terra firma 2008 annual review

8/14/2019 Terra Firma 2008 Annual Review

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2 Portfolio Business Review 4 Terra Firmas FundsContents

3 Business & Financial Review 5 Contact Information1 Executive Summary


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4/115a unique perspective Terra Firma annual review 2008 1

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Contents

1 Executive Summary 2

L tt o th CeO 3about T F 7r v w & h ghl ghts o 2008 11Pl y ng ou p t n th cono c cov y 15Long-t l gn nt 16T nsp ncy nd d sclosu 17Outloo o 2009 19

2 Portfolio Business Review 21

ann ngton 24

aWaS 30D utsch ann ngton 36emi 42infn s 48Od on / UCi 54PNG 60T n & r st 66

3 TFCP Limited Business & Financial Review 72

St t gy 75V lu c t on 76Outloo 83r sou c s 84Bus n ss d sc pt on & nv on nt 90Co po t soc l spons b l ty 92Co po t gov n nc 96S n o n g nt un t on 98al gn nt o nt st 99r s s nd unc t nt s 100

4 Terra Firmas Funds 102

F n nc l n o t on 103Not s to th ccounts 105 5 Contact Information 110

2 Portfolio Business Review 4 Terra Firmas Funds




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1 e cut v Su y


3 Business & Financial Review 5 Contact Information



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letteR FRoM tHe Ceo

31 D c mb r 2008

I am delighted to present the second Annual Review o Terra Firma and itsport olio businesses.

In the time since our last Annual Review, the nancial world has changedbeyond recognition. Governments now own, or e ectively control, many o thebiggest nancial institutions on the planet. Some nancial groups are breakingapart, others are merging, and a ew have simply ceased to e ist. The dramaticworldwide decline in stock market values has destroyed more than ve years o growth in the value o listed investments. Nominal stock market valuations in theUK are e ectively back to those last seen in 1997, while real share values haveretreated to 1993 levels. Most Western countries are now in recession, and the keyquestion is whether this will develop into a global depression.

Over the last our years, I have e pressed great concern about the state o Western economies, how leveraged they were, and about our nancial systems.However, I did not oresee either the speed with which recent events would un oldor how systemic and deep the collapse would be.

During the last 10 years, un ortunately, virtually all governments, banks,consumers, commentators, economists and investors in the West adoptedthe same thesis justi ying a belie in perpetual economic growth. There wasa widespread conviction that the economic cycle had been tamed and thatdiversi cation and syndication could somehow eliminate the risk o economicbust. Meanwhile, i the West did need money, the new emerging economies o Asia and the oil rich economies o the Middle East would provide a bottomless pitwhich would bail the West out.

Much has been, and undoubtedly will be, written about the driving orces behindthe resulting e traordinary bubble, the subsequent implosion in the nancialsector, and its e ect on the real economy. One o the key questions is: what werethe causes behind the unprecedented levels o leverage that were allowed tobuild up? For Western economies, the period rom 2002 through to 2008 saw

many developed nations abandon sustainable scal rectitude or uninhibited,short-term prosperity. In the UK, regulators and shareholders acquiesced while simajor banks increased their aggregate reliance on wholesale, unsecured unding

rom 38 billion in 2003 to 498 billion in 2008 in order to nance increasinglyspeculative lending.

i hop you w ll g th t ou po t ol o

bus n ss s h v , to d t , w th d th fn nc lsto nd b ng n g d to d l v l st ngv lu to ou nv sto s nd ou y st hold s





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In retrospect, it is almost beyond belie that sophisticated, developed nationsput themselves in a position where they were so dependent on oreign unding.The easing o monetary policy clearly played a major role in encouraging banks,individuals and companies to borrow as debt became cheaper than ever be ore.However there were, I believe, two equally important contributory actors: rst,a lack o transparency; and second, inappropriate incentive schemes at many

nancial institutions. Leverage is particularly dangerous when it is masked inopaque structures, and many people simply did not know how dependent theWestern banking systems had become upon short-term oreign unding. Thisdanger was urther compounded as many key market players had power ulincentives to keep the illusion o perpetual motion going. Across the G-7countries, senior bank e ecutives, economists, regulators and politicians notonly loudly claimed credit or the new economic paradigm but also bene tedsubstantially rom it. In reality, the Great Moderation was merely a very largebubble waiting to burst.

Eighteen months ago, in order to be more like public companies, private equityin the United Kingdom was enjoined to become more open and to e plain to

stakeholders at large its activities and why it was bene cial to the overall economy.This initiative was entirely appropriate given that private equity rms purchase andcontrol businesses that a ect the lives o a wide range o stakeholders. Terra Firmaand other private equity groups continue to work hard to improve on this ront,and I hope you nd this Annual Review in ormative. However, it is now clear thatthe same task should have been given to a much wider group o companies in the

nancial world including those with public ling requirements. The truth is thatbanks and their activities, which most thought were o little interest to those outsidethe nancial community, have been shown to be o critical importance to all.

At the very least, the boards o directors and auditors o public companies shouldhave ensured that appropriate disclosure was provided to stakeholders. Theboards o private equity-owned businesses are typically made up o people whohave relevant sector e pertise and there ore understand the business they are

overseeing. The same cannot be said o some public companies particularlybanks where the members o the boards uni ormly have impeccable reputationsand world-class connections, but o ten lack the e pertise to oversee comple

nancial operations. Furthermore, going orward, we must surely increase theoverall degree and clarity o in ormation that public audited accounts provide.





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I also believe we have to return to a banking system where there is a divisionbetween commercial lending banks, which take deposits and are e ectivelyback-stopped by the Government, and investment banks, which take a varietyo signi cant risks in pursuit o ees and quick gains. The Glass-Steagall Act wasa sensible reaction to the 1930s depression, and it is a tragedy that the hubris o bankers, regulators and politicians resulted in its repeal. It needs to be reinstatedglobally as soon as possible, and backed by real regulatory teeth. Commercialbanks must get back to what they are meant to do, while those investment bankswho are entrepreneurial and inventive should continue to operate, but without ata payer-backed sa ety-net. We cannot a ord a nancial system where heads theinvestment bankers win and tails everybody loses.

Turning to compensation, better, longer-term structures, such as those thatare ound in private equity, would also have helped to prevent recent events.The short-term bonus culture o most nancial groups meant that manysenior e ecutives were incentivised to ignore or avoid longer-term risks, whilstenjoying e traordinary short-term gains. Simple share schemes are just asdangerous as yearly cash bonuses and have, perhaps, even greater dangers asthey push management teams to grow their business, year on year, regardlesso the risks. In this race or wealth, again, all too many parties became complicit.

Over the past several decades, government budgets and in the US, politicalcampaigns have been major bene ciaries o the short-term bonus culture.As income ta revenues soared, politicians were able to und pet projectswithout concern or the longer-term scal consequences. Now rueing theirunsustainable largesse, they have become nances harshest critics.

As I have argued publicly or several years, to be e ective, incentive structuresmust be long term in nature, and by long term I mean at least 5-10 years.Moreover, I am a strong proponent o clear, simple, ully-understood taand regulatory rules that encourage such orms o remuneration. In myopinion, there is no better way to nurture a good, sustainable entrepreneurialenvironment or business. Un ortunately, this is not what has been happeningin certain Western countries, in particular the UK, where the ever-increasingcomple ity and level o ta has resulted in non-economic actions and

ine ciencies.All o the employees o Terra Firma know that their rewards depend onthe longer-term per ormance that our port olio businesses deliver to ourinvestors. The operational per ormance o our port olio has been strong,





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but the investment climate has been harsh on the valuations o our businesses.As a result, Terra Firma will in March distribute back to investors the carriedinterest (payments or strong investment per ormance) that had previouslybeen earned (accrued in escrow, but not paid) and which would have ormedthe bulk o the reward or Terra Firmas senior teams hard work since 2004.This is absolutely right; our investors have su ered and there ore our rewardsshould su er at the same time. Such longer-term rewards throughout theentire nancial system would have led to a very di erent world to the onewe nd ourselves in today.

