Presented by: Elias Sabo, PartnerCompass Group Management, LLCApril 2009 – FEI: 6th Annual Scholarship Awards Banquet

Leveraged Buyout Market -What Happened? -Where Are We? -Where Are We Going?

Table of Contents

Introductions

LBO Boom In Perspective

Growth & Collapse Of The Leverage Market

The Current Market

Equity Buyouts – Are They An Alternative?

What Should You Expect from Debt and Equity Sponsors?

Compass Group Management Overview

Compass Group Management LLC (“Compass”) is an external manager making investments in high return assets on behalf of two primary investment pools:

– Compass Diversified Holdings (“CODI”): Publicly traded holding company with approximately $1 billion of capitalization targeting middle market buyouts – currently over $400 million of availability to consummate acquisitions.

– Kattegat Trust: Philanthropic organization which has provided over $350mm of equity capital to invest opportunistically in high return assets.

CODI is the first U.S. listed, pure play private equity vehicle.

– Offering completed May 16, 2006 with four initial controlled companies (currently six).

– CODI provides 100% of the capital needed to consummate acquisitions allowing:

• NO FINANCING CONTINGENCIES

• Streamlined diligence process

• Reduced time to close

• Increased confidentiality

– Diversified portfolio and public structure reduces cost of capital.

– Permanent capital base removes need to exit around fund cycles.

End of the Party

After hours at the New York Stock Exchange, 1938. (BettmanCorbis)

The Boom Years

Source: Bureau of Economic Advisors and Yahoo Finance

US Debt Outstandings as a % of GDP( Nominal GDP in $Trillions)

$880 $903

$1,468$1,418

$1,248$1,212

$1,112

300.0%

320.0%

340.0%

360.0%

380.0%

2002 2003 2004 2005 2006 2007 2008

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

US Debt Outstandings as a % of GDP S&P 500

$10.5 $11.7$10.9 $12.4 $13.2$14.3$13.8

Note: Nominal GDP in Red

• Starting in 2002, the economy experienced a dramatic boom in growth.– Nominal GDP grew 36% (5.3% CAGR) between 2002 and 2008.– S&P 500 grew 67% (10.8% CAGR) between 2002 and 2007.

Expansion Of Money Supply

Asset Class Expansion

US Leveraged Loans Outstanding:

– Grew from $13.6 billion in 1996 to $132.5 billion in 2002 (46% CAGR).

– Further grew from $132.5 billion in 2002 to $596.1 billion in 2008 (28% CAGR).

US Home Mortgage Debt Outstanding:

– Grew from $6.0 trillion in 2002 to $10.4 trillion in 2008 (9.6% CAGR).

US Consumer Household Debt:

– Grew from $2.0 trillion in 2002 to $2.6 trillion in 2008 (4.4% CARG).

US Financial Sector Debt Outstanding (excludes non regulated financial companies):

– Grew from $1.0 trillion in 2002 to $17.3 trillion in 2008 (60.8% CAGR).

According to a market survey report performed by the International Swaps and Derivatives association, it is estimated that credit swaps on CDOs and other contracts not captured on the DTCC’s Trade Information Warehouse may exceed $47 trillion, representing a 100 fold increase over the past decade.

Growth of Middle Market Leveraged Loans

Source: Standard and Poor's 4Q08 review and Middle Market Lenders

MM Sponsor Volume vs. # Lead Agents

$0.0

$5.0

$10.0

$15.0

$20.0

$25.0

$30.0

2001 2002 2003 2004 2005 2006 2007 2008

$ i

n b

illi

on

s

0

10

20

30

40

50

60

# o

f A

gen

ts

MM Sponsor MM Lead Agents

An Excess of Debt Issuances

• Leveraged buyout levels reached unprecedented levels in 2006 and 2007 vs. average 1998-2005 levels.

