0.10          -24.20
       1990          17         11.90          9.50          9.20        35.70          19.50          8.90         3.00           -3.40
       1991          15         14.10         14.80         16.90        40.20          23.60         13.20         6.20          -17.50
       1992           8         21.70         27.30         27.20        42.80          32.30         22.10        10.20            1.70
       1993          12         22.80         18.10         17.30        87.90          26.80         15.70         9.00           -9.90
       1994          14         27.20         42.60         42.50        59.80          49.20         16.50        14.60           -1.80
       1995          14         27.70         43.30         36.00       107.30          60.10         13.90         1.00          -16.00
       1996          20         27.40         14.60         11.40       268.10          21.00         12.80         6.90          -12.40
       1997          32         16.70         19.00         14.60       132.80          21.30          6.70        -0.60          -17.40
       1998          34          5.90          8.50          8.90        30.20           9.70          4.30        -0.90          -11.10
       1999          31          7.10         10.10         11.00        40.80          12.70          6.00        -0.20          -16.40
       2000          32         10.00         13.60         14.60        35.00          17.80          8.80            -           -9.60
       2001          21         15.10         26.40         26.00        64.80          28.20         11.30            -           -5.30
       2002          27         15.80         20.30         23.30       110.10          27.50          8.30        -0.40           -7.10
       2003          17         12.10         20.70         26.50        45.50          22.90          6.10        -1.30           -8.50
       2004          15         21.70         28.80         21.90       234.10          17.50         -0.20        -5.10          -19.60
       2005          33          5.90          1.90          6.30        82.40          11.50          2.70        -7.10          -50.90
       2006          19         -1.50         -13.40       -12.90        91.30           5.60         -4.40       -14.40          -40.10
2007                 11          32.30         -0.30         1.80       436.50           12.80                     -32.00          -73.80
                                                        Average        85.12           23.42         8.97 -        1.3            -15.0
                                                       Minimum         23.30            5.60         -4.4        -14.4            -50.9
                                                       Maximum        268.10           60.10        22.10        14.60             1.70
                                                         Median        62.30           21.15         8.75         -0.2            -11.8




                                                                                                                             65
             Presentation
• Private equity investors and their
  managers: Vivre avec un fond
  d’investissement, Les Echos, October
  2006




                                         66
The world’s biggest private
      equity firms




                              67
                            Carlyle
      • Founded in 1987 by David Rubenstein, Daniel D’Aniello
        and William Conway;
      • Since inception, Carlyle has invested $49.4 billion of
        equity in 836 deals for a total purchase price of $220
        billion;
      • Over $89 billion AUM throughout 64 funds in buyouts
        (69%), growth capital (4%), real estate (12%) and
        leveraged finance (15%);
      • Over 525 investment professionals operating in 21
        countries;
      • Assets deployed in Americas (59%), Europe (28%) and
        Asia (13%);
      • Currently: 140 companies, $68 billion in revenues and
        200,000 workers.
                                                             68
Source: www.carlyle.com
                Carlyle deals
•   Hertz
•   Zodiac
•   Terreal
•   Le Figaro
•   VNU




                                69
                   Blackstone
• Founded in 1985 by Steven Schwarzman and Peter
  Peterson;
• Global AUM $119.4 billion in private equity, real estate,
  Funds of Hedge Funds, CLOs, Mutual funds;
• 89 senior MDs and total staff of over 750 investments
  and advisory professionals in US, Europe and Asia;
• Blackstone is the first major PE firm to become public:
  IPO was in June 2007 at $36 – under water since first
  day !
• Currently: 47 companies, $85 billion in annual revenues
  and more than 350,000 employees.


                                                          70
          Blackstone deals
• The weather channel: $3.6bn in
  September 2008;
• Hilton: $26.9bn in October 2007;
• Center Parcs: $2.1bn in May 2006;
• Deutsche Telekom: £3.3bn in April 2006
  (minority);
• Orangina: $2.6bn in February 2006;

                                           71
                         KKR
• Founded in 1976 by James Kohlberg, Henry Kravis and
  George Roberts;
• Total AUM $68.3bn from $25.4bn invested capital;
• Total of 165 deals since inception with an aggregate
  enterprise value of $420bn;
• KKR is currently from a “one-trick pony” to a multi asset
  manager with infrastructure and mezzanine funds being
  raised;
• The $31bn buyout of RJR Nabisco inspired the book
  “Barbarians at the gate”;
• Currently: 35 companies, $95 billion in annual revenues
  and more than 500,000 employees.
                                                          72
                 KKR deals
•   Legrand;
•   Pages Jaunes;
•   Tarkett;
•   Alliance Boots;
•   ProSieben;
•   TDC;
•   Toys R’ Us.

