Thinking Outside the Stocks: The Private Equity Ecosystem

1
Thinking Outside the StocksThe Private Equity
Ecosystem

• Thunderbird School of Global Management

April 2008
Presented by
JORDAN ROBINSON Vice President, Global Private
Equity AIG Investments
This material must be read in conjunction with
the Disclosure Statement.
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Agenda

• I. Where Are We Today? - Current Market
  Conditions
• II. Portfolio Building Blocks
• III. Where Are We Going Tomorrow? - Looming
  Questions
• IV. Where We You Going Tomorrow? - Job Search
  Thoughts

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I. Where Are We Today? - Current Market Conditions
4
The Ecosystem
Private equity has developed a true ecosystem
ecosystem ek-oh-sis-tuh m noun the
complex of a community of organisms and its
environment functioning as an ecological unit
5
Record Global Fundraising
14.5
9.3
9.5
72.5
76.6
75.6
4.9
3.8
75.3
78.4
13.0
14.9
14.1
17.8
19.8
Source Venture Economics, EMPEA
6
Emerging Markets Fundraising
Source Emerging Markets Private Equity
Association. Data as of March 2008.
7
Allocations expected to increase
Despite the recent slowdown in private equity
deal-making, strong fundraising is expected to
continue, driven by increasing allocations to
private equity by institutional investors
LPs planning to increase their private equity
allocations over the next 12 months (Winter
2005-2006 to Winter 2007-2008)
Current and Expected Allocation to Private Equity
Source Coller Capital Global Private Equity
Barometer Winter 2007-08, Citigroup Global
Markets CIO Survey September 2007.
8
Purchase prices pre-2008 have increased
Average LBO Purchase Price as a Multiple of
Non-adjusted Pro Forma Trailing EBITDA for Total
Sources of 500 million or More
9.87
6.28x for 250-499 MM
8.51x for 250-499 MM
8.46
8.42
7.52
6.91
6.70
6.68
6.40
40.6
40.0
39.5
35.1
32.1
33.6
32.9
37.8
Source Standard Poors. As of December 31,
2007.
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Purchase prices in 2008 have declined
Comparable Deal Analysis
Industry 2 in Mkt. Share (Revenues 10-20 Bil)
Industry 3 in Mkt. Share (Revenues 5-10 Bil)
x
14.5x
Senior Debt 46.1
6.7 EBITDA L 170
9.6x
35.5
(And all asset backed)
3.4x EBITDA L 200
Sub Debt 22.5
3.2x EBITDA Rate 9
1.6x EBITDA Rate 12.5
16.1
48.4
Equity
31.4
What a difference a year makes!!!
Sources AIG Internal Data
10
Convergence has slowed
Private equity hedge fund convergence has
slowed

• Concerns about liquidity (hedge funds)
• Uncertain inflows (hedge funds)
• Concerns about portfolios (private equity)

11
Global Summary

• Lots of committed capital
• Access to credit acute for large transactions
• Convergence has slowed down
• Emerging markets are hot
• Returns holding up (so far)

12
II. Portfolio Building Blocks
13
Ecosystem
Private equity has matured into a true ecosystem
ecosystem ek-oh-sis-tuh m noun the
complex of a community of organisms and its
environment functioning as an ecological unit
14
Funds Flows
Distressed Debt
China
Club Deals
Credit Statistics
Convergence
Succession
KKR IPO
Alpha
Greed
Brazil
Activist Investors
Overhang
Short Durations
India
Fire inthe Belly
LBO PurchasePrices
Redemptions
Leverage
BDCs
Beta
15
Portfolio Company Lifecycle

• Private equity investments address opportunities
  across company lifecycles

Venture Capital
Buyouts

• Seed Stage

• Early Stage

• Late Stage

• Pre-IPO

• Growth

• Leveraged Buyouts

• Distressed/Turn-Around

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A Broad Menu of Private Equity Strategies
Indirect
Other
Direct
Indirect

• Real Estate
• Bridge Funds
• Distressed Debt

• Fund of Funds
• Secondaries
• Co-Investments

• Buyouts
• Venture Capital
• Early Stage
• Venture Capital
• Late Stage
• Growth Equity

• Co-Investments
• (Direct)
• Natural Resources
• Infrastructure
• Turnaround
• Mezzanine

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The Direct Investment Process is Relevant to
Every PE Segment
ResearchInsight-Driven Deals
Portfolio Management/Value Creation
Structuring/Negotiations
Due Diligence
Exit
Access/Origination

• Research/Insight-Driven Deals Top-to-Bottom
  Opportunistic
• Access/Origination Information Arbitrage
• Due Diligence Intense Scrutiny
• Structuring/Negotiations Governance
  Shareholder Rights
• Portfolio Management/Value Creation Management
  Oversight, Investor Add-Value
• Exit Timing Multiple Options (IPO, Strategic
  Sale, Structured Arrangement)

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Secondary Investment Process Key Beneficiary of
the Ecosystem Development

• Knowledge - Primary fund commitments,
  Co-investments, direct equity investments and
  mezzanine debt, Emerging markets direct
  investments
• Insight Industry Performance, Sectors, Regions,
  Facilitators, Blockers
• Relationships - General Partners (quality of
  portfolio, transfer process efficiency), Limited
  Partners (Awareness of deals, Ability to
  negotiate)

Global Secondary Investments
Relationships Information
Expertise
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Portfolio Construction Creating an Investment
Framework
Analyze available manager opportunity set
Develop a macro point of view

