Carlyle Pres 2-27-08 Rub en Stein Super Return

8/8/2019 Carlyle Pres 2-27-08 Rub en Stein Super Return

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Questions for Audience:Questions for Audience:1. How many of you are GPs?1. How many of you are GPs?

2. LP's?2. LP's?3. Service providers?3. Service providers?4. Media?4. Media?5. Labor unions?5. Labor unions?6. Think the golden age is over and that the best days of private equity are behind6. Think the golden age is over and that the best days of private equity are behind

us?us?7. Think the best days lie ahead?7. Think the best days lie ahead?8. Think there will be buyouts of 5 or 10 billion this year?8. Think there will be buyouts of 5 or 10 billion this year?9. Next year?9. Next year?10. Think there will be visible bankruptcies?10. Think there will be visible bankruptcies?11. Think returns will be better from deals done now? worse?11. Think returns will be better from deals done now? worse?

12. Think taxes will go up? Stay the same? Go down?12. Think taxes will go up? Stay the same? Go down?13. Think private equitys image will improve? Worsen?13. Think private equitys image will improve? Worsen?14. How about the next president? Who thinks it will be Obama, Clinton, McCain,14. How about the next president? Who thinks it will be Obama, Clinton, McCain,

Huckabee?Huckabee?


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1. Will Leverage for Buyouts Return in Time1. Will Leverage for Buyouts Return in Timefor PE Investors and Professionals to Stayfor PE Investors and Professionals to Stay

with the Industry?with the Industry?


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1

0

121 5

4

54 1

20 111 1

22 0 2 0

1

1

0

50

100

150

200

Leveraged Loan Volumes Will RecoverLeveraged Loan Volumes Will Recover

US Leveraged Loan Volumes Bounced Back after theUS Leveraged Loan Volumes Bounced Back after theDownturn of 2000Downturn of 2000- -20012001

1996 1997 1998 1999 2000 2001 20042003 2005 20062002 2007

US Buyout Leveraged Loan Volume ($Bn)

+ 1,929%

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


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Leveraged Loan Volumes Will RecoverLeveraged Loan Volumes Will Recover

While European Issuance has Grown Every Year SinceWhile European Issuance has Grown Every Year Since19991999

European Buyout Leveraged Loan Volume (Bn)

Source: S&P LCDSource: S&P LCD

6 ! " " " #


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But This Will Not Happen OvernightBut This Will Not Happen Overnight

In the US, it took roughly three years for leveragedIn the US, it took roughly three years for leveragedloan volumes to match their previous highs after 2000loan volumes to match their previous highs after 2000

And those three years were challenging for privateAnd those three years were challenging for private

equity investorsequity investorsIn 2001 and 2002, US leveraged loan issuance fell toIn 2001 and 2002, US leveraged loan issuance fell toapproximately 1/3 of its 1998 totalapproximately 1/3 of its 1998 total

But when the recovery came, it exceeded allBut when the recovery came, it exceeded allexpectationsexpectations

Leveraged loan issuance more than doubled between 2002 andLeveraged loan issuance more than doubled between 2002 and2004 and again between 2004 and 20062004 and again between 2004 and 2006Issuance jumped 20x between 2001 and 2007Issuance jumped 20x between 2001 and 2007



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2. Are There Going to be Major Defaults2. Are There Going to be Major Defaultsfrom Buyouts Completed within the "Goldenfrom Buyouts Completed within the "Golden

Age"?Age"?


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And Credit Ratios Are DepressedAnd Credit Ratios Are Depressed

1 1 2 3 1 1 2 3

2 1 03 1 1 4 3

2 1 53

5 1 13

2 1 4 3

2 1 2 3

2 1 13

2 1 03

1 1 6 3

1 1 03

2 1 03

5 1 03

20042004 20052005200 7 200 7 1 8 8 9 1 8 8 9 20062006 200 9 200 9 1 8 8 @ 1 8 8 @ 1 8 8 8 1 8 8 8 20002000 20012001 20022002

