1

Ten Key Questions Facing the Ten Key Questions Facing the Private Equity WorldPrivate Equity World

David RubensteinDavid Rubenstein

Co-founder & Managing Co-founder & Managing Director Director

February 27, 2008 February 27, 2008

3

1. Will Leverage for Buyouts Return 1. Will Leverage for Buyouts Return in Time for PE Investors and in Time for PE Investors and

Professionals to Stay with the Professionals to Stay with the Industry?Industry?

4

189.0

121.5

64.5

47.1

20.111.19.8

22.330.230.8

18.617.8

0

50

100

150

200

Leveraged Loan Volumes Will Leveraged Loan Volumes Will Recover Recover US Leveraged Loan Volumes Bounced Back after US Leveraged Loan Volumes Bounced Back after

the Downturn of 2000-2001the Downturn of 2000-2001

1996 1997 1998 1999 2000 2001 20042003 2005 20062002 2007

US Buyout Leveraged Loan Volume ($Bn)

+ 1,929%

Source: S&P Leveraged Buyout Review Source: S&P Leveraged Buyout Review

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Leveraged Loan Volumes Will Leveraged Loan Volumes Will Recover Recover While European Issuance has Grown Every Year While European Issuance has Grown Every Year

Since 1999Since 1999European Buyout Leveraged Loan Volume (€Bn)

Source: S&P LCDSource: S&P LCD

140.0

115.8102.9

44.4

29.528.424.718.815.3

0

50

100

150

2005 20062001 2002 20072000 20031999 2004

6

But This Will Not Happen But This Will Not Happen Overnight Overnight In the US, it took roughly three years for In the US, it took roughly three years for

leveraged loan volumes to match their previous leveraged loan volumes to match their previous highs after 2000highs after 2000

And those three years were challenging for And those three years were challenging for private equity investorsprivate equity investors In 2001 and 2002, US leveraged loan issuance fell to In 2001 and 2002, US leveraged loan issuance fell to

approximately 1/3 of its 1998 total approximately 1/3 of its 1998 total

But when the recovery came, it exceeded all But when the recovery came, it exceeded all expectationsexpectations Leveraged loan issuance more than doubled between Leveraged loan issuance more than doubled between

2002 and 2004 and again between 2004 and 20062002 and 2004 and again between 2004 and 2006 Issuance jumped 20x between 2001 and 2007Issuance jumped 20x between 2001 and 2007

Source: S&P Leveraged Buyout Review Source: S&P Leveraged Buyout Review

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2. Are There Going to be Major 2. Are There Going to be Major Defaults from Buyouts Completed Defaults from Buyouts Completed

within the "Golden Age"?within the "Golden Age"?

8

Leverage Levels Are at Leverage Levels Are at Historical Highs Historical Highs

5.7x

5.4x

4.7x

4.2x4.1x

4.0x

4.6x4.8x

5.3x5.4x

6.2x

3.0x

4.0x

5.0x

6.0x

19971997 1999199919981998 200220022001200120002000 2007200720062006200520052004200420032003

Average Large LBO Leverage Multiples (Debt/EBITDA)

Source: S&P Leveraged Buyout ReviewSource: S&P Leveraged Buyout ReviewNote: Includes issuers with EBITDA of $50MM or more Note: Includes issuers with EBITDA of $50MM or more

9

And Credit Ratios Are Depressed And Credit Ratios Are Depressed

1.8x 1.8x

2.0x1.9x

2.5x

3.1x2.9x

2.8x

2.1x

2.0x

1.7x

1.0x

2.0x

3.0x

20042004 200520052003200319971997 20062006 2007200719981998 19991999 20002000 20012001 20022002

(EBITDA – Capex) / Cash Interest

Source: S&P Leveraged Buyout Review Source: S&P Leveraged Buyout Review

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1.0%0.6%

1.9%

3.6%2.6%

7.4%

10.0%9.9%

7.0%

4.0%

1.0%1.0%0.0%0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

Default Rates Have Remained Default Rates Have Remained Low Over the Past Three Years Low Over the Past Three Years

Percentage of Outstanding Leveraged Loans in Default or Bankruptcy

Source: S&P LCD Source: S&P LCD

Avg. 3.80%

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And Remain Below Levels Seen And Remain Below Levels Seen During Past Market Downturns During Past Market Downturns Leveraged Loan Default Rates During Recent Leveraged Loan Default Rates During Recent

Market Downturns: 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%

vs.