In the current climate, private equity groups must ocus more than ever onensuring their businesses are operationally robust in order to generate returns

or their investors. This emphasis on operations will mean that private equitywill continue to help the economy and will be one o the orces that help usrecover rom the current troubles. At Terra Firma, we have always consideredthis one o our key strengths and, as you review the per ormance o ourport olio companies, I hope you will agree that they have, to date, weatheredthe nancial storm, and are being managed to deliver lasting value to ourinvestors and our key stakeholders. We are e ceedingly ortunate in havingappro imately 50% o TFCP III still to invest and investing over the ne t two

years will, I believe, provide some quite incredible opportunities or successand enable TFCP III to return a substantial pro t to our investors.

Finally, as someone who believes that there is virtually nothing new in humanbehaviour, the ollowing quote by Abraham Lincoln seems rather poignant:

A a d d a h d r ak b b rr g, d hr g a m a d r d b r , a d , b rr r m,

m b h a g r m .

Abraham l c

B h

G Ha d





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ABout teRRA FiRMA 1,2

th p r f bar h r r d a h gh r

f p rf rma c hr gh ac mb a f ra g c cha g ,a d m a d mpr d

ma ag m . i h c rrr m , a k h p

c mpa h m f h rf d g a d q d y .

We add value through involvingourselves directly in the companies webuy. Working alongside management,we overhaul the business bothstrategically and operationally. Thiso ten involves introducing new

initiatives, processes and proceduresin order to change the behaviour andculture o a company. This type o change takes time, but a long-termapproach to investment is vital in

order to create success ul, sustainablebusinesses. These revitalised

companies are later sold to realisea return or the investors in TerraFirmas unds.

Since its launch in 1994, Terra Firmahas invested approximately 11 billiono equity capital and has completedinvestments with an aggregatetransaction value o 42 billion.

Terra Firma iNVeSTS iN LarGe, aSSeT-BaCkeDaND COmPLex BUSiNeSSeS THaT HaVe BeeNOVerLOOkeD, UNDer-VaLUeD Or miSUNDerSTOODBY THe FiNaNCiaL COmmUNiTY

1 A re erence to Terra Firma means, prior to27 March 2002, the Principal Finance Group o Nomura International plc and post 27 March 2002,as the conte t requires, TFCP Holdings Limited,Terra Firma Capital Partners Limited, AnningtonManagement Services (Guernsey) Limited and anyo their a liates.

2 The in ormation contained in this Annual Reviewis as o 31 December, 2008




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16 b 11 b

42 b





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ABout teRRA FiRMA

A pp r r rak h d r d r a d r

, p a a d r

ouR investoRsWe invest on behal o pension unds,insurance companies, sovereign wealth

unds and endowments rom aroundthe world. Our largest investors arepension unds investing on behal o todays pensioners and the pensionerso the uture. The success o TerraFirmas businesses helps to provideimproved and more secure retirementincome or pensioners and our otherinvestors. Clearly, the current declinein asset values is greatly troubling to allinvestors and Terra Firma is committedto delivering as strong a per ormanceas possible.

ouR stRuCtuReTerra Firmas unds are typicallyGuernsey Limited Partnerships. Itsactive unds are Terra Firma CapitalPartners II (TFCP II), Terra Firma CapitalPartners III (TFCP III) and Terra FirmaDeutsche Annington (TFDA). TerraFirmas investors invest as LimitedPartners and the day-to-day a airso each partnership are managed byits General Partner in Guernsey. TheGeneral Partners make all investmentdecisions on behal o the unds.

Terra Firma Capital Partners Ltd(TFCPL) in the UK, with support romterra rma GmbH in Germany, providesinvestment advice to the General

Partners, including sourcing andadvising on investment opportunitiesand realisation strategies.

Terra Firmas unds make investments inselected businesses across the world,but with a particular ocus on Europe.These port olio businesses currentlyoperate in over 60 countries globally.

ouR PeoPleTerra Firma has developed the ullrange o nancial skills, strategicinsights and operational e pertise topursue a di erentiated investmentstrategy. The highly diverseknowledge base o the group allowsTerra Firma to spot opportunities thatare missed by others and to carry outmany di erent types o investment.

Operational e pertise is undamentalto enhancing value within our

port olio businesses and in thecurrent economic climate such skillsare more important than ever. Ouroperational team has many yearse perience in running and improvingper ormance in numerous businessesand has strong strategic, operationaland managerial e pertise. Financiale pertise is also o huge importanceat the current time and Terra Firmaspersonnel have a wealth o theseskills, particularly with regards tohelping companies with some o their

unding and liquidity issues.

The Terra Firma advisory team ismade up o around 100 people inLondon and Frank urt, drawn rom 20countries and speaking 28 languages.They come rom a wide variety o backgrounds, including industry,

nance, consultancy, private equity,law and accountancy.

Public pension funds 18%

Staff 4%

Banks/financial institutions 16%

Corporate 3%

Endowments 5%

Family trusts 8%

Funds of funds 20%

Private pension funds 5%

Insurance companies 9%

Government investment funds 12%

USA 25%

Asia (exc. Japan) 5%

Australia 3%

Canada 10%

Europe (exc. UK) 15%

Japan 10%

Middle East 11%

UK 21%

teRRA FiRMA investoRs By ReGiona long-termapproach toinvestment is

vital in order to

create success ul,sustainablebusinesses

teRRA FiRMA investoRs By tyPe





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16 billion of equity funds have beenRAISED TO IMPLEMENT TERRA FIRMASinvestment strategy

11 billion of equity capital has beeninvested in out-of-favour businessesacross a variety of sectors aroundTHE WORLD

42 billion is the total enterprise value ofinvestments made

our funds have doubled the moneythey have invested. in our view, it is thisLONG-TERM GENERATION OF PROFIT FOR OURinvestors which is key, not the annualmarking to market of our investmentHOLDINGS

terra firma has held its investments foralmost five years on average, whichis far longer than the average holdperiod for public company stock heldby uk institutional investors. goingFORWARD, TERRA FIRMA WOULD ExPECT THISHOLDING PERIOD TO INCREASE AS IT SUPPORTSits portfolio businesses in the difficultprevailing economic climate

sinCe 1994:





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Review AnD HiGHliGHts oF 2008

D p gh c d , t rra F rma b c d p r rm 2008 a d ha c ar p a a h r

p r rma c 2009

th a ar ha b a d c r pr a . ob a g

h rd par d b a c m ha b r a

mp b , a a ha aa d h r r ma h

m ha r mad 2006a d 2007 h p h mark b m ch r ha hh r ca rm r pr a .

We chose not to invest in any newbusinesses in 2008 and eel that 2009will present better opportunities orinvesting. We have not been idle,however. This year, our ocus hasbeen on protecting the value in oure isting port olio and ensuring that

our port olio businesses are resilientand robust enough to survive thecurrent downturn and handle the moredi cult operating environment whichnow e ists.

The recent challenging conditionshave taught us numerous lessons and

orced us to create new solutions. As abusiness, we are e tremely sel -criticaland we are not a raid to take di cultdecisions.

1 b 9 d 07 December 08

2 Pegasus Aviations results are included in2007 rom 14 June 2007

C rr c 2007 2008 Cha g %

ann ngton 1 145 99 -32%aWaS 2 $ 523 698 n/DaiG 435 466 7%emi 1 90 221 146%infn s 53 54 3%Od on/UCi 73 72 -1%

PNG 29 30 3%T n & r st 180 188 4%

eBitDA By PoRtFolio Business





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oPeRAtinG PeRFoRMAnCeDespite tough conditions, Terra Firmasbusinesses continued to per orm wellin 2008. They undertook appro imately540 million o capital e penditureduring the year and have clear plans tosustain their per ormance in 2009:

AnninGton Annington reported higher rentalrevenue in year-to-date December2008 compared with the sameperiod the previous year. While rentsmake up appro imately two thirdso business revenue, developmentsales which make up the remainder,have allen substantially. This is

ebitda. ae pected, sales volumes were behindcomparable volumes in 2007, refectingthe prevailing UK housing marketconditions. Sales, however, are nota critical component o Anningtonsrevenue stream as its rental income issu cient to cover its debt obligations

and to enable Annington to takeadvantage o any uture acquisitionopportunities.

AwAsAWAS concluded a very challengingyear with earnings broadly in line withbudget. The business was able to avoidmajor customer de aults by proactivelymanaging high-risk customers andwill continue to do so going orward.Despite lower jet uel costs, 2009is likely to be a di cult tradingenvironment or airlines as passenger

tra c slows due to reduced GDPgrowth. However, AWAS sees a numbero opportunities to take advantage o the so t market to grow the businessthrough accretive acquisitions which willdevelop the business strategically.

