Ten Key Questions Facing the
Private Equity World
David Rubenstein
Co-founder & Managing Director
1
February 27, 2008
1. Will Leverage for Buyouts Return in Time
for PE Investors and Professionals to Stay
with the Industry?
3
Leveraged Loan Volumes Will Recover

US Leveraged Loan Volumes Bounced Back after the
Downturn of 2000-2001
US Buyout Leveraged Loan Volume ($Bn)
200
189.0
150
121.5
+ 1,929%
100
64.5
47.1
50
17.8
18.6
1996
1997
30.8
30.2
22.3
9.8
11.1
2001
2002
20.1
0
4
1998
1999
Source: S&P Leveraged Buyout Review
2000
2003
2004
2005
2006
2007
Leveraged Loan Volumes Will Recover

While European Issuance has Grown Every Year Since
1999
European Buyout Leveraged Loan Volume (€Bn)
150
140.0
115.8
102.9
100
44.4
50
18.8
15.3
24.7
28.4
29.5
0
1999
5
2000
Source: S&P LCD
2001
2002
2003
2004
2005
2006
2007
But This Will Not Happen Overnight

In the US, it took roughly three years for leveraged
loan volumes to match their previous highs after 2000

And those three years were challenging for private
equity investors


6
In 2001 and 2002, US leveraged loan issuance fell to
approximately 1/3 of its 1998 total
But when the recovery came, it exceeded all
expectations

Leveraged loan issuance more than doubled between 2002 and
2004 and again between 2004 and 2006

Issuance jumped 20x between 2001 and 2007
Source: S&P Leveraged Buyout Review
2. Are There Going to be Major Defaults
from Buyouts Completed within the "Golden
Age"?
7
Leverage Levels Are at Historical Highs
Average Large LBO Leverage Multiples
(Debt/EBITDA)
6.2x
6.0x
5.7x
5.4x
5.4x
5.3x
5.0x
4.8x
4.7x
4.6x
4.2x
4.0x
4.1x
4.0x
3.0x
1997
8
1998
1999
2000
2001
Source: S&P Leveraged Buyout Review
Note: Includes issuers with EBITDA of $50MM or more
2002
2003
2004
2005
2006
2007
And Credit Ratios Are Depressed
(EBITDA – Capex) / Cash Interest
3.0x
3.1x
2.9x
2.8x
2.5x
2.0x
2.0x
1.8x
1.8x
1997
1998
2.1x
2.0x
1.9x
1.7x
1.0x
9
1999
2000
Source: S&P Leveraged Buyout Review
2001
2002
2003
2004
2005
2006
2007
Default Rates Have Remained Low Over
the Past Three Years
Percentage of Outstanding Leveraged Loans
in Default or Bankruptcy
9.9% 10.0%
10.0%
8.0%
7.4%
7.0%
6.0%
4.0%
3.6%
2.6%
1.0% 1.0%
10
0.6% 1.0%
Source: S&P LCD
YE
20
06
YE
20
05
YE
20
04
YE
20
03
YE
20
02
YE
20
01
YE
20
00
YE
19
99
YE
19
98
YE
19
97
0.0%
YE
19
96
0.0%
1.9%
2/ 8
/2 0
08
2.0%
Avg.
3.80%
YE
20
07
4.0%
And Remain Below Levels Seen During
Past Market Downturns

Leveraged Loan Default Rates During Recent Market
Downturns:
Historical Correction
Year
Default Rate
Russian Default / LTCM
1998
1.5%
Tech. / Telecom Meltdown
2000
7.0%
9/11 and Recession
2001
9.9%
Corporate Defaults
2002
10.0%
Current
1.0%
vs.
Credit Crunch
11
Source: Morgan Stanley
But the Trading Levels of Many LBO
Debt Deals Suggest Defaults are Likely

A Spread vs. Treasuries of Above 1,000 Indicates
Significant Distress
Bond
G
G
R
F
U
H
C
A
M
D
I
12
Face Value ($MM)
2,500
2,000
1,700
1,598
1,500
1,000
825
800
750
725
700
Source: Merrill Lynch High Yield Master II Index
Type
senior
senior
senior
sub
senior
senior
senior
senior
senior
sub
senior
Price
92.90
86.71
70.25
70.75
70.50
60.25
81.00
80.00
86.00
81.75
64.25
Spread
T+1,002
T+1,045
T+1,587
T+1,303
T+1,389
T+1,134
T+1,222
T+1,057
T+1,004
T+1,208
T+1,342
3. What is Going to Happen to All of the
Buyout Debt Still Held by the Major
Syndicating Banks?
13
A Massive Backlog Remains

Approximately $200 billion of leveraged loans are still
sitting on banks’ balance sheets


14
This represents a decrease of only $75 billion from last year’s
peak
Every bank is affected
Bank
Bear Stearns
Exposure
$2.5 billion
Goldman Sachs
$26.0 billion
Lehman Brothers
$23.8 billion
Merrill Lynch
$19.0 billion
Morgan Stanley
$20.0 billion
Citigroup
$43.0 billion
J.P. Morgan
$26.4 billion
Bank of America
$12.0 billion
UBS
$11.4 billion
Wachovia
$9.1 billion
Sources: The Wall Street Journal, Morgan Stanley
4. What Areas Will PE Firms Pursue to
Achieve the Types of Returns Sought by
Their Investors?
15
PE Firms Will Invest More in Emerging
Markets

