private equity europe 26 september 2007 confidentialpresentation to: vittorio pignatti morano, vice...
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Private Equity Europe
26 September 2007
Confidential Presentation to:
Vittorio Pignatti Morano, Vice Chairman
What is Private Equity?
Private Equity funds are pools of capital managed by professional investors who make equity investments in private companies
Private Equity funds align the economic interests of three key players:– Investors looking for higher risk / return equity exposure – Companies seeking financing to complement or replace traditional sources of capital– The investment professionals / venture capitalists
Types of Private Equity– Corporate Buyouts
• Merchant Banking• Co-Investment• Infrastructure
– Venture Capital– Fund of Funds– Real Estate– Mezzanine Products
The performance of the fund is defined by the investment’s internal rate of return (“IRR”); the IRR of a fund is the return on the investment
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Private Equity Returns
Private Equity has outperformed public equity over the last 10 and 20 years
Net IRRs Ending 31 December 2006
20-Year 10-Year
___________________________1. Historical trends do not imply, forecast or guarantee future results. Thomson Venture Economics’ US Private Equity Performance Index is based on the latest (31 December 2006) quarterly statistics from Thomson Venture Economics’ Private Equity Performance Database analysing the cash flows and returns for 1,860 US venture capital and private
equity partnerships with a capitalisation of over $679bn. Sources are financial documents and schedules from limited partner investors and general partners. All returns are calculated by Thomson Venture Economics from the underlying financial cash flows. Returns are net to investors after management fees and carried interest.2. Source: Bloomberg, LP. Represents quarterly total returns for the period. S&P 500 & Dow Jones exclude dividend reinvestment. NASDAQ and Russell 2000 exclude dividends.
13.9%
9.2%9.9% 10.2%
9.2%
0%
3%
6%
9%
12%
15%
(% )
PE Index S&P 500 Dow Jones NASDAQ Russell 2000(1) (2) (2) (2) (2)
11.0%
6.7% 6.8% 6.5%
8.1%
0%
3%
6%
9%
12%
15%
(% )
PE Index S&P 500 Dow Jones NASDAQ Russell 2000(1) (2) (2) (2) (2)
2
Strong Industry Growth
The market for LBOs has increased more than ten times in the last five years
29 33
57 53
40
20 22
47
94
130
233
0
50
100
150
200
250
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
($bn)
Total US Leveraged Buyout Volume
___________________________Source: S&P Global Leveraged Loan Review 4Q06. Historical trends do not imply, forecast or guarantee future results.
3
Increasing Deal Sizes
The average size of an LBO reached over $1bn in 2006
0.5
0.4 0.4 0.4 0.4 0.4
0.5
0.7 0.7
1.0
1.3
0.0
0.4
0.8
1.2
1.6
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
($bn)
Average LBO Size
___________________________Source: S&P Global Leveraged Loan Review 4Q06. Historical trends do not imply, forecast or guarantee future results.
4
Globalisation of Private Equity
The industry has expanded outside the US
69%
52%
17%
38%
14%10%
0%
20%
40%
60%
80%
100%
2000 2005
(% )
North America Europe Asia + Other
Funds Raised
___________________________Source: International Financial Services London (ESFL) estimates based on Thomsan, PwC and EVCA data.
Investments
68%
40%
17%
43%
15% 17%
0%
20%
40%
60%
80%
100%
2000 2005
(% )
North America Europe Asia + Other
5
Global Fundraising EnvironmentRapid growth of private equity in recent years is capturing the attention of many investors who have never invested in the asset class
___________________________Source: Thomson Financial, through December 31, 2006. Includes Buyout and Mezzanine funds.
$47
$71
$99$88
$114$103
$71 $66
$94
$203
$352
0
50
100
150
200
250
300
350
400
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
($ billions)
North America Europe Other
Commitments to Global Private Equity Partnerships
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European Fundraising Environment