                             73
             PAI Partners
• The biggest French PE firms formerly
  known as Paribas Affaires Industrielles;
• Since 1998, PAI invested €3.92bn in 36
  deals across Europe;
• Last fund raised reach €5.2bn
• Investments include: Kaufman & Broad,
  Vivarte, Neuf Cegetel, Panzani Lustucru,
  Atos Origin
                                             74
           Private equity deals
• Private equity funds own companies of
  “everyday life”…
  –   Pages jaunes;
  –   Comptoir des cotonniers;
  –   Pizza Pino;
  –   Picard;
  –   Alain Afflelou;
  –   Jimmy Choo;
  –   Odlo;
  –   Orangina…
                                          75
           Impact of PE on French economy
                   is overall positive

       • 2006-2007 employees growth rate:
              – +2.1% (vs. 0.5% for CAC 40);


       • 2006-2007 sales growth:
              – +5.3% (vs. 4.1% for CAC 40);



                                               76
Source: AFIC/Ernst&Young
       • As of 30 June 2006:
              – 55% of PE-backed companies have less than 100
                empoyees and 83% have less than 500 employees;

              – 79% have less than €50m revenues;

              – 4852 PE-backed companies in France;

              – Work force of 1.5 million people (9% of total private
                employees);

              – €199bn in revenues including €128bn generated
                abroad.

                                                                        77
Source: AFIC/Ernst&Young
           Presentations
• KKR
• Blackstone
• Carlyle




                           78
The mega buyout era




                      79
            Fund growth
• PE AUM 1980-2006: 24%CAGR;
• 2003-2006: PE commitments increased
  260%;
• Cost of debt historically low

    → Global volume of LBOs increased to
 $700 billion in 2006 (4x 2003 level);
    → Global volume of LBOs in H1 2007
 reached $560 billion (25% of global M&A).
                                         80
• Bigger are the funds, bigger are the target
  companies;
     • Fund size and deal size are correlated;
     • “Club-deals” were required to complete the biggest
       acquisitions;
• More cash you have,more cash you need:
     • Co-investors such as other funds, LPs or
       shareholders of target companies were sought
       after;
     • Some funds created quoted vehicles to access
       permanent capital or listed the management
       companies on the public market;


                                                       81
   Large funds are getting (much)
               larger
• US 12 largest funds raised in the US as of
  June 2007 totaled close to $155 billion:
     • This represents a 142% increase compared with
       their predecessor funds;
     • In Europe, the fund-to-fund increase of the 12
       largest funds was only 75%;


• In addition, GPs were starting to raise at
  shorter intervals.
                                                        82
 Rational for larger pools of capital
• Economies of scale in the management of
  the fund;
• Higher management fee enable to build
  top investment teams;
• Expanded buyout opportunities at the
  larger end of the market:
    • Higher quality assets;
    • Less competition at the upper-end of the market;
    • Huge potential returns.
                                                         83
 Rational for larger pools of capital
• Ability to pursue a pro-active acquisition
  strategy;
• Implement a levered capital structure;
• Flexible (covenant-lite) and low-cost
  financing;
• Various exit options (IPO, Corporate
  transaction, secondary buyouts...)

                                               84
           Target companies
• Very large companies are attractive
  targets:
     • Mature companies need restructuring effort to get
       rid of the “fat”;
     • The value-addition is thus often obvious an
       obvious path;
     • Usually less competition among the buyers.
• Public market offer a lot of opportunities:
     • PE investors add value to the company they invest
       in as opposed to passive public shareholders.
                                                           85
          Rise of Club-deals
• Club-deals are iconic of the concentration
  trends of private equity;
• 91% of US buyouts of over $5 billion were
  club-deals...
• ... but also 38% of P-to-P valued between
  $250 million and $1 billion were club
  deals:
     • Many firms shared the risks and pooled resources.

                                                       86
  Disappearance of club-deals
• Collusion charges;
• Difficulties to share informations;
• Tendency to monopolize the control the
  control;
• Ego-issues.




                                           87
   Examples of mega club deals
        Target                    Value          Buyers
Hospital Corp, of        $32.7 billion    Bain Capital, KKR,
America                                   Merrill Lynch
Harrah’s Entertainment   $27.4 billion    Apollo, TPG

Clear Channel            $25.7 billion    Bain, Thomas H Lee

Kinder Morgan            $21.6 billion    Carlyle, Riverstone,
                                          Goldman Sachs
Freescale                $17.6 billion    Blackstone, Carlyle,
Semiconductor                             Permira , TPG
Hertz                    $15.0 billion    Carlyle, CD&R, Merrill
                                          Lynch
TDC                      $13.9 billion    Apax, Blackstone, KKR,
                                          Permira, Providence 88
            Presentations
• Caveat Investor / the uneasy crown, The
  Economist, Feb 2007;
• Who’s next, The Deal, July 2008




                                            89
Value creation in private
         equity




                            90
      Value creation drivers
• EBITDA generation
• Multiple expansion
• Debt reduction




                               91
        EBITDA generation
• EBITDA is generated by:
  – Sales expansion;
  – Margin improvement;
  – Add-on acquisitions;
  – Organic growth (=GDP growth)




                                   92
         Multiple expansion
• Multiple: EV/EBITDA;
• Based on comparable transactions;
• Multiple expansion: Difference between
  entry and exit multiple;

• =Multiple uplift x Exit EBITDA
• Multiple uplift:
       =Exit EV/EBITDA – entry EV/EBITDA
                                           93
            Debt reduction

