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TD Capital Private Equity Investors

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Title: TD Capital Private Equity Investors


1
CONFIDENTIAL
Perspectives on the Global Private Equity Market
Presentation at the Alternative Investment
Conference - Montreal April 24, 2008
2
Agenda
  • Private equity background
  • Drivers of private equity performance
  • How to invest in private equity
  • Appendix - Perspective on the private equity
    market

3
Private equity investing consists of buyout and
venture capital opportunities
Buyout funds
Venture capital funds
  • Usually invest in mature, typically
    cash-flow-generating companies, and provide
    funding for investments involving expansions,
    turnarounds, spin-offs, or consolidations
  • Use their own capital to purchase the equity and
    use leverage (debt) to finance the remainder of
    the purchase price
  • Typically focus their attention on smaller, less
    mature companies that require capital for
    research and/or product development, and
    marketing, as well as other activities which
    commonly occur during the earlier stages of a
    firms life cycle
  • Generally do not use leverage and provide funding
    through a series of equity investments as
    operating milestones are met

4
North American institutions are typically
allocating 5 to 10 to the asset class
Strategic (targeted) allocation to private equity
by type of organization 2007 (North America) ()
Endowments/ Foundations
Public Pension Funds
Corporate Pension Funds
Source Russell Investment Group Alternative
Investing Report 2007-2008.
5
Private equity has delivered strong long-term
returns
Return Comparison Public vs. Private Equity
Drivers of Private Equity Returns
Private Equity Horizon Returns ()
1
  • Active, hands-on value creation model

(Period Ending September 30, 2007)
Years
2
Since inception
5
10
15
20
3
1
3
  • Alignment of manager/owner interests

TD Capital Fund Investments
18.67
13.75
16.60
15.11
26.87
17.12
4
VE Private Equity Index
10.50
14.20
13.80
11.80
13.60
14.20
  • Illiquidity premium

5
SP 500
15.37
6.53
11.08
10.56
13.01
11.24
  • Structural, governance and informational
    advantages

1 The internal rate of return ("IRR") is an
annualized money-weighted return calculated using
periodic cash flows and end of holding period
valuations. Performance of all Fund Investments
made by TD Capital in years 1969-2007 is measured
as of September 30, 2007 after all fees, expenses
and carried interest of all the underlying
partnerships but has not been adjusted to reflect
estimated fees and expenses of TD Capital. 2
Since Inception returns measured from December
31, 1969 to September 30, 2007 for all markets
except Buyout for which TD Capital's first Buyout
Fund Investment occurred November 21, 1980.
Benchmark returns for this segment contain Buyout
Funds raised from 1980 onwards. 3 Performance
of all Fund Investments made by TD Capital is
measured as of September 30, 2007 net of
underlying Fund Sponsor fees and expenses but
before TD Capital fees and expenses. Returns as
at September 30, 2007 are estimates and are
subject to change. 4 Source for Private Equity
Benchmark Returns Venture Economics Thomson
Financial Investment Horizon Summary Reports run
on January 25, 2008 for the US Primary Market as
at September 30, 2007. Database last refreshed
on October 15, 2007. Venture Economics data is
continuously updated and is therefore subject to
change. 5 Source for Public Market Benchmark
Returns Bloomberg L.P., TD Capital Private
Equity Investors estimates - Total Returns for
SP 500 Index figures assume dividends are
reinvested into the index. These returns do not
reflect the cash flows used to calculate the
Private Equity Benchmark returns or the TD
Capital returns and accordingly a direct
comparison may not be meaningful.
6
Growth in the number of private equity funds has
made manager identification and selection more
important - and more difficult
Cumulative number of direct investment funds
(1990-2006)
Key considerations
Key considerations
  • Extensive resources and expertise required to
    effectively cover complex and fluid marketplace
  • Proactive deal flow generation is key to sourcing
    top-tier managers
  • Systems and processes are essential to manage and
    evaluate deal flow