Credit Crunch Current 1.0%

Source: Morgan Stanley Source: Morgan Stanley

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But the Trading Levels of Many But the Trading Levels of Many LBO Debt Deals Suggest LBO Debt Deals Suggest Defaults are Likely Defaults are Likely A Spread vs. Treasuries of Above 1,000 Indicates A Spread vs. Treasuries of Above 1,000 Indicates

Significant Distress Significant Distress

Source: Merrill Lynch High Yield Master II Source: Merrill Lynch High Yield Master II Index Index

Bond Face Value ($MM) Type Price Spread G 2,500 senior 92.90 T+1,002

G 2,000 senior 86.71 T+1,045

R 1,700 senior 70.25 T+1,587

F 1,598 sub 70.75 T+1,303

U 1,500 senior 70.50 T+1,389

H 1,000 senior 60.25 T+1,134

C 825 senior 81.00 T+1,222

A 800 senior 80.00 T+1,057

M 750 senior 86.00 T+1,004

D 725 sub 81.75 T+1,208

I 700 senior 64.25 T+1,342

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3. What is Going to Happen to All of 3. What is Going to Happen to All of the Buyout Debt Still Held by the the Buyout Debt Still Held by the

Major Syndicating Banks?Major Syndicating Banks?

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Bank Exposure

Bear Stearns $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

A Massive Backlog Remains A Massive Backlog Remains

Approximately $200 billion of leveraged loans are Approximately $200 billion of leveraged loans are still sitting on banks’ balance sheets still sitting on banks’ balance sheets This represents a decrease of only $75 billion from last This represents a decrease of only $75 billion from last

year’s peak year’s peak

Every bank is affectedEvery bank is affected

Sources: The Wall Street Journal, Morgan Stanley Sources: The Wall Street Journal, Morgan Stanley

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4. What Areas Will PE Firms Pursue 4. What Areas Will PE Firms Pursue to Achieve the Types of Returns to Achieve the Types of Returns

Sought by Their Investors?Sought by Their Investors?

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PE Firms Will Invest More in PE Firms Will Invest More in Emerging Markets Emerging Markets

Emerging Market Fundraising Has Grown Emerging Market Fundraising Has Grown

Exponentially Exponentially

2007200620042003 2005

2.2 2.8

15.519.4

28.7Emerging Asia ($Bn)

200520042003 2006 2007

0.5 0.82.9 3.3

14.6CEE/Russia ($Bn)

20062003 2004 2005 2007

0.4 0.71.3

2.7

4.4Latin America ($Bn)

2003 2004 2005 2006 2007

1.4 1.7 2.7

7.9

11.4Middle East & Africa

($Bn)

Source: EMPEASource: EMPEA

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PE Firms Will Invest More in PE Firms Will Invest More in Emerging Markets Emerging Markets

As Has Deal Volume As Has Deal Volume

Emerging Asia ($Bn) CEE/Russia ($Bn)

Latin America ($Bn) Middle East & Africa ($Bn)

Source: Morgan Stanley, Thomson Source: Morgan Stanley, Thomson

21.411.19.0 27.3

51.1

27.3

2003 2004 2005 2006

54.5

1H 2007

2.6 2.2 1.6

4.0

5.3

5.3

10.5

1H 2007

2003 2004 2005 2006

2.9

4.1

0.60.20.1

2.9

2003 2004 2005 2007

5.9

2006

16.11.9 2.9

9.6

24.916.1

2003

32.2

2005 2006 20072004

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PE Firms Will Invest More in PE Firms Will Invest More in Emerging Markets Emerging Markets A growing percentage of global private equity A growing percentage of global private equity

activity is dedicated to Emerging Markets activity is dedicated to Emerging Markets