DeutsCHe AnninGton Earnings rom both DeutscheAnningtons rental and salesbusinesses were ahead o those

rom 2007. Furthermore, the overallvacancy rate showed a markedimprovement, ending the year at3.9% compared with 4.2% at theend o 2007. DAIG stepped up itse penditure on maintenance andmodernisation in 2008 and as a result,185 million has been earmarked toimprove and maintain the homes inits port olio.

eMi EMI has seen improved results atboth its Recorded Music and MusicPublishing businesses. In the year-to-date, earnings o Recorded Musichave improved on the prior yeardue to the signi cant progress thathas been made in cutting costs andintroducing a new, more commercialculture to the business. MusicPublishing delivered solid results

as it pursues its long-term strategyo actively developing new marketsand licence types or the commercialusage o music.

inFinis In nis recorded year-end earningsin e cess o budget and prior year.The outlook or 2009 is positive,with additional generating capacitye pected to be installed during theyear. The company is substantiallycontracted or power sales in 2009which were agreed at a healthy level

and it has a strong contract positionwith regard to prices or 2010 and 2011.

oDeon/uCi Odeon/UCI has continued to openand acquire new sites and roll-out 3Dscreens in order to bene t rom theattractive 3D lm slate. It continuesto invest in success ul retail initiativesand premium seating both in the UKand Europe. Overall, the business hada slightly so ter year in 2008, primarilydue to the need to change its screenadvertising arrangements in the UKand the de erral o a major blockbuster

lm until 2009; but on a like- or-like, ebitda 2008

were ahead o prior year. The businesse pects a stronger year in 2009as a result o a good lm slate, thecontribution rom urther new cinemasand retail improvements.

PnG PNG also per ormed well in 2008,with results ahead o budget andprior year. In March 2008, PNG soldits transmission business to NorthernIreland Energy Holdings Ltd, using the

proceeds o 99 million to pay downdebt. PNG continued to grow its gasnetwork and customer base duringthe year.

tAnK & RAst In a challenging economicenvironment, Tank & Rastoutper ormed 2007s results. Despitehigh uel prices or most o 2008 andthe German economic downturn,revenue and earnings grew, driven bythe per ormance o capital investmentprojects. The business e pects some

urther improvements heading into2009 generated by the implementationo its key growth initiatives includingthe roll-out o its ast ood and otherconsumer-driven projects.





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the businessesare well-supported withlong-term

inancing inplace and arewell-positionedto continueto operate inthe currentenvironment

14,000 540m

p p mp d r p r b

cap a m d r ak b r p r b





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FinAnCiAl PositionIn what remains a liquidity-constrainedenvironment, the Terra Firma port oliobusinesses do not have signi cantre nancing needs in 2009. Thebusinesses are well-supported withlong-term nancing in place and arewell positioned to continue to operatein the current environment.

vAluAtionsWe believe private equity rms must berealistic and transparent about valuingtheir businesses, even though somemay argue that the only importantvaluation is the one attained whena business is ultimately sold. TerraFirma was there ore one o the rstprivate equity rms to signi cantlyrevise its valuations to refect this newmarket. We engaged in a thoroughand detailed review o the valuations o Terra Firmas port olio businesses andhad those processes audited by KPMG.

Private equity valuations have twomajor elements: the operatingper ormance o the port olio businessitsel and the application o somemultiple or discount rate rom listedcomparable companies or recenttransactions to value that operatingper ormance. As we have seen, theper ormance o Terra Firmas port oliobusinesses in 2008 has continued tobe strong with most showing year-on-year improvement. However, thevaluations o public companies acrossall sectors have plummeted and, orprivate equity, this decline is magni edby the higher levels o leverage.Furthermore, in some o Terra Firmasbusinesses the continuing decline o Sterling against the Euro has reducedvaluations in Euro terms, especially atEMI. While we are all working hard toensure that the nal per ormances o these investments are positive ones,we must be open and realistic aboutwhere the markets stand today andnot take credit now or potential uture

improvements in earnings or marketconditions. There ore, the General Partners havetaken the view that i current marketconditions were to continue, the undsmay not recover the ull value o their2007 investments, and have there oretaken a provision or impairment intheir results or 2008. Whilst indeedthey could make a partial or indeed a

ull recovery in the uture, the Directorso the General Partners believe thatgiven the current world economic

situation, this is a prudent position totake in terms o the long-term view o market recovery (see Pro t and LossStatement on page 103).





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PlAyinG ouR PARt in tHe eConoMiC ReCoveRy

A g- rm r , pr a ca h p r rc m c h a h hr gh mpr d p ra a d

ha c d pr d c

i pr a rm c g h r h ca d r

dam a cha g ba d mpr h r p ra , h

h ca p a a k r h p g k ck- ar c m c r c r .

The rapid deterioration o theeconomic climate has orcedcompanies, large and small, tore-e amine their business models.Optimistic, sometimes aggressive,assumptions about consumerdemand and credit availability areyielding to tougher realities. Insuch an environment, e periencedmanagement, committed ownersand access to new capital are critical.Fundamentally, this is what privateequity provides.

Terra Firma adds value throughinvolving ourselves directly in thecompanies we buy. Working alongsidemanagement, we overhaul the businessboth strategically and operationally.This o ten involves introducing newinitiatives, processes and proceduresin order to change the behaviour andculture o a company. This type o

change takes time, but a long-termapproach to investment is vital in

order to create success ul, sustainablebusinesses. Furthermore, we have the

nancial e pertise to help companieswith some o their unding and liquidityissues. All our management teamsincentives are contingent on thedelivery o long-term, sustainablegrowth, in contrast to the ocus onshort-term rewards that havecontributed to the economic crisis. Aslong-term investors, private equity canhelp to restore economic healththrough improved operations andenhanced productivity.

There are now speci c proposals orEuropean legislation which covers bothdisclosure and regulatory elements orhedge unds and private equity rms.t e v cAssociation estimates that in Europealone, private equity rms still haveover 75 billion to invest capital thatwill rescue the ortunes o thousands o businesses across the continent. Wetrust that the urgent and necessaryre orms needed to regulate anddemysti y banks, hedge unds andother comple institutions will notinadvertently stife private equity rms

ability to invest this much-neededcapital in Europes economy.

workingalongsidemanagement,we overhaul the

business bothstrategically andoperationally





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lonG-teRM AliGnMent

t b c , c r c rm b g rm a r

th g- rm a r pr a r f c d r ard

r c r . th g- rm a g m r b r

a d mp h mmp r a c r pr a

, b a r h ab r d a c a mark .

Whilst not per ect, private equityreward structures mean that valuemust be delivered over a long-termperiod and are ar superior to theritualised culture o annual bonuses.b x , m , tFirma will distribute back to investorsthe carried interest (payments orstrong investment per ormance)that had previously been earned(accrued in escrow, but not paid)and which would have ormed thebulk o the reward or Terra Firmassenior team. I our investors su er,then it is only right that the TerraFirma teams rewards should su erat the same time. The uture stabilityo the nancial markets would beenhanced i other parts o the nancialcommunity adopted such long-termincentive practices.

Carried interest is per ormance-based and only results in enhancedreturns or the Terra Firma team i investors receive a return in e cesso 8% per annum over the li e o the

und. A und typically has a 10-14 yearli e and carried interest is typicallypaid in the later years when themajority o a unds investments havebeen realised and investors havereceived back their investment plusthe majority o their pro ts.





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tRAnsPARenCy AnD DisClosuRe

Br ad g h d r a d g h ar a d ha d m r mp r a h c rr c ma

i rma a , par c ar m c m c r ,

br ad g h d r a d g h ar a d ha d m r mp r a h

c rr c ma .

The businesses Terra Firma investsin touch the lives o many peopleand we are mind ul o the socialresponsibilities that our work bringswith it. It is essential that all ourstakeholders customers, employees,investors, suppliers, unions,governments and trade bodies understand our intentions, plans andresults, and how our activities andport olio businesses contribute to thewider community.

We welcomed the publication o theWalker Report in the UK in November2007 and are very positive aboutboth the initial public response to oure orts, and the ongoing work to make

private equity even better understoodby its stakeholders.