As in the U.S., 2006 was a record year for private equity fundraising in Europe
___________________________1. Source: Thomson VenturExpert.
€ 61.8
€ 53.5
€ 16.7
€ 23.7
€ 19.1
€ 52.6
€ 60.7
€ 27.0
€ 21.1€ 18.4
€ 8.3
0
10
20
30
40
50
60
70
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
($ billions)
Commitments to Asian Private Equity Partnerships1Observations
Fundraising has predominately been in the buyout space as traditional venture capital investing is relatively less important
The list of the largest funds raised in Europe in 2006 is dominated by:
– Pan-European funds, headquartered in London; or
– Nordic funds headquartered in Stockholm Many investors believe middle-market European funds, which
tend to be most often country-specific, are more likely to generate outsized returns
Fund Name Location Year Amount (€mm)
Permira IV London 2006 11,000
Cinven IV London 2006 6,500
3i Europe Partners V London 2006 5,000
EQT V Stockholm 2006 4,250
CVC European Equity Partners IV London 2006 4,200
Charterhouse Capital Partners VIII London 2006 4,000
Terra Firma Capital Partners III London In Market 4,000
Nordic Capital Fund VI Stockholm 2006 1,900
TDR Capital Fund II London 2006 1,750
Altor Equity Partners II Stockholm 2006 1,150
10 Largest European Funds Ever Raised
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Evolution of the Buyout Market
Bull Market
Recession
Resurgence
Growing
Developing
Recession
Late ’90s 2000–2002 2003–2007Late ’80sEarly to Mid ’80s Early ’90sStrong Good Poor Good StrongExcellent
VintagePerformance
Loan Market
Under Exploited Balance Sheets
Underperforming Economy
DevelopingHY Market
More Sophisticated
Financial Engineering
Growing M&A
Limited Equity
Increasing Deal Size
Recapitalisation Through Equity
Markets
Multiple Contraction
HLT Regulation
Abundant Fundraising
EconomicBoom
Overheated Stock Market
Tech / Telecom Bubble
Non US Buyouts
Focus on Growth Investments
Valuation Decline
Tight Credit
Management Focus
Increased Equity
Robust Credit Market
Club Deals
Strategic Buyers Less Relevant
Low Interest Rates
Sarbanes-Oxley
Globalisation of Business
Mega Buyouts
Growing Level of Sophistication
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Lehman Brothers Private Equity Fund Performance
Fund Performance1
Asset Class Invested Capital Period Gross IRR
Merchant Banking $3.5 billion 1989 – 2007 37%
Venture Capital $699 million 1996 – 2007 28%
Real Estate $4.7 billion 2000 – 2007 33%
European Mezzanine $1.2 billion 2002 – 2007 17%
CDO Opportunity $556 million 2002 – 2007 25%
Fund of Fund Investments $2.9 billion 1997 – 2006 32%
First quartile performance in aggregate since inception of each asset class
___________________________Source; Lehman Brothers Inc. Past performance is not necessarily indicative of future results. There can be no assurance that future funds will achieve comparable results. 1. Returns are expressed in US Dollars. All returns are as of March 31, 2007 except for the Fund of Fund Investments return, which is as of 12/31/2006. Gross internal rates of return (IRRs) do not reflect the management fees, carried interest, taxes, transaction costs and other expenses to be borne by
investors in each fund, which in the aggregate are expected to be substantial.
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Current Areas of Interest in Private Equity
1. Secondary Investments
– Purchase of limited partnership interests from original investors
– Access to relatively mature private equity investments often at favorable prices
– Reduces the J-curve effect by hastening the time until portfolio investment gains are realized
– Improved visibility pertaining to the underlying partnership portfolio companies
2. Co-Investment
– Direct investment in private equity transactions
– Selectivity in deals
– Reduced GP fees
– Lower fees and the immediacy of capital calls contribute to truncation of the J-curve
– Beneficiary of limited “club deals”
3. Mezzanine
– Through mezzanine debt, investors can acquire buyout equity exposure without paying high premiums
– Historically, mezzanine debt has offered equity-like returns with fixed-income-like risk levels
– Mezzanine also offers good diversification benefits vs. high yield (i.e., historical correlation = zero)
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Current Areas of Interest in Private Equity (cont’d)
4. Large Cap Buyouts
– Mega cap deals (greater than $5 billion) can have less competition than the middle market and small market
– This is largely an historically untapped market
– Resale of subsidiaries to strategic buyers
– Strategic buyers emerging in Asia and the Persian Gulf
5. Infrastructure
– Hybrid investment between private equity and fixed income
– Illiquidity risk premium plus long duration
– Long-dated contracts
– Inelastic demand
– Municipalities, electric utilities
6. Distressed Debt in private equity
– Slow deployment of capital from date of subscription
– Opportunistic investment as distressed situations arise
– Effective counterbalance and diversification to LBO equity investments
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2008 – 2010 Opportunities
Real Estate – Asia, Emerging Europe
Mezzanine – Europe, U.S.
