1

Seminar: introduction to private equity

2

Contact

• Antoine Parmentier:– Antoine.parmentier@aig.com– +44(0)7809.510.373

3

Final presentations

• Corporate governance and public debate over private equity;

• Private equity in emerging markets;

• FIP, FCPI, defiscalisation;

• Investments in infrastructure;

• Private equity post credit crunch;

• Private equity in retail and consumer goods.

4

Content• Introduction;• Why allocate assets to PE?;• LBO activity in Europe;• European fundraising activity;• The measure of perfromance;• FoF due diligence: selection of PE managers;• The world’s biggest private equity firms;• The mega-buyout era;• Value creation in private equity;• The structure of a leverage buyout deal;• The pros and cons of being private;• The credit crisis: impact and consequences on PE;• Case study: Baneasa

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Introduction to Private Equity

6

Introduction• Asset class representing the companies not publicly

traded (vs. public equity traded on stock exchange);

• Medium to long term investment;

• Venture capital, growth capital, buyout…

• PE funds are raised from pension funds, insurance companies, large corporate, HNWI, etc…;

• Investors in PE funds are called “Limited Partners”;

• PE funds are managed by the “General Partners”

7

• Structure of private equity participations

LP Insurance company

Pension fund

Large corporate

HNWI

GP The PE fund Manager

Portfolio Company A Company B Company C Company D Company E Company D

8

The fuel of private equity

• The debt:– Acquisitions are made through leveraged buyout

deals (LBOs);

• The investors:– PE funds managers must be disciplined and patient;

• The managers: – The success of an investment relies on the

implementation of the business plan;

• The macro environment: – Acquisition multiple arbitrage can be positive in period

of growth;

9

A diversified asset class

• Private equity includes a large number of strategies: venture, buyout, distressed, secondary…

• Like-minded strategies: mezzanine, clean-tech/energy, infrastructure, real assets…

10

Venture capital (1/2)

• Earlier stage: venture investors provide funds for start-up and early expansion;

• Based on innovative business, development of a new product, new patent;

• Two sectors: technology or life science;

• Highly skilled professionals and scientists;

• Scalable investments with a lot of failures and few great successes;

11

Venture capital (2/2)

• Investment from up to €10m and often pre-revenues balance-sheet;

• Financing in several rounds (round 1, round 2, round 3…) with typically clinical test results as threshold for next round;

• Most of the exits are IPO (NASDAQ, Zurich…);

• Examples: Skype, Google, Apple, Atari, Cisco, Yahoo, YouTube, LinkedIn, Paypal.

12

Buyout (1/3)

• The most important strategy of PE;

• Buyout comes after venture and growth capital;

• Taking control of a company through leveraged buyout (LBO);

• Management team of the company is investing alongside the PE fund (alignment of interest);

13

Buyout (2/3)

• Development of a business plan over 4 to 6 years in order to add value;

• Revenue growth + Margins improvement + deleveraging = added value;

• Mature companies with leading market position, active management team, strong cash-flow;

• PE funds provide capital for international expansion, corporate divestures, succession issues…

14

Buyout (3/3)

• Buyout starts at €5 million enterprise value (EV);

• At the bottom end: growth/expansion capital.

Large cap€800 million and above

Mid market€100 million to €800 million

Lower market€5 million to €100 million

15

Distressed / Special situation (1/2)

• Investment in debt-securities or equity of a company under financial stress;

• Distressed companies are in default, under Chapter 11 (reorganization) or under Chapter 7 (liquidation=bankruptcy);

• Loans are rated BB and below by S&P based on usual ratio (debt/EBITDA, EBITDA interest coverage, etc…);

16

Distressed / Special situation (2/2)

• Distressed debt investors try first to influence the process;

• Debt holders have access to confidential information;

• Then, as debt holders, they can take the control of the company;

17

Secondary (1/2)

• Purchase of existing (hence secondary) commitments in PE funds or portfolios of direct investments;

• LP selling their portfolio = secondary deal;• Needs in depth valuation and bidding/auction process;• Specialized investors: Alpinvest, Coller Capital,

Lexington Partners;• Booming specialization as most of institutional

investors are seek cash.

18

Secondary (2/2)

LP Insurance company

Pension fund

Large corporate

HNWI

GP The PE fund Manager

Portfolio Company A Company B Company C Company D Company E Company D

SecondarybuyerLP Insurance

companyPension

fundLarge

corporateHNWI

GP The PE fund Manager

Portfolio Company A Company B Company C Company D Company E Company D

Secondarybuyer

Secondarybuyer

19

Mezzanine (1/3)

• Debt instrument immediately subordinated to the equity;

• The most risky debt instrument = highest yield;• Returns generated by:

– cash interest payment: fixed rate or fluctuate along an index (e.g. EURIBOR, LIBOR);

– PIK interest: payment is made by increasing the principal borrowed;

– Ownership: mezzanine financing most of the time include equity ownership.