In 2001, they accounted for 4.5% of private In 2001, they accounted for 4.5% of private equity fundraising and 3.3% of deal volume equity fundraising and 3.3% of deal volume In 2007, they accounted for 15.9% of fundraising In 2007, they accounted for 15.9% of fundraising In the first half of 2007, they accounted for 7.0% of In the first half of 2007, they accounted for 7.0% of

global LBO deal volume global LBO deal volume

Source: Morgan Stanley, Thomson Source: Morgan Stanley, Thomson

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Private Equity Firms Will Make Private Equity Firms Will Make More Minority Investments More Minority Investments Private equity firms have increased their Private equity firms have increased their

commitments to non-control investments: commitments to non-control investments:

Source: Dealogic Source: Dealogic

Period # of Deals 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 In the past six months, private equity firms have made large minority investments in companies made large minority investments in companies includingincluding Sprint Nextel, NC Numericable, MBIA, Global Hyatt, Sprint Nextel, NC Numericable, MBIA, Global Hyatt,

Antero Resources, Galaxy Entertainments, MoneyGram Antero Resources, Galaxy Entertainments, MoneyGram International, Legacy Hospital Partners, and Bharti International, Legacy Hospital Partners, and Bharti Infratel Infratel

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And They Will Commit More And They Will Commit More Capital to Distressed Capital to Distressed Investments Investments

$0

$5

$10

$15

$20

$25

'02 '04 '06 1H07 '08 '10

($ B

of Dis

tress

ed F

undra

isin

g)

$25

$75

$125

$175

$225

($ B

of Debt

Mat

uri

ng)

Distressed Debt / Restructuring Fundraising

Below Investment Grade Debt

Distressed Debt Fundraising Anticipating Debt Distressed Debt Fundraising Anticipating Debt Maturity Schedule:Maturity Schedule:

Source: Private Equity Analyst,Source: Private Equity Analyst, data as of 6/30/07; Fitch Ratings, data as of July 2007 data as of 6/30/07; Fitch Ratings, data as of July 2007

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5. Should Investors in PE Expect 5. Should Investors in PE Expect Higher or Lower Rates of Return?Higher or Lower Rates of Return?

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Top Quartile PE Returns Are Top Quartile PE Returns Are Unrivalled Unrivalled

Source: Thomson Venture EconomicsSource: Thomson Venture EconomicsNote: PE data as of 30 June 2007; Bloomberg, market data as of 30 June 2007Note: PE data as of 30 June 2007; Bloomberg, market data as of 30 June 2007

Top Quartile US Buyout Returns

IRR %IRR %

6.1%

5.7%

5.4%

18.2%

21.8%

12.2%

7.7%

8.7%

22.1%

20.4%

19.9%

20.3%

18.4%

28.5%

32.1%

0% 10% 20% 30% 40%

NASDAQ

DJIA

S&P 500

Top Quartile >$2Bn

Top Quartile U.S.

Buyout

10-year 5-year 1-year

23

Top Quartile PE Returns Are Top Quartile PE Returns Are Unrivalled Unrivalled

Source: Thomson Venture EconomicsSource: Thomson Venture EconomicsNote: PE data as of 30 June 2007; Bloomberg, market data as of 30 June 2007Note: PE data as of 30 June 2007; Bloomberg, market data as of 30 June 2007

Top Quartile European Buyout Returns

78.6%

13.0%

32.5%

27.6%

7.3%

10.4%

37.0%

3.5%

7.6%

1-year 10-year5-year

Top Quartile Eu. Buyout

FTSE 100

CAC-40

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6. Is Now the Right Time for 6. Is Now the Right Time for Investors to Pursue Private Equity Investors to Pursue Private Equity

Investments?Investments?

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PE Funds Raised During Times of PE Funds Raised During Times of Market Distress Generally Market Distress Generally Perform WellPerform Well Private equity investments have produced Private equity investments have produced

healthy returns during each of the three most healthy returns during each of the three most recent global economic slowdowns recent global economic slowdowns

Top Quartile Private Equity IRRs by Vintage

United States Europe

1980 21.6% 11.3%1981 14.8% 9.2%1982 9.1% 15.1%

1990 19.5% 18.8%1991 25.5% 17.4%

2001 15.3% 3.4%2002 16.0% 13.5%

Source: Thomson Venture ExpertSource: Thomson Venture ExpertNote: IRRs are cumulative and are calculated from inception to 9/30/07 Note: IRRs are cumulative and are calculated from inception to 9/30/07

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7. Will Regulators and Legislators 7. Will Regulators and Legislators Continue to Seek Changes in PE Continue to Seek Changes in PE

Regulation, Oversight and Taxation?Regulation, Oversight and Taxation?

