Super Return Final

The Similarities & Differences Between The Tech Bubble Burst of 2000 & The Current Private Equity Markets: Are We On The Verge Of A PE Bubble Burst? David M. Rubenstein Co-Founder and Managing Director February 28, 2007

Bubble
No one definition – “Know it when I see it”
Greater Fool Theory: “…speculation is justified because there are enough fools to push prices further upward” – Barron’s
“… whole communities suddenly fix their minds upon one object, and go mad in its pursuit….” – Charles Mackay, Extraordinary Popular Delusions And The Madness Of Crowds, 1841
Source: Barron’s Dictionary of Finance and Investment Terms; Charles Mackay, Extraordinary Popular Delusions And The Madness Of Crowds, 1841 and preface, 1852

Famous Bubbles
1634 - 1638 “Tulipmania” (Netherlands)
Price for some single bulbs exceeded 10x average annual income
Crash of 93% of value
1710’s South Sea Company (England)
Promised 50%+ returns
Crash of 84%
1710’s Mississippi Scheme (France)
Promised 120% annual returns
Crash of 99%
Source: PBS; Charles Mackay, Extraordinary Popular Delusions And The Madness Of Crowds, 1841; Various

Famous Bubbles
1920 Ponzi’s Securities & Exchange Company
Promised 100% returns on 90 day notes
100% loss
1929 U.S. Stock Market
Dow up 250% in 2 years
Crash of 87%
1979 – 1982 Silver Market
Rose 700% in 3 years
Crash of 88%
1978 – 1986 Kuwaiti Stock Market
Rose 7,000% in eight years
Crash of 98%
Source: Various

Famous Bubbles
1987 Dow Jones Industrial Average
Dow up 200% in 5 years (real GDP up 20%)
October 19 collapse of 508 points (22.6%)
1998 Russian Ruble
Ruble went from 6 to 20 per dollar in a 2 week period
1999 Tech Bubble
$7 trillion loss of value
Source: Various

Bubbles Share Certain Characteristics
Everyone expects increase; no downside caution
No economic justification or historic standard for increase
Bad news filtered out of popular thinking
Everyone wants to invest in whatever it is or get in on the activity
Stories of instant or fast wealth creation circulate
The words “once-in-a-lifetime opportunity” appear frequently
Anyone staying on the sidelines is seen as a fool
Smaller investors get involved
Some or many very smart / savvy investors stay or get involved
Sir Isaac Newton

Bubbles Share Certain Characteristics
Capital flows to investments with no underlying assets / value
Discipline evaporates from the investment process
Prices increase far beyond historical norms or reasonably estimable economic value
People invest more than they can afford to lose

Certain Lessons Can Be Gleaned From Historical Bubbles
If something seems to good to be true, it is not true
Upward trends always end, and the rate of decline exceeds the previous rate of increase
When fear is nowhere, it will soon be everywhere
Investors need diversification – no exceptions
Investors rarely gain great wealth
New big ideas produce “bubble amnesia” – investors ignore these lessons

Tech Bubble Had Numerous Symptoms (In Retrospect)
Ease of raising large amounts of capital for untested business models
Investors committed almost 3x as much money to venture in the 4-years-ended 2000 than they had in the previous three decades
Global venture fundraising:
Source: Thomson Venture Economics, data as of December 31, 2006 – includes partnerships and investment bank affiliated or subsidiary partnerships

Global number of $1 bil+ venture funds raised in the 4-years-ended 2000 exceeded 4x the number raised in the previous three decades:
Source: Thomson Venture Economics, data as of December 31, 2006

Venture capital investors poured $440 million into Webvan, an internet grocery deliver service
15x as much as Kleiner Perkins raised for its first fund
The company went public with $400,000 in revenue and reached a market cap of $1.2 billion
Two years later the stock had fallen from 34 dollars to 6 cents
Bankrupt two years later

Priceline
Following 1999 IPO, market cap peaked at $14 billion – more than the combined market cap of Continental, Delta, Northwest, and United – which totaled $12 billion at the time
Current (2007) market cap ~ $2 billion
eToys
Revenue was $250 million or 1/44 th of Toys “R” Us’s revenue of $11 billion
Market value was 3x greater than Toys “R” Us
Went bankrupt

Internet Capital Group
L argest IPO of 1999
Held investments in 47 e-commerce startups
Valuations were 120x earnings
Reached market cap $46 billion within 4 months – more than General Motors
Current (2007) market cap: $487 million
Detachment of prices from underlying revenue / economic significance
VA Linux
Sells computers running Linux operating system
Closed up 698% on the first day of trading
At one point, trading up 10x IPO price
Current (2007) market cap 1/8 of peak