Middle Market

$16.7

$22.5$20.9

$5.0

$-

$5.0

$10.0

$15.0

$20.0

$25.0

1998-2005Average

2006 2007 2008

$ in

Bil

lio

ns

0%

5%

10%

15%

20%

25%

MM Sponsor % of Total Sponsor Leverage

Source: Standard & Poor's 4Q08 Leveraged Buyout Review

Total Leveraged Market

$77.0

$234.0$293.7

$58.4

$246.1

$241.4

$94.7

$130.6

$0.0

$100.0

$200.0

$300.0

$400.0

$500.0

$600.0

1998-2005Average

2006 2007 2008

$ in

Bil

lio

ns

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

Total Sponsor Total Non-Sponsor % Sponsor

$207.6

$480.1

$535.1

$153.2

Credit Products Issued With Borrower Friendly Terms

Covenant Lite Loans By Volume and Number From 1997 - 1Q 2009

Source: Standard & Poor’s

Volume

0.02.5

96.6

23.6

2.40.10.50.020.30.3

3.11.8

$0

$20

$40

$60

$80

$100

$120

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

1Q09

In B

illio

ns

Number

01

12

19

2 2 1 3 14

37

125

0

20

40

60

80

100

120

140

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

1Q09

NANA

0%

25%

50%

75%

100%

Loan Market Share: Banks vs. Non-Banks

Non-banks include: institutional investors, insurance companies, finance companies and securities firms

Non-banks

Banks

Excludes all left and right agent commitments (including administrative, syndication and documentation agent as well as arranger)For 2Q08, All Deals includes block sales like TXU while New Deals include only deals launched and structured this year

Primary Market for Highly Leveraged Loans

New Funding Sources Emerge – Leveraged Buyouts

Leveraged Buyout Loans

2006 Agents

Long Term Funded Finance Co.’s

Commercial Banks

Short Term Funded, Securitized Finance Co.’s / CLOs

BDCs

Low-Leveraged Hedge Funds

Public Finance Co.’s

Investment Banks

Highly Leveraged Hedge Funds

2009 Agents

Long Term Funded Finance Co.’s

Commercial Banks

Short Term Funded, Securitized Finance Co.’s / CLOs - INACTIVE

BDCs - INACTIVE

Low-Leveraged Hedge Funds

Public Finance Co.’s

Investment Banks - INACTIVE

Highly Leveraged Hedge Funds - INACTIVE

• New sources arose with the flood of money entering the system and funneled funds to private equity and other users.

New Funding Sources Emerge – Other Assets

Other Asset Classes

Industry• Mortgages

• Consumer

• Corporate

• Municipalities

Financial Product Innovation:• Home Equity Loans• (Option) Adjustable Rate Mortgages• Interest Only Mortgages

• Structured Investment Vehicles (SIV)• Variable Rate Demand Notes (VRDN)• Credit Cards• Student Loans• Auto Loans

• Asset Backed Securities• CLOs, CDOs, CBOs

• Credit Linked Notes• Credit Default Swaps & Baskets• Credit Enhancements• Constant Proportion Debt Obligation

• (Preferred) Auction Rate Securities• Tender Option Bonds

• Other sectors of the economy also benefited from new funding sources. • Funding Intermediaries created a variety of exotic instruments.

Improved Credit Terms ResultedPercent of Institutional Tranches Priced Inside of L+300 bp for deals rated BB- or higher

Source: Standard & Poor‘s

71%

39%33%

31%

94%89%

24%

0%

98%100%

69%

46%

0%

25%

50%

75%

100%

1998 (70) 1999 (90) 2000 (91) 2001(88) 2002(118)

2003(104)

2004(148)

2005(118)

2006 (91) 2007 (62) 2008 (51) 1Q09 (0)

Period (Observations)

L+200 bp or Less L+212.5 bp - L+237.5 bp L+250 bp - L+287.5 bp

Large vs. Mid. Market LBO Purchase Multiples (Mid. Market Multiple Displayed By Capitalization)

0.6x 0.4x0.9x

4.1x5.4x 3.6x

3.8x3.5x3.3x

3.0x

0.8x

3.3x

9.8x10.2x

8.8x

7.7x

0.0x

2.0x

4.0x

6.0x

8.0x

10.0x

12.0x

1998-2005

2006 2007 2008

xEB

ITD

A

MM Equity Cap MM Sub. Debt Cap MM Sr. Debt Cap Large LBO Multip

1998-2005 20072006 2008

And Purchase Price Multiples Increased - LBOs

• Higher risk tolerance was a function of lower returns. • Seeking higher yields, investors sought out riskier securities. Competition led to pricing at historical lows,

looser covenants, relaxed terms and support for higher leverage multiples.• A fundamental flaw was that acquisitions were priced assuming continued economic growth or stability.

