Ten Key Questions Facing the

Private Equity World

David Rubenstein
Co-founder & Managing Director February 27, 2008
1
 1. Will Leverage for Buyouts Return in Time
for PE Investors and Professionals to Stay
with the Industry?

3
 Leveraged Loan Volumes Will Recover

 US Leveraged Loan Volumes Bounced Back after the

Downturn of 2000-2001
US Buyout Leveraged Loan Volume ($Bn)
200 189.0

150
121.5
+ 1,929%

100

64.5
50 47.1
30.8 30.2
17.8 18.6 22.3 20.1
9.8 11.1
0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

4 Source: S&P Leveraged Buyout Review

 Leveraged Loan Volumes Will Recover

 While European Issuance has Grown Every Year Since

1999
European Buyout Leveraged Loan Volume (€Bn)
150 140.0

115.8
102.9
100

50 44.4
28.4 29.5
24.7
15.3 18.8

0
1999 2000 2001 2002 2003 2004 2005 2006 2007

5 Source: S&P LCD

 But This Will Not Happen Overnight

 In the US, it took roughly three years for leveraged loan

volumes to match their previous highs after 2000

 And those three years were challenging for private

equity investors
 In 2001 and 2002, US leveraged loan issuance fell to
approximately 1/3 of its 1998 total

 But when the recovery came, it exceeded all

expectations
 Leveraged loan issuance more than doubled between 2002 and
2004 and again between 2004 and 2006
 Issuance jumped 20x between 2001 and 2007

6 Source: S&P Leveraged Buyout Review

 2. Are There Going to be Major Defaults
from Buyouts Completed within the "Golden
Age"?

7
 Leverage Levels Are at Historical Highs
Average Large LBO Leverage Multiples
(Debt/EBITDA)

6.2x
6.0x

5.7x

5.4x 5.4x
5.3x
5.0x

4.8x
4.7x
4.6x

4.0x 4.2x
4.1x
4.0x

3.0x
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Source: S&P Leveraged Buyout Review

8 Note: Includes issuers with EBITDA of $50MM or more
 And Credit Ratios Are Depressed
(EBITDA – Capex) / Cash Interest

3.0x
3.1x
2.9x
2.8x

2.5x

2.0x 2.1x
2.0x
1.9x 2.0x
1.8x 1.8x
1.7x

1.0x
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

9 Source: S&P Leveraged Buyout Review

 Default Rates Have Remained Low Over
the Past Three Years
Percentage of Outstanding Leveraged Loans
in Default or Bankruptcy

10.0% 9.9% 10.0%

8.0% 7.4%
7.0%
6.0%

4.0%
4.0% 3.6% Avg.
2.6% 3.80%
2.0% 1.9%
1.0% 1.0%
0.6% 1.0%
0.0%
0.0%

10 Source: S&P LCD

 And Remain Below Levels Seen During
Past Market Downturns
 Leveraged Loan Default Rates During Recent Market
Downturns:

Historical Correction Year Default Rate

Russian Default / LTCM 1998 1.5%

Tech. / Telecom Meltdown 2000 7.0%
9/11 and Recession 2001 9.9%
Corporate Defaults 2002 10.0%
vs.
Credit Crunch Current 1.0%

11 Source: Morgan Stanley

 But the Trading Levels of Many LBO
Debt Deals Suggest Defaults are Likely
 A Spread vs. Treasuries of Above 1,000 Indicates
Significant Distress
Bond Face Value ($MM) Type Price Spread
G 2,500 senior 92.90 T+1,002
G 2,000 senior 86.71 T+1,045
R 1,700 senior 70.25 T+1,587
F 1,598 sub 70.75 T+1,303
U 1,500 senior 70.50 T+1,389
H 1,000 senior 60.25 T+1,134
C 825 senior 81.00 T+1,222
A 800 senior 80.00 T+1,057
M 750 senior 86.00 T+1,004
D 725 sub 81.75 T+1,208
I 700 senior 64.25 T+1,342

12 Source: Merrill Lynch High Yield Master II Index

 3. What is Going to Happen to All of the
Buyout Debt Still Held by the Major
Syndicating Banks?

13
 A Massive Backlog Remains

 Approximately $200 billion of leveraged loans are still

sitting on banks’ balance sheets
 This represents a decrease of only $75 billion from last year’s
peak
 Every bank is affected
Bank Exposure
Bear Stearns $2.5 billion
Goldman Sachs $26.0 billion
Lehman Brothers $23.8 billion
Merrill Lynch $19.0 billion
Morgan Stanley $20.0 billion
Citigroup $43.0 billion
J.P. Morgan $26.4 billion
Bank of America $12.0 billion
UBS $11.4 billion
Wachovia $9.1 billion