Source Venture Economics. All private equity
funds, excluding Fund of Funds and Secondary
funds.
7
The current wave of fundraising has demonstrated
the increasing cyclicality of the private equity
asset class and the importance of long-term
diversity across vintage years and asset class
Buyout Commitments
Funds less than 5 years old are in the early
stages of their life cycle and experiencing the
J-curve effect
Venture Commitments
176
171
138
121
105
87
80
68
58
SP500 11.2 (1969-2007)
38
39
35
33
29
19
19
16
15
15
10
8
6
8
Buyout Percent
NM
Vintage year returns
65.7
20.6
12.8
11.1
21.6
14.2
8.3
20.2
19.4
9.6
7.9
5.5
8.4
2.5
9.8
11.1
17.6
20.0
35.3
19.3
9.7
-3.6
Venture Percent
10.0
12.5
14.8
20.4
17.9
28.2
28.5
32.6
37.6
39.1
59.9
83.7
49.6
20.8
-6.6
1.2
3.6
3.9
3.9
6.3
-2.7
NM
-5.9
As at September 30, 2007
Source Thomson Venture Economics Cumulative
Vintage Year Performance Report, Pooled Average
for US Primary Market for All Private Equity,
Venture and Buyout Funds (report date February 8,
2008)
8
Agenda
  • Private equity background
  • Drivers of private equity performance
  • How to invest in private equity
  • Appendix - Perspective on the private equity
    market

9
Portfolio company managers identify a number of
benefits from private equity
Portfolio company managers identify a variety of
benefits from private equity ownership
Change for the better
No change
Percent of survey respondents
Change for worse
  • Key aspects of private equity transactions
  • Facilitation of structural change
  • Resolve succession issues
  • Provide growth financing
  • Facilitate industry consolidation
  • Elimination of regulatory burden
  • Alignment of interests
  • Strong management incentives
  • Long-term investment horizon
  • Balance sheet restructuring
  • Dramatic changes to ensure can service debt
  • Instil entrepreneurial growth culture

Cost management
Operational efficiency
Marketing
Executive recruitment
Strategy
Source PriceWaterhouseCooper and AVCAL survey
2006
Profitability development in buyouts management
perceptions
Percentage of respondents answering
Significant improvement
Improved profitability leads to greater tax
revenue, job creation, invested capital for
investment and fewer bankruptcies
Improved
Unchanged
Decline
Significant decline
Source KPMG, 2006
10
Private equity transactions create value through
growth and operational improvement, not
restructuring or leverage
  • Organic revenue growth is the primary driver of
    EBITDA growth in private equity-backed companies

Leading private equity firms focus on fundamental
value creation rather than leverage
Source of value ()
Leverage
US
Other
Multiple arbitrage
Operational improvement
Cost reductions, restructuring
Organic revenue growth
Acquisitions
Europe
Other
Cost reductions, restructuring
Organic revenue growth
Leverage era (1980s)
Multiple expansion era (1990s)
Earnings growth era (2000s)
Operational improvement era (2010s)
Acquisitions
Source Goldman Sachs BCG IESE estimate
Source Ernst Young How Do Private Equity
Investors Create Value, Survey of top 100 exits
in 2006
11
Studies have shown a strong correlation between
active ownership by private equity firms and
superior performance
…have produced sustainable portfolio company
outperformance
Leading edge practices of top-tier firms…
Primary source of value creation Percent
  • Seeking out expertise and privileged knowledge
    and conducting extensive due diligence before
    investing
  • Instituting substantial and focused performance
    incentives for senior company management
  • Designing specific value creation plans and
    executing on them more effectively
  • Devoting more time to planning in the initial
    stages of deals
  • Strengthening management teams early in the
    investment, often before closing