We remain committed to ollowing and in many areas, e ceeding theWalker guidelines. All our port oliobusinesses have produced Annual andInterim Reports, even though the onlyone that was required to do so wasOdeon/UCI. Our Irish and Germanport olio businesses, AWAS, Tank &Rast and Deutsche Annington, alsoproduced Annual Reports last yearand Germany has since ollowed suitwith its own voluntary disclosure code.Deutsche Annington and Tank & Rastare also ully compliant with these newGerman guidelines.

However, our approach totransparency is not entirely altruistic.We take the view that a progressiveapproach to transparency gives us acompetitive advantage by making usmore attractive to potential sta , to

the businessesterra irmainvests in touchthe lives o manypeople and weare mind ulo the social

responsibilitiesthat our workbrings with it





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companies that we wish to invest in,and to governments and unions withwhom we co-operate. O course, ourinvestors, importantly, provide thecapital that we invest in businesses,and the nancial workings o ourbusinesses have always been entirelyvisible to them. However, even thisgroup is beginning to use broadertransparency as a benchmark orwhether or not they invest witha given private equity rm.

t b to whether private equity disclosuresshould be regulated at Europeanlevel. Our concern is that attemptsto regulate public disclosures orprivate equity investment will stifethis competitive tension i disclosurerequirements are based on mandatoryand rigid rules designed or comple

nancial institutions like hedgeunds. For evidence o this, one

only has to look at public company

reporting, which is so rule-driven andbureaucratic that it has been renderedmeaningless and as a consequenceis increasingly mistrusted. In thecase o banks, all o the largest o which are publicly-listed, this has hadcatastrophic consequences.

There is a template or success.The Walker initiative in the UK hasbeen very well received and theGerman and Scandinavian initiativeshave been great steps orward. Thesupport o European governments,the European Commission andthe European Parliament wouldbe welcomed to see this approachsucceed throughout Europe.





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outlooK FoR 2009

w b ha ar r a r mh ch r a ha ha b h

pr a ar a ar

A h r d r gg hr gh hm cha g g c m c cr

r 70 ar , pr a ac r cha g g m .

th c rr ack a c r ag m a ha h ab

am a ca d pr a d c c d rab r h ar . C mb d h

h ack d b r pr a -back d c mpa , h m a

ha b h h ca pr a m a d h d r

hr k ma r a .

However, or long-term investors witha secure capital base, we believesign cant opportunities do e ist. A tera long pause throughout 2008, sellersare beginning to become more realisticand pricing now increasingly refectsthe liquidity needs o vendors. Almostno business is recession proo , butthose businesses which cater to basic

needs and are underpinned by realassets are, in our view, at the lower endo the risk spectrum. All businesseswill ace operational di culties in theupcoming years and how managementdeals with these challenges willbe undamental to generating ormaintaining value within port oliobusinesses.

We are seeing opportunities to investin businesses that are operationallysound, but which have nancialchallenges due to their level o debt. Terra Firma has a great dealo e perience in dealing with suchdi culties and there ore many o these businesses represent attractiveinvestment opportunities.

In addition, given the huge mark-downs in valuations that are occurring,it is more likely that Terra Firma can

nd opportunities where the

w b ha ar r a r mh ch r a ha ha b h

pr a ar a ar

both the scaleo private equityinvestments and

the industryitsel will shrinkmaterially





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true valuation and potential o thebusinesses are being overlooked.In these situations, Terra Firmascontrarian investment approach andability to utilise its skills and resourcesto build value in businesses over thelong term can potentially deliverstrong results.

We believe that the number o investment opportunities in 2009 and2010 will continue to be low and thatthe number o investments completedwill be small. Holding periods orinvestments made during this periodare also likely to be longer than inrecent years. During the course o 2010, we e pect the market to improveand become more predictableand that we will start to enter anenvironment which will o er value thathas not been seen in the private equityarena in years.





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4 Terra Firmas FundsContents




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intRoDuCtion

Terra FirmaS iNVeSTOrS PrOViDeCaPiTaL WHiCH iS USeD TO aCqUireaND iNVeST iN UNDerPerFOrmiNG

BUSiNeSSeS. YeT CreaTiNG VaLUe iNTHOSe BUSiNeSSeS reqUireS mUCHmOre THaN CaSH; iT DemaNDSeNerGY, STraTeGY aND LONG-TermCOmmiTmeNT

wh har h d r p b cc mpa ca h r har a da ba a d rar h d h m

g r ha ra m h , t rraF rma r c mm h r

cap a r r 10 ar . e rb ha h ab ,g g back g. w rk h a

b ca r c g ha b hm a d c mm m ar a

d r dam a cha g a dg- rm cc h k d -

- a r c mpa ac r .

stRAteGiC CHAnGeOnce acquired, Terra Firmasport olio businesses are nurturedto a higher level o per ormancethrough a combination o strategic

change, improved management andsustained investment. This transitionrequires an intense, ongoing andlong-term partnership between TerraFirma and the management o each

port olio business. As part o that, allTerra Firmas employees invest theirown money in each und, so theirpersonal, pro essional and nancialsuccess is tied to the success o our

port olio businesses. Similarly, themanagement o our businesses, o tenselected rom di erent industriesto bring resh thinking to a sector,is motivated to succeed and iscompensated based on the long-term success o each business. Thisalignment o interest is undamentalto the way Terra Firma does business.

It is perhaps no surprise that TerraFirma people and our managementteams are passionate even a littleobsessive about our businesses.

The ne t ew pages give an overviewo our port olio businesses and howwe are working together to createa success ul, sustainable uture.





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PoRtFolio Businesses

Terra Firma annual review 2008 23a unique perspective

p h

o t o

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uK r d a h ga & r a

w r d d a rcraa g

G rma r d ah g a & r a

G ba m c p b h ga d r c rd d m c





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AnninGton

ANNINGTON IS Ahousing business thatacquired around 57,600HOMES IN ENGLAND ANDWALES FROM THE UKS

ministry of defenceA g r h maj r pr p r h M r D c (M D) pr d

am acc mm da r marr d r c p r . th M D ha h r p b rma a c a d pk p h pr p r a . A a d h h M D d rm ha

aca pr p r ar rp r r m , g h c ra p a g r rr p r d p m , r r rp pr p r A g . A g h r a

a d h h h p b c, c d g c rr a d - r c p r , ac mp pr c . A g a pr a r a mb r pr p r a d cca ar d p r b d h m





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2008

60%35%164,053

-





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AnninGton

anningtonshomes have provedpopular with thepublic becauseit has ocusedon creatingenvironmentswhere people wantto live

investMent RAtionAleFollowing detailed due diligenceo the UK residential housing market,Terra Firma believed that rentand house price increases wouldsubstantially e ceed the orecasts

. bon detailed analysis o demographic,military and political trends, it lookedlikely that the MoD would releasesurplus properties or redevelopmentand sale earlier than it had agreedat the time o acquisition.

Predicting that more cash would begenerated more quickly than manyother bidders were e pecting, TerraFirma ensured this was refected in theprice it paid to the MoD. It was alsoclear that the rental cash fow romthe estate, along with proceeds romthe uture sale o properties, couldbe securitised to help und the initialinvestment in the port olio.

CHAllenGes FACeDThe biggest single challenge acingAnnington at the moment is clearly

the housing market. Operatingpredominantly at the rst-time buyerend o the market, the company sawsales all but evaporate during 2008 asmortgage availability dried up. House

prices in the United Kingdom ell by anaverage o more than 16% in 2008 with

orecasts o a urther 10%15% declinethrough 2009 and into 2010. Sales,however, are not a critical componento Anningtons revenue stream as itsrental income is su cient to coverits debt obligations and to enableit to take advantage o any utureacquisition opportunities.

Another challenge acing Anningtonrelates to the release o surplusproperties rom the MoD. Annington

has no control over the timing o therelease o properties as the MoDshousing requirement is dependenton the long-term de ence strategywhich dictates troop movements anddeployments. With the wars in Iraq,A ghanistan and a number o othercommitments abroad, managemento housing requirements has becomeeven more complicated or the MoD.Once Annington is noti ed o therelease o surplus properties, it has torespond quickly so that sites are notle t vacant or unoccupied and they can

be prepared or sale.Historically, Anningtons primarybusiness has been the re urbishmentand sale o previously-owned homes.