• = Entry net debt – exit net debt




                                     94
                               Example

                                EV creation
                                                         € 61.0       € 1,493.7
                                       € 323.6




               € 345.1




€ 764.0




Entry EV   EBITDA generation      Multiple expansion   Deleveraging   Exit EV




                                                                                  95
    What to understand from EV
             creation
• If most of the value comes from:
  – EBITDA increase: growing industry and/or
    company, possibly in a young market or efforts
    mainly on sales force;
  – Multiple expansion: margin increased over the
    holding period; the investors rationalized and
    optimized the production, cut costs, disposed of
    non core assets, arbitrage strategy, etc…
  – Deleveraging: usually the last factor to be
    implemented; Debt reduced by cash not reinvested.

                                                    96
                                        Entry                                          Exit
                        EV        EBITDA Net debt Multiple            EV        EBITDA Net debt Multiple
Company A               1,275.0      150.0    45.0      8.5           1,972.0      210.0     5.0      9.2




EBITDA generation:      1,275.0 = Enty EBITDA x Entry multiple (1)
                        1,785.0 = Exit EBITDA x Entry multiple (2)
                          510.0 = (2) - (1)

Multiple expansion:        0.7 = Multiple uplift (exit EV/EBITDA - entry EV/EBITDA) (3)
                         210.0 = Exit EBITDA (4)
                         147.0 = (3) x (4)

Debt reduction:            45.0 = Entry net debt (5)
                            5.0 = Exit net debt (6)
                           40.0 = (5) - (6)

Total value creation:    697.0

Exit EV:                1,972.0 = Entry EV + Total value creation




                                                                                                   97
                Value creation chart

                                                       Debt reduction:   Exit EV:
                                 Multiple expansion:
                                                           € 40.0        € 1,972.0
            EBITDA generation:         € 147.0
                 € 510.0


Entry EV:
€ 1,275.0




Entry EV    EBITDA generation    Multiple expansion    Debt reduction    Exit EV




                                                                                     98
     Factors of value creation
• Changing business and driving growth:
     • Taking advantage of market cycles (buying cheap,
       selling at better price) and financial engineering
       are no longer enough;
• Objectives must be well defined;
• Management is incentivized: alignment of
  interest between Board members and
  shareholders;
• Must create value for the next acquirer: PE
  is not necessarily short term focused.
                                                        99
          Other factor: Industry
             characteristics
• Stability, low cyclicality;
• High margins (or potential for
  improvement);
• Strong operating cash-flows:
     • PE businesses are cash-flow driven rather than
       earning driven: need to pay down the debt
• Industry-wide revenue growth;
• Potential for overall efficiency
  improvements.
                                                        100
  Other factor: The GP makes the
             difference
• Managers contribute to value creation:
     • Select the right target companies;
     • Undertake appropriate changes;
     • Experience of the GPs/prior buyout experience
• Focus on few sectors generates better returns:
     • Industry-focus strategy generate better returns…;
     • … but moderately diversified approach generates better
       returns;
     • Focus strategy exposes to industry cycles but good industry
       expertise;
• Example of bad deal in the wrong industry:
  Foxton deal “The deal of the century”, FT
                                                                 101
• Recruitment/management;
• Buy-and-build;
• New investments to develop to new
  markets;
• Optimization/cost cutting;
• Divesture of non core business(es)


                                       102
  Primary source of value creation (%)
• Almost 2/3 of the value generated comes from company
  outperformance: Companies’ fundamentals are key
  drivers of growth.
                         Sample: 60 deals from 11 leading PE firms

                                                            Arbitrage
                                                               5%




                                                                        Market/sector
                                                                     appreciation, plus
                                                                     financial leverage
                                                                            32%




                   Company
                outperformance
                     63%



      Source: McKinsey & Company
                                                                                          103
• Five features of a leading-edge practice:
     • Expertise and knowledge: insights from the
       management, trusted external source;
     • Substantial and focused performance incentives:
       top management usually owns 15-20% of the
       equity;
     • Performance management process: initial
       business plans are subject to continual review and
       revision;
     • Focused 100-day plan: deal partners must devote
       most of their time to a new deals to build
       relationship, detail responsibilities and challenge
       the management;
     • Management should be changed sooner rather
       than later

                                                        104
             Presentation
• Foxtons: The sale of the century, FT
  magazine, June 2008




                                         105
Structure of a Leverage
  Buyout transaction




                          106
 Structure of a leverage buyout
• Deal structure:
  – Equity
  – Debt


• Debt is either:
  – Unsecured
  – Secured


                              107
            LBO structure
                             Nine-year average: E+284.5;
                             Nine-year median: E+287.5;
             Senior debt
                             Nine-year minimum: E+249.5 in June 2007;
                             Nine-year maximum: E+287.5 in June 2008*.



                             2nd lien have disappeared with the credit crunch; they
 Secured       2nd lien
                             were seen as cheap mezzanine.


