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375 Park Avenue New York, NY 10152
Telephone 212 418 1700 Facsimile 212 418 1701
February 19, 2010 Dear Limited Partner: We would like to take a moment to reflect on the events of 2009 and our objectives for 2010 and the future. To state the obvious, last year presented the firm with many challenges. We responded by sharpening the focus of the firm, making significant changes to our people and processes, and greatly increasing our communication with you – all while maintaining our focus on the performance of our business. We are enormously grateful for the attention, support and guidance you provided during this period, and believe strongly that your input and our decisions as a partnership position us well to continue to create value for you, our investors. Simply put, since the change in leadership at Quadrangle, we have strengthened our partnership and rededicated ourselves to our core mission of private equity investing. QCP’s Mission Our mission has always been to create value for our investors through our private equity investments. That mission remains unchanged, and its implementation through prudent investing in the middle-market with a focus on media, communications and information-based businesses remains the same. We believe our sector expertise, investment processes and business practices have only improved with time. Nevertheless, the events of 2009 highlighted that increased communication and transparency with each other and our investors needed to become a more integral part of our DNA. The reputation and integrity of our firm are of the utmost importance to us, and we have further implemented policies and practices to institutionalize our values of integrity and personal accountability. Portfolio Activity In 2009, we were extremely active as we continued to invest, add value to our portfolio companies and position investments for successful exits. New Investments In 2009, we reviewed approximately 300 opportunities, had dozens of meetings with management teams, submitted over a dozen term sheets to make new investments and committed more than $200 million. Despite the difficult market environment, we continued to see interesting opportunities in our sectors and sought creative solutions that enabled us to continue to invest in what we believe are opportunities with attractive risk-reward profiles. Importantly, we were
cognizant of the severe liquidity crisis and accordingly prioritized our capital to focus on portfolio support and investments that we believe offered truly outsized risk adjusted returns: • Mobilicity (formerly DAVE Wireless): Invested $37.2 million in a convertible debt instrument to drive the launch of service in the Toronto market. When coupled with the C$200 million of new third party debt that Mobilicity raised in the second half of 2009, we believe that Mobilicity is fully funded to launch wireless service in Toronto, Vancouver, Calgary, Edmonton and Ottawa. NNB Master Holdings: Invested $40.4 million in NNB Master Holdings, a holding company for distressed debt investments. While the combination of the Key Man Event and the debt market recovery prevented us from investing as much capital as we would have liked, we were pleased to return 1.7x invested capital later in 2009. Tower Vision: Committed $125 million to invest in Tower Vision, an Indian tower company, and subsequently closed on this investment on January 29, 2010. We believe Tower Vision is a great opportunity to obtain exposure to one of the fastest growing wireless markets in the world and is well positioned capitalize on the growth potential of India’s telecommunications sector. In addition, we believe our structured preferred security provides an attractive risk-reward profile.
While our investment pace slowed slightly in 2009, we believe these investments are consistent with our investment philosophy of maintaining steady progress and implementing conservative investment structures with the objective of providing significant capital protection while generating private equity returns. Portfolio Management Against the backdrop of the well documented market dislocation of 2009, we executed a number of significant actions to strengthen the balance sheets of our portfolio companies and position them for long-term value creation. • • Managed the increase in value of our investments by $42.7 million or 9% in QCP I and $226.9 million or 19% in QCP II. Secured and refinanced $3.2 billion of portfolio company debt across both funds, thereby extending maturities, increasing available capital and gaining additional covenant flexibility. Maintained solid growth across our portfolios with weighted average revenue remaining steady across both funds in a difficult environment and EBITDA growing approximately 7.1% and 4.4% for QCP I and QCP II, respectively. With the exception of MGM, which we had already written down by 90%, none of our portfolio companies had a financing crisis or default in 2009,
despite the challenging economic landscape. As a result of this balance sheet strength and overall continued operating success, we had no realized losses in QCP I or II during 2009. On balance, we were gratified that our portfolio demonstrated strength and resilience through the worst market downturn of our generation. Realizations We took steps in 2009 both to prudently realize investments and to create greater flexibility for many of our companies to consider strategic alternatives. • QCP II realized $253.6 million, principally from the realizations of Intelsat and NNB Master Holdings. These two investments generated a combined gross multiple of money of 2.25x and an IRR of 174%. QCP II has returned 26% of capital called. QCP I realized a total of $92.3 million, principally from the $68.6 million sale of Cinemark shares, which generated a gross multiple of money of 2.0x and an IRR of 17.6%. QCP I has returned 107% of capital called. Furthermore, in early February 2010, the sale of NuVox Communications Inc. closed, resulting in a QCP I realization of approximately $23 million and generating a gross multiple of money of 2.6x and an IRR of 17.0%. We expect to distribute proceeds in early March.
