JULY 2009
PRESENTATION PREPARED FOR
 CFA Hawaii Institutional
Investor Conference
Confidential and Proprietary
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Confidential and Proprietary
AGENDA

Introduction

Private Equity Market
 Then and Now
 Secondary Investing
 Outlook and Activity

Hedge Fund Market
 The Case for Hedge Funds
 Process Breakdown
 Key Trends
NOTE: The information contained in this presentation is proprietary and confidential in nature and must not be disclosed to any third party except to the extent required under applicable law or as expressly
permitted pursuant to a written agreement with Pathway Capital Management, LLC.
©2009 Pathway Capital Management, LLC
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Confidential and Proprietary
PRIVATE EQUITY MARKET
THEN: 2003–2007
Private equity was...
“The New Kings of Capitalism”
 “In two decades, private-equity firms have moved from the outer
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fringe to the center of the capitalist system”
The Economist, November 27, 2004
“Going Private”
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 “Hotshot executives are fleeing the scrutiny of public
companies for the mad money of the private equity boom”
Business Week, February 27, 2006
“Blackstone IPO—Sign of the Times?”
 Ninth largest U.S. IPO of all time
Wall Street Journal, March 23, 2007
“Unprecedented Heights”

“PE Deal Volume and Funds Raised On Course to Hit New Highs”
Buyouts magazine, July 10, 2007
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PRIVATE EQUITY MARKET
THEN: 2003–2007
The 2003–2007 time period was marked by extraordinary capital activity and
the prominence of the private equity industry.
Economic Drivers
Private Equity Themes
 Low cost of capital
 The Club Deal
 Attractively priced assets (2002–2004)
 Public-to-Private Transactions
 Flexible Financing: Cov-Lite, PIK
 The Mega Deal
GP Activity
Private Equity Investor Mindset
 Record LBO volume & debt issuance
 Increased target allocations to private equity
 Robust fundraising
 Easy money to be made in buyouts
 Strong portfolio performance
 High confidence in superior return potential
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PRIVATE EQUITY MARKET
NOW: 2009-
The credit crisis has dramatically altered the private equity landscape.
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Economic Drivers
Private Equity Themes
 Challenging credit markets
 Larger equity contributions
 Secondaries & distressed strategies
“in favor”
 Purchase price multiples declining
 Flight to quality
 Greater alignment of interests
GP Activity
Private Equity Investor Mindset
 Preservation of value & operational
initiatives
 Investors dealing with liquidity issues
 Debt exchange offers and debt
buybacks
 Deal activity is slow
 Investors over-allocated to PE
 Slower fundraising process
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PRIVATE EQUITY MARKET
SECONDARY INVESTING
Yesterday
Secondary Market
Timing
There has been record fundraising over the past few years to capture the anticipated expansion
of investment opportunities resulting from “liquidity” sellers.
What Happened
 Transaction volume has not matched expectations due to valuation difficulties and disparities.
 This sector is not immune to financial market difficulty—2008 quarter-over-quarter secondary pricing declines were in
nearly perfect correlation with the S&P.
 Bid/ask spreads have narrowed as a result of low transaction activity.
 A number of prominent dedicated secondary funds that were early movers into the market have been burned and are now
extremely cautious.
 Sellers are unhappy with bid pricing and have become wary. Some have aborted portfolio sales—Harvard Management,
Columbia University.
 Underwriting rates have risen substantially—from the low teens in 2007 to the 20% range in the second half of 2008—
reflecting the riskiness of this market.
Important Considerations
 Deep discounts on assets will persist until audited financials are released for 2008. Further declines may occur as FMV is
reconciled by the GPs.
 Secondary investing is not a “gimme” as promoted. The basic premise of shortening return horizons and gaining higher
near-term IRRs has been shaken, if not discredited.
 Better to focus on GP quality and selectively target specific opportunities in the primary or secondary markets.
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PRIVATE EQUITY MARKET
SECONDARY INVESTING
Secondary Market Private Equity Funds Raised
More than $70 billion raised since 2004
($ billions)
NOTE: Based on data from Private Equity Intelligence, Thomson Financial VentureXpert, and UBS Investment Bank estimates.
a
Lexington Capital Partners IV Closed commitments of $2.5 billion in 2006 and $1.3 billion in 2007.
b
Represents the closed commitments in 2008.
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PRIVATE EQUITY MARKET
SECONDARY INVESTING
Secondary Pricing—% of NAV
Pricing trends are dramatically lower as a result of the credit crunch and the decline in public markets.
 Rise of “Mega-Deals”
There remains a large disparity between buyer and seller expectations.