20

Mezzanine (2/3)

• Mezzanine suffered before credit crunch as senior debt was easy to access;

• Since July 2007 and lack of funding, mezzanine is back:– As of 30 September 2008, 70% of PE deals

used mezzanine vs. 48% in 2007;– Q3 2008 average spread: E+1,042, versus

E+979 in Q2 2008;

21

Mezzanine (3/3)

Rolling 3-month average spreads of mezzanine

600

650

700

750

800

850

900

950

1000

1050

1100

Ma

r-0

0

Jul-

00

No

v-0

0

Ma

r-0

1

Jul-

01

No

v-0

1

Ma

r-0

2

Jul-

02

No

v-0

2

Ma

r-0

3

Jul-

03

No

v-0

3

Ma

r-0

4

Jul-

04

No

v-0

4

Ma

r-0

5

Jul-

05

No

v-0

5

Ma

r-0

6

Jul-

06

No

v-0

6

Ma

r-0

7

Jul-

07

No

v-0

7

Ma

r-0

8

Jul-

08

E+

bp

s

Highest in May 2003: E+1,051.5 bps September 2008: E+1,042 bps

Credit crunch: E+780.5 bps

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Infrastructure (1/2)

• Among the newest PE-like asset;• Global needs for infrastructure assets• Roads, ports, airports, energy plant, hospitals. Prisons,

schools, etc…• Mix of private investors and governments through PPP

(Public-Private Partnerships);• Traditional PE funds raised infrastructure funds: KKR,

CVC, 3i, Macquarie;• Longer term investment, lower return, steady cash-flow

with regular yield;• French highways or Viaduc de Millau are contracted to

Eiffage/Macquarie;

23

Infrastructure (2/2)

• A multi trillion market opportunity:– $1 trillion to $3 trillion annually through 2030;– US: power industry needs $1.5 trillion

between 2010 and 2030;– Mexico: a 5-year and $250 billion plan will be

funded 50% by private capital;– EU: €164 billion to be invested in natural gas

infrastructure by 2030 to facilitate import of gas to meet long-term shortfall;

– China: close to 100 airports will be needed.

Source: Global Infrastructure Demand through 2030, CG/LA Infrastructure, March 2008.

Infrastructure to 2030, volume 2, OECD publication, 2007.

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Real assets (1/2)

• Cash-flow producing asset or pool of assets privately originated:– Equipment leasing (shipping, aircraft…): the asset is

purchased and simultaneously leased back to the seller;

– Agricultural finance (forests, timber lands, etc…): growing demand from the renewable energy sector;

– Mines, intellectual property rights, financial assets on the secondary market, etc…

• It is usually not asset-backed securities but a direct investment in the assets

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Real assets (2/2)

• Steady and regular cash flow: 10%-15% annual cash return;

• Downside protection due to high recovery value of the assets: loss of value of the asset is unlikely;

• Uncorrelated assets;

26

Why allocate assets to PE ?

27

Portfolio management

• Asset allocation is define by returns, risk (measured by standard deviations of returns) and correlations;

• Diversification improve returns while reducing risk;

• Allocation is determined using public information of traditional asset classes (equity, bonds, REIT, etc...)

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The issue with private equity

• Private market:• PE funds invest in private companies = no public

market to help set the valuation;• PE funds are themselves private companies = no

market to value them and no public disclosure required.

• Quarterly valuation:• Risk of inconsistency: quarterly marked-to-market

valuation = significant degree of subjectivity;• Risk of stale valuation: quarterly valuation can

understate the standard deviation and correlation to other asset classes.

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The issue with private equity

• Illiquid investments:• PE funds are closed-end funds (except secondary

market);

• Time line too long:• PE funds has a 5-year investment period and a 10-

year life;

• Restricted information disclosure:• Only LPs have access to the fund’s performance.

Private equity is an inefficient market

30

• However, Allocation to PE increased significantly over the last years:

• Low correlation to pricing trends of traditional assets;

• Diversification thus risk reduction;• Good returns over the years: Average

annual IRR 1986-2005 is 18.3%

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Reason to invest in PE

• Adding a risky asset with a low correlation of pricing trends compared to traditional asset classes can reduce the risk of an overall portfolio;

• Relatively good returns of PE over the last years.

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LBO activity in Europe

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Geography

LBO activity in Europe per value (Q1-Q3 2008)

36%

14%

5%

4%

3%

3%

2%

12%

21%

UK

France

Germany

Netherlands

Sweden

USA

Norway

Belgium

Other

LBO activity in Europe per volume (Q1-Q3 2008)

24%

18%

7%

4%

3%

3%

3%

3%

14%

21%

UK

France

Germany

Netherlands

Sweden

Norway

Belgium

Spain

Italy

Other

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Sectors

LBO value in Europe per sector (Q1-Q3 2008)

16%

10%

9%9%

8%

6%

5%

23%

14% Manufacturing

Services & Leasing

Building Materials

Healthcare

Retail Food & Drug

Insurance

Chemicals

Oil & Gas

Other

LBO volume in Europe per sector (Q1-Q3 2008)

19%

10%

7%7%

5%

5%

3%

3%

23%

18%

Services & Leasing

Manufacturing

Healthcare

Retail

Food & Beverage

Chemicals

Building Materials

Computers & Electronics

Automotive

Other

35

European buyout value

European buyout value: €72 billion in Q1-Q3 2008

36

European buyout by region

European LBO volume by region (€ billion)

€ 0

€ 20

€ 40

€ 60

€ 80

€ 100

€ 120

€ 140

UK France Germany Italy Nordic Region Western Europe

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Jan-Sep 08

37

PE as a percentage of GDP• Nordic countries have the most important PE activity;• Benelux figures are impacted by few mega deals.