14 Sources: The Wall Street Journal, Morgan Stanley

 4. What Areas Will PE Firms Pursue to
Achieve the Types of Returns Sought by
Their Investors?

15
 PE Firms Will Invest More in Emerging
Markets
 Emerging Market Fundraising Has Grown Exponentially
Emerging Asia ($Bn) CEE/Russia ($Bn)
28.7 14.6

19.4
15.5

2.9 3.3
2.2 2.8 0.5 0.8

2003 2004 2005 2006 2007 2003 2004 2005 2006 2007

Latin America ($Bn) Middle East & Africa ($Bn)

4.4 11.4

7.9
2.7

1.3 2.7
0.7 1.4 1.7
0.4

2003 2004 2005 2006 2007 2003 2004 2005 2006 2007

16 Source: EMPEA
 PE Firms Will Invest More in Emerging
Markets
 As Has Deal Volume
Emerging Asia ($Bn) CEE/Russia ($Bn)
54.5 10.5
51.1
27.3 5.3
21.4 4.0
11.1 2.6 2.2
9.0 27.3 1.6 5.3

2003 2004 2005 2006 1H 2007 2003 2004 2005 2006 1H 2007

Latin America ($Bn) Middle East & Africa ($Bn)

5.9 32.2
24.9
4.1 2.9 16.1

9.6
0.6 2.9 2.9 16.1
0.1 0.2 1.9

2003 2004 2005 2006 2007 2003 2004 2005 2006 2007

17 Source: Morgan Stanley, Thomson

 PE Firms Will Invest More in Emerging
Markets
 A growing percentage of global private equity activity
is dedicated to Emerging Markets

 In 2001, they accounted for 4.5% of private equity

fundraising and 3.3% of deal volume
 In 2007, they accounted for 15.9% of fundraising
 In the first half of 2007, they accounted for 7.0% of global LBO
deal volume

18 Source: Morgan Stanley, Thomson

 Private Equity Firms Will Make More
Minority Investments
 Private equity firms have increased their commitments
to non-control investments:
Period # of Deals Deal Volume ($Bn)
1H 2007 252 25.0
2H 2007 289 31.0
Year-to-Date 84 5.8

 In the past six months, private equity firms have made

large minority investments in companies including
 Sprint Nextel, NC Numericable, MBIA, Global Hyatt, Antero
Resources, Galaxy Entertainments, MoneyGram International,
Legacy Hospital Partners, and Bharti Infratel

19 Source: Dealogic
 And They Will Commit More Capital to
Distressed Investments
 Distressed Debt Fundraising Anticipating Debt Maturity
Schedule:
Distressed Debt / Restructuring Fundraising

$25 Below Investment Grade Debt $225

($ B of Distressed Fundraising)

$20
$175

($ B of Debt Maturing)
$15
$125
$10

$75
$5

$0 $25
'02 '04 '06 1H07 '08 '10

Source: Private Equity Analyst, data as of 6/30/07; Fitch Ratings, data as of July 2007
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 5. Should Investors in PE Expect Higher or
Lower Rates of Return?

21
 Top Quartile PE Returns Are Unrivalled
Top Quartile US Buyout Returns

IRR %

Top Quartile U.S. 32.1%

20.4%
Buyout 21.8%

28.5%
Top Quartile >$2Bn 22.1%
18.2%

18.4%
S&P 500 8.7%
5.4%

20.3%
DJIA 7.7%
5.7%

19.9%
NASDAQ 12.2%
6.1%

0% 10% 20% 30% 40%

10-year 5-year 1-year

Source: Thomson Venture Economics

22 Note: PE data as of 30 June 2007; Bloomberg, market data as of 30 June 2007
 Top Quartile PE Returns Are Unrivalled
Top Quartile European Buyout Returns

78.6%
Top Quartile
27.6%
Eu. Buyout
37.0%

13.0%
FTSE 100 7.3%
3.5%

32.5%
CAC-40 10.4%
7.6%

1-year 5-year 10-year

Source: Thomson Venture Economics

23 Note: PE data as of 30 June 2007; Bloomberg, market data as of 30 June 2007
 6. Is Now the Right Time for Investors to
Pursue Private Equity Investments?

24
 PE Funds Raised During Times of
Market Distress Generally Perform Well
 Private equity investments have produced healthy
returns during each of the three most recent global
economic slowdowns
Top Quartile Private Equity IRRs by Vintage

United States Europe

1980 21.6% 11.3%
1981 14.8% 9.2%
1982 9.1% 15.1%
1990 19.5% 18.8%
1991 25.5% 17.4%
2001 15.3% 3.4%
2002 16.0% 13.5%

Source: Thomson Venture Expert

25 Note: IRRs are cumulative and are calculated from inception to 9/30/07
 7. Will Regulators and Legislators Continue
to Seek Changes in PE Regulation, Oversight
and Taxation?

26
 The PE Industry Faces Various
Legislative and Regulatory Proposals

 Several countries are considering or have introduced

changes to the way that private equity returns are
taxed

 The industry is under pressure to increase disclosure

and transparency

 In some markets, foreign private equity firms are

subject to limitations on their investment activity

27
 8. Will Sovereign Wealth Funds Replace PE
Firms as Principal Sources of Capital for
Corporations/Sellers Seeking New Capital?