27

The PE Industry Faces Various The PE Industry Faces Various Legislative and Regulatory Legislative and Regulatory Proposals Proposals Several countries are considering or have Several countries are considering or have

introduced changes to the way that private introduced changes to the way that private equity returns are taxedequity returns are taxed

The industry is under pressure to increase The industry is under pressure to increase disclosure and transparencydisclosure and transparency

In some markets, foreign private equity firms are In some markets, foreign private equity firms are subject to limitations on their investment activitysubject to limitations on their investment activity

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8. Will Sovereign Wealth Funds 8. Will Sovereign Wealth Funds Replace PE Firms as Principal Replace PE Firms as Principal

Sources of Capital for Sources of Capital for Corporations/Sellers Seeking New Corporations/Sellers Seeking New

Capital?Capital?

29

PE Firms Pale in Comparison to PE Firms Pale in Comparison to the Largest Sovereign Wealth the Largest Sovereign Wealth Funds Funds

Rank Country Fund Assets ($Bn) Active Investment Strategy?

#1 UAE Abu Dhabi Investment AuthorityAbu Dhabi Investment Council

875 X

#2 Norway Government Pension Fund 328

#3 Saudi Arabia No Designated Name > 300

#4 Kuwait Kuwait Investment AuthorityGeneral Reserve FundFuture Generations Fund

300

#5 Singapore Government Investment Corp.Temasek Holdings

> 200 X

#6 China China Investment Corp. 200 X

#7 Russia Oil Stabalization Fund 141

#8 Hong Kong Monetary Exchange Fund 140

#9 Qatar Qatar Investment Authority 60 X

#10 Australia Australian Future Fund 60

Top Sovereign Wealth Funds

Source: CitigroupSource: Citigroup

30

Sovereign Wealth Fund Sovereign Wealth Fund Investment Activity Has Investment Activity Has Increased Dramatically Increased Dramatically

69.8

44.2

16.8

7.15.67.613.0

9.46.811.011.4

0

10

20

30

40

50

60

70

80

0

50

100

150

200

250

300

Value of Deals

2007

Number of Deals

2006

Deal Volume ($Bn) # of Deals

1997 1998 1999 2000 2001 2002 20042003 2005

+ 1,151%

Sovereign Wealth Fund Deal Volume

Sources: World Economic Forum, Thomson Financial Sources: World Economic Forum, Thomson Financial

31

But These Investments Still But These Investments Still Represent A Tiny Proportion of Represent A Tiny Proportion of Total M&A ActivityTotal M&A Activity

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

20022001200019991998 200720062005200420031997

Sovereign Wealth Funds StrategicPrivate Equity

Breakdown of Global M&A Activity ($Bn)

Sources: World Economic Forum, Thomson Financial Sources: World Economic Forum, Thomson Financial

32

Sovereign Wealth Funds and PE Sovereign Wealth Funds and PE Firms Are Forming a Productive Firms Are Forming a Productive Partnership Partnership Sovereign wealth funds have purchased Sovereign wealth funds have purchased

substantial equity stakes in several alternative substantial equity stakes in several alternative asset managersasset managers China Investment Corp. invested $3 billion in BlackstoneChina Investment Corp. invested $3 billion in Blackstone Abu Dhabi’s Mubadala invested $1.4 billion in Carlyle Abu Dhabi’s Mubadala invested $1.4 billion in Carlyle Dubai International Capital invested 1.3 billion in Och-Dubai International Capital invested 1.3 billion in Och-

ZiffZiff

They are among the private equity industry’s They are among the private equity industry’s largest individual investors largest individual investors

In the future, sovereign wealth funds and private In the future, sovereign wealth funds and private equity firms are likely to pursue large investment equity firms are likely to pursue large investment opportunities through joint ventures opportunities through joint ventures Sovereign wealth funds will benefit from PE firms’ deep Sovereign wealth funds will benefit from PE firms’ deep

pools of investment talent and deal expertise pools of investment talent and deal expertise

33

9. Can the PE Industry Improve its 9. Can the PE Industry Improve its Image with the Public, Media, Image with the Public, Media,

Governments, Unions, Environmental Governments, Unions, Environmental and Consumer Groups?and Consumer Groups?