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Nordic countries German speaking countries BeneluxSouthern Europe France UKOthers

38

European fundraising activity

39

Funds on the market

40

Seeking capital is becoming difficult

• Number of vehicles seeking capital keep on increasing;

• But the number of final closing and the path investors deploy capital has slowed down dramatically;

• Investors (LPs) are hesitant and sometimes face liquidity issues;

41

• Distributions are expected to decrease as well: this won’t ease the fundraising processes;

• Average fundraising:– 2008: 14.2 months;– 2007: 12 months;– 2006: 11.1 months

42

Average fundraising

43

State of the market

• Aggregate PE commitments globally are close to $2,000 billion (vs. $1,000 billion in 2003 and an expected $5,000 billion within 5 to 7 years);

• Globally: app. 1,200 funds are currently seeking $713 billion including:– Buyout: 290 funds seeking $320 billion;– Venture: 470 funds seeking $85 billion;– Mezzanine: 25 funds seeking $10 billion;– FoF: 205 funds seeking $220 billion.

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Funds of the market

• Permira: €13.5 billion;

• CVC: €13.7 billion;

• Apax Partners: €11.4 billion;

• Cinven: €8.2 billion;

• Charterhouse: €7.4 billion;

• PAI Partners: €5.5 billion.

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Outlook

• PE is set to enter its most challenging time;• Increasing pressure and difficulties for managers

seeking capital;• Fundraising take more time;• Less deals are being signed so there’s no rush to

raise;• Historical performances and focus strategies will

become key factors in the future: some GPs won’t survive;

• Some LPs will need to free up some capital and clean up their portfolio: increase in secondary transactions.

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Outlook

• PE AUM has grown steadily since 1996:• 60% of LPs are expected to increase their

allocation to PE;

• Sovereign wealth funds are a huge source of capital:

• Represent today $3,000 of assets and are expected to reach $7,900 billion by 2011;

• Europe accounts for 19% ($580 billion) of SW funds capital;

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Fundraising sources

48

• LPs usually invest in home-based funds;

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• Globally, US is the single largest investor;

• In Europe, UK is ahead of anybody;

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Profile of the LPs

51

The measure of performance

52

Track record

Napoca Fund II

As of 30 December 2007 - $ million CountryInitial

investment date

Exit CostRealized

valueUnrealized

valueTotal value

Multiple of cost

Gross IRR

Realized investmentsBeverage Plus Holdings, LLC US Feb-04 Mar-07 23.3 49.6 0.0 49.6 2.1x 38.0%Dear Lagoon UK Feb-05 Jul-06 65.6 151.0 0.0 151.0 2.3x 43.0%Sport Management Arizona US Jun-06 Apr-08 97.7 164.2 0.0 387.7 4.0x 96.0%Napoca Distressed Credit Other Jul-05 Jan-08 14.6 12.1 0.0 12.1 0.8x - Total realized investments 201.2 376.9 0.0 376.9 1.9xUnrealized investmentsFenchurch Street Insurance Bermuda Dec-06 - 130.0 - 131.7 131.7 1.0x - Alketechnic Germany Jun-06 - 48.2 - 55.6 55.6 1.2x 5.3%OutSpace Clothing Switzerland Apr-06 - 38.0 - 52.8 52.8 1.4x 26.1%Avi Construction France Apr-06 - 49.7 - 55.8 55.8 1.1x 5.1%Hospital Management Holdings US Feb-06 - 46.2 - 46.2 46.2 1.0x - Pack4Life Belgium Mar-08 - 72.2 - 72.2 72.2 1.0x - Foxtruck Finance US Mar-08 - 150.0 - 150.0 150.0 1.0x - Total unrealized investments 534.3 - 564.3 564.3 1.1x -

Total Napoca Fund II 735.5 376.9 564.3 941.2 1.3x 5.3%

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Measures of performance

• Multiple of cost:• Also called Total Value over Paid-In capital (TVPI);• (Cash distributions + Unrealized value)/capital

invested;• Cash returned regardless of timing (total return).

• Internal Rate of Return (IRR):• Discount rate that makes NPV of all cash flows

equal zero;• Linked to timing: Quick flip = high IRR.

54

The J-curve

• In the early years, low or negative valuation due to:

• Management fees drawn from committed capital;• Initial investments to identify and improve

inefficiencies;The J-curve effect

-5

0

5

10

15

20

Years

Val

ue

Actual returns

Investments valued below its cost:- Management fees;- Initial investments.

55

The J-curve

• Fees are charged based on the fund’s entire committed capital;

• Example:• Fund size: €100 million;• Management fee: annual 2% committed capital;• Organizational expenses: €300,000

→ €2,300,000 expenses/fees called regardless of any investment made.