Highest Amount of
Capital Raised by Private
Equity Funds

Private Equity Garnered
Larger Share of Overall
M&A Markets

Record-Setting
Deal Volume
SOURCE: Cogent Partners.
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PRIVATE EQUITY MARKET
OUTLOOK & ACTIVITY
Outlook
Yesterday
 Private equity has entered into a new investment cycle, characterized by more-rational capital
structures, lower purchase prices, and a greater reliance on operational management skills than on
financial engineering. Established and proven general partners that have been through difficult
economic cycles are best-positioned to thrive in the prospective market environment.
 This period will serve to differentiate the highest-quality managers to a greater degree than in the
recent past. Median-performing GPs will find fundraising market place very difficult.
 Buyouts: The best buyout managers are adapting to the changed environment to take advantage
of attractive opportunities made available by the current financial and economic dislocation.




Greater focus on smaller transactions, growth equity investments, and build-up opportunities
Structured equity investments
Restructuring opportunities
Discounted leveraged loans
 Venture Capital: Technological refinement and innovation will continue to drive investment
opportunities, but large disparity in performance among venture capital managers warrants
continued emphasis on selectivity.
 Attractive investment opportunities are beginning to emerge. Experienced managers with “dry
powder” to invest will be well positioned to take advantage of changing market conditions.
However, until the credit markets re-open, investment pace will be carefully managed.
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PRIVATE EQUITY MARKET
OUTLOOK & ACTIVITY
Buyout Performance in Post-Recessionary Years
U.S. buyout funds have historically shown superior performance in the two years following a U.S.
recession.
a
Venture Economics Final December 31, 2008, return benchmarks.
Bureau of Economic Analysis.
b
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Confidential and Proprietary
PRIVATE EQUITY MARKET
OUTLOOK & ACTIVITY
General partners are focused on managing their existing investments and in accessing emerging areas of
opportunities.
Existing Portfolio
Investment Opportunities
 Heavily Discounted Leveraged Loans & Bonds
 Equity-like returns for senior/secured positions
 Apply cost-cutting measures
 Evaluate capital expenditure plans
 Opportunistic Add-on Acquisitions
 Lower Purchase Prices
 Refocus on core businesses vs. new initiatives
 Average purchase price multiple in 2H08 was 8.8x Ebitda vs. 9.7x
Ebitda in 2007. Multiples are expected to decrease further.
 More-rational capital structures -lower leverage, higher equity
contribution rates
 Balance Sheet Adjustments
Debt exchange offers
Debt buybacks
Covenant amendments/equity cures
Debt refinancing/credit facility extensions/creative financing (fee
deferrals, annex funds, lower LP co-investment thresholds)
Venture Capital