(EBITDA Capex) / Cash Interest



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1 0%0 %

1 %

%2 %

4%

10 0%%

0%

4 0%

1 0%1 0%0 0%0 0%

2 0%

4 0%

0%

0%

10 0%

Y 1 9

9 6

Y 1 9

9 7

Y 1 9

9 8

Y 1 9

9 9

Y 2

Y 2

1

Y 2

2

Y 2

3

Y 2

4

Y 2

5

Y 2

6

Y 2

7

2 / 8 / 2

8

Default Rates Have Remained Low OverDefault Rates Have Remained Low Overthe Past Three Yearsthe Past Three Years

P ercentage of Outstanding Leveraged Loansin Default or Bankruptcy

Source: S&P LCDSource: S&P LCD

Avg. 3 . 80%


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And Remain Below Levels Seen DuringAnd Remain Below Levels Seen DuringPast Market DownturnsPast Market Downturns

Leveraged Loan Default Rates During Recent MarketLeveraged Loan Default Rates During Recent MarketDownturns: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 StanleySource: Morgan Stanley


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But the Trading Levels of Many LBOBut the Trading Levels of Many LBODebt Deals Suggest Defaults are LikelyDebt Deals Suggest Defaults are Likely

A Spread vs. Treasuries of Above 1,000 IndicatesA Spread vs. Treasuries of Above 1,000 IndicatesSignificant DistressSignificant Distress

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

B ond Face Value ($MM) Type Price SpreadG 2,500 senior 92.90 T+1,002

G 2,000 senior 86.71 T+1,045R 1,700 senior 70.25 T+1,587F 1,598 sub 70.75 T+1,303U 1,500 senior 70.50 T+1,389H 1,000 senior 60.25 T+1,134C 825 senior 81.00 T+1,222

A 800 senior 80.00 T+1,057M 750 senior 86.00 T+1,004D 725 sub 81.75 T+1,208I 700 senior 64.25 T+1,342


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3. What is Going to Happen to All of the3. What is Going to Happen to All of theBuyout Debt Still Held by the MajorBuyout Debt Still Held by the Major

Syndicating Banks?Syndicating Banks?


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B ank ExposureB ear Stearns $2.5 billionGoldman Sachs $26.0 billionLehman B rothers $23.8 billionMerrill Lynch $19.0 billionMorgan Stanley $20.0 billionCitigroup $43.0 billionJ.P. Morgan $26.4 billionB ank of America $12.0 billionUB S $11.4 billionWachovia $9.1 billion

A Massive Backlog RemainsA Massive Backlog Remains

Approximately $200 billion of leveraged loans are stillApproximately $200 billion of leveraged loans are stillsitting on banks balance sheetssitting on banks balance sheets

This represents a decrease of only $75 billion from last yearsThis represents a decrease of only $75 billion from last yearspeakpeak

Every bank is affectedEvery bank is affected

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


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4. What Areas Will PE Firms Pursue to4. What Areas Will PE Firms Pursue toAchieve the Types of Returns Sought byAchieve the Types of Returns Sought by

Their Investors?Their Investors?


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PE Firms Will Invest More in EmergingPE Firms Will Invest More in EmergingMarketsMarkets

Emerging Market Fundraising Has Grown ExponentiallyEmerging Market Fundraising Has Grown Exponentially

2007200620042003 2005

2 A 2 2 A B

C 5 A 5C D A 4

2 B A 7Emerging Asia ($Bn)

200520042003 2006 2007

0 E 5 0 E F 2 E G 3 E 3

H 4 E 6CEE Russia ($Bn)

20062003 2004 2005 2007

0 E 4 0 E 7H E 3

2 E 7

4 E 4Latin America ($Bn)

2003 2004 2005 2006 2007

H E 4 H E 72 E 7

7 E G

H H E 4Middle East & Africa ($Bn)

Source: EMPEASource: EMPEA


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As Has Deal VolumeAs Has Deal VolumeEmerging Asia ($Bn) CEE Russia ($Bn)