                             Mezzanine benefits from the credit crunch;
                             Mezzanine reimbursement has cash and PIK
              Mezzanine      components;
                             H1 2008 cash spread: E+414.7
                             H1 2008 PIK spread: E+535.3



            Unsecured debt   Unsecured debt usually bonds


Unsecured
                             Equity contribution
                             10-year minimum: 29.6% in 1997;
                Equity       10-year maximum: 42.9% in H1 2008;
                             10-years median: 35.9%;
                             10-year average: 36.0%


                                                                                      108
                     Equity
• Common equity, preferred equity, shareholder
  loan;

• Equity is unsecured and the most risky and
  rewarding tranche;

• Equity is held by the shareholders: private equity
  fund, management, various investors, often debt
  mezzanine providers, sometimes intermediaries.

                                                  109
                     Mezzanine debt
•   Secured debt but subordinated to senior debt;

•   Mezzanine is provided by mezzanine funds and sometimes hedge funds;

•   Reimbursement after the senior debt but has priority over the equity holders

•   Reimbursement is cash or PIK;

•   PIK note: payment made in additional bonds or preferred stocks which
    increase the performance of the investment;

•   Mezzanine is usually reimbursed at exit if not refinanced before.

•   H1 2008 cash spread: E+414.7bps

•   H1 2008 PIK spread: E+535.3bps

                                                                             110
              Second lien
• Developed pre-July 2007 and does not
  really exist anymore: as of Q3 2008, 12%
  of LBOs used 2nd lien versus 52% in 2007;

• Reimbursement in cash, priority level
  between senior debt and mezzanine;

• Second lien was seen as a cheap
  mezzanine.
                                          111
                Senior debt
• Negotiated for a period of time between 7 and 9
  years usually based on expected cash flow;

• Tranche A is first reimbursed. Other tranches (B
  and C) are usually reimbursed in fine;

• Tranche D is a revolving credit to refinance
  previous debt of the target company;

• H1 2008 spread: E+337.48bps
                                                 112
            Capital structure
                               Nine-year average: E+284.5;
                               Nine-year median: E+287.5;
               Senior debt
                               Nine-year minimum: E+249.5 in June 2007;
                               Nine-year maximum: E+287.5 in June 2008*.



                               2nd lien have disappeared with the credit crunch; they
 Secured         2nd lien
                               were seen as cheap mezzanine.


                               Mezzanine benefits from the credit crunch;
                               Mezzanine reimbursement has cash and PIK
                Mezzanine      components;
                               H1 2008 cash spread: E+414.7
                               H1 2008 PIK spread: E+535.3



              Unsecured debt   Unsecured debt usually bonds


Unsecured
                               Equity contribution
                               10-year minimum: 29.6% in 1997;
                  Equity       10-year maximum: 42.9% in H1 2008;
                               10-years median: 35.9%;
                               10-year average: 36.0%


                                                                                        113
             The loan market:
                  in 2008
• Average leverage of European LBOs: 4.5x in Q3
  2008 vs. 7.0x in Q3 2007;
• Average equity contributions: 43% in Q3 2008
  vs. 34% in Q3 2007
• European Senior loan in Q3 2008: 450-550bps
  (compared to 225bps-275bps in early 2007) –
  partly offset by lower base rates;
• Mezzanine margins have increased to 1100 –
  1300bps plus warrants or equity co-invest
  (compared to 750-900bps with little call
  protection and no equity participation in 2007);

                                                114
Average LBO equity contribution

Less debt available = more equity required to close a deal


                      Average LBO equity contribution

      50%
                                                                            44.9%
      45%                                                           42.0%           42.8%

            37.6%   38.6%
      40%                   37.3%
                                    35.9%
                                            33.7%   33.7%   33.6%
      35%
      30%
      25%
      20%
      15%
      10%
       5%
       0%
            2001    2002    2003    2004    2005    2006    2007    1Q08 2Q08       3Q08

                                                                                            115
      Loan volume dropped significantly
Banks’ lending capacities are dry !
         Q1-Q3 2008 loan volume: €46.6 billion
         Q1 2007 loan volume: €45.75 billion


                                    Annual senior loan volume (in € bn)
                 € 150

                 € 130

                 € 110

                  € 90
                                                                                                       4Q
                  € 70                                                                                 3Q
                                                                                                       2Q
                  € 50
                                                                                                       1Q

                  € 30

                  € 10

                  -€ 10   1998   1999   2000   2001   2002   2003   2004   2005   2006   2007   2008

                                                                                                            116
Evolution of capital structure

Back to the classic structure: Senior Debt + Mezzanine


                       Evolution of capital structure over years

    100%                     1.6%
                                                                                9.3%
                                           15.9%
    90%
                                                      28.7%          27.9%
    80%
              51.6%      50.0%
    70%
                                           34.9%
                                                                 20.4%
    60%                                                                                 Sr + 2nd Lien + Mezz
                                                      33.2%                     68.5%
    50%                                                                                 Sr + Mezz
                         4.8%
                                       11.7%
    40%                                                          23.9%
                                                                                        Sr + 2nd Lien
                                                      10.7%
    30%                                                                                 Sr Only
              48.4%
                         43.7%                                                  3.7%
    20%                                    37.5%
                                                      27.5%      27.9%
    10%                                                                         18.5%