• Analysis Framework
• Macroeconomic and capital market conditions
• Private equity capital flows segment, sector,
  country
• Manager quality and availability
• Fundraising cycles
• Regulatory environment
• Performance cycle analysis

Investment Framework Rigorous analysis with
flexibility to capture attractive investment
opportunities as they present themselves
20
Building a Private Equity Portfolio
Strategies
Indirect
Direct
21
Building a Private Equity Portfolio
Strategies
Indirect
Direct
22
Building a Private Equity Portfolio
Strategies
Indirect
Direct
23
Building a Private Equity Portfolio
Strategies
Indirect
Direct
24
Building a Private Equity Portfolio
Strategies
Indirect
Direct
25
Emerging Markets
Hot Macro Environment

• Compelling GDP growth
• Stability of Political, Legal and Accounting
  Characteristics
• Trade Interdependence and Surpluses
• Lower/Stable Inflation and Interest Rates
• Improved Credit Ratings

Emerging Markets Attractive PE Opportunity

• Emerging markets companies competing and winning
  globally
• Capital markets growing quickly
• Strong IPO receptivity Strategic Acquisitions
• Market correlations are lower
• Less competition (despite recent fundraisings)
• Large opportunity set

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PE in Asia Asset Class Penetration Potential
PE Deal Value as a of GDP
6.9x
3.9x
Source Bain study. Data as of end 2006.
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Brazil How to access these growing markets?
Sugar Industry Market Share in 2005
Ibovespa Index
Capital Goods Services
Construction Transportation
Basic Materials
Basic Materials
Consumer Cyclical
Source F.O. Licht and LMC International.
Consumer Non-Cyclical
Brazil Credit Card Market
Basic Materials Energy account for 57 share of
the Ibovespa index
Telecom
Energy
Financial
Source Bovespa.
Source Bank of Brazil and Brazilian Association
of Credit Card Companies and Services.
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Building a Private Equity Portfolio
Strategies
Indirect
Direct
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III. Where Are We Going Tomorrow - Looming
Questions
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Is Now a Good Time To Invest In Private Equity?

• Market dislocations create opportunity for
  private market investors
• Private equity should generate a significant
  premium over public market equities

Source Cambridge Associates, pooled mean and
median net IRR to limited partners by vintage
year as of 9/30/07.
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How will 500 Billion in Dry Powder Be Spent?
Emerging Markets
?
New
Markets
PIPES
Base
Old
Old
New
Products
32
Competition Are Sovereign Wealth Funds Changing
the Game?
Sources World Economic Forum, Thomson Financial
33
Where are You Going Tomorrow? Job Search Thoughts

• Focus on satisfaction, right motives
• Private Equity is endgame Doesnt need to be
  first career move
• Experience not brand
• Industry or regional expertise helpful to
  eventually develop
• The Ecosystem has much to offer

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Private Equity Endnotes

• Interests in open funds (the Funds) are offered
  only pursuant to the terms of a Confidential
  Private Placement Memorandum (the Memorandum),
  which is furnished to qualified investors on a
  confidential basis for their consideration in
  connection with the private offering of limited
  partnership interests (the interests) in the
  Fund. The Information contained in this
  presentation may not be reproduced or
  redistributed without the written approval of AIG
  Investments.
• No person has been authorized to make any
  statement concerning the Funds other than as set
  forth in the Memoranda, and such statements, if
  made, may not be relied upon. The information
  contained herein is qualified in its entirety by
  the more complete information contained in the
  Memoranda. This presentation is not an offer to
  sell or a solicitation of interests in the Funds.
  The Manager, its affiliates and AIG Equity Sales
  Corp. make no representation as to the accuracy
  or completeness of the information contained
  herein.
• Additionally, investors should note the following
  regarding private equity investments
• They are not subject to the same regulatory
  requirements as mutual funds, including mutual
  fund requirements to provide certain periodic and
  standardized pricing and valuation information to
  investors
• They are speculative and involve a high degree of
  risk
• Investors could lose all or a substantial amount
  of their investment
• Interests may be illiquid and there may be
  significant restrictions in transfer. There is no
  secondary market for interests, and none is
  expected to develop
• They may be leveraged, and their performance may
  be volatile
• They have high fees and expenses that will reduce
  returns
• They may involve complex tax structures
• They may involve structures or strategies that
  may cause delays in important tax information
  being sent to investors
• They and their managers/advisers may be subject
  to various conflicts of interest
• They may hold concentrated positions with a
  limited number of investments
• They, or their underlying fund investments, may
  invest a substantial portion of their assets in
  non-U.S. securities, which could mean higher
  risk
• The list set forth here is not a complete list of
  the risks and other important disclosures
  associated with such investments and is subject
  to the more complete risk and disclosures
  contained in the applicable confidential offering
  documents
• The investment manager has total trading
  authority over fund investments. The use of a
  single adviser applying generally similar trading
  programs could mean lack of diversification and,
  consequently, higher risk.
• Certain materials contained herein constitute
  projections, forecasts and other
  forward-looking statements relating to certain
  investments and do not reflect actual results.
  These projections, forecasts and other
  forward-looking statements are based primarily
  upon applying assumptions retroactively to
  certain historical financial information relating
  to the investments. The projections, forecasts
  and other forward-looking statements presented
  herein are, therefore, valid only as of the date
  shown on the front page of this presentation.
• AIG Equity Sales Corp., member FINRA, is acting
  as a placement agent for the Funds in the United
  States only.

AIG Investments Web Address www.
aiginvestments.com
Rev. 11/05/07
35
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Rev. 7/13/07