Arbitrage
Market/sector appreciation plus financial leverage
Company outperformance
Source McKinsey Company
12
Plan sponsors predict that private equity returns
will continue to outperform other asset classes
Plan sponsors rate of return expectations across
various asset classes
Based on the 2007-2008 Russell Survey of leading
institutional investors…
Private equity
  • Median annualized forecast private equity returns
    for 2007-2009 are expected to range from 9.0 to
    15.0 globally
  • Allocations to private equity are forecast to
    increase through 2009, with more popularity for
    secondaries and venture capital over the next
    three years
  • Markets that have traditionally had lower
    allocations (Europe and Japan) are expected to
    show the largest increases

EAFE
Canadian equities
US equity investments
Real estate
Hedge funds
Fixed interest investments
Source Greenwich Associates, January 2007 The
2007-2008 Russell Investments Survey on
Alternative Investing.
13
Agenda
  • Private equity background
  • Drivers of private equity performance
  • How to invest in private equity
  • Appendix - Perspective on the private equity
    market

14
Sustainable out-performance in private equity is
dependent on successful implementation
Key success factors in private equity
Diversification
Sustainable Outperformance in Private Equity
Manager Selection and Access
  • Successful participation in private equity
    requires that each of these key factors be
    considered and applied in building out a
    long-term investment program
  • TD Capital Private Equity Investors fund of
    funds program successfully addresses each of
    these key considerations

Administration
Timing and Sequence of Allocation
15
In private equity, access to top quartile
managers is critical and limited
Manager Selection and Access
  • Wide dispersion in returns makes focus on top
    performers imperative

Persistence of performance and limited
fundraising makes access a constant challenge
Percentage point spread between top and bottom
quartile performance, 1996-2005
Percent
73
63
52
Venture Capital
Top quartile
Follow-on fund performance
28
Buyouts
2nd quartile
Public Equity
Top quartile
2nd quartile
3rd quartile
Bottom quartile
Prior fund performance
Venture Economics U.S. Cumulative Vintage Year
Composite Performance (IRR) as of December 31,
2005 for vintage years 1996-2005. Watson
Wyatt Worldwide Pooled Fund Report as of December
31, 2005. Note Private equity returns are
calculated as internal rates of return ("IRRs"),
while those for the public markets are not.
Direct comparisons are therefore not possible.
Source McKinsey Co.
16
Private equity investing requires a proactive and
selective approach
Manager Selection and Access
Proactive Market and Manager Research
TD Capital Example Funds Reviewed in 2005-2007
Initial manager meeting
Beat up committee review
Investment team review
Formal due diligence
Investment committee
38 fund investments
Screening
gt1000
716
63
42
44
Number of funds/managers
Of the 38 fund investments, most were with
managers with whom TD Capital had a prior
investment relationship
17
Fund of funds offer an attractive risk profile
Balanced diversification
The Risk Profiles of Private Equity ()
Risk of some loss
Key private equity diversification parameters
Risk of total loss
  • Manager
  • Fund type (buyout venture capital)
  • Sector focus
  • Geography
  • Investment type (primary secondary,
    co-investment)
  • Vintage year

Direct investment in single private company
Investment in single private equity fund
Investment in private equity fund of funds
Number of portfolio company investments
1
6 - 12 (Buyout) 20 - 40 (Venture)
400 - 1200
Note Comparing the risk profiles of venture
capital investment vehicles. Data contains about
5,000 direct investments (US data - no European
data available), 300 European funds and 50,000
simulated European fund of funds. Source Weidig
and Mathonet report, The Risk Profiles of
Private Equity, January 2004.
18
A successful private equity program requires
efficient administration
Administration
Institutional investor in private
equity (Indirect exposure to portfolio of 20
funds)
Clear and concise communication
(Portfolio of 20 funds)
400-600 administrative events/notices per year
Capital calls/ distributions
Quarterly and annual reporting
Administrative/legal amendments
Annual meetings
Monitoring and risk management
19
Private equity funds draw down and distribute
capital over time
Timing/Sequence of Allocation
ILLUSTRATIVE
Single 10 million commitment US Millions
  • Target Private Equity allocation of 10 million
    never reached with single fund commitment given
    net cash flows
  • Amount of net invested capital in each fund
    declines rapidly after year five or six
    depending on investment pace