     0%
           2003       2004          2005           2006       2007           1H08
                                                                                                               117
                 Cost of debt

       Cost of debt increased significantly in 2008

                       LBO cost of funding in bps
500.00
                                                         445.97
450.00
400.00
350.00
                             309.23                               2003
300.00                                                            2004
250.00                                                            2005
200.00                                                            2006
                                                                  2007
150.00
                                                                  Jan-Sep 08
100.00
 50.00
   -
               Senior debt            Senior debt + Mezzanine



                                                                               118
                                  LBO spread
                        Average spread for initial and secondary buyouts
                                                                                         E+344.58 in
                                                                                         June 2008

340

320
                    E+298.39 in              E+301.56 in
                    August 2001             January 2004
300


280

260
      E+253.78 in
      Sept. 2000                                                           E+249.58 in
240                                                                        June 2007


220


200
 M 0




 M 1




 M 2




 M 3




 M 4




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 Se 00




 Se 01




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 Se 5




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 Se 07




        8
 Ja 0




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 Ja 7
     -0




     -0




     -0




     -0




     -0
      0




      0




      0




      0




      0




      0




      0




      0




      0
      0




      0




      0




      0




      0




      0




      0




      0
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                                                                                               119
               The loan market
• Loans started to fall below “par value” (100) in June
  2007;
• Secondary market became depressed (less liquidity,
  decline in value, etc) but presents some good buying
  opportunities;
• Default rate at its lowest level although was expected to
  increase in 2008;
• A lot of new investors (incl. traditional PE funds) entered
  the loan market in H1 2008 with levered vehicles;
• They did not anticipate that the loan market will decline
  even more sharply in 2008 = BAD
• Sponsor-backed credit is usually poorly valued
  regardless of the company’s performance

                                                           120
              Consequences
• The market is stuck:
     • sellers have not yet adjusted their price;
     • Buyers don’t want/cannot pay high price.


• Deals are negotiated at cheaper:
  – EBITDA multiples are lower
  – More equity and less debt = more
    conservative structure

                                                    121
         EBITDA multiples

        Average LBO purchase price (EBITDA multiple)

12.0x                                                                                10.9x
                                                                                             10.5x
                                                                              9.7x
10.0x                                                                  8.8x                          8.7x
               8.2x                                             8.3x
                      7.7x                               7.6x
 8.0x   7.3x                 7.3x   7.1x   7.0x   6.8x

 6.0x

 4.0x

 2.0x

 0.0x




                                                                                 08

                                                                                 08

                                                                                 08
    97

           98

                  99

                         00

                                01

                                       02

                                              03

                                                     04

                                                            05

                                                                   06

                                                                          07
                                                                               1Q

                                                                               2Q

                                                                               3Q
   19

         19

                19

                       20

                              20

                                     20

                                            20

                                                   20

                                                          20

                                                                 20

                                                                        20



                                                                                                            122
                           Purchase prices
Secondary buyouts are the most impacted as:
    • They were traditionally the most expensive transactions = price adjustment;
    • Sellers are very likely forced to sell so accept lower prices.


                                  Purchase price per deal type
            11.0x

            10.5x

            10.0x

             9.5x

             9.0x
                                                                         All Buyouts
             8.5x
                                                                         Sponsor to Sponsor
             8.0x                                                        Corporate
             7.5x                                                        Public to Private

             7.0x

             6.5x

             6.0x
                    2002   2003   2004   2005   2006   2007   YTD 2008

                                                                                              123
The pros and cons of being
          private




                             124
     Results of a 2008 McKinsey
               survey:
• Private equity Boards are overall more efficient
  than public equity Boards:
     • Better financial engineering;
     • Stronger operatonal performance.
• Pros and cons of public equity Boards offer
  some:
     • Superior access to capital and liquidity;
• More extensive and transparent approach to
  governance and more explicit balancing of
  stakeholder interests.
                                                     125
  Public versus Private: differences in
 ownership structures and governance
• Public companies have arm’s length
  shareholders:
     • Need for accurate and equal information among
       shareholders and capital market (audit, remuneration,
       compliance, risk);
     • Management development across the board.

• Private equity companies have more efficient
  processes:
     • Stronger strategic leadership;
     • More effective performance oversight;

• Manage only key stakeholders’ interests.
                                                               126
     Rating of public and private Boards
                 of Directors
                                                          Private equity Boards             Public companies Boards



                                      4.8                                             4.8
                                                                                                                              4.6
        4.3                                                                                                   4.2
                                                                            4.1
                                                                    3.8                                3.8
                                                                                                                                      3.5
                 3.3                                                                        3.3
                                               3.1




    Strategic leadership              Performance            Development/succession   Stakeholder    Governance (audit,    Overall effectiveness
                                      management                   management         management    compliance and risk)

                                                                                                                                        127
Source: McKinsey Quarterly, The Voice of Experience Public vs. Private Equity
      Strategic leadership in PE
              companies
• Joined efforts of all Directors;
• Usually, defined and shaped dring the due
  diligence (prior acquisition);
• Boards approve management strategic decision
  (in M&A for example);
• PE funds stimulate management’s ambition and
  creativity;
• Executive management reports on the progress
  of the latest strategic decision implemented.