56

The J-curve

• If 5 investments are made the first year for €3 million each:

• 5 x €3 million = €15 million;• If 20% of committed capital is called the first year: €20

million;

• Interim value is thus: €17.7 million or 0.89x contributed capital;

Capital contributed €20 million (20% of committed capital)Assets:Investments €15 million (5 investments at €3 million each, held at cost)Remaining cash €2.7 million (20-15-2.3 = €2.7 million)Total assets €17.7 million (= 0.89x the 20 million contributed by LPs)

57

The J-curve

• Underperforming investments tend to be written down more quickly than successful companies develop;

• Example 2nd year:• Another 20% of committed capital : €20 million;

• Five new deals at €3 million each: €15 million;

• Two first-year investments are written down/off;

• Annual management fee: €2 million.

Capital contributed €40 million (40% of committed capital)Assets:First-year investments €10.5 million (original 5 investments, one written off, one written down to half its value)2nd-year investments €15 million (another five investments at €3 million each, held at cost)Cash on hand €5.7 (cash after €4.3 million of expenses(2+2+0.3) and €30 million of investments)Total assets €31.2 million (=0.78x the €40 million)

58

The J-curve

• Companies performing well, held at cost or conservative valuation, understate the value of the portfolio;

• Interim is thus often misleading;• NAV + cumulative distributions track over time relative to

contributed capital:

59

Fund of Funds due diligence: the selection of PE managers

60

Due diligence focus

• Quantitative analysis:– Past investments and track record;– Leverage and debt;– Sources of proceeds.

• Qualitative analysis:– Team;– Strategy;– Market opportunity

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Critical items of due diligence

• Track record: what’s behind a bad investment?;• Unrealized portfolio: lack of recent track record

and ability of current team – look at current valuation carefully.

• Organization: fund size, multi or single office, Pan-European, domestic or transatlantic, risk of spin-off, autocratic management, etc;

• Team: number of Partners, Principles and Associates, carry split, staff retention and turnover, motivation in case of large distribution under previous funds, key man clause, succession issues.

62

Reasons to invest

• Attractive track record;• Experienced investment team;• Differentiated investment strategy;• Proprietary deal flow;• Sector/geographic focus.

• Must be combined with FoF portfolio management and exposure > seek diversification.

63

Track record• Entry and exit date;• Realized and unrealized value (part sell off or

recapitalization);• Multiples of cost and IRR.Napoca Fund II

As of 30 December 2007 - $ million CountryInitial

investment date

Exit CostRealized

valueUnrealized

valueTotal value

Multiple of cost

Gross IRR

Realized investmentsBeverage Plus Holdings, LLC US Feb-04 Mar-07 23.3 49.6 0.0 49.6 2.1x 38.0%Dear Lagoon UK Feb-05 Jul-06 65.6 151.0 0.0 151.0 2.3x 43.0%Sport Management Arizona US Jun-06 Apr-08 97.7 164.2 0.0 387.7 4.0x 96.0%Napoca Distressed Credit Other Jul-05 Jan-08 14.6 12.1 0.0 12.1 0.8x - Total partially realized investments 201.2 376.9 0.0 376.9 1.9xUnrealized investmentsFenchurch Street Insurance Bermuda Dec-06 - 130.0 - 131.7 131.7 1.0x - Alketechnic Germany Jun-06 - 48.2 - 55.6 55.6 1.2x 5.3%OutSpace Clothing Switzerland Apr-06 - 38.0 - 52.8 52.8 1.4x 26.1%Avi Construction France Apr-06 - 49.7 - 55.8 55.8 1.1x 5.1%Hospital Management Holdings US Feb-06 - 46.2 - 46.2 46.2 1.0x - Pack4Life Belgium Mar-08 - 72.2 - 72.2 72.2 1.0x - Foxtruck Finance US Mar-08 - 150.0 - 150.0 150.0 1.0x - Total unrealized investments 534.3 - 564.3 564.3 1.1x -

Total Napoca Fund II 735.5 376.9 564.3 941.2 1.3x 5.3%

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Benchmark analysis

• DPI: Distributed Paid In > Proceeds distributed, only realized deals;

• RVPI: Residual Value Paid In > Unrealized value;

• TVPI: Total Value Paid In: Realized and Unrealized value.

Venture Economics Benchmark Comparison (as of 30 September 2007)

Fund by fund basis

Vintage YearFund SizeContributed capitalDistributionsResidual valueTotal Value

Gross IRR

Net IRRNapoca

Europe US Europe USLower boundary of Upper Quartile 17.8% 16.7% 9.7% 9.9%Quartile 1st 1stDPINapoca

Europe US Europe USLower boundary of Upper Quartile 1.04x 0.94x 0.18x 0.11xQuartile 1st 1st 1st 1stRVPINapoca

Europe US Europe USLower boundary of Upper Quartile NA 0.83x NA 1.03xQuartile 4st 4thTVPINapoca

Europe US Europe USLower boundary of Upper Quartile 1.04x 1.52x 0.18x 1.15xQuartile 1st 1st 1st 3rd

0.09x 0.55x

3.62x 1.04x

42.3% Too immature

3.53x 0.50x

$2,585.9 $637.1

55.6% 5.3%

$2,518.5 $303.4$67.4 $333.7

$714.0 $1,305.0$713.8 $611.3

Napoca Fund I Napoca Fund II

2001 2005

65

Vintage year performanceCumulative Vintage Year Performance (Thomson Venture Xpert - as of 30 J une 2008)