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

Source: Morgan Stanley, ThomsonSource: Morgan Stanley, Thomson

I P Q R

P P Q P

S Q T

I U Q V

W P Q P

I U Q V

X Y Y ` X Y Y a X Y Y b X Y Y 6

b a c b

d H X Y Y e

I Q 6 I Q I P Q 6

R Q T

W Q V

W Q V

d Y c b

d H X Y Y e X Y Y ` X Y Y a X Y Y b X Y Y 6

I Q S

R Q P

T Q 6T Q I

T Q P

I Q S

X Y Y ` X Y Y a X Y Y b X Y Y e

b c f

X Y Y 6

P 6 Q P P Q S

I Q S

S Q 6

I R Q S

P 6 Q P

X Y Y `

` X c X

X Y Y b X Y Y 6 X Y Y e X Y Y a


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A growing percentage of global private equity activityA growing percentage of global private equity activityis dedicated to Emerging Marketsis dedicated to Emerging Markets

In 2001, they accounted for 4.5 of private equityIn 2001, they accounted for 4.5 of private equity

fundraising and 3.3 of deal volumefundraising and 3.3 of deal volumeIn 2007, they accounted for 15.9 of fundraisingIn 2007, they accounted for 15.9 of fundraisingIn the first half of 2007, they accounted for 7.0 of global LBOIn the first half of 2007, they accounted for 7.0 of global LBOdeal volumedeal volume

Source: Morgan Stanley, ThomsonSource: Morgan Stanley, Thomson


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Private Equity Firms Will Make MorePrivate Equity Firms Will Make MoreMinority InvestmentsMinority Investments

Private equity firms have increased their commitmentsPrivate equity firms have increased their commitmentsto nonto non--control investments:control investments:

Source: DealogicSource: Dealogic

Pe ri # f ea ls ea l l e ( B )

.

.Yea r-t - a te 84 5 .8

In the past six months, private equity firms have madeIn the past six months, private equity firms have made

large minority investments in companies includinglarge minority investments in companies includingSprint Nextel, NC Numericable, MBIA, Global Hyatt, AnteroSprint Nextel, NC Numericable, MBIA, Global Hyatt, AnteroResources, Galaxy Entertainments, MoneyGram International,Resources, Galaxy Entertainments, MoneyGram International,Legacy Hospital Partners, and Bharti InfratelLegacy Hospital Partners, and Bharti Infratel


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And They Will Commit More Capital toAnd They Will Commit More Capital toDistressed InvestmentsDistressed Investments

g h

g 5

g

10

$1 5

$ 20

$ 25

'0 2 ' 0 4 ' 0 6 1H0 7 ' 0 8 ' 10

( $

i

op

D i s t r e s s e

d

q

r

n d r a

i s i n

s

t

$ 25

$ 75

$1 25

$1 75

$ 225

( $

i o

p

D e

u

t M a

tr

r i n

s

t

Distressed De v t w x estr y ct y rin y ndraisin

elo Investment rade De v t

Distressed Debt Fundraising Anticipating Debt MaturityDistressed Debt Fundraising Anticipating Debt MaturitySchedule:Schedule:

Source: Private Equity Analyst,Source: Private Equity Analyst, data as of 6

30

07; Fitch Ratings, data as of July 2007data as of 6

30

07; Fitch Ratings, data as of July 2007


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5. Should Investors in PE Expect Higher or5. Should Investors in PE Expect Higher orLower Rates of Return?Lower Rates of Return?


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Top Quartile PE Returns Are UnrivalledTop Quartile PE Returns Are 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%

1 8.4%

28 .5%

32 .1 %

0% 1 0% 20% 30% 40%

NASDAQ

DJIA

S&P 500

Top Quartile >$2Bn

Top Quartile U . S.Buyout

10-year 5-year 1 -year


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Top Quartile PE Returns Are UnrivalledTop Quartile PE Returns Are 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 .

.

.

7 .

7 .

.

7 .

.

7 .

-year -year -year

Top QuartileEu. Buyout

FTSE

CAC-


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6. Is Now the Right Time for Investors to6. Is Now the Right Time for Investors toPursue Private Equity Investments?Pursue Private Equity Investments?