Corvis
Developer of long haul optical communications equipment
Zero trailing revenue at IPO
Raised $1.1 billion in IPO proceeds at a $12 billion valuation in August 2000
Acquired in 2006 for $1.4 billion
Ariba
E-commerce software firm
IPO in June 1999 with $1 billion valuation
Peak valuation of $42 billion in September 2000 (higher than Boeing, GM or Ford)
Current (2007) market cap $759 million
98% decline from peak valuation

Kozmo.com
Internet delivery service with no service charge
Spent $280 million to build service
Bankrupt
Globe.com
Designed by two 23 year olds to sell ads on its website
Stock went from $9 / share to $97 / share
One of the largest first-day gains of any IPO
No longer in business
[email_address]
$35 billion of market cap at peak
Bankrupt

Cisco
Peak market cap reached $555 billion – highest in the world
Price / earnings multiple reached 160x in March 2000
Lost $400 billion of market cap

Source: Forbes Tech Bubble Had Numerous Symptoms (In Retrospect) 378% 386% 427% 442% 458% 482% 483% 508% 525% 698% First-Day Return 120 Network Equipment CacheFlow 1999 144 Internet Software webMethods 2000 173 Internet Retailing FreeMarkets 1999 110 Network Equipment Cobalt Networks 1999 234 Internet Services Akamai Technologies 1999 28 Internet Services theglobe.com 1998 284 Network Equipment Sycamore Networks 1999 216 Telecom Products Avanex 2000 125 $132 Offer Value Telecom Products Computer Software Business Foundry Networks 1999 VA Linux Systems 1999 Company Year ($ mil)

Source: Forbes Tech Bubble Had Numerous Symptoms (In Retrospect) 330% 13 Consulting Services Intgrtd. Sys. Consultg. 1996 357% 155 Telecom Products Finisar 1999 356% 110 Internet Services FirePond 2000 337% 68 Network Equipment Crossroads Systems 1999 331% 160 Internet Services Priceline.com 1999 331% 72 Internet Services Andover.Net 1999 313% 60 Telecom Services Wireless Facilities 1999 303% 91 Internet Services Neoforma.com 2000 42 $120 Offer Value Internet Services Internet Services Business 364% Ask Jeeves 1999 371% Selectical 2000 First-Day Return Company Year ($ mil)

Source: Renaissance Capital; IPO Monitor
Number of IPOs with first-day return of 50 % +, 100%+, 200%+, 300%+, 400%+ :

Source: World Federation of Exchanges Tech Bubble Burst Destroyed Staggering Amount Of Value Combined: (42%)
Combined domestic market capitalization of NYSE and NASDAQ declined $7.3 trillion
NASDAQ: (73%) NYSE: (24%)

Tech Bubble Burst Destroyed Staggering Amount Of Value
Europe
Neue Market established in 1997
Market value multiplied by 17x by March 2000
Market closed at 4% of peak

Tech Bubble Commonality With Classic Bubbles
New big idea (with some validity) captured popular imagination
In this case - transformative power of technology / computers / the internet
Everyone wanted to participate or invest
Rapid price increases
Abandonment of downside caution
Rush of money toward concepts with no underlying assets or revenues

Are We Repeating Tech-Bubble Situation In Private Equity?

Distributions To LPs from U.S. Buyout Market Remain High Source: Thompson Venture Economics, data for partnerships and investment bank affiliate or subsidiary partnerships; includes primary U.S. market buyout funds; 2006E is annualized estimate, data as of 9/30/06

U.S. Buyout Has Outperformed Public Markets Source: Thomson Venture Economics, PE data as of 9/30/06 and for partnerships and investment bank affiliate or subsidiary partnerships; Bloomberg, market data as of 6/30/06 35.7 27.2 41.5 23.2 24.8 20.0 U.S. Buyout Top Quartile 8.3 10.5 8.7 5.0 9.9 9.4 7.1 5.7 8.0 DJIA 9.2 8.6 6.9 5.1 10.3 S&P 500 9.1 8.8 7.0 6.2 11.0 Russell 3000 10.2 9.8 6.3 8.1 8.5 NASDAQ 21.0 11.0 12.7 8.7 14.5 8.8 U.S. Buyout All Quartile 1-year 15-year 20-year 10-year 3-year 5-year (IRR %) 37.2 U.S. $2 bil plus Top Quartile