42%

Source: Standard & Poor's 4Q08 Leveraged Buyout Review

58%59%

62% 54%

41% 38% 46%

7.1x

8.1x

9.3x

8.3x

Where Else Did Asset Prices Increase? - Housing

Where Else Did Asset Prices Increase? - Commodities17 Components: Includes Livestock, Agriculture, Energy and Metals

The Reckoning Begins

The Bubble Bursts

Inflation Adjusted US House Price Index and Stock Prices, 2003-2009

Source: Case-Shiller; Dow Jones, Keefe, Bruyette & Woods. All indices inflation adjusted by the CPL

Rising Payment Default Rates Are Beginning

Percent of Outstanding Leveraged Loans in Payment Default or Bankruptcy

Source: Standard & Poor’s LCD and S&P/LSTA Leveraged Loan Index

0.0%1.0% 1.0%

4.0%

2.6%3.6%

1.9%

0.6%

3.7%

7.6%7.4%7.0%

10.0%9.9%

0.0%

5.0%

10.0%

15.0%

As of

•Includes all loans including those not included in the LSTA/LPC mark-to-market service.

•Vast majority are institutional tranches.

Earnings Pressures Lead to Exercised PIKs

• Switching on a PIK toggle helps a company buy breathing room and preserve its cash until its financial situation improves.

• PIK toggles — much like covenant-lite loans — still don’t address fundamental problems that a company faces.–While they buy breathing room, bankruptcy is still a possibility.

What Happens to Height of Market Valuations?

• If 2009 valuations drop to average levels from 1998-2005 (7.1x EBITDA), it translates to a destruction of 62% for Equity assuming constant debt levels.–This drop in value is prior to any decline in EBITDA levels.

Middle Market CapitalizationsAssuming a return to 1998-2005 average purchase price multiples

5.4x 5.4x

0.4x 0.4x

3.5x

1.3x

0.0x

1.0x

2.0x

3.0x

4.0x

5.0x

6.0x

7.0x

8.0x

9.0x

10.0x

2007 2009

xEB

ITD

A

Sr. Debt Sub. Debt Equity

9.3x

7.1x62% decline

in equity value

Is There An End In Sight?

• Forced sales of defaulted ABS vehicles flooded the secondary market.

–Secondary prices dropped dramatically, with bids at the end of January at 70 for actively traded names and 64 for leveraged middle market, lightly traded accounts.

• Secondary market trends create a challenge for new issue pricing due to relative value analysis.

Monthly Bid Prices by Market Size

Source: Standard and Poor's LoanStatsWeekly Supplemental and LSTA Weekly Secondary Spreads

60

65

70

75

80

85

90

95

100

105

1/15

/200

7

3/15

/200

7

5/15

/200

7

7/15

/200

7

9/15

/200

7

11/1

5/20

07

1/15

/200

8

3/15

/200

8

5/15

/200

8

7/15

/200

8

9/15

/200

8

11/1

5/20

08

1/15

/200

9

Bid

Pri

ce

Flow Names Large Corporates Middle Market

A Glimmer of Hope?

What Strategies Are Equity Sponsors Employing?