34

Private Equity’s Image Could be Private Equity’s Image Could be Better Better

Gluttons at the GatePrivate equity are using slick new tricks to gorge on corporate assets. A story of excess

– Business Week

A Backlash Against Private EquityGrumbling by unions over post-deal job cuts has escalated into a public outcry

– Business Week

35

10. Is PE's Future Going to Be Better, 10. Is PE's Future Going to Be Better, Bigger, and Stronger than Before, Or Bigger, and Stronger than Before, Or

Have We Already Seen the High-Have We Already Seen the High-water Mark?water Mark?

36

It’s Always Darkest Just Before It’s Always Darkest Just Before Dawn Dawn As before, deal volume will rebound and As before, deal volume will rebound and

yesterday’s records will be left far behind yesterday’s records will be left far behind

543128

715670

291247

14211065

10211265

0

100

200

300

400

500

600

700

800

0

500

1,000

1,500

2,000

2,500

2007200620052004200320022001200019991998

# of DealsDeal Volume ($Bn)

1997

Deal Volume

# of Deals

19961995

Global LBO Activity

Source: DealogicSource: Dealogic

CAGR: 31%

37

What I Was Supposed to Talk About: What I Was Supposed to Talk About:

“Giving Private Equity a Positive “Giving Private Equity a Positive Image: Why is there such Disparity Image: Why is there such Disparity Between the Public’s Perception of Between the Public’s Perception of the Industry and the Industry’s the Industry and the Industry’s Perception of Itself, and What can be Perception of Itself, and What can be done to bring these Views into done to bring these Views into Alignment” Alignment”

38

The Current Situation The Current Situation

Perception of the Industry Perception of the Industry outside the Industryoutside the Industry

Destroyed JobsDestroyed Jobs

Relocated Facilities OverseasRelocated Facilities Overseas

Focused Only on Short-Term Focused Only on Short-Term ProfitsProfits

Left Companies in Worse ShapeLeft Companies in Worse Shape

Made Too Much Money for PE Made Too Much Money for PE ProfessionalsProfessionals

Insufficient Level of Taxes PaidInsufficient Level of Taxes Paid

Perception of the Industry Perception of the Industry within the Industrywithin the Industry

Improved operation of Improved operation of companiescompanies

Prevented job losses; created Prevented job losses; created jobsjobs

Improved EconomiesImproved Economies

Created High Returns for Created High Returns for Investors/Pension FundsInvestors/Pension Funds

Paid Large Amount of TaxesPaid Large Amount of Taxes

Created an IndustryCreated an Industry

39

Why the Disparity in Why the Disparity in Perceptions? Perceptions? Industry Focused for Long Time Principally on Industry Focused for Long Time Principally on

ReturnsReturns

Industry Spent Little Time Explaining its Actions Industry Spent Little Time Explaining its Actions to those Outside of Investor Baseto those Outside of Investor Base

Industry Lacked Data to Support its ViewsIndustry Lacked Data to Support its Views

No Industry Vehicle for Long TimeNo Industry Vehicle for Long Time

Other Problems of Industry Critics/Convenient Other Problems of Industry Critics/Convenient and Attractive Targetand Attractive Target

40

What Can the Industry Do to What Can the Industry Do to Improve Its Image? Improve Its Image? Continue to Produce Hard DataContinue to Produce Hard Data

Engage Industry Critics in Debate/Discussion Engage Industry Critics in Debate/Discussion

Consider Factors Other than Just Returns When Consider Factors Other than Just Returns When Assessing/Overseeing InvestmentsAssessing/Overseeing Investments

Involve Portfolio Companies Directly in the EffortInvolve Portfolio Companies Directly in the Effort

Enhance Transparency/Public FocusEnhance Transparency/Public Focus

Recognize that Some Changes Can and Should Recognize that Some Changes Can and Should OccurOccur

41

Ten Leading Questions Facing Ten Leading Questions Facing the Private Equity Worldthe Private Equity World

David RubensteinDavid Rubenstein

Co-founder & Managing Co-founder & Managing Director Director

February 27, 2008 February 27, 2008