28
 PE Firms Pale in Comparison to the
Largest Sovereign Wealth Funds
Top Sovereign Wealth Funds
Rank Country Fund Assets ($Bn) Active Investment Strategy?
#1 UAE Abu Dhabi Investment Authority 875 X
Abu Dhabi Investment Council

#2 Norway Government Pension Fund 328

#3 Saudi Arabia No Designated Name > 300

#4 Kuwait Kuwait Investment Authority 300

General Reserve Fund
Future Generations Fund

#5 Singapore Government Investment Corp. > 200 X

Temasek Holdings

#6 China China Investment Corp. 200 X

#7 Russia Oil Stabalization Fund 141

#8 Hong Kong Monetary Exchange Fund 140

#9 Qatar Qatar Investment Authority 60 X

#10 Australia Australian Future Fund 60

Source: Citigroup
29
 Sovereign Wealth Fund Investment
Activity Has Increased Dramatically
Sovereign Wealth Fund Deal Volume

Deal Volume ($Bn) # of Deals

80 300
69.8
70
250
60
200
50 + 1,151% 44.2
40 150
30
100
20 16.8
11.4 11.0 13.0
9.4 7.6 50
10 6.8 5.6 7.1

0 0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Number of Deals
Value of Deals

Sources: World Economic Forum, Thomson Financial

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 But These Investments Still Represent
A Tiny Proportion of Total M&A Activity
Breakdown of Global M&A Activity ($Bn)
4,500
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Sovereign Wealth Funds Private Equity Strategic

Sources: World Economic Forum, Thomson Financial

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 Sovereign Wealth Funds and PE Firms
Are Forming a Productive Partnership
 Sovereign wealth funds have purchased substantial
equity stakes in several alternative asset managers
 China Investment Corp. invested $3 billion in Blackstone
 Abu Dhabi’s Mubadala invested $1.4 billion in Carlyle
 Dubai International Capital invested 1.3 billion in Och-Ziff
 They are among the private equity industry’s largest
individual investors
 In the future, sovereign wealth funds and private
equity firms are likely to pursue large investment
opportunities through joint ventures
 Sovereign wealth funds will benefit from PE firms’ deep pools
of investment talent and deal expertise

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 9. Can the PE Industry Improve its Image
with the Public, Media, Governments,
Unions, Environmental and Consumer
Groups?

33
 Private Equity’s Image Could be Better

A Backlash Against
Private Equity
Grumbling by unions over
post-deal job cuts has
escalated into a public outcry
– Business Week

Gluttons at the Gate

Private equity are using slick new tricks to
gorge on corporate assets. A story of excess
– Business Week
34
 10. Is PE's Future Going to Be Better, Bigger,
and Stronger than Before, Or Have We
Already Seen the High-water Mark?

35
 It’s Always Darkest Just Before Dawn
 As before, deal volume will rebound and yesterday’s
records will be left far behind
Global LBO Activity
Deal Volume ($Bn) # of Deals
800 2,500
715
700 670
2,000
600 CAGR: 31%
500 1,500
400
291 1,000
300 247
200 142
112 102 110 500
100 54 65 65
28 31
0 0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

# of Deals
Deal Volume
Source: Dealogic
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 What I Was Supposed to Talk About:

“Giving Private Equity a Positive Image: Why

is there such Disparity Between the Public’s
Perception of the Industry and the
Industry’s Perception of Itself, and What can
be done to bring these Views into
Alignment”

37
 The Current Situation

Perception of the Industry within Perception of the Industry outside

the Industry the Industry

Improved operation of companies Destroyed Jobs

Prevented job losses; created jobs Relocated Facilities Overseas

Improved Economies Focused Only on Short-Term Profits

Created High Returns for Left Companies in Worse Shape

Investors/Pension Funds
Made Too Much Money for PE
Paid Large Amount of Taxes Professionals

Created an Industry Insufficient Level of Taxes Paid

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 Why the Disparity in Perceptions?

 Industry Focused for Long Time Principally on Returns

 Industry Spent Little Time Explaining its Actions to

those Outside of Investor Base

 Industry Lacked Data to Support its Views

 No Industry Vehicle for Long Time

 Other Problems of Industry Critics/Convenient and

Attractive Target

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 What Can the Industry Do to Improve
Its Image?
 Continue to Produce Hard Data

 Engage Industry Critics in Debate/Discussion

 Consider Factors Other than Just Returns When

Assessing/Overseeing Investments

 Involve Portfolio Companies Directly in the Effort

 Enhance Transparency/Public Focus

 Recognize that Some Changes Can and Should Occur

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 Ten Leading Questions Facing the
Private Equity World

David Rubenstein
Co-founder & Managing Director February 27, 2008
41