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The signi cant deterioration in theUK housing market, both in terms o volumes and prices, has been mitigatedby the stable rental income thebusiness receives matched to its long-term nancing structure. Anningtonremains well positioned with a fe iblebusiness model that has allowed it tominimise the impact o the currentmarket di culties.

ACHieveMentsOne o Anningtons key strengthshas been the e ciency o its sales

operation. Since 1996, the MoD hasreturned 16,397 units to Annington,o which more than 15,600 havenow been sold to the public. Innormal market conditions, Anningtonattracts rst-time buyers with pricingthat makes mortgage paymentscomparable to rental payments.Together with the use o various

nancial incentives, it aims to makehome-buying a realistic option orthose who have previously beenpriced out o the UKs propertymarket. On average, more than 60%

o those buying an Annington homehave been rst-time buyers and30% have been sold to Service ore -Service personnel. On average,35% o properties have been sold

to people who the UK Governmentclassi es as key workers.

Another reason Anningtons homeshave proved so popular with the publicis that it has also ocused on creatingenvironments where people will wantto live. Wherever possible, the streetscene is improved, rom planting newlandscaping to changing the e ternalappearance o a property.

Annington had predicted the endo the housing boom or some time

and has spent the past three yearsrationalising the business in readinessor alling release numbers and the

anticipated decline in sales levels.Anningtons operating model wasbased on a small core team usingoutsourcing as a major tool so amajor restructuring e ercise has notbeen necessary, although some levelo downsizing has occurred. Sta numbers and operating structureshave been reduced over the last threeto our years through gradual cutsand natural wastage. These combined

actions meant that adapting to thecurrent environment has been a lot lesspain ul or Annington than or many inthe property sector.

Given the turmoil in the housing marketin recent months and the downturn inhouse sales across the UK, Annington ise pected to weather the storm betterthan its peers. From January 2008,Annington had reached a point whereit was no longer reliant on house sales

or cash fow to service its loans.

CuRRent FinAnCiAlsFor the 9 months to December 2008,Annington reported rental revenueo 123 million and sold 110 unitswhich generated a urther 20 million

o sales revenue. Sales volumeswere below budget and behindcomparable volumes in 2007, refectingthe prevailing UK housing marketconditions. However, sales stocks didnot rise signi cantly dueto continued low levels o releases

rom the MoD.

The business continues with a strongbalance sheet which should enableit to take advantage o selectiveopportunities in the current market.Current debt servicing obligations can

now be met by rental cash fows so thebusiness is not dependent on salesvolumes. With its long-term nancingstructure in place, the business has nonew near-term unding requirements.

yeAR enD: 31 MARCH ytD D c 07 ytD D c 08

r nt l bus n ss v nu 116 123S l s bus n ss v nu 68 20inco o nv st nts 44 1Costs (83 ) (45 )eBitDA 145m 99mB n nt st (116 ) (112 )ear g /( ) b r d pr c a a d a 29m (13m)

C p t l p nd tu (74 ) (37 )P v t un ts sold 299 110D v lop nt s l s un ts sold 225 0av g s l s p c p un t 129,624 167,317





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DeveloPMent PlAnIn the current climate, Anningtonwill continue to manage its businesstightly. Stock levels are low, but it willcontinue to re urbish and sell availableproperties to reduce its debt levelsas appropriate.

The robustness o its rental incomewill enable Annington to adapt tothe new economic environment,which itsel may a ord the businesssome uture opportunities allowingcomplementary investments atattractive valuations. The businesscontinues to selectively build itsinvestment port olio o residentialrental units acquiring propertiesthat e ceed threshold return criteria.Annington is also keen to work withthe MoD to nd creative solutionsto its housing challenges.

CoMPAny stRuCtuReAnnington Homes manages the corebusiness o renting 41,000 propertiesto the MoD and the re urbishmentand sale o homes on the open

market. Since 1996, Annington hassold more than 15,600 propertiesto the public. Annington RentalHoldings owns 1,404 fats and houseslet on individual and bulk leaseson the open market. It manages a

urther 359 properties on behal o other Group companies. AnningtonDevelopments seeks opportunities

or in ll or wholesale re-developmenton all Annington sites. The businessspriority is to ma imise added valuethrough obtaining planning consentand then either to sell the land,

carry out in rastructure works, carryout construction or partner withdevelopers.

MAnAGeMentJam H pk ,Ch e c o c rJames joined Annington HomesLtd as Chie E ecutive in 1998.Prior to joining Annington, Jameswas Managing Director o HansonLand Ltd, a property developmentand management companyestablished to undertake the1 billion Hampton new towndevelopment south o Peterborough.James was previously at Hanson plc,where he per ormed a number o roles involving asset managementand property development, includingdirectorships o both subsidiary and

joint venture companies.

Barr Chamb r ,F a c D r c rb f do Annington Holdings plc and otherAnnington group companies in 1998.His responsibilities span all nancialmatters, liaising with shareholders, ITsystems development, administration

. b j

Annington rom Rouse Kent Ltd,a special purpose vehicle establishedto construct a large mi ed-usedevelopment on 650 acres at KingsHill, Kent. Prior to that, he was GroupFinancial Controller at Rosehaugh plc.

n ck va gha ,C mm rc a D r c rNick joined Annington Property Ltdas Commercial Director in January2001 and was appointed to thea h b a2001. Previously, Nick was Financial

Analyst and Programme Managerat Annington Management Ltd. He joined rom Rosehaugh plc, wherehe was Finance Director o a numbero group companies.





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A g ag a 2005, A ga pr d c g ha h h g

b m d r a h gb . thr gh h r g mark ,A g a ab r c r

a c r h g rm. D ph ak g mark , h b

a r b p a g r d r a

h r c d b a d haca h ba a c h .

This action meant that the companywas positioned not just to weather awidespread economic downturn, butto seize the opportunities that comewith a alling market. With the recessioncontinuing to deepen, Annington hascosts under control. It is orecastingcash surpluses in every nancial quarterover the ne t ve years, which willhelp to signi cantly repay currentdebt still urther.

Some moderate diversi cation hasalso been a actor in Anningtonscontinuing success, with selectiveinvestment in its rental port olio.

The business has taken advantageo strong running yields that havebeen underpinned in an area o theproperty market where demand isoutstripping supply.

The plan or the uture is equallymeasured. The ne t year will be a timeto ocus on managing costs, continuallyreviewing the business and takingadvantage o the opportunities topurchase properties or rental.

Against the backdrop o a turbulent

marketplace, Annington has also keptup its good work outside the o ce.The business remains committedto being as much a part o the local

community as the properties it owns.The Annington Trust was set up in1996 to support projects bene tingService amilies. Grants range rom a

ew hundred pounds to a ew thousandand can be used to und anything

rom toddler groups to summer youthcamps or wel are sta training. Ane ample in 2008 was a grant o 2,500in support o Storybook Soldiers, aninnovative project allowing Servicepersonnel to record stories or theirchildren be ore being deployed abroadon active service.

Annington, as a company, alsosupports the local communities inwhich it is working. One o 2008sgrants, or e ample, was used tohelp Hemswell Cli Pre-School moveto a new site rom the ormer RAFcommunity centre. A 2,000 donationpaid or a much-needed new cabinwhere the pre-school equipmentcould be stored.

Whether in the business world or inits community work, Annington is an

organisation with a clear vision o whatit wants to achieve. Forward-planningand the energy o its people haveensured that, whatever it sets out todo and whatever the challenges alongthe way, it is getting results.

orwardthinking inthe o iceand in thecommunity





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AwAs

awaS iS one oFThe worldS leadinGaircraFT leaSinG

companieSAwAs a ac r d b t rra F rma 2006 a d d b h 2007 ac P ga A rcra F a c C mpa . F g a ar rd r a rcra , hc mb d b ha r 210 d a rcra a d a d r p p

m r ha 130 a rcra





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$5 billion8 years4.4 years





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AwAs

investMent RAtionAle &ReDeFinition oF stRAteGy The combination o AWAS andPegasus created a market leaderwith a highly distinctive strategy.That strategy is to drive superiorrental yields on an aircra t port oliothat is highly diversi ed by vintage,aircra t type and lessor quality, and toma imise residual asset value througha leading asset trading capability.