Emerging Market Fundraising Has Grown Exponentially
Emerging Asia ($Bn)
CEE/Russia ($Bn)
28.7
15.5
2.2
2.8
2003
2004
2005
14.6
19.4
2006
2007
0.5
0.8
2003
2004
Latin America ($Bn)
2.9
3.3
2005
2006
Middle East & Africa ($Bn)
4.4
11.4
7.9
2.7
0.4
2003
16
0.7
2004
Source: EMPEA
1.3
2005
2006
2007
2007
1.4
1.7
2003
2004
2.7
2005
2006
2007
PE Firms Will Invest More in Emerging
Markets

As Has Deal Volume
Emerging Asia ($Bn)
51.1
CEE/Russia ($Bn)
54.5
10.5
27.3
5.3
21.4
9.0
11.1
2003
2004
27.3
2005
2006
1H 2007
4.0
2.6
2.2
1.6
2003
2004
2005
Latin America ($Bn)
5.3
2006
Middle East & Africa ($Bn)
5.9
4.1
17
0.1
0.2
0.6
2003
2004
2005
Source: Morgan Stanley, Thomson
32.2
24.9
2.9
2.9
2006
1H 2007
2007
9.6
1.9
2.9
2003
2004
2005
16.1
16.1
2006
2007
PE Firms Will Invest More in Emerging
Markets
18

A growing percentage of global private equity activity
is dedicated to Emerging Markets

In 2001, they accounted for 4.5% of private equity
fundraising and 3.3% of deal volume

In 2007, they accounted for 15.9% of fundraising

In the first half of 2007, they accounted for 7.0% of global LBO
deal volume
Source: Morgan Stanley, Thomson
Private Equity Firms Will Make More
Minority Investments

Private equity firms have increased their commitments
to non-control investments:
Period

Deal Volume ($Bn)
1H 2007
252
25.0
2H 2007
289
31.0
Year-to-Date
84
5.8
In the past six months, private equity firms have made
large minority investments in companies including

19
# of Deals
Sprint Nextel, NC Numericable, MBIA, Global Hyatt, Antero
Resources, Galaxy Entertainments, MoneyGram International,
Legacy Hospital Partners, and Bharti Infratel
Source: Dealogic
And They Will Commit More Capital to
Distressed Investments
Distressed Debt Fundraising Anticipating Debt Maturity
Schedule:

Distressed Debt / Restructuring Fundraising
Below Investment Grade Debt
$225
$20
$175
$15
$125
$10
$75
$5
$0
$25
'02
20
'04
'06
1H07
'08
Source: Private Equity Analyst, data as of 6/30/07; Fitch Ratings, data as of July 2007
'10
($ B of Debt Maturing)
($ B of Distressed Fundraising)
$25
5. Should Investors in PE Expect Higher or
Lower Rates of Return?
21
Top Quartile PE Returns Are Unrivalled
Top Quartile US Buyout Returns
IRR %
Top Quartile U.S.
Buyout
Top Quartile >$2Bn
18.2%
S&P 500
5.7%
NASDAQ
0%
28.5%
20.3%
7.7%
12.2%
6.1%
22.1%
18.4%
8.7%
5.4%
DJIA
10%
19.9%
20%
10-year
22
32.1%
20.4%
21.8%
5-year
Source: Thomson Venture Economics
Note: PE data as of 30 June 2007; Bloomberg, market data as of 30 June 2007
30%
1-year
40%
Top Quartile PE Returns Are Unrivalled
Top Quartile European Buyout Returns
78.6%
Top Quartile
Eu. Buyout
27.6%
37.0%
13.0%
FTSE 100
7.3%
3.5%
32.5%
CAC-40
10.4%
7.6%
1-year
23
5-year
10-year
Source: Thomson Venture Economics
Note: PE data as of 30 June 2007; Bloomberg, market data as of 30 June 2007
6. Is Now the Right Time for Investors to
Pursue Private Equity Investments?
24
PE Funds Raised During Times of
Market Distress Generally Perform Well

Private equity investments have produced healthy
returns during each of the three most recent global
economic slowdowns
Top Quartile Private Equity IRRs by Vintage
25
United States
Europe
1980
1981
1982
21.6%
14.8%
9.1%
11.3%
9.2%
15.1%
1990
1991
19.5%
25.5%
18.8%
17.4%
2001
2002
15.3%
16.0%
3.4%
13.5%
Source: Thomson Venture Expert
Note: IRRs are cumulative and are calculated from inception to 9/30/07
7. Will Regulators and Legislators Continue
to Seek Changes in PE Regulation, Oversight
and Taxation?
26
The PE Industry Faces Various
Legislative and Regulatory Proposals
27

Several countries are considering or have introduced
changes to the way that private equity returns are
taxed