19
20
An ongoing investment program is required to
achieve and maintain a full allocation to private
equity
Timing/Sequence of Allocation
ILLUSTRATIVE
US Millions
Cumulative net invested capital
Fund I
Millions
Fund II
Fund III
Fund IV
Fund V
Years
20
21
Funds less than 5 years old typically show
negative interim returns as they track through
the j-curve
Timing/Sequence of Allocation
Illustrative J-Curve
J-Curve Phenomenon
  • Declining values early on as funds recognize fees
    and write-downs prior to realizations or external
    financing events
  • Funds less than 3 - 5 years old have a
    significant percentage of undrawn and uninvested
    capital
  • Investment periods are typically 5 years long,
    with underlying investments typically held for 3
    7 years before realization

Year
millions
Drawdown Distribution Net investment
2.06 (0.02) 2.04
2.41 (0.06) 4.39
2.17 (0.25) 6.27
1.50 (0.92) 6.85
0.92 (1.42) 6.35
0.39 (1.25) 5.49
0.42 (1.65) 4.26
0.07 (1.54) 2.78
0.05 (1.77) 1.07
0.01 (1.08)
10MM commitment
Source Venture Economics/NVCA TD Capital
proprietary investment pacing model.
22
Agenda
  • Private equity background
  • Drivers of private equity performance
  • How to invest in private equity
  • Appendix - Perspective on the private equity
    market

23
Up until July 2007, the availability of leverage
enabled both larger buyout deals and higher prices
  • Average purchase price/EBITDA and total
    debt/EBITDA for US transactions vs. default rate

2.0
10.0x
10.0x
9.0x
10.0
8.6x
8.3
8.1x
8.0x
7.9x
8.0
7.3
7.1x
7.0x
7.5x
6.8x
6.7x
6.0
6.5x
6.4x
6.2x
6.0x
4.7
6.1x
4.0
4.0
5.0x
5.0x
5.0x
3.0
5.1x
4.9x
4.6x
4.3x
2.0
2.6
1.8
1.4
4.0x
1.7
4.1x
4.1x
3.9x
1.0
3.5x
0.7
3.0x
0.0
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Q207
Purchase price/ EBITDA
Debt/EBITDA
Default rate
Source Standard Poors Notes JPMorgan
Domestic High Yield Default Rate. Acquisition and
leverage multiples are Q2 2007 and default rate
is LTM 8/31/07 Excludes Media and Telecom loans
24
The easy credit came to a stop in July 2007
lending terms and market conditions are returning
to more traditional levels
US leveraged loan volume US Billions
  • Zero tolerance of covenant-lite and PIK-toggle
    terms
  • Syndicating banks dealing with hung bridges
  • Distressed players starting to invest
  • Buyout sponsors raising opportunistic credit funds

US high yield bond volume US Billions
Source UBS SP
25
Since July, MA deals have declined sharply in
number and volume

2007 MA announced deals and deal value by
month US billions
NA Number of deals
NA Total deal value
EU Number of deals
EU Total deal value
Deal decline since July has been largely related
to a decrease in the announcement of large
transactions
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
North American European with transaction
values over US100 million Source Capital IQ
26
The credit crunch has had a significant impact on
buyout transactions, particularly at the large
end of the market
  • While large-cap deals have disappeared…

…middle market deal flow has continued but at a
reduced pace
Announced North American LBO transactions over
500M in size Billions
Announced North American LBO transactions below
500M in size Billions
Credit market dislocation
Credit market dislocation
2007
2008
2007
2008
Source Thomson Financial
27
The impact of current credit market conditions on
private equity valuations and deal flow should be
closely monitored
28
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  • 6th Floor, TD Waterhouse Tower
  • Toronto, Ontario, Canada M5K 1A2
  • T 1 416 308 6316
  • F 1 416 983 9763

Triton Court 14/18 Finsbury Square London, United
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