                                              128
    Strategic leadership in public
             companies

• Boards only oversee, challenge and shape
  the strategic plans, accompanying the
  management in the implementation;

• The executive management takes the lead
  in proposing and developing it; it is mainly
  a formal reporting.
                                            129
    Performance management in
     private equity companies
• Private equity have one focus: realisation
  of their investment;
• Consequently, PE Boards have a
  « relentless focus on value creation
  drivers »;
• Performance indicators are clearly defined
  and focus on cash metrics and speed of
  delivery.
                                          130
Performance management in public
           companies
• High level performance managment, no real
  detailed analysis;
• Focus on quarterly profit targets and market
  expectations;
• Need to communicate an accurate picture of
  short-term performance;
• Budgetary control, short-term accounting profits;
• Public companies Boards focus on information
  that will impact the share price.

                                                 131
   Management development and
  succession in private companies

• PE companies mainly focus on top
  management (CEO, CFO) and replace
  underperformers very quickly;

• Very little efforts deployed on long-term
  challenges such as development of
  management, succession, etc
                                              132
  Management development and
  succession in public companies
• Efficient thorough management-review: top
  management and their successors;

• Focus on challenges and key capabilities for
  long-term success: management development
  and remuneration policies;

• However, public Boards have weaknesses:
     • Slow to react and their voice is more (perceived as) advisory
       than directive;
     • Remuneration decisions sometimes more driven by
       public/stakeholders expected reaction than performance

                                                                  133
Stakeholder management in private
            companies
• Executive management can clearly identify a
  majority shareholder;
• PE funds are locked-in for the duration of the
  fund;
• PE fund represent a single block and are much
  more involved and informed than public
  shareholders;
• Less onerous and constructive dialogue;
• No or little experience dealing with media and
  unions (see Walker report and debate over PE in
  2007)

                                               134
Stakeholder management in public
           companies
• Shareholding struture is more complex
  and diversified than private companies:
     • Institutionals, minority individuals, growth investors,
       long-term strategic, short-term hedge funds.
• Different priorities and demands: CEOs
  need to learn to cope with this very diverse
  range of investors;
• In case of P2P, HF can block the
  privatization (95% threshold to delist):
  Alain Afflelou purchase by Bridgepoint.
                                                           135
 Governance and risk management
       in public companies
• Where public companies score the best: consequences of
  Sarbanes-Oxley legislation and Higgs Report;

• Several subcommittees to scrutinize remuneration, audit,
  nomination, etc…

• Overall Board supervise and can rely and decide on the sub-
  committees’ recommendations;

• Important factor of investor confidence;

• Downside: expensive, time-consuming, inefficient sometimes (“The
  focus is on box-ticking and covering the right inputs, not delivering
  the right outputs”)


                                                                     136
Governance and risk management
      in private companies

• Lower level of governance than in public
  companies: only audit committees are
  needed in PE’s approach;

• More focus on risk management than risk
  avoidance;

• Not perceived as a pure operational factor.
                                             137
                                                                 Top priorities
                                                           Private equity Boards                 Public companies Boards
                                                      Sample of 20 UK-based directors who have served on the
         18                                           boards of both private and public companies, most with an
                                                      EV of >£500 million.




                                       11

                                                                                9                                                        9

                                                                                                                                                                 7

                   5                                                 5                     5                  5
                                                                                                   4



                                                0                                                                    0            0                       0
       Value creation                 Exit strategy             Strategic initiatives   External relations   100-day plan   Governance, compliance Organization design and
                                                                   (inclu. M&A)                                                    and risk              succession

                                                                                                                                                                 138
Source: McKinsey Quarterly, The Voice of Experience Public vs. Private Equity
          Survey’s conclusion
• Public companies Directors are more focus on
  risk avoidance than value creation:
     • They are not as well financially rewarded as PE Directors by
       a company’s success but they can still lose their hard-earned
       reputations if investors are disappointed.


• Greater level of engagement by nonexecutive
  Directors at PE-backed companies:
     • In addition to formal meetings, PE nonexecutive Directors
       spend an additional 35 to 40 days a year to informal
       communication with the management.


                                                                   139
   Credit crisis: impact and
consequences on private equity




                                 140
           Before July 2007 (1/3)
• Growth of the institutional loan market, CDOs and second lien loans;
• Intermediaries/brokers underwrote debt to sell to other investors for
  syndication fee: became less demanding in terms of potential
  risk/reward;
• Multiplication of highly rated structured credit products
  (CDOs/CLOs) although their inherent value was increasingly
  complex to calculate;
• Increasing interest from investors for LBO funds led to higher
  leverage;
• New loans were issued as “covenant lite arrangements”:
   DONNER DES EXEMPLES DE COVENANT A
   RESPECTER DANS UN LOAN TYPE



                                                                    141
       Before July 2007 (2/3)
• Increasing leverage loan activity but
  decline of credit quality of the new debt
  due to:
        –Covenant lite;
        –Rising ratio of debt to earnings for US
         and EU LBOs;
        –Mid and large LBO debt/EBITDA ratios
         were at all time high in 2007 (and were
         even higher for large than mid LBOs).
                                                   142
        Before July 2007 (3/3)
• Three indicators of a bubble:
        – Debt/EBITDA ratio at all time high in 2007: a
          decline of operating performance will expose
          the company to the risk of default;
        – Companies under LBOs have less liquidity to
          serve their debt;
        – Interest coverage ratio decreased since 2003
          reaching a ten-year low of 1.7x in 2007.