Vintage Year

Number of funds

included Average

Capital Weighted Average

Pooled Average

Maximum Lower

boundary of 1st Quartile

Lower boundary of 2nd Quartile

Lower boundary of 3rd Quartile

Minimum

1989 12 5.20 10.60 9.30 23.30 14.30 8.70 -0.10 -24.20

1990 17 11.90 9.50 9.20 35.70 19.50 8.90 3.00 -3.40

1991 15 14.10 14.80 16.90 40.20 23.60 13.20 6.20 -17.50

1992 8 21.70 27.30 27.20 42.80 32.30 22.10 10.20 1.70

1993 12 22.80 18.10 17.30 87.90 26.80 15.70 9.00 -9.90

1994 14 27.20 42.60 42.50 59.80 49.20 16.50 14.60 -1.80

1995 14 27.70 43.30 36.00 107.30 60.10 13.90 1.00 -16.00

1996 20 27.40 14.60 11.40 268.10 21.00 12.80 6.90 -12.40

1997 32 16.70 19.00 14.60 132.80 21.30 6.70 -0.60 -17.40

1998 34 5.90 8.50 8.90 30.20 9.70 4.30 -0.90 -11.10

1999 31 7.10 10.10 11.00 40.80 12.70 6.00 -0.20 -16.40

2000 32 10.00 13.60 14.60 35.00 17.80 8.80 - -9.60

2001 21 15.10 26.40 26.00 64.80 28.20 11.30 - -5.30

2002 27 15.80 20.30 23.30 110.10 27.50 8.30 -0.40 -7.10

2003 17 12.10 20.70 26.50 45.50 22.90 6.10 -1.30 -8.50

2004 15 21.70 28.80 21.90 234.10 17.50 -0.20 -5.10 -19.60

2005 33 5.90 1.90 6.30 82.40 11.50 2.70 -7.10 -50.90

2006 19 -1.50 -13.40 -12.90 91.30 5.60 -4.40 -14.40 -40.10

2007 11 32.30 -0.30 1.80 436.50 12.80 - -32.00 -73.80Average 85.12 23.42 8.97 1.3 -15.0 Minimum 23.30 5.60 -4.4 -14.4 -50.9 Maximum 268.10 60.10 22.10 14.60 1.70

Median 62.30 21.15 8.75 -0.2 -11.8

66

Presentation

• Private equity investors and their managers: Vivre avec un fond d’investissement, Les Echos, October 2006

67

The world’s biggest private equity firms

68

Carlyle

• Founded in 1987 by David Rubenstein, Daniel D’Aniello and William Conway;

• Since inception, Carlyle has invested $49.4 billion of equity in 836 deals for a total purchase price of $220 billion;

• Over $89 billion AUM throughout 64 funds in buyouts (69%), growth capital (4%), real estate (12%) and leveraged finance (15%);

• Over 525 investment professionals operating in 21 countries;

• Assets deployed in Americas (59%), Europe (28%) and Asia (13%);

• Currently: 140 companies, $68 billion in revenues and 200,000 workers.

Source: www.carlyle.com

69

Carlyle deals

• Hertz

• Zodiac

• Terreal

• Le Figaro

• VNU

70

Blackstone

• Founded in 1985 by Steven Schwarzman and Peter Peterson;

• Global AUM $119.4 billion in private equity, real estate, Funds of Hedge Funds, CLOs, Mutual funds;

• 89 senior MDs and total staff of over 750 investments and advisory professionals in US, Europe and Asia;

• Blackstone is the first major PE firm to become public: IPO was in June 2007 at $36 – under water since first day !

• Currently: 47 companies, $85 billion in annual revenues and more than 350,000 employees.

71

Blackstone deals

• The weather channel: $3.6bn in September 2008;

• Hilton: $26.9bn in October 2007;

• Center Parcs: $2.1bn in May 2006;

• Deutsche Telekom: £3.3bn in April 2006 (minority);

• Orangina: $2.6bn in February 2006;

72

KKR

• Founded in 1976 by James Kohlberg, Henry Kravis and George Roberts;

• Total AUM $68.3bn from $25.4bn invested capital;• Total of 165 deals since inception with an aggregate

enterprise value of $420bn;• KKR is currently from a “one-trick pony” to a multi asset

manager with infrastructure and mezzanine funds being raised;

• The $31bn buyout of RJR Nabisco inspired the book “Barbarians at the gate”;

• Currently: 35 companies, $95 billion in annual revenues and more than 500,000 employees.

73

KKR deals

• Legrand;

• Pages Jaunes;

• Tarkett;

• Alliance Boots;

• ProSieben;

• TDC;

• Toys R’ Us.