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PE Funds Raised During Times of PE Funds Raised During Times of Market Distress Generally Perform WellMarket Distress Generally Perform Well

Private equity investments have produced healthyPrivate equity investments have produced healthyreturns during each of the three most recent globalreturns during each of the three most recent globaleconomic slowdownseconomic slowdowns

Top Quartile P rivate Eq uity IRRs by Vintage

Un ited ta te s r e

1980 21 . 11 .1981 14 .8% 9 .2%1982 9 .1% 15 .1%

1990 19 .5% 18 .8%1991 25 .5% 17 .4%

2001 15 . % 3 .4%2002 16 .0% 13 .5%

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


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7. Will Regulators and Legislators Continue7. Will Regulators and Legislators Continueto Seek Changes in PE Regulation, Oversightto Seek Changes in PE Regulation, Oversight

and Taxation?and Taxation?


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The PE Industry Faces VariousThe PE Industry Faces VariousLegislative and Regulatory ProposalsLegislative and Regulatory Proposals

Several countries are considering or have introducedSeveral countries are considering or have introducedchanges to the way that private equity returns arechanges to the way that private equity returns aretaxedtaxed

The industry is under pressure to increase disclosureThe industry is under pressure to increase disclosureand transparencyand transparency

In some markets, foreign private equity firms areIn 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 Replace PE8. Will Sovereign Wealth Funds Replace PEFirms as Principal Sources of Capital forFirms as Principal Sources of Capital for

Corporations Sellers Seeking New Capital?Corporations Sellers Seeking New Capital?


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PE Firms Pale in Comparison to thePE Firms Pale in Comparison to theLargest Sovereign Wealth FundsLargest Sovereign Wealth Funds

an Countr Fund ssets ( n) ctive Investment Strateg ?

#1

j

k l m n o k i I v st t

l t n ority

k l m n o k i I v st t o l cil87 5 X

#2 or o y Gov r t sio l 28

# So l i

r o k i o o m sig o t o > 00

#4 Kl o it Kl o it I v st t

l t n orityG r o l R s rv l

l t l r G r o tio s l

00

#5 Si g o z or Gov r t I v st t or z .{

o s k | ol i gs> 200 X

# } n

io n

io

I

v

st

t

orz

. 200 X# 7 Rl ssi o ~ il St o k o liz o tio l 141

# 8 H o g Ko g

o t o ry j xc n o g l 140

# o t o r o t o r I v st t

l t n ority } 0 X

#10

l str o li o

l str o li o l t l r l } 0

Top Sovereign Wealth Funds

Source: CitigroupSource: Citigroup


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Sovereign Wealth Fund InvestmentSovereign Wealth Fund InvestmentActivity Has Increased DramaticallyActivity Has Increased Dramatically

44 2

1

15 1

0 4

11 011 4

0

10

20

0

40

50

0

0

0

0

50

100

150

200

250

00

Value of Deals

200

Number of Deals

200

Deal Volume ($Bn) of Deals

1 1 1 2000 2001 2002 2004200 2005

+ 1,151%

Sovereign Wealth Fund Deal Volume

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


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But These Investments Still RepresentBut These Investments Still RepresentA Tiny Proportion of Total M&A ActivityA Tiny Proportion of Total M&A Activity

0

500

1 000

1 500

2 000

2 500

000

500

4 000

4 500

20022001200019991998 2007200620052004200 1997

Sovereign Wealth Funds StrategicPrivate Equity

Breakdown of Global M& A Activity ($Bn)

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


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Sovereign Wealth Funds and PE FirmsSovereign Wealth Funds and PE FirmsAre Forming a Productive PartnershipAre Forming a Productive Partnership

Sovereign wealth funds have purchased substantialSovereign wealth funds have purchased substantialequity stakes in several alternative asset managersequity stakes in several alternative asset managers

China Investment Corp. invested $3 billion in BlackstoneChina Investment Corp. invested $3 billion in BlackstoneAbu DhabisAbu Dhabis MubadalaMubadala invested $1.4 billion in Carlyleinvested $1.4 billion in Carlyle

Dubai International Capital invested 1.3 billion inDubai International Capital invested 1.3 billion in Och Och--ZiffZiff