Europe Buyout Has Outperformed Public Markets Source: Thomson Venture Economics, PE data as of 6/30/06 and for partnerships and investment bank affiliate or subsidiary partnerships; Bloomberg, market data as of 6/30/06 37.3 23.6 26.8 28.7 22.5 14.7 Europe Buyout Top Quartile 14.1 6.1 6.5 4.6 13.1 0.7 FTSE 22.2 12.5 13.2 13.7 10.9 7.0 Europe Buyout All Quartile 1-year 15-year 20-year 10-year 3-year 5-year (IRR %)

Reasons For Concern: More Money Than Ever Going Into U.S. Buyout Market
200 6 vs. 1996
Fundraising: 4.1x
Investment: 1.7 x
Source: Thompson Venture Economics, data for partnerships and investment bank affiliate or subsidiary partnerships; includes U.S. buyout firms

Reasons For Concern: More Money Than Ever Going Into Europe Buyout Market Source: EVCA; 2006E is annualized estimate
2006E vs. 1996
Fundraising: 9.6x
Investment: 8.7x

Asia (including Japan and Australia) trends:
Reasons For Concern: More Money Than Ever Going Into Asia Private Equity Market Source: Asia Private Equity Review

Latin America private equity activity remains below 1998 highs, but has increased:
2006 fundraising 150% above 2005 level
2006 investment 275% above 2005 level
Reasons For Concern: More Money Going Into Latin America Private Equity Market Source: Venture Equity Latin America; includes real estate funds

Reasons For Concern: Investors Increasing Already Large Allocations Source: Dow Jones – Private Equity Analyst, data as of July 2006 15% 7,500 50,000 Michigan Department of Treasury 10% 10,000 100,000 GIC Special Investments 10% 7,924 79,241 Ontario Teachers’ Pension Plan Board 10% 8,089 80,891 Canada Pension Plan Investment Board 5% 10,457 209,143 ABP Investments 7,920 10,000 10,400 10,835 11,520 $12,426 Allocation 132,000 56,000 130,000 69,900 128,000 $207,100 Total Assets 6% 15% 8% 16% 9% 6% % To PE Florida State Board of Administration Washington State Investment Board New York State Common Retirement Fund California Public Employees’ Retirement System California State Teachers’ Retirement System Oregon State Treasury ($ mil) Institution

Reasons For Concern: Funds Bigger In U.S. (1) Estimated target fund size. Source: Firm press releases; Citigroup Estimates; Capital IQ; PEI Average % increase: 130% Blackstone V KKR Millennium II Apollo VI Bain Capital IX TH Lee VI (1) (1) TPG V Warburg IX (1) Carlyle V

Reasons For Concern: Funds Bigger In Europe Permira IV Fourth Cinven 3i Europe Partners V BC European Capital VIII CVC IV Apax Europe VI Source: Firm press releases; Capital IQ; PEI Average % increase: 38%
Most recent fund size vs. predecessor fund size:
Doughty Hanson V

Reasons For Concern: Funds Bigger In Asia Source: Capital IQ Average % increase: 141% CVC Asia Pacific II Carlyle Asia Partners II CCMP Capital Asia II Newbridge Asia IV Carlyle Japan Partners II

Reasons For Concern: Deals Bigger – Size Not A Barrier in U.S. Source: Dealogic, data for Sponsor-entry transactions with U.S. targets and as of December 31, 2006
Number of $1+, $3+, $5+, and $10+ billion sponsor-involved U.S. deals increasing:

Reasons For Concern: Deals Bigger – Size Not A Barrier in Europe Source: Dealogic, data for Sponsor entry transactions and as of December 31, 2006
Number of €1+, €3+, €5+, and €10+ billion sponsor-involved Europe deals increasing:

Reasons For Concern: Deals Bigger – Size Not A Barrier in Asia (incl. Japan) Source: Dealogic, data for Sponsor-entry transactions with Asia (incl. Japan) targets and as of December 31, 2006
Number of $250+, $500+, $750+, and $1,000+ million sponsor-involved Asia deals increasing:

Reasons For Concern: Deals Bigger – Size Not A Barrier in Latin America Source: Dealogic, data for Sponsor-entry transactions with Latin America targets and as of December 31, 2006
Number of $100+, $200+, $300+, and $500+ million sponsor-involved Latin America deals increasing:

Reasons For Concern: 2005-2007YTD: 9 of 10 Biggest U.S. Buyouts Source: Dealogic; FT; WSJ; 2006-2007YTD ‡‡ Estimated, deal not closed ‡‡ ‡‡ ‡‡ ‡‡ ‡‡ KKR/TPG/GS United States TXU $45.0 2007 Bain/Lee United States Clear Channel 25.7 2006 Apollo/TPG United States Harrah’s 25.7 2006 Blackstone United States EOP 36.0 2006 Carlyle/Merrill/CDR SuperValu/CVS/Cerberus Blackstone/Carlyle/Permira/TPG Carlyle/GS/AIG KKR KKR/Bain/ML Acquirer United States United States United States United States United States United States Location Freescale 17.6 2006 HCA 32.7 2006 Albertson’s 17.4 2006 Kinder Morgan 21.6 2006 Hertz 15.0 2005 RJR Nabisco 31.4 1988 Target Value Date ($ bil)

Reasons For Concern: 2005-2006: 7 of 10 Biggest Buyouts in Europe Source: Dealogic; 2005-2006 ‡‡ Estimated, deal not closed ‡‡ ‡‡ Renova Group Russia SUAL Holding 5.2 2006 Permira/Saban Germany ProSiebenSat 7.7 2006 3i/Colonial First State UK AWG 7.9 2006 Weather Invest. Italy Wind Telecom. 12.1 2005 KKR/Wendel France Legrand 5.0 2002 KKR/Silverlake/Apax/Bain/ Alpinvest Netherlands Philips Semiconductor 7.4 2006 Apax/Blackstone/KKR/Permira/ Providence Denmark TDC € 12.8 2006 Value (€ bil) AlpInvest/Blackstone/ Carlyle/Hellman/KKR/Lee Netherlands VNU 9.2 2006 BC/CVC/Permira Italy Seat Pagine Gaille 5.7 2003 UK Location 5.6 Madison Dearborn Acquirer Jefferson Smurfit sub. 2002 Target Date

Reasons For Concern: 2005-2006: 6 of 10 Biggest Asia (ex Japan, Australia) Buyouts Source: Dealogic; 2005-2006 ‡‡ Estimated, deal not closed Ripplewood Korea Daewoo Electronics 721 2006 Onex Singapore Omni Industries 799 2001 CVC/Fransisco/Court Square Warburg Pincus KKR MBK Partners Gilbert Global Equity Colony Lone Star GS Acquirer Korea India India Taiwan Korea Singapore Korea China Location Hynix Semicon. 822 2004 Anam Semicon. 950 1999 ICBC $2,582 2006 HDFC Securities 874 2000 China Network Sys. 932 2006 Raffles 1,019 2005 Flextronics Software 900 2006 KEB 1,194 2006 Target Value Date ($ mil)

Reasons For Concern: 2005-2006: 6 of 10 Biggest Japan Buyouts Source: Dealogic; AVCJ; APER; 2005-2006 ‡‡ Estimated, deal not closed Cerberus/Nikko Japan Seibu Railway Co. 1,390 2005 Harbor Holdings Japan World Co. 1,900 2005 Colony Capital Ripplewood/ABN/ Bank of Nova Scotia/Citi GS/Mori Trust Unison Capital Carlyle/Kyocera GS/Newbridge/Ripplewood/TVG/PPM GS/Daiwa/Sumitomo Mitsui CVC/Nomura Acquirer Japan Japan Japan Japan Japan Japan Japan Japan Location LTCB/Shinsei Bank 1,149 1999 Fukuoka Hawks Town (from Daiei) 915 2003 DDI Pocket/Willcom 2,023 2004 Skylark $3,155 2006 Recruit Cosmos 1,516 2005 Japan Telecom 2,210 2003 Fujita Corp. 1,349 2005 Sanyo Electric 2,585 2005 Target Value Date ($ mil)

Reasons For Concern: 2005-2006: 7 of 10 Biggest Latin America Buyouts Source: Dealogic; 2005-2006 Advent Uruguay Banco Comercial 167 2005 Advent Argentina OCA 280 2004 GP Investimentos Brazil CEMAR 350 2003 Newbridge/Advent/Capital Heartland Industrial Oaktree/Onex Southern Cross AIG Blackstone/Soros/AIG Advent Acquiror Mexico Brazil Mexico Chile Brazil Mexico Brazil Location Controladora Milano 200 2006 ESSBIO 405 2006 Brasif Duty Free Shop $500 2006 Grupo Cinemex 285 2002 Grupo Providencia 466 2006 COTEMINAS 200 2005 Avantel 500 2006 Target Value Date ($ mil)

Reasons For Concern: Credit Statistics Tighter in U.S. / Convenants More Favorable Source: Standard & Poor’s LCD; excludes Media and Telecom loans; data as of 4Q06 30% 52% (34%) (36%)