74

PAI Partners

• The biggest French PE firms formerly known as Paribas Affaires Industrielles;

• Since 1998, PAI invested €3.92bn in 36 deals across Europe;

• Last fund raised reach €5.2bn

• Investments include: Kaufman & Broad, Vivarte, Neuf Cegetel, Panzani Lustucru, Atos Origin

75

Private equity deals

• Private equity funds own companies of “everyday life”…– Pages jaunes;– Comptoir des cotonniers;– Pizza Pino;– Picard;– Alain Afflelou;– Jimmy Choo;– Odlo;– Orangina…

76

Impact of PE on French economy is overall positive

• 2006-2007 employees growth rate:– +2.1% (vs. 0.5% for CAC 40);

• 2006-2007 sales growth:– +5.3% (vs. 4.1% for CAC 40);

Source: AFIC/Ernst&Young

77

• As of 30 June 2006:– 55% of PE-backed companies have less than 100

empoyees and 83% have less than 500 employees;

– 79% have less than €50m revenues;

– 4852 PE-backed companies in France;

– Work force of 1.5 million people (9% of total private employees);

– €199bn in revenues including €128bn generated abroad.

Source: AFIC/Ernst&Young

78

Presentations

• KKR

• Blackstone

• Carlyle

79

The mega buyout era

80

Fund growth

• PE AUM 1980-2006: 24%CAGR;• 2003-2006: PE commitments increased

260%;• Cost of debt historically low

→ Global volume of LBOs increased to $700 billion in 2006 (4x 2003 level);

→ Global volume of LBOs in H1 2007 reached $560 billion (25% of global M&A).

81

• Bigger are the funds, bigger are the target companies;

• Fund size and deal size are correlated;• “Club-deals” were required to complete the biggest

acquisitions;

• More cash you have,more cash you need:• Co-investors such as other funds, LPs or

shareholders of target companies were sought after;

• Some funds created quoted vehicles to access permanent capital or listed the management companies on the public market;

82

Large funds are getting (much) larger

• US 12 largest funds raised in the US as of June 2007 totaled close to $155 billion:

• This represents a 142% increase compared with their predecessor funds;

• In Europe, the fund-to-fund increase of the 12 largest funds was only 75%;

• In addition, GPs were starting to raise at shorter intervals.

83

Rational for larger pools of capital

• Economies of scale in the management of the fund;

• Higher management fee enable to build top investment teams;

• Expanded buyout opportunities at the larger end of the market:

• Higher quality assets;• Less competition at the upper-end of the market;• Huge potential returns.

84

Rational for larger pools of capital

• Ability to pursue a pro-active acquisition strategy;

• Implement a levered capital structure;

• Flexible (covenant-lite) and low-cost financing;

• Various exit options (IPO, Corporate transaction, secondary buyouts...)

85

Target companies

• Very large companies are attractive targets:

• Mature companies need restructuring effort to get rid of the “fat”;

• The value-addition is thus often obvious an obvious path;

• Usually less competition among the buyers.

• Public market offer a lot of opportunities:• PE investors add value to the company they invest

in as opposed to passive public shareholders.

86

Rise of Club-deals

• Club-deals are iconic of the concentration trends of private equity;

• 91% of US buyouts of over $5 billion were club-deals...

• ... but also 38% of P-to-P valued between $250 million and $1 billion were club deals:

• Many firms shared the risks and pooled resources.

87

Disappearance of club-deals

• Collusion charges;

• Difficulties to share informations;

• Tendency to monopolize the control the control;

• Ego-issues.

88

Examples of mega club deals

Target Value BuyersHospital Corp, of America

$32.7 billion Bain Capital, KKR, Merrill Lynch

Harrah’s Entertainment $27.4 billion Apollo, TPG

Clear Channel $25.7 billion Bain, Thomas H Lee

Kinder Morgan $21.6 billion Carlyle, Riverstone, Goldman Sachs

Freescale Semiconductor

$17.6 billion Blackstone, Carlyle, Permira , TPG

Hertz $15.0 billion Carlyle, CD&R, Merrill Lynch

TDC $13.9 billion Apax, Blackstone, KKR, Permira, Providence

89

Presentations

• Caveat Investor / the uneasy crown, The Economist, Feb 2007;

• Who’s next, The Deal, July 2008

90

Value creation in private equity

91

Value creation drivers

• EBITDA generation

• Multiple expansion

• Debt reduction

92

EBITDA generation

• EBITDA is generated by:– Sales expansion;– Margin improvement;– Add-on acquisitions;– Organic growth (=GDP growth)

93

Multiple expansion

• Multiple: EV/EBITDA;

• Based on comparable transactions;

• Multiple expansion: Difference between entry and exit multiple;

• =Multiple uplift x Exit EBITDA

• Multiple uplift:=Exit EV/EBITDA – entry EV/EBITDA

94

Debt reduction

• = Entry net debt – exit net debt

95

Example

EV creation

€ 1,493.7

€ 764.0

€ 61.0€ 323.6

€ 345.1

Entry EV EBITDA generation Multiple expansion Deleveraging Exit EV

96

What to understand from EV creation

• If most of the value comes from:– EBITDA increase: growing industry and/or

company, possibly in a young market or efforts mainly on sales force;

– Multiple expansion: margin increased over the holding period; the investors rationalized and optimized the production, cut costs, disposed of non core assets, arbitrage strategy, etc…

– Deleveraging: usually the last factor to be implemented; Debt reduced by cash not reinvested.