They are among the private equity industrys largestThey are among the private equity industrys largestindividual investorsindividual investorsIn the future, sovereign wealth funds and privateIn the future, sovereign wealth funds and privateequity firms are likely to pursue large investmentequity firms are likely to pursue large investmentopportunities through joint venturesopportunities through joint ventures

Sovereign wealth funds will benefit from PE firms deep poolsSovereign wealth funds will benefit from PE firms deep poolsof investment talent and deal expertiseof investment talent and deal expertise


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9. Can the PE Industry Improve its Image9. Can the PE Industry Improve its Image

with the Public, Media, Governments,with the Public, Media, Governments,Unions, Environmental and ConsumerUnions, Environmental and ConsumerGroups?Groups?


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Private Equitys Image Could be BetterPrivate Equitys Image Could be Better

Gluttons at the GateP rivate e q uity are using slick new tricks togorge on corporate assets. A story of excess

Business Week

A Backlash AgainstP rivate Eq uityGrumbling by unions over post-deal job cuts hasescalated into a public outcry

Business Week


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1 0. Is PE s Future Going to Be Better, Bigger,1 0. Is PE s Future Going to Be Better, Bigger,and Stronger than Before, Or Have Weand Stronger than Before, Or Have We

Already Seen the HighAlready Seen the High- -water Mark?water Mark?


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Its Always Darkest Just Before DawnIts Always Darkest Just Before Dawn

As before, deal volume will rebound and yesterdaysAs before, deal volume will rebound and yesterdaysrecords will be left far behindrecords will be left far behind

,

,

,

,

of DealsDeal Volume ($Bn)

Deal Volume of Deals

Global LBO Activity

Source: DealogicSource: Dealogic

CAGR: 31%


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

Giving Private Equity a Positive Image: WhyGiving Private Equity a Positive Image: Why

is there such Disparity Between the Publicsis there such Disparity Between the PublicsPerception of the Industry and thePerception of the Industry and theIndustrys Perception of Itself, and What canIndustrys Perception of Itself, and What canbe done to bring these Views intobe done to bring these Views intoAlignmentAlignment


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The Current SituationThe Current Situation

Perception of the Industry outsidePerception of the Industry outsidethe Industrythe Industry

Destroyed JobsDestroyed Jobs

Relocated Facilities OverseasRelocated Facilities Overseas

Focused Only on ShortFocused Only on Short- -Term ProfitsTerm Profits

Left Companies in Worse ShapeLeft Companies in Worse Shape

Made Too Much Money for PEMade Too Much Money for PEProfessionalsProfessionals

Insufficient Level of Taxes PaidInsufficient Level of Taxes Paid

Perception of the Industry withinPerception of the Industry withinthe Industrythe Industry

Improved operation of companiesImproved operation of companies

Prevented job losses; created jobsPrevented job losses; created jobs

Improved EconomiesImproved Economies

Created High Returns forCreated High Returns forInvestors/Pension FundsInvestors/Pension Funds

Paid Large Amount of TaxesPaid Large Amount of Taxes

Created an IndustryCreated an Industry


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Why the Disparity in Perceptions?Why the Disparity in Perceptions?

Industry Focused for Long Time Principally on ReturnsIndustry Focused for Long Time Principally on Returns

Industry Spent Little Time Explaining its Actions toIndustry Spent Little Time Explaining its Actions tothose Outside of Investor Basethose 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 andOther Problems of Industry Critics/Convenient andAttractive TargetAttractive Target


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What Can the Industry Do to ImproveWhat Can the Industry Do to ImproveIts Image?Its Image?

Continue to Produce Hard DataContinue to Produce Hard Data

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

Consider Factors Other than Just Returns WhenConsider Factors Other than Just Returns WhenAssessing/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 OccurRecognize that Some Changes Can and Should Occur


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Ten Leading Questions Facing theTen Leading Questions Facing thePrivate Equity WorldPrivate Equity World

David RubensteinDavid Rubenstein

CoCo--founder & Managing Directorfounder & Managing Director February 27 2008February 27 2008

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Carlyle Pres 2-27-08 Rub en Stein Super Return

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