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
Source: S&P Leveraged Buyout Review
2. Are There Going to be Major Defaults from Buyouts Completed within the "Golden Age"?
Leverage Levels Are at Historical Highs 1997 1999 1998 2002 2001 2000 2007 2006 2005 2004 2003 Average Large LBO Leverage Multiples (Debt/EBITDA) Source: S&P Leveraged Buyout Review Note: Includes issuers with EBITDA of $50MM or more x
And Credit Ratios Are Depressed 2004 2005 2003 1997 2006 2007 1998 1999 2000 2001 2002 (EBITDA – Capex) / Cash Interest Source: S&P Leveraged Buyout Review x
Default Rates Have Remained Low Over the Past Three Years Percentage of Outstanding Leveraged Loans in Default or Bankruptcy Source: S&P LCD Avg. 3.80% %
And Remain Below Levels Seen During Past Market Downturns
Leveraged Loan Default Rates During Recent Market Downturns:
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
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?
Source: Private Equity Analyst, data as of 6/30/07; Fitch Ratings, data as of July 2007
5. Should Investors in PE Expect Higher or Lower Rates of Return?
Top Quartile PE Returns Are Unrivalled Source: Thomson Venture Economics Note: PE data as of 30 June 2007; Bloomberg, market data as of 30 June 2007 Top Quartile US Buyout Returns IRR % 6.1% 5.7% 5.4% 18.2% 21.8% 12.2% 7.7% 8.7% 22.1% 20.4% 19.9% 20.3% 18.4% 28.5% 32.1% 0% 10% 20% 30% 40% NASDAQ DJIA S&P 500 Top Quartile >$2Bn Top Quartile U.S. Buyout 10-year 5-year 1-year
Top Quartile PE Returns Are Unrivalled Source: Thomson Venture Economics Note: PE data as of 30 June 2007; Bloomberg, market data as of 30 June 2007 Top Quartile European Buyout Returns 7.6% Top Quartile Eu. Buyout FTSE 100 CAC-40 1-year 10-year 5-year
6. Is Now the Right Time for Investors to Pursue Private Equity Investments?
PE Funds Raised During Times of Market Distress Generally Perform Well
Private equity investments have produced healthy returns during each of the three most recent global economic slowdowns
Top Quartile Private Equity IRRs by Vintage Source: Thomson Venture Expert Note: IRRs are cumulative and are calculated from inception to 9/30/07
7. Will Regulators and Legislators Continue to Seek Changes in PE Regulation, Oversight and Taxation?
The PE Industry Faces Various Legislative and Regulatory Proposals
Several countries are considering or have introduced changes to the way that private equity returns are taxed
The industry is under pressure to increase disclosure and transparency
In some markets, foreign private equity firms are subject to limitations on their investment activity
8. Will Sovereign Wealth Funds Replace PE Firms as Principal Sources of Capital for Corporations/Sellers Seeking New Capital?
PE Firms Pale in Comparison to the Largest Sovereign Wealth Funds Top Sovereign Wealth Funds Source: Citigroup
Sovereign Wealth Fund Investment Activity Has Increased Dramatically Value of Deals 2007 Number of Deals 2006 Deal Volume ($Bn) # of Deals 1997 1998 1999 2000 2001 2002 2004 2003 2005 + 1,151% Sovereign Wealth Fund Deal Volume Sources: World Economic Forum, Thomson Financial
But These Investments Still Represent A Tiny Proportion of Total M&A Activity 2002 2001 2000 1999 1998 2007 2006 2005 2004 2003 1997 Breakdown of Global M&A Activity ($Bn) Sources: World Economic Forum, Thomson Financial Sovereign Wealth Funds Strategic Private Equity
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
9. Can the PE Industry Improve its Image with the Public, Media, Governments, Unions, Environmental and Consumer Groups?
Private Equity’s Image Could be Better Gluttons at the Gate Private equity are using slick new tricks to gorge on corporate assets. A story of excess – Business Week A Backlash Against Private Equity Grumbling by unions over post-deal job cuts has escalated into a public outcry – Business Week
10. Is PE's Future Going to Be Better, Bigger, and Stronger than Before, Or Have We Already Seen the High-water Mark?
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”
The Current Situation Perception of the Industry outside the Industry Destroyed Jobs Relocated Facilities Overseas Focused Only on Short-Term Profits Left Companies in Worse Shape Made Too Much Money for PE Professionals Insufficient Level of Taxes Paid Perception of the Industry within the Industry Improved operation of companies Prevented job losses; created jobs Improved Economies Created High Returns for Investors/Pension Funds Paid Large Amount of Taxes Created an Industry