We would note that while we are mindful of our investors’ desire for liquidity, we have not engaged in any forced selling. Rather, we continue to apply a strict discipline of examining expected future returns when considering an appropriate time to exit. Organizational Changes As we have discussed with you at length, leading up to 2009 Quadrangle’s prior leadership had positioned the firm to be a multi-product firm that included a multibillion dollar private equity business. When we assumed leadership of the firm, we reassessed those ambitions and concluded that we had inherited an unsustainable cost structure that did not align our resources with our highest priorities or greatest opportunities. The challenges created by this cost structure were exacerbated by the triggering of the Key Man Clause in QCP II’s LP Agreement, caused by Steven Rattner’s departure, and the investigation of “pay-toplay” activities of former employees under the firm’s prior leadership. Faced with these challenges, we took a number of actions to change our firm, including its culture, structure and business practices. In addition, we more closely
aligned the incentives of Quadrangle with those of our limited partners. Specifically, we took the following actions in 2009: • • Simplified the firm’s operating structure and strategic focus; Increased our headcount and resources in Hong Kong, while reducing headcount elsewhere, principally in our London office, to focus our resources where we have the greatest sources of differentiated information and deal flow; Dedicated partner resources to our portfolio, with a particular focus on achieving realizations of our mature investments; Overhauled our firm’s compliance programs; Transitioned to new inside and outside legal counsel; and Instituted quarterly QCP II LPAC calls, reduced fees, strengthened the language of the continuing Key Man clause, and improved our LP reporting packages.
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Consistent with this increased focus on our core mission of private equity investing and Mayor Bloomberg’s desire to have the Quadrangle Asset Management (“QAM”) team focus on his assets, we are also transferring QAM’s team and its investments to an independent entity that will serve the needs of Mayor Bloomberg and his foundation. As you are aware, at the beginning of 2008, Mayor Bloomberg and his foundation retained Quadrangle to build a separate, dedicated investment team to provide customized asset management services. Having successfully built out the investment team and operating functions necessary to provide these services, Mayor Bloomberg believes creating this independent entity will allow his investment team to operate with the flexibility and privacy that he seeks. We thank Mayor Bloomberg for his support and confidence, and we wish our colleagues well in the transition to their new home. The separation of this team will have no impact on our private equity team or investment capabilities. Regulatory Update We remain constrained in what we can communicate about the New York Attorney General’s (“NY AG”) investigation relating to the actions of certain former employees, and deeply regret that the regulatory situation continues to be outstanding. While we would prefer to be in a position to tell you when we expect to reach a resolution, the decision is out of our control. That said, we are doing all that we can to resolve it. We do wish to reiterate, however, the following salient facts: • Quadrangle is fully cooperating with the NY AG’s office. • The NY AG’s office understands that no one currently working at the firm was involved in the matters under investigation.
The NY AG’s office is not waiting for any additional information from Quadrangle. We have indicated to the NY AG’s office that we are willing to adopt the NY AG’s Code of Conduct as a part of any resolution to this situation.
Importantly, as the substance of this letter demonstrates, our focus continues to be on creating value for you. 2010 and Forward In conversations with our investors, we have also received certain questions with sufficient frequency that we would like to address them here: • What liquidity can we expect in 2010? Given the successful value creation at several companies, we believe the time has come to examine their strategic alternatives. We ended 2009 with $197.3 million of marketable securities in QCP II and another $179.4 million in QCP I, situations that we believe could present opportunities for further realizations in the coming year. Specifically, while there is no certainty that it will lead to any transaction, Protection One, in QCP I’s portfolio, announced it has hired JP Morgan to explore its strategic alternatives. Similarly, we believe that other portfolio companies, with proven and sustainable operating growth that may benefit from stronger financing markets, would be well positioned to examine strategic alternatives in the current year. Where are you seeing interesting investment opportunities? Pro forma for our investment in Tower Vision, and after reserving for follow-on investments, we have sufficient capital for new investments prior to the end of the Commitment Period in December 2010. We would highlight three areas of focus: (i) As evidenced by our investment in Tower Vision, we continue to see the benefit of investing globally across specialized areas. Specifically, we are looking at two additional tower opportunities: one in Japan, another in the United States, and we expect to replicate our global approach to towers in other areas. Our long history of successful investments in competitive telecommunications providers has drawn our attention to companies with specialized strategies that can take advantage of the massive increase in data usage. We continue to believe that the migration of consumer time and viewership to the Internet along with the attendant
benefits of greater targeting and measurability associated with Internet advertising will provide compelling investment opportunities. Our experience and relationships in this area combined with our experience in growth investing will continue to serve us well, particularly in an environment where new leveraged transactions remain muted relative to long-term historic levels. • What are your plans for QCP III? We are enthusiastic about the quality of our team, the nature and attractiveness of our deal flow, and the investment proposition that we offer to investors. We are in the early stages of developing a view on the timing and size of QCP III, and the first step in that process will be discussions with our existing investors, which we plan to begin in the spring.
We conclude with our sincerest thanks for your support and advice. As always, we hope you will contact us with any comments or questions.
Peter Ezersky Managing Principal
Andrew Frey Managing Principal
Michael Huber Co-President & Managing Principal
Edward Sippel Managing Principal
Joshua Steiner Co-President & Managing Principal
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