AWAS has been repositioned topursue a di erentiated strategy

within the aircra t leasing market,ocusing on ma imising returns andmanaging risk through a combinationo both aircra t leasing and trading.This strategy is highly distinctive as itplaces a heavy emphasis on a rigorous,investment-led approach to all leasingand asset trading decisions withan emphasis on return on investedcapital. This is complemented byproactive asset trading based on aproprietary and di erentiated viewo prospective movements in theaircra t cycle and also on the credit

and equity capital markets. AWAStakes a measured approach to risk-taking and prices each transaction ata level which o ers an appropriatebalance between risk and return.

The investments in AWAS and Pegasusinvolved a high degree o operationalchange. With AWAS, that change washeavily ocused on centralising thebusiness in Dublin and signi cantlyincreasing the operational e ciencyo the business. The acquisition o Pegasus posed the di erent, butequally challenging, operational tasko integrating a business o equivalentsize and taking advantage o thesynergies to reduce costs in as shorta timescale as possible.

ACHieveMentsFrom an operational perspective,the rationalisation o the AWASbusiness was completed within12 months o acquisition. Thesubsequent merger with Pegasusreleased signi cant synergies andthe integration was managed to ensurethat the best o both businesses wasretained within the combined entity.As a consequence o the improvedoperational e ciencies in the business,it has been possible to materiallyincrease assets under management.

The integration o AWAS and Pegasuswas completed early in 2008 aheado budget and has generated costsavings ahead o plan.

awas has beenrepositionedto ocus onmaximising returnsand managingrisk through acombination oboth aircra tleasing and

trading





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Terra Firma has ocused on improvingthe overall quality o the managemento the business. Under Terra Firmasownership, there have been newappointments to the position o CEO,CFO and Head o Sales, as well as thecreation o new positions and unctionsrefecting the dramatically increasedemphasis placed on investmentanalysis and the management o credit risk. As the business gears up

or the ne t phase o developmentand management in the conte t o dramatically changed nancial and

asset markets, there will be continuedemphasis placed on ongoingimprovement o the managementteam and business processes.

AWAS has success ully sold a highnumber o assets at avourable pricesand used the proceeds to repay debt.The merger o AWAS and Pegasushas diversi ed the port olio andmade it more de ensive ahead o thedownward cyclical adjustment that theindustry is currently e periencing.

CuRRent FinAnCiAls In the ace o current marketconditions, AWAS has continued todevelop the business with a particularemphasis on protecting value through

proactive management o the overallfeet mi alongside protecting incomethrough re-marketing and creditmanagement activities.

In a year that saw record oil prices,a general economic downturn andturmoil in the credit markets, anda consequently high rate o airlinebankruptcies, the business per ormedwell ending the year in line with

ebitda pbt .

yeAR enD: 30 noveMBeR 20071 2008 2

r v nu $591 $781

Costs ($68 ) ($83 )eBitDA $523m $698mB n nt st ($240 ) ($287 )ear g b r d pr c a a d a $283m $411m

1 P g sus av t ons sults nclud d n 2007 o 14 Jun2 2008 sults subj ct to fn l ud t pp ov l





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DeveloPMent PlAn2009 is likely to present a di culttrading environment as passengertra c slows due to reduced GDPgrowth. This, in turn, is likely to resultin a so t market or lease rates andasset values, as well as increasedcredit de aults by weak airlines.The price o jet uel has declinedsigni cantly in line with the decline o oil prices. However, or some o thelarger and nancially stronger airlines,the bene t o this is not likely to eedthrough until the second part o theyear as a number o them boughthedges during last year at record highoil prices.

The businesss development plan isthere ore very ocused on protectingvalue through active managemento credit risks, rapid redeploymento assets a ter repossession orscheduled lease e piry and usingin-house technical e pertise toma imise residual values o assets atthe end o their use ul li e. Alongsidethis, the business sees a number o opportunities to take advantage o

the so t market to grow the businessthrough acquisition and which developthe business strategically. Aside rom opportunistic acquisitions,AWAS will take delivery o threenew A330-300s aircra t under leasecontracts to Singapore Airlines in the

rst hal o 2009. In the second hal o 2009, two A330-200s are due ordelivery to Oman Air.

Given the turmoil in nancing marketsseen over the course o 2008 and

particularly the second hal o the year,the businesss liquidity and undingrequirements remain under ongoingreview by AWAS management andTerra Firma.

MAnAGeMentFra k Pra ,Ch e c o c rFrank joined AWAS as its Chie E ecutive and President in September2006. Frank was previously ManagingDirector o CIT Aerospace International,where he managed CITs internationalaircra t port olio. Frank joined CIT in1997 v p m . i1998, he ormed CIT Aerospaces NewAircra t Programs Group and took the

s v p Marketing and Sales.

M cha H ard,Ch F a c a o c rMichael Howard was appointed asAWASs Chie Financial O cer inMarch 2007. Michael joined AWAS

rom Statoil Topaz, where he also heldthe position o Chie Financial O cer.Prior to that, he was with Irish DistillersGroup, originally as Treasury andProjects Manager be ore becomingGroup Finance Director in 2000.Michael is due to leave AWAS in April2009, his successor is Alan Stewart.

A a s ar ,Ch F a c a o c r Alan will replace Michael Howardas CFO. Previously, Alan was GroupFinance Director at WHSmith plc, a rolehe had held or 5 years. Prior to that,Alan was Chie E ecutive at ThomasCook UK Ltd and sat on the Thomasc ag b .

P r e ,H ad saIn early 2008, AWAS appointed PeterEllison as Head o Sales or worldwide

operations. Peter has almost 25 yearse perience in aviation and joinedAWAS rom easyJet, where he wasTechnical Director and responsible orrestructuring the airlines engineering

organisation in preparation or growthplans. He was previously at Lu thansat b , Managing Director responsible or thestart-up o operations.

J h n z ,Ch i m o c rJohn Nozell joined AWAS in October2007 as Chie Investment O cer.Previous to this, John was a SeniorFinance lecturer at Cornell University.John has 25 years e perience insenior nance positions, primarily withChase Manhattan where he was theManaging Director Global Investmentb , r h : a &Aerospace Group.

A g w am ,H ad R k Ma ag mAngus Williamson joined AWASin April 2007 as Head o RiskManagement. Angus has over 18years e perience in aviation having

i b Aviation and most recently as Head o i & b dat AerCap.





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F g a r h AwAsC rp ra s c a R p bp c d r g 2008, h c mpaha mad a c mm m d g

rga a d d ca ga d pp r g ch dr d.tha c mm m ha a r adr ap d b g b r a mb r

g d ca r m D b husA a d e h p a.

One o the recent und-raisinghighlights has been the AWASm v b sight-saving charity, Orbis. OrbisIreland speci cally undraises tosupport a project to eradicate blindingtrachoma in the Gama Go u regiono Ethiopia by 2012. This is vital workin an area where around a third o one to nine years olds have their livesblighted by this disease.

The theme or the night was WorldCultures, refecting the global natureo the aviation industry and theambition o a charity that is workingto eliminate blindness in some o the worlds poorest countries. Orbis

International has long-establishedties with the industry as it alsooperates a McDonnell Douglas DC-10 fying eye hospital equipped withan operating theatre and teachinghospital. The impressive support onthe night helped the nal und-raisingtotal to more than 95,000, addingto the 25,000 raised in 2008 at asmaller event.

In addition to its work with Orbis,AWAS has also developed a globalrelationship with Child und Alliance,

a worldwide organisation whosemembers provide assistance to morethan 5.5 million impoverished childrenand amilies in over 50 countries.

The charity helps its memberorganisations to apply consistentquality standards to child developmentprogrammes and to work e cientlyand e ectively.

On a local level, AWASs largero ces in Dublin and Miami have setup partnerships with good causesbased in their communities. In Dublin,they include St. Josephs School or

v i JStreet West Transitional Care Unitwhich provides support to youngpeople who have been in care. InMiami, the team is supporting the worko United Way, a charity that helpschildren succeed at school, and Handson Miami, an organisation that putsvolunteers in touch with local schoolsand public agencies.