Buyouts – mid-cap globally
Secondary investments
Infrastructure investments – globally
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0x
2x
4x
6x
8x
10x
12x
14x
2004 2005 2006 2007 YTD
EB
ITD
A m
ult
iple
<$1 B $1-5 B $5+ B
Mega Caps And Mezzanine
___________________________
Source: Factset, Lehman Brothers
LBOs: EBITDA Multiples
Attractive Risk Adjusted Performance Of Mezzanine Investing
Source: Thomson, Bloomberg, Lehman; As of 12/06; Mezzanine data represents 25 th %ile returns
0%
5%
10%
15%
20%
25%
Return Risk Return Risk Return Risk Return Risk Return Risk
Mezzanine Debt US Large Cap Equity US Fixed Income High Yield LBO
3yrs
5yrs
7yrs
10yrs
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Impact of Recent Credit Market Repricing Favours Mid-Cap The mezzanine market has experienced a widening of spreads. Current all-in new issue spreads are around 900-950 bps, versus 700 bps at
the lowest point during Q2 2007, and 850 bps on average for H1 2007. In addition, the market for leveraged dividend recapitalizations is shut, which leads to higher expected duration (from 2 years to 3 years). As a result, on a Fund basis, projected Net Returns to investors are higher by 3% - 5% and Net Multiple of Cash by up to 0.2x.
Returns on Invesments(1)
___________________________Source: 1. Based on the assumption of Euribor of 4.75% and using the fund modelling assumptions for LBEMP II L.P. The base margin (from which the incremental margin is calculated) is 700 bps2. Assumes all-in Margin of 850 bps over Euribor
Multiple of Capital Invested(1)(3)
1.28x
1.36x
1.44x
1.52x
1.44x
1.56x
1.69x
1.82x
1.30x
1.39x
1.48x
1.57x
1.00x
1.10x
1.20x
1.30x
1.40x
1.50x
1.60x
1.70x
1.80x
1.90x
2.00x
24 30 36 42
Duration (months)
Gross Unlevered Multiple Gross Levered Multiple Net Multiple
Lowest spread in Q2 2007 (700bps)
Average spread in H1 2007 (850 bps)
Current spread in Q3 2007 (900-950 bps)
Average duration in H1 2007
Expected duration as of Q3 2007
12.5%
14.1%14.7%
15.2%
18.4%
22.6%
23.6%
12.8%
15.6%16.5%
17.4%
21.5%
10.0%
12.5%
15.0%
17.5%
20.0%
22.5%
25.0%
0 50 100 150 200 250 300
Incremental Margin (bps)
Gross Unlevered IRR Gross Levered IRR Net IRR
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DisclaimerThis presentation (the "Presentation") is being furnished on a confidential basis to a limited number of sophisticated institutions on a "one-on-one" basis for informational and discussion purposes only and does not constitute an offer to sell or a solicitation of an offer to purchase any security in Lehman Brothers European Mezzanine Partners II ("Fund II"). Any such offer or solicitation shall be made only pursuant to the confidential private placement memorandum relating to Fund II, as amended or supplemented from time to time (the "Memorandum"), which describes the risks relating to an investment in Fund II as well as other important information about Fund II and Lehman Brothers.
This Presentation is qualified in its entirety by all of the information set forth in the Memorandum, including without limitation the notice to investors set out at the front of the Memorandum and the section headed "Risk Factors and Conflicts of Interest". The Memorandum must be read carefully in its entirety prior to investing in Fund II. This Presentation does not constitute a part of the Memorandum.
This Presentation is based on or derived from information which is believed to be reliable and no representation is made that it is accurate or complete. Past performance is no indication of future results. No reliance should be placed on the contents of this Presentation by any person who may subsequently decide to enter into a transaction with Lehman Brothers.
Investors should determine for themselves the relevance of the information contained in this Presentation and any subsequent decision to invest in Fund II should be based on such investigation as they themselves deem necessary. An investment in Fund II is suitable only for sophisticated investors and requires the financial ability and willingness to accept the high risks and lack of liquidity inherent in such a transaction.
The distribution of this Presentation in certain jurisdictions may be restricted by law. This Presentation is only directed at persons to whom it may lawfully be distributed and any investment activity to which this Presentation relates will only be available to such persons. It is the responsibility of any potential investor to satisfy itself as to the full compliance of the applicable laws and regulations of any relevant jurisdiction, including obtaining any governmental or other consent and observing any other formality prescribed in such jurisdiction.
This Presentation is proprietary to Lehman Brothers and may not be disclosed to any third party or used for any purpose without the prior written consent of Lehman Brothers.
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