 Evaluate Existing Portfolio Companies Critically
Distressed Debt
Acquisitions
 Operational Initiatives
 Relative Value Analysis of Existing Portfolio
 Restructuring/Distressed Investments > Rescue Capital
 Structured Equity (PIPEs, Preferred Equity Investments)
 Bar Has Been Raised for New and Follow-on Investments
 Lower Purchase Prices
 Which companies have the greatest chance of success?
 Rank portfolio company financing needs by priority
 Late-stage companies at early-stage prices
 Opportunistic cram-down financings
 Operational Initiatives
 Sectors of Interest/Emerging Sectors & Geographic Regions
 Conserve cash, reduce non-essential expenses, reduce
headcount
 Focus on reaching cash flow breakeven rather than growth
 Pharmaceuticals (drug pipeline needs driving industry consolidation),
clean technology, China/India, cloud computing
 Opportunity Set Has Increased Significantly in Past 12 Months
 Sell existing investments to reinvest in more-attractive opportunities
 Invest/Recycle Interest Income in More-Attractively Priced
Opportunities
 Add to Existing Positions on the Way Down If Confident in
Underwriting Case
 Gain control of restructuring process/reorganized equity
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 4.1% default rate in 2008, representing $430 billion in par value
 65% of high-yield bond market trading at >1,000 bps over U.S.
Treasuries >$300 billion in par value
 Severe Dislocation in Leveraged Loan Market
 Forced selling by CLOs and hedge funds have driven yields in loan
market to unprecedented levels
 Equity-like returns for senior/secured positions
Confidential and Proprietary
HEDGE FUND MARKET
THE CASE FOR HEDGE FUNDS
Reasons Why Institutions Will Increase Their Commitments to Hedge Funds
in the Coming Years
Diversification
 Opportunistic and diversified allocation, practiced by the best and brightest, make hedge funds attractive on a riskadjusted basis.
Capital Preservation and Risk Reduction
 Hedge funds are best-equipped to manage risk through hedged portfolio management.
Structural Change
 Regulatory developments, institutional preferences, and economic reality will result in more-attractive terms, more control,
and transparency for investors.
Industry Contraction
 The bigger get better (and bigger); the bad go away. Fewer participants means less efficient markets and, therefore,
better opportunities to generate alpha.
The Environment Requires Expertise
 Markets of change are best exploited by employing the expertise and execution capabilities offered by select, sectorspecialist hedge fund managers.
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Confidential and Proprietary
HEDGE FUND MARKET
THE CASE FOR HEDGE FUNDS
Long-Term, Risk-Adjusted Performance
There are a number of compelling reasons why allocations to hedge funds make sense. The first is
long-term performance.
Sharpe Ratio
SOURCE: PAAMCO and Bloomberg.
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Confidential and Proprietary
HEDGE FUND MARKET
THE CASE FOR HEDGE FUNDS
Long/Short vs. Long-Only Performance
Hedged portfolio management consistently outperforms long-only, and does so with substantially
lower risk.
 Through December 31, 2008, long/short equity portfolios had a standard deviation of 6.5%; the
S&P 500 had 14.5%.
SOURCE: PAAMCO and Bloomberg.
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Confidential and Proprietary
HEDGE FUND MARKET
PROCESS BREAKDOWN
Process Breakdown: What Ever Happened to Due Diligence?
Funds of Funds Invested with Madoff
Investor
Description
Amount of Exposure
Comment
Austin Capital Management
Fund of Funds Based in
Austin, Texas
$10,000,000
The exposure is about 7.5% of assets.
Bramdean Alternatives
An Asset Manager
$31,200,000
The exposure is about 9.5% of assets.
Fairfield Greenwich Advisors
An Investment
Management Firm
$7,500,000,000
Man Group PLC
A UK Hedge Fund
$360,000,000
Invested in funds directly and indirectly subadvised by Madoff Securities;
Madoff acted as broker-dealer for these funds. Madoff investment represents
1.5% of the company's funds under management for its RMF fund-of-funds
business and 0.5% of funds under management for Man Group itself, according
to a Dec. 15 disclosure. Man Group is considering taking legal action to recover
some of its investments.
Maxam Capital Management
A Fund of Funds Based in
Darien, Connecticut
$280,000,000
The fund reported a combined loss of $280 million on funds the firm had
invested in.
Meridian Capital Partners
Fund of Funds Based in
Albany, NY
$100,000,000
NA
Tremont Group Holdings
An Asset Management Firm
Union Bancaire Privée
Swiss Bank
$3,300,000,000
$700,000,000
More than half of Fairfield Greenwich's $14.1 billion in assets under
management, or about $7.5 billion, was connected to Madoff.
The investment firm is owned by OppenheimerFunds and Massachusetts
Mutual Life Insurance Co. Tremont's Rye Investment Management business
had $3.1 billion invested, and its Fund-of-Funds Group invested another $200
million. The loss is more than half of all assets overseen by Tremont.
Half of UBP's 22 funds of funds put at least some of their money into Madoffrelated investment vehicles, including one run by J. Ezra Merkin. The principal
fund, Dinvest Total Return, had about 3% of its more than $1 billion of assets in
Madoff-related funds. One fund of funds had as much as 6.9% of assets in
Madoff-related funds. The bank had most recently met with Madoff Nov. 25 as
part of an ongoing vetting process.
 Grosvenor Capital Management LLC, Arden Asset Management Inc., and EIM Management (USA) had
investments with Madoff but redeemed funds over the past few years.
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Confidential and Proprietary
HEDGE FUND MARKET
KEY TRENDS
Key Industry Trends
Concentration of Assets
 Investors will commit capital only to those managers viewed as having sustainable businesses.
Investors in the Driver’s Seat
 Investors focus increasingly on transparency and risk-management. Scrutiny on liquidity terms and
management fees.
Traditional Assumptions are Insufficient
 Realistic investment objectives with flexible and opportunistic allocations.
Institutionalization of the Industry Asset Base
 More stable asset base and more-mature operating platforms.
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Confidential and Proprietary