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Super Return Final Super Return Final Presentation Transcript

  • 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
  • Tech Bubble Had Numerous Symptoms (In Retrospect)
        • 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
  • Tech Bubble Had Numerous Symptoms (In Retrospect)
      • 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
  • Tech Bubble Had Numerous Symptoms (In Retrospect)
      • 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
  • Tech Bubble Had Numerous Symptoms (In Retrospect)
      • 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
  • Tech Bubble Had Numerous Symptoms (In Retrospect)
      • 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
  • Tech Bubble Had Numerous Symptoms (In Retrospect)
      • 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
  • Tech Bubble Had Numerous Symptoms (In Retrospect)
      • 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%+ :
    Tech Bubble Had Numerous Symptoms (In Retrospect)
  • 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.
  • Is This A Bubble Bursting Like Tech Bubble?
    • 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
  • Is This A Bubble Bursting Like Tech Bubble?
    • 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
  • Is This A Bubble Bursting Like Tech Bubble?
      • 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