These are just some o the charitableprojects AWAS is supporting around theworld. With such strong partnerships inplace, the organisation will now be ableto help even more children and youngpeople in the uture.

making adi erenceto childrenaroundthe world





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DeutsCHe AnninGton

deuTScheanninGTon iSGermanyS leadinG

houSinG companyD ch A g imm b GmbH (DAiG) a cr a d 2001 h t rra F rmaac r d 64,000 apar m r m h G rma F d ra Ra a . thr gh add-ac , h c mpa ha m r ha r p d z . DAiG m m da d ph ph c r pr d g c a r p b , a - c d pr p rma ag m a d d g h pp r r p p b h r h m . o

h m c p ra r h d r , DAiG ha a cc app d ma ag m appr ach -ac r d p r r d a pr p r





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2008

co2

No.150,000185

12,000

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DeutsCHe AnninGton

investMent RAtionAleDAIGs original housing port olio wasoccupied mainly by e isting or retiredrailway workers and their amilies whowere entitled to stay in the housing aspart o their contractual employmentrights. This ongoing rental stream gavethe business a strong and predictablesource o cash fow. Furthermore, rentswere substantially below market levelsand could be modestly increased toimprove cash fow. The apartmentswere owned and managed by 10regional housing companies which had

historically operated independently ona not- or-pro t basis. As such, there wasenormous scope or the port olio tobe run more e ciently by integratingthe companies into one plat orm andintroducing market-based processesand strategy. German residential realestate is an intrinsically low-risk assetclass and the business also bene ted

rom strong asset backing with ageographically diversi ed port olio.Theoriginal port olio was supplemented by

v 2005 (owned or managed appro imately

150,000 apartments) creating a total o over 12 million square metres o rentedspace.

Today, DAIG is the largest residentialhousing management company inGermany and has proven its ability toacquire new port olios and success ullyintegrate them into its operations. Thecompany relies on a value enhancementstrategy based on three core elements:e cient long-term management o thehousing port olio, selective sales totenants and port olio growth throughstrategic acquisitions.

stRAteGy DAIG has a clearly de ned strategy

which enables it to generate long-termpro table growth. This strategy hasproven to be success ul in di erentmarket conditions and has solidi ed themarket leadership o DAIG over the pastyears. The business model is ocusing onthree core elements:

l g- rm, a - ha c g pr p rma ag m : As a responsiblelandlord, DAIG o ers its customersa competitive range o propertieswith e cellent service. The group hasimplemented a benchmark plat orm

or the management o its port olioand is constantly striving to urtherimprove service quality, customer

ocus and e ciency.

in 2008, daigannounced acomprehensivestrategic initiativeto urtherraise the levelo customersatis actionacross the group





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s ra g c ac r d ah g p r :DAIG aims to

urther e pand its port olio throughthe purchase o suitable residentialproperties. The company there orecontinuously pursues opportunities

or urther acquisitions on the basiso a disciplined approach to valuation.

s c a d c a r p ba pr mar a :

DAIG o ers property ownership ata ordable prices. DAIG only sellscare ully selected units, primarily to

its tenants, but also to investors. DAIGinvolves tenants and local authorities inthis process at an early stage.

ACHieveMentsDAIGs strategy has been highlysuccess ul even in the recent morechallenging environment and thegroup has proven its ability to createsustainable growth in the Germanproperty market. It is now the primeconsolidator o housing port olios in theGerman market, with the companysacquisition plat orm sustaining year-on-

year returns by continually replenishingthe port olio and building an ever-growing rental asset base that providesstable, recurring cash fows.

Over the past two years, DAIG haspursued a very care ul acquisitionstrategy due to generally un avourableconditions in the wholesale housingmarket. Some investors acquiredport olios o property at unsustainablevaluations with heavy debt burdens inthe hope that property prices wouldrise. We believe that this infated markethas now come to an end and that DAIGis well-positioned to acquire port oliosopportunistically as speculative buyerse perience a more di cult market.

DAIG has also success ully improvedthe quality and reduced the cost o maintaining and servicing the homesit rents to its customers. It also hasinvested in improving the quality andvalue o the properties with DAIGtenants enjoying a whole host o bene ts. For e ample, the companynegotiates special deals or its tenantswith companies with relevant productsand services. These include specialdiscounts or cinemas, a telephoneservice provider, an online pharmacyand a removal rm. Additionally,

together with the German railway,d b , daig tenants to become more mobile. In aninitial pilot project, tenants in Colognecan use a car-sharing o er rom

d b .DAIG also provides a consultancyservice, Annington Wohnen Plus, orolder tenants, which is designed to helpelderly people live independently intheir own homes or as long as possible.

Furthermore, the tenant privatisationprogramme created by DAIG has giventhousands o German citizens theopportunity to own their own homes

or the rst time, and the company hasnow sold more than 50,000 homessince its inception.

settinG new stAnDARDsin tHe inDustRy In 2008, DAIG announced acomprehensive strategic initiative to

urther raise the level o customersatis action across the whole group.It will invest appro imately 70 millionto reshape the company to bettermeet the needs o the customer and toimprove e ciency. These plans, whichDAIG believes will set new standardswithin the German residential housingindustry, will be implemented in 2009.

yeAR enD: 31 DeCeMBeR 2007 20081

r nt l bus n ss g oss nts 710 751r nt l bus n ss costs (275 ) (290 )S l s bus n ss v nu 236 137S l s bus n ss costs (240 ) (132 )Oth 4 0op ra a eBitDA 435m 466mB n nt st (248 ) (255 )ear g b r d pr c a a d a 187m 211m

Ov ll v c ncy t 4.2% 3.9%ac u s t ons s gn d 8,834 763

1 2008 sults subj ct to fn l ud t pp ov l





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The plan provides or a completeoverhaul o the groups structureand organisation. The core eatureso the new organisation will be atenant centre, a nationwide hotline

or all tenant questions, a servicecentre or handling standardprocedures such as utility chargesand a new, power ul mobile serviceorganisation employing state-o -the-art communication technology thatwill ocus on providing tenants with

ast and fexible on-site service. Thenew organisation will enable DAIGto streamline processes as well asaccelerate and simpli y responseprocedures.

CuRRent FinAnCiAlsThe nancial per ormance o DAIG

s fur r ro n 2008. b son preliminary results, DAIG againincreased its pro tability. Compared

r or y r, ebitda n r sby 7.1% to 466 million.

DAIGs rental business concluded2008 on a positive note with a rentalvacancy rate o 3.2% at the end o theyear. During the year, vacancies hadbeen slightly higher than expected,a trend which has now been reversed.Due to this e ect as well as higherrents and lower costs, ull year rentalbusiness earnings were 6.0% ahead o 2007. The overall vacancy rate, whichincludes sales-related vacancies,showed a marked improvement to3.9% compared with 4.2% at theend o 2007.

Within the sales business, the year-end earnings result o 4.8 millionmarked a signi cant improvementover the prior year. Earnings were

higher due to a reduction in salescosts and the success ul conclusiono unbudgeted high margin land sales.

DeveloPMent PlAnDAIG stepped up its expenditureon maintenance and modernisationin 2008, urther enhancing theattractiveness o its propertiesto tenants. As a result o a 185million investment programme, thebusiness has been able to cut the CO 2 emissions o its properties by 12,000tonnes in 2008 alone.

With a letting rate o over 95%, thebusiness generates a steady cashfow and, having reduced the sellingprogramme in 2008, the businesswill again be selling ewer units in thecoming months.

DAIG has access to signi cantcommitted capital unding and TerraFirma believes the business is in astrong position to make the most o

the continued disruption in the capitalmarkets by selectively acquiringresidential property port olios. MAnAGeMentw j a d D k r ,Cha rma f h Ma ag mB ardWijnand was appointed Chairmano the Deutsche Anningtonm n n bo r n m y 2007.b for jo n n daig, w jn n s no r 20 y rs bp l n nextensive international experience.

He ran several large businesses in theoodstu s, petrochemicals and gassectors where customer orientationwas the priority and has worked andlived in Europe, the USA and Asia.

h s r of bp c lsGermany supervisory board rom2001 o 2005. w jn n s vChairman o the GDW, the associationo residential housing companies inGermany.

Dr. Ma fr d P ch ,M mb r f h Ma ag m B ardIn 1998, Man red Pschel wasappointed Chie Financial O cerof v rr ag. af r daig qu r

v rr n 2005, m nfr member o the Deutsche Anningtonm n n bo r . m nfr s

rof ss on l r r s r vebaas a member o the planning sta ,

rom which he moved to managementpositions as board member and Chie Executive at Raab Karcher, as well asat several Stinnes group companies.