The industry is under pressure to increase disclosure
and transparency

In some markets, foreign private equity firms are
subject to limitations on their investment activity
8. Will Sovereign Wealth Funds Replace PE
Firms as Principal Sources of Capital for
Corporations/Sellers Seeking New Capital?
28
PE Firms Pale in Comparison to the
Largest Sovereign Wealth Funds
Top Sovereign Wealth Funds
29
Rank
Country
Fund
Assets ($Bn)
#1
UAE
Abu Dhabi Investment Authority
Abu Dhabi Investment Council
875
#2
Norway
Government Pension Fund
328
#3
Saudi Arabia
No Designated Name
#4
Kuwait
Kuwait Investment Authority
General Reserve Fund
Future Generations Fund
#5
Singapore
Government Investment Corp.
Temasek Holdings
#6
China
#7
Active Investment Strategy?
X
> 300
300
> 200
X
China Investment Corp.
200
X
Russia
Oil Stabalization Fund
141
#8
Hong Kong
Monetary Exchange Fund
140
#9
Qatar
Qatar Investment Authority
60
#10
Australia
Australian Future Fund
60
Source: Citigroup
X
Sovereign Wealth Fund Investment
Activity Has Increased Dramatically
Sovereign Wealth Fund Deal Volume
Deal Volume ($Bn)
# of Deals
300
80
69.8
70
250
60
50
200
+ 1,151%
44.2
150
40
30
20
10
100
11.4
11.0
6.8
9.4
13.0
16.8
7.6
5.6
50
7.1
0
0
1997
1998
1999
2000
2001
Number of Deals
Value of Deals
30
Sources: World Economic Forum, Thomson Financial
2002
2003
2004
2005
2006
2007
But These Investments Still Represent
A Tiny Proportion of Total M&A Activity
Breakdown of Global M&A Activity ($Bn)
4,500
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
1997
1998
1999
2000
2001
Sovereign Wealth Funds
31
Sources: World Economic Forum, Thomson Financial
2002
2003
Private Equity
2004
2005
Strategic
2006
2007
Sovereign Wealth Funds and PE Firms
Are Forming a Productive Partnership

Sovereign wealth funds have purchased substantial
equity stakes in several alternative asset managers

China Investment Corp. invested $3 billion in Blackstone

Abu Dhabi’s Mubadala invested $1.4 billion in Carlyle

Dubai International Capital invested 1.3 billion in Och-Ziff

They are among the private equity industry’s largest
individual investors

In the future, sovereign wealth funds and private
equity firms are likely to pursue large investment
opportunities through joint ventures

32
Sovereign wealth funds will benefit from PE firms’ deep pools
of investment talent and deal expertise
9. Can the PE Industry Improve its Image
with the Public, Media, Governments,
Unions, Environmental and Consumer
Groups?
33
Private Equity’s Image Could be Better
A Backlash Against
Private Equity
Grumbling by unions over
post-deal job cuts has
escalated into a public outcry
– Business Week
Gluttons at the Gate
Private equity are using slick new tricks to
gorge on corporate assets. A story of excess
– Business Week
34
10. Is PE's Future Going to Be Better, Bigger,
and Stronger than Before, Or Have We
Already Seen the High-water Mark?
35
It’s Always Darkest Just Before Dawn

As before, deal volume will rebound and yesterday’s
records will be left far behind
Global LBO Activity
Deal Volume ($Bn)
# of Deals
800
670
700
600
715
2,500
2,000
CAGR: 31%
500
1,500
400
300
247
200
100
0
28
1995
31
Source: Dealogic
65
102
65
110
1,000
142
500
0
1996
# of Deals
Deal Volume
36
54
112
291
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
What I Was Supposed to Talk About:
“Giving Private Equity a Positive Image: Why
is there such Disparity Between the Public’s
Perception of the Industry and the
Industry’s Perception of Itself, and What can
be done to bring these Views into
Alignment”
37
The Current Situation
38
Perception of the Industry within
the Industry
Perception of the Industry outside
the Industry
Improved operation of companies
Destroyed Jobs
Prevented job losses; created jobs
Relocated Facilities Overseas
Improved Economies
Focused Only on Short-Term Profits
Created High Returns for
Investors/Pension Funds
Left Companies in Worse Shape
Paid Large Amount of Taxes
Made Too Much Money for PE
Professionals
Created an Industry
Insufficient Level of Taxes Paid
Why the Disparity in Perceptions?
39

Industry Focused for Long Time Principally on Returns

Industry Spent Little Time Explaining its Actions to
those Outside of Investor Base

Industry Lacked Data to Support its Views

No Industry Vehicle for Long Time

Other Problems of Industry Critics/Convenient and
Attractive Target
What Can the Industry Do to Improve
Its Image?
40

Continue to Produce Hard Data

Engage Industry Critics in Debate/Discussion

Consider Factors Other than Just Returns When
Assessing/Overseeing Investments

Involve Portfolio Companies Directly in the Effort

Enhance Transparency/Public Focus

Recognize that Some Changes Can and Should Occur
Ten Leading Questions Facing the
Private Equity World
David Rubenstein
Co-founder & Managing Director
41
February 27, 2008