97

EV EBITDA Net debt Multiple EV EBITDA Net debt MultipleCompany A 1,275.0 150.0 45.0 8.5 1,972.0 210.0 5.0 9.2

EBITDA generation: 1,275.0 = Enty EBITDA x Entry multiple (1)1,785.0 = Exit EBITDA x Entry multiple (2)

510.0 = (2) - (1)

Multiple expansion: 0.7 = Multiple uplift (exit EV/EBITDA - entry EV/EBITDA) (3)210.0 = Exit EBITDA (4)147.0 = (3) x (4)

Debt reduction: 45.0 = Entry net debt (5)5.0 = Exit net debt (6)

40.0 = (5) - (6)

Total value creation: 697.0

Exit EV: 1,972.0 = Entry EV + Total value creation

Entry Exit

98

Value creation chart

Exit EV:€ 1,972.0

Entry EV:€ 1,275.0

Debt reduction:€ 40.0

Multiple expansion:€ 147.0EBITDA generation:

€ 510.0

Entry EV EBITDA generation Multiple expansion Debt reduction Exit EV

99

Factors of value creation

• Changing business and driving growth:• Taking advantage of market cycles (buying cheap,

selling at better price) and financial engineering are no longer enough;

• Objectives must be well defined;• Management is incentivized: alignment of

interest between Board members and shareholders;

• Must create value for the next acquirer: PE is not necessarily short term focused.

100

Other factor: Industry characteristics

• Stability, low cyclicality;• High margins (or potential for

improvement);• Strong operating cash-flows:

• PE businesses are cash-flow driven rather than earning driven: need to pay down the debt

• Industry-wide revenue growth;• Potential for overall efficiency

improvements.

101

Other factor: The GP makes the difference

• Managers contribute to value creation:• Select the right target companies;• Undertake appropriate changes;• Experience of the GPs/prior buyout experience

• Focus on few sectors generates better returns:• Industry-focus strategy generate better returns…;• … but moderately diversified approach generates better

returns;• Focus strategy exposes to industry cycles but good industry

expertise;

• Example of bad deal in the wrong industry: Foxton deal “The deal of the century”, FT

102

• Recruitment/management;

• Buy-and-build;

• New investments to develop to new markets;

• Optimization/cost cutting;

• Divesture of non core business(es)

103

Primary source of value creation (%)• Almost 2/3 of the value generated comes from company

outperformance: Companies’ fundamentals are key drivers of growth.

Sample: 60 deals from 11 leading PE firms

Company outperformance

63%

Arbitrage5%

Market/sector appreciation, plus financial leverage

32%

Source: McKinsey & Company

104

• Five features of a leading-edge practice:• Expertise and knowledge: insights from the

management, trusted external source;• Substantial and focused performance incentives:

top management usually owns 15-20% of the equity;

• Performance management process: initial business plans are subject to continual review and revision;

• Focused 100-day plan: deal partners must devote most of their time to a new deals to build relationship, detail responsibilities and challenge the management;

• Management should be changed sooner rather than later

105

Presentation

• Foxtons: The sale of the century, FT magazine, June 2008

106

Structure of a Leverage Buyout transaction

107

Structure of a leverage buyout

• Deal structure:– Equity– Debt

• Debt is either:– Unsecured– Secured

108

LBO structure

Senior debt

Nine-year average: E+284.5;Nine-year median: E+287.5;Nine-year minimum: E+249.5 in June 2007;Nine-year maximum: E+287.5 in June 2008*.

Secured 2nd lien2nd lien have disappeared with the credit crunch; they were seen as cheap mezzanine.

Mezzanine

Mezzanine benefits from the credit crunch;Mezzanine reimbursement has cash and PIK components;H1 2008 cash spread: E+414.7H1 2008 PIK spread: E+535.3

Unsecured debt Unsecured debt usually bonds

Equity

Equity contribution10-year minimum: 29.6% in 1997;10-year maximum: 42.9% in H1 2008;10-years median: 35.9%;10-year average: 36.0%

Unsecured

109

Equity

• Common equity, preferred equity, shareholder loan;

• Equity is unsecured and the most risky and rewarding tranche;

• Equity is held by the shareholders: private equity fund, management, various investors, often debt mezzanine providers, sometimes intermediaries.

110

Mezzanine debt• Secured debt but subordinated to senior debt;

• Mezzanine is provided by mezzanine funds and sometimes hedge funds;

• Reimbursement after the senior debt but has priority over the equity holders

• Reimbursement is cash or PIK;

• PIK note: payment made in additional bonds or preferred stocks which increase the performance of the investment;

• Mezzanine is usually reimbursed at exit if not refinanced before.

• H1 2008 cash spread: E+414.7bps

• H1 2008 PIK spread: E+535.3bps

111

Second lien

• Developed pre-July 2007 and does not really exist anymore: as of Q3 2008, 12% of LBOs used 2nd lien versus 52% in 2007;

• Reimbursement in cash, priority level between senior debt and mezzanine;

• Second lien was seen as a cheap mezzanine.

112

Senior debt

• Negotiated for a period of time between 7 and 9 years usually based on expected cash flow;

• Tranche A is first reimbursed. Other tranches (B and C) are usually reimbursed in fine;

• Tranche D is a revolving credit to refinance previous debt of the target company;

• H1 2008 spread: E+337.48bps

113

Capital structure

Senior debt

Nine-year average: E+284.5;Nine-year median: E+287.5;Nine-year minimum: E+249.5 in June 2007;Nine-year maximum: E+287.5 in June 2008*.