LBOE

$100 Million

Equity Buyout Example

Leveraged Buyout LBO EBOInitial EBITDA: $100 $100Purchase Price: $860 $550Purchase Multiple: 8.6x 5.5x

Debt Invested: $645 $0Equity Invested: $215 $550EBITDA Growth/Year: 10% 10%EBITDA in Year 4: $146 $146Special Dividend (4x): $0 $586EBITDA Year 5: $161 $161Sale Price at 7x: $1,127 $1,127Profit: $267 $577

•Less Debt •Includes Dividend•Less Debt

IRR Return: 17.5% 17.5%

Key FactsEquity Buyout

$100 Million

$860 Million Purchase $550 Million

8.6x EBITDA 5.5x EBITDA

$645 Million

$215 Million

Debt

Equity $550 Million

$0

EBITDA

Equity Buyout Example

Leveraged Buyout LBO EBOInitial EBITDA: $100 $100Purchase Price: $860 $550Purchase Multiple: 8.6x 5.5x

Debt Invested: $645 $0Equity Invested: $215 $550EBITDA Growth/Year: 10% 10%EBITDA in Year 4: $146 $146Special Dividend (4x): $0 $586EBITDA Year 5: $161 $161Sale Price at 7x: $1,127 $1,127Profit: $267 $577

•Less Debt •Includes Dividend•Less Debt

IRR Return: 17.5% 17.5%

Key FactsEquity Buyout

EBITDAGrowth

$586 Million

Year 4: Special 1-Time Dividend

(4x EBITDA, paid via debt-issuance)

Sale

10% Annually

10% Annually

EBITDA

EBITDA

$100 Million

$161 Million$161 Million Year 5

Year 5

7x EBITDA

$1.1 Billion $1.1 Billion $267Million

Leveraged Buyout Equity Buyout

Profit$577

Million

~17.5% IRR ~17.5% IRR

$100 Million

Predicting The Future – Intermediate Term

Deal Flow:

– Deal flow will return to historical returns, but remain low given economic uncertainty.

– Funds that depended on financial engineering to drive returns will be distracted by tripped covenants, liquidity challenges and potential brand damage for future fund raises.

Holding Period:

– Given the lackluster IPO market, Strategics’ focus on current operations and most Sponsors frozen given the credit markets, exit opportunities will be minimal.

– Quick flips will fade as historical hold periods of 5+ years return.

Sponsor Returns:

– Funds that fully invested 2006-2008 may not be able to return capital to investors.

– Funds not fully invested may be able to average down their portfolio’s average purchase price and improve returns going forward

What Is The New Normal For Lendors?

Multiples:

– 2.5x EBITDA is the norm for senior multiples (maybe 3x for pristine operating profiles).

– 3.5-4.0x for total leverage (mezzanine, subordinated debt) vs. 2007’s 6x

– In 2009, leverage multiples for a stable, recession-resistant, cash flow transaction are expected to be no greater than 2.50x senior and up to 3.75x total (+/- 0.25x).

Debt Pricing:

– Senior debt is more expensive at L+650 to L+700

– Including Libor floors of 2-3% and upfront fees of 3%, all-in pricing approaches 11.5-13%.

Impact on Transaction Pricing?

– 40% equity translates to 5.8-6.6x EBITDA purchase multiples vs. 8.3-9.3x for 2008 & 2007.

What Is The New Normal For Equity Sponsors?Pre-Transaction

Company Differentiation (Pre-LOI):

– What is the company’s reason to exist?

– Unique product lines, customer relationships, etc.

Heightened Due Diligence:

– More information requested and in greater granularity

– Deeper understanding of company attributes

– Longer periods to close post-LOI.

Has EBITDA stabilized?

Was that new customer account signed?

Impact on Transaction Pricing?

More Expensive Debt + Higher Equity Contributions + Heightened Economic Uncertainty Lower Purchase Multiples

What Is The New Normal For Equity Sponsors?Post-Transaction

OPERATIONAL IMPROVEMENTS

More Intense Focus on Portfolio Companies:

– Expect greater involvement by equity sponsors on a weekly (if not daily) basis.

– Be ready to defend proposed investments.

• What is the ROI on the investment? Is it possible to accelerate the payback of the investment? Is the investment nice to have or a must have?

– More accountability of senior management teams

– Are current investments in HR and Capital appropriate given current business levels?

Strategic Initiatives

– Does it make sense to acquire / merge?

– Divestitures of non-core operations

– Heightened scrutiny of non-income producing investments

Questions?

Compass Group Management