• More equity + more debt = bigger deals and
  bigger leverage;
                                                          143
         After July 2007 (1/5)
• Sudden increase in credit spreads makes the
  debt more expensive and more in line with the
  real risk held by the debt holder;

• Banks and debt underwritters could not
  distribute their debt to other investors: had to
  keep it on their balance sheet while their value
  was declining;
        – A number of transactions collapsed and could
          not be closed;
        – Banks that did not distribute their debt had to
          report significant losses on their books.

                                                        144
      After July 2007 (2/5)
– Slowing buyout activity in US and Europe
  (almost no activity in 2008);

– Debt was repriced and more difficult to
  access;

– Default rate was historicaly low as of July
  2007;

– Meant to rise sharply since then, starting with
  construction, airline and retail industries as
  global recession is impacting our economy; 145
       After July 2007 (3/5)
– Increase in the issuance of junk bonds: in the
  past four years, almost half of the newly
  issued bonds have been rated as “junk” at
  their outset;

– Default risk (according to Moodys and Edward
  Altman (NYU Salomon Center)):
      – CCC 4-year default risk: 53.6%;
      – CCC 10-year default risk: 91.4% in 10 years;
      – B default risk: 25.2% after four years.

– In reality, the default rate over the last years is
  much lower that those predictions;               146
      After July 2007 (4/5)
– Reasons for the low deafult rate:
     – Given the lareg amount of liquidity, bonds that
       would have defaulted have been refinanced;
     – The rise of covenant lite means that any event
       short of a failure to pay interest would not result
       in a default;


– Private equity deals should be seriously
  impacted very soon;

– Deals signed in 2005, 2006 and H1 2007 are
  the most risky deals;                     147
         After July 2007 (5/5)
• The crisis opens doors to new investment
  opportunities:
        – Distressed debt and special situation funds;
        – Need for leverage should benefit mezzanine
          funds;
        – Credit dislocation funds: purchase loans at a
          discount from lenders;
        – Small to mid-market buyout funds will benefit
          from desaffection for mega buyout firms;
        – Secondary funds: some large institutions need
          cash.

                                                      148
                        Consequences
             June 2007                          June 2008

          Top of the cycle                      Recession


• Prices are too high              • Prices are falling. More to go


• Risk levels are extraordinary    • The risk profile has changed
                                   fundamentally
• Liquidity is driving behaviour   • Lack of liquidity is driving behaviour
• Seller’s market                  • Buyer’s market but must proceed
                                   carefully and beware the falling knives
• No distressed opportunities      • Some interesting distressed situations
                                   (and even more to come)
                                                                          149
          Crisis = opportunities
• Recession years have produced the best vintages for
  private equity;

• Although some LPs are facing liquidity crisis, more
  money should be deployed now and in 2009 !

• Recession years considered to be 1991 + 2 years and
  2001 + 2 years.




                                                        150
Recession years are usually good vintage years




                                                 151
Recession vs Non-recession




                             152
Case study: Baneasa




                      153
           Investment rationale
• Market leader in French retail (#1 in Footwear and #2 in
  clothing);
• Experienced management team: Bogdan Novac has a
  long standing experience of the sector and the group;
• Strong financial performance and strong growth in sales
  expected over the next 3 years;
• Resilient business model: lower end of the market and
  diversified range of products;
• Diversified offering: geography (city centre or out of
  town, France and overseas, apparel and footwear);
• Potential growth prospect: organic growth (new stores
  openings) and consolidation (fragmented industry).
                                                        154
• Banesa is #1           • Fragmented industry,
  footwear retailer with   gives M&A
  14.4% of the French      opportunity/growth by
  market and #2            acquisition
  clothing retailer in
  France with only 3.7%
  of the French apparel
  market



                                              155
• 45% of OOT footwear     • Indication about
  market and 24% of OOT     competition: Zara, H&M,
  clothing market           Mango, etc… are city
                            centres = Baneasa has a
                            dominant position where
                            those competitors are not
                            present. Zara, H&M,
                            Mango, etc… are thus the
                            main city centre
                            competitors;



                                                  156
• Historically, Baneasa   • First mover
  has always been           advantage
  active in OOT:
  created suburban
  discount shoe stores
  in 1981 with Osier
  Chaussures; and in
  1984 with Osier
  Vetements

                                          157
• Clothing business:   • Well balanced, similar
  44% sales and 43%      EBITDA margins in
  of EBITDA and          both segments
• Footwear business:
  56% sales and 57%
  EBITDA




                                             158
• France: 93% sales and    • Baneasa is diversified
  95% EBITDA;                (but maybe not as much
• Out Of Town: 68% sales     as the investor thinks);
  and 72% EBITDA           • Sales and EBITDA
                             indicates that city centres
                             and overseas stores are
                             more expensive (lower
                             margins, Baneasa has
                             lower performances
                             abroad and in city centres
                             where is the tough
                             competition)

                                                     159
• Bogdan Novac was      • Good management
  CEO of Baneasa from     team // experienced
  2000 to 2003 and        CEO
  2004 to today.