Reasons For Concern: Credit Statistics Tighter in Europe / Covenants More Favorable Source: Standard & Poor’s LCD; data as of 4Q06 29% 26% (13%) (15%)

Reasons For Concern: Strong Debt Markets Fueling Buyouts in U.S.
Leverage for buyouts remains near 7 year high
Source: Standard & Poor’s LCD; data for U.S., as of 4Q06

Reasons For Concern: Strong Debt Markets Fueling Buyouts in Europe
Leverage for buyouts at 7 year high
Source: Standard & Poor’s LCD; data for Europe, as of 4Q06

Reasons For Concern: EBITDA Multiples Rising in U.S.
Acquisition multiples at a decade high levels
Source: Standard and Poor’s M&A Statistics, July 200 6 ; LBOs>$500 million, includes fees/expenses

Reasons For Concern: EBITDA Multiples Rising in Europe Source: Standard and Poor’s M&A Statistics, July 2006; LBOs > €500 million, data for Europe, includes fees/expenses
Acquisition multiples at a decade high levels

Reasons For Concern: Defaults Low Source: Bloomberg, Altman – data as of 9/30/06
High yield default rate:

Reasons For Concern: Individuals Getting In
High net worths are coming into the market
Feeder funds
UBS
Deutsche Bank
Credit Suisse
Citi
JP Morgan

Public vehicles Are Being Raised And Are Providing Cash Source: Dealogic, data as of February 2007, includes global IPOs for hedge and private equity firms
In 2006-2007YTD, global hedge and private equity vehicle IPOs raised nearly 5x as much money as during the previous ten years:
# of IPOs: 1 5 5 3 1 0 3 1 1 1 15

Similarities With Bubbles
More money than ever in deals and funds
Higher allocations by investors to asset class
More public attention than ever
More small investors than ever
Higher prices than recent past
More public distributions of high, quick profit
More master of universe publicity than ever
More globalization of the phenomenon
Few stories of failures – fear factor gone
Even rock stars getting into the business

Reasons For Concern: Inevitably There Will Be A Downturn
Downturn will occur because of
Business cycle – slowing of economic growth
Stock market crash / decline
One or more visible buyouts will fail
Cataclysmic event
Federal reserve will tighten credit
Legislative or regulatory constraints
In the downturn
Deals will fail
Money will be lost
Returns will decline
Investor interest will diminish
Lending will get tougher

Is This A Bubble Bursting Like Tech Bubble?
Not same
Recognition that this is unusual time – not going on forever
Better equitized:
Average LBO: 34% equity in 2006 vs. 7% in 1987 (1)
GP’s have been through down cycles
Worse case scenarios are constant point of review
Companies have revenues and earnings
Not too much money – for example, U.S. buyout industry capital under management represents only 3.2% of U.S. public market capitalization
Debt covenants make default less likely – able to work through weak economic times
(1) Standard and Poors LCD, data for U.S.

Companies can operate in private – able to fix problems without constant public scrutiny
Array of potential exits
Financial buyers
Private equity firms
Hedge funds
Strategic buyers
IPO’s
Organizations are able to better monitor, oversee, and deal with problems
Better managers can be recruited
Fund sizes large enough to provide additional capital

Funds are better diversified
Greater recognition that cycles end – greater ability / willingness to wait for rebound
Not a one company – boom – retire forever mentality
Still, need to be concerned about a creeping “this time is different” mentality – most dangerous words in investment world
But money could be lost – returns will decline
Impact can be ameliorated by:
Better educating public about what private equity
Better preparing investors for lower returns / delayed exits
Standing behind transactions to ensure healthy revivals and rebounds

Better preparing for public / investor scrutiny / criticism
Being more open with public about problems, needed changes, likely outcomes
Contrast / compare with companies not involved with private equity
Recognition that best private equity investments occur in economic downturns

Summary
We are not in a bubble similar to tech bubble of 2000
But decline will occur – losses will be incurred – cannot continue like this forever
Industry / investments better able to sustain losses, downturns
But industry must recognize that:
Any losses will be seized upon by opponents of private equity
All investors will not be understanding
Upward cycle may not occur overnight
Industry will face increased public / government scrutiny

Summary
Therefore:
Industry needs to prepare itself for decline
Industry needs to prepare investors
Industry needs to have more open face to the public
Industry needs to explain how it works, can fix problems
Industry should act like a public industry – for that is what it has become – change equity – public setting & public responsibilities

The Similarities & Differences Between The Tech Bubble Burst of 2000 & The Current Private Equity Markets: Are We On The Verge Of A PE Bubble Burst? David M. Rubenstein Co-Founder and Managing Director February 28, 2007

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