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u d r g DAiG g- rmc mm m r d ,

h c mpa a ch d a 185m pr gramm 2008

m d r a d ma a h g ck. th c

ha m ha b r m a a d rg

a g m a r ( ch a ggr ma r a r pgrad g

a ) a d mpr gh a r h

g h pr p r .

In a modernisation project inb , x , daig opted to use a new type o roo tilewhich breaks down air borne pollutants.The make-up o the tile allows daylightto convert harm ul nitrogen o ides intoharmless substances which are washedaway by the rain. Matthias Stock,Managing Director o DAIG Nord, seesactive environmental protection asa key issue or DAIG. As the largestprovider o homes or rent in Germany,

we can make a direct contribution tocleaner air in our cities and towns withthis new roo tile technology, he says.Following the success o early trials, thecompany is planning to renew morethan 10,000 square metres o roo ngwith the new tiles.

As well as delivering environmentalbene ts, the modernisationprogramme is also improving thequality o li e or residents . 72-yearold Inge Hanke is a DAIG tenant whohas been living in a development atKnauer-und Karbonweg in Dortmund

or more than 40 years. Followingan e tensive 1.5 million renovationprogramme o her building shecommented, The hallways have nowbeen reshly painted and brightly lit.Following our balconys renovationand the installation o new railings,it is now quite attractive and alsoeasy to keep clean. And the new

ront door with its intercom is a greatconvenience or day-to-day living.Other improvements have includedrenovating and installing insulationthroughout, upgrading the electricalsystems and installing communallaundry rooms.

Some 700 kilometres to thesouth, in Traunstein, DAIG has

invested appro imately 240,000in modernising buildings inPermanederstrae. These buildings,dating rom the 1930s, now eaturenew entrance doorways withintercoms as well as new windows.The attics and cellar ceilings wereinsulated, as were some o thee terior walls. DAIG tenant OttoDiener is impressed. Im happyto have a landlord whos investingin the building, says the 47-yearold technical employee. Goodinsulation is really important,

especially in view o e plodingenergy prices.

you can haveany colour youwant as longas its green





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eMi GRouP

emi iS one oF TheworldS larGeST

muSic companieSi p ra d r c 50 c r , ha c a r h r 20 c r a d mp

r 3,150 p p . th b mad p d : eMi M c P b h ga d eMi R c rd d M c





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(2009)

(2009)

(2008)

(2009)

(2009)

(2008)

25 Grammy Awards7 Brit Awards5 Ivor Novello Awards





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eMi

investMent RAtionAleEMI draws on Terra Firmas e periencein strategically trans ormingbusinesses, repositioning assets,driving operational change andenhancing cash fows. It is an asset-richbusiness with e ceptional publishingand recorded music catalogues.However, EMIs revenue had beendeclining due to the structural shi t inthe consumer music market and to aslow response, both by the industryand the company, to the move towardsdigital consumption and alling

retail space or music. This shi t hasbeen particularly detrimental to theconsumer- acing Recorded Musicbusiness.

Terra Firma recognised the potentialto develop the publishing cataloguewhile streamlining the recordedmusic business and repositioning itto capitalise on the opportunitieso ered by the booming digital marketand by re-engaging with consumersand new generation retailers.

ReDeFinition oF stRAteGy & DeveloPMent PlAnSince acquiring EMI in August 2007,Terra Firma has embarked on a majorrestructuring o the business which

will trans orm not only EMI, butpotentially the entire music industry.The goal is or EMI to become themost innovative, artist- riendly andconsumer- ocused music companyin the world, while delivering the

nancial per ormance needed tobuild a sustainable business. EMIRecorded Music, like the other majormusic companies, has traditionallybeen ocused on producing success ulalbums. This has led to a policy o making large advances to artists tosecure recording contracts, ollowed

by a number o album releases thatare supported by signi cant up- rontmarketing spend.

The reality was that a small number o very success ul albums compensated

nancially or the losses incurred onthe majority o artists and or a generallack o cost discipline within theindustry.

Under Terra Firma ownership, EMIwill aim to provide the best service toartists while maintaining the companys

cost base at a level that can ensurepro table growth. To achieve this,Terra Firma is radically changingEMI Recorded Musics e istingorganisation. This will involve

the goal is oremi to become themost innovative,artist- riendly andconsumer- ocusedmusic company inthe world





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moving rom standalone labels to astreamlined structure where the labelsare solely ocused on A&R (Artists andRepertoire). The key label supportactivities, such as marketing, will bebrought together under a uni ed,global leadership. EMI labels in the

uture will work closely with theirartists on the creative process andon developing their long-term musiccareers. The support unctions willassist the labels, ensuring that bothEMI and its artists e tract the ullvalue rom their work. The resulting

re-shaped organisation will simpli ywhat EMI does and help creativedevelopment while also speedingup decision-making.

b , changes and other restructuringe orts will enable Terra Firma toreduce headcount by 1,500-2,000people, rationalise e isting artistrosters and streamline the internationalmarket ootprint. Cost savings arepredicted to be in the region o 200 million per annum.

A key area o ocus will be EMIRecorded Musics artist roster.Currently, EMI has more than 14,000artists on its roster, o which just 200

account or hal o revenues. It isactively working with 1,300 artists,but only a small number o theserelationships are pro table. In the

uture, EMI will be more selective inits artist relationships. It will alsodevelop a broader relationship withits new artists. EMI is nancing thebuilding o the artist brand thereturn on this investment will comethrough not only the sale o recordedmusic, but also rom touring, licensingand other revenue streams.

CuRRent FinAnCiAlsR c rd d M cIn the year-to-date, EMIs RecordedMusic business realised a net domesticsales gross margin o 250.4 million,which was a 30.5% improvementcompared with prior year. This positivevariance arose rom the combinationo higher digital sales and lowerphysical returns. Coupled with lowercosts, this meant that earnings in theyear-to-date were 92 million betterthan prior year.

M c P b h gThe Music Publishing businessrecorded year-to-date revenue whichwas 1.6% below budget, but 0.4%better than prior year.

The avourable variance to prioryear was due to strong results inthe US, UK, Latin America and Spain.Digital sales at 21 million were 13.3%better than prior year.

yeAR enD: 31 MARCH ytD D c 07 ytD D c 08

R c rd d M cG oss g n n t do st c s l s 192 250G oss g n l c nc nco ndn ghbou ng ghts 69 70

Ov h ds nd sc ll n ous1 (249 ) (216 )eBitDA 12m 104m

M c P b h gN t v nu 306 307roy lty costs, ov h ds nd ssoc t s (225 ) (216 )eBitDA 81m 91m Gr p eBitDA 2 90m 221mB n nt st (139 ) (147 )

1 includ s co po t ov h d lloc t onnd sh o ssoc t s

2 includ s nco t G oup l v l





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MAnAGeMentl rd B r ,Cha rma , Ma b l dIn addition to his unction as a member

emi s b , lb tFirma since 2005. Prior to that, he wasChairman o In nis Ltd and between2000 and 2005, his activities includedmemberships o the Cabinet O ces b c sr p b Strategy Adviser to the Prime Minister,an adviser to McKinseys Global MediaPractice and the Chairmanship at Lync v . l b career with LWT where he becamea Director o Programmes be ore

1987 bbc was Deputy Director-General be orebecoming Director-General. l b St. Catherines College, O ord.

R g r Fa ,Cha rma a d Ch e c eMi M c P b h gRoger took up his current role asChairman and Chie E ecutive o

EMI Music Publishing in March 2007.He was previously President andCo-Chie E ecutive o EMI MusicPublishing. Roger has held a numbero senior roles at EMI includingPresident and Chie OperatingO cer o EMI Music Publishing,Chie Financial O cer o EMI Group

ex v p Chie Financial O cer o EMI MusicPublishing. Roger joined EMI romSothebys, where he was Chie E ecutive o Sothebys Europe andpreviously Chie Operating O cer

o Sothebys North and SouthAmerican operations.

e l -sc ,Ch e c eMi M c,Pr d n M cElio joined EMI as CEO o EMI Musicin September 2008. Prior to thathe had spent 16 years at Reckittb category manager be o

terra firma 2008 annual review

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