• EBITDA has grown      • Strong performance
  from €231m to €365m     over the last years
  (a CAGR of 16.4%)       (since 2003)


                                                160
• Nataf estimates sales and    • Nataf and Berrilio offer
  EBITDA in the financial        potential margin
  year to 28 February 2007       improvements as the
  of €237 million and €23        margin is 9.7% and 7.3%
  million respectively (9.7%     respectively versus
  margin).                       16.1% margin for
• Berrilio had sales in the      Baneasa.
  12 months to 30
  September 2006 of €64.5
  million and EBITDA of
  €4.6 million (7.3%
  margin).

                                                       161
• French clothing        • The actors must gain
  market has been          market share to grow:
  stable since 2000 with   no organic growth
  0.2% CAGR                resulting from industry
                           growth




                                                162
• Average prices have          • Pressure on cost,
  decreased by 1.5%              margins are difficult to
  CAGR. Price-volume             increase and can only be
  elasticity is high with        increased through cost
  declines in average            reduction (rather than
  prices driven by the pass-     price increase): price
  through of purchasing          pressure on Baneasa +
  gains from lower-cost          tough competition + need
  sourcing (Asia) to end-        to keep production cost
  customers and from the         low (cost cutting and
  increasing development         tough negotiation with
  of value retail.               suppliers)
                                                       163
• Womenswear               • Womenswear is the
  represents the             core business
  majority of the French
  market with 51% of
  sales. It was the
  strongest growing
  segment as well as
  the most competitive
  and innovative until
  2002.
                                                 164
• Menswear has                • Menswear is a new
  experienced fast growth       business with high growth
  rates in recent years due     so absolute need to be
  to the introduction of        active
  semi-annual collections
  and has increased its
  share of the total French
  clothing market (from
  31% in 2002 up to 35% in
  2004).



                                                       165
• Baby and               • Children wear is a
  childrenswear are        good market with
  expected to remain       higher consumer
  broadly stable, with     spending
  upside coming from
  increased spend per
  child and the
  emerging trend of
  higher-priced
  designer baby and
  childrenswear.
                                                166
•   Between 2001 and 2003, out-of-        •   Potential decline of
    town banners saw their market             OOT/inconsistent growth rate:
    share decline from 11.9% in 2000          risk.
    to 10.9% in 2003. This reflected
    the impact of hard discount
    retailing and the growth of city-
    centre banners. Since 2003,
    however, OOT specialised chains
    have regained share and have
    returned to 11.7% market share,
    growing by 3.9% in 2004 and
    4.7% in 2005, to €3.1 billion. This
    dynamism has been driven by
    new store openings and volume
    increases supported by increased
    price-competitiveness.




                                                                              167
• Specialist out-of-town      • Footwear: OOT has a
  (OOT) distribution has        strong growth in share;
  seen the strongest growth     OOT is where Baneasa is
  in share (2.3% growth per     the best with 45% market
  annum over 2003-05 and        share (with Osier
  3.2% over 1998-2003)          Chaussures, Velo and
  and continues to gain         Blue Shoes) while the
  market share on the food      closest competitor has
  retailers and the lower-      only 10%.
  end city-centre players
  due to a broad product
  range and low prices.
                                                      168
• The Spanish footwear market      • Spanish market: active market
  is more dynamic than the           at the time of the investment
  French one (3.9% p.a growth        (quid now?) but city centres
  since 2000) but experiences        have more market shares than
  the same volume and price          OOT (risk: Baneasa is better in
  trends with volumes up 6.5%        OOT).
  p.a while prices decreased by
  2.6% p.a largely driven by
  growing Asian imports. The
  market is still dominated by
  independent city centre stores
  (40% market share vs 15% in
  France) and OOT footwear is
  gaining share (8.4% p.a
  between 1998 and 2003).

                                                                 169
• Suburban stores are      • OOT stores need high
  typically large format     volume sales to be
  value stores and           profitable // city
  account for the great      centres are more
  majority of sales and      fashionable products
  profits, whilst city       so potentially higher
  centre stores are          margins although
  more fashionable           probably higher costs
  premium stores.            (including marketing
                             costs)
                                                170
• Over 2003-06, gross     • Indicates that
  margin has grown at       Baneasa has grown
  a 9.5% CAGR and           organically and by
  EBITDA at 16.4%           acquisitions but
  CAGR while sales          acquisitions are the
  CAGR was 5.8%, of         main growth factor.
  which like-for-like
  sales growth of 3.7%.



                                                   171

				
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