Secured 2nd lien2nd lien have disappeared with the credit crunch; they were seen as cheap mezzanine.

Mezzanine

Mezzanine benefits from the credit crunch;Mezzanine reimbursement has cash and PIK components;H1 2008 cash spread: E+414.7H1 2008 PIK spread: E+535.3

Unsecured debt Unsecured debt usually bonds

Equity

Equity contribution10-year minimum: 29.6% in 1997;10-year maximum: 42.9% in H1 2008;10-years median: 35.9%;10-year average: 36.0%

Unsecured

114

The loan market:in 2008

• Average leverage of European LBOs: 4.5x in Q3 2008 vs. 7.0x in Q3 2007;

• Average equity contributions: 43% in Q3 2008 vs. 34% in Q3 2007

• European Senior loan in Q3 2008: 450-550bps (compared to 225bps-275bps in early 2007) – partly offset by lower base rates;

• Mezzanine margins have increased to 1100 –1300bps plus warrants or equity co-invest (compared to 750-900bps with little call protection and no equity participation in 2007);

115

Average LBO equity contribution

Average LBO equity contribution

37.6% 38.6% 37.3% 35.9%33.7% 33.7% 33.6%

42.0%44.9%

42.8%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

2001 2002 2003 2004 2005 2006 2007 1Q08 2Q08 3Q08

Less debt available = more equity required to close a deal

116

Loan volume dropped significantly

Annual senior loan volume (in € bn)

-€ 10

€ 10

€ 30

€ 50

€ 70

€ 90

€ 110

€ 130

€ 150

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

4Q

3Q

2Q

1Q

Banks’ lending capacities are dry !

Q1-Q3 2008 loan volume: €46.6 billion

Q1 2007 loan volume: €45.75 billion

117

Evolution of capital structure

Evolution of capital structure over years

48.4% 43.7% 37.5%27.5% 27.9%

18.5%

4.8%11.7%

10.7%

23.9%

3.7%

51.6% 50.0%

34.9%

33.2%

20.4%68.5%

1.6%

15.9%

28.7% 27.9%

9.3%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2003 2004 2005 2006 2007 1H08

Sr + 2nd Lien + Mezz

Sr + Mezz

Sr + 2nd Lien

Sr Only

Back to the classic structure: Senior Debt + Mezzanine

118

Cost of debt

LBO cost of funding in bps

309.23

445.97

-

50.00

100.00

150.00

200.00

250.00

300.00

350.00

400.00

450.00

500.00

Senior debt Senior debt + Mezzanine

2003

2004

2005

2006

2007

Jan-Sep 08

Cost of debt increased significantly in 2008

119

LBO spread

Average spread for initial and secondary buyouts

200

220

240

260

280

300

320

340

Jan-

00

May

-00

Sep-0

0

Jan-

01

May

-01

Sep-0

1

Jan-

02

May

-02

Sep-0

2

Jan-

03

May

-03

Sep-0

3

Jan-

04

May

-04

Sep-0

4

Jan-

05

May

-05

Sep-0

5

Jan-

06

May

-06

Sep-0

6

Jan-

07

May

-07

Sep-0

7

Jan-

08

May

-08

E+249.58 in June 2007

E+344.58 in June 2008

E+253.78 in Sept. 2000

E+298.39 in August 2001

E+301.56 in January 2004

120

The loan market

• Loans started to fall below “par value” (100) in June 2007;

• Secondary market became depressed (less liquidity, decline in value, etc) but presents some good buying opportunities;

• Default rate at its lowest level although was expected to increase in 2008;

• A lot of new investors (incl. traditional PE funds) entered the loan market in H1 2008 with levered vehicles;

• They did not anticipate that the loan market will decline even more sharply in 2008 = BAD

• Sponsor-backed credit is usually poorly valued regardless of the company’s performance

121

Consequences

• The market is stuck:• sellers have not yet adjusted their price;• Buyers don’t want/cannot pay high price.

• Deals are negotiated at cheaper:– EBITDA multiples are lower– More equity and less debt = more

conservative structure

122

EBITDA multiples

Average LBO purchase price (EBITDA multiple)

7.3x8.2x

7.7x 7.3x 7.1x 7.0x 6.8x7.6x

8.3x8.8x

9.7x

10.9x 10.5x

8.7x

0.0x

2.0x

4.0x

6.0x

8.0x

10.0x

12.0x

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

1Q08

2Q08

3Q08

123

Purchase prices

Purchase price per deal type

6.0x

6.5x

7.0x

7.5x

8.0x

8.5x

9.0x

9.5x

10.0x

10.5x

11.0x

2002 2003 2004 2005 2006 2007 YTD 2008

All Buyouts

Sponsor to Sponsor

Corporate

Public to Private

Secondary buyouts are the most impacted as:

• They were traditionally the most expensive transactions = price adjustment;

• Sellers are very likely forced to sell so accept lower prices.

124

The pros and cons of being private

125

Results of a 2008 McKinsey survey:

• Private equity Boards are overall more efficient than public equity Boards:

• Better financial engineering;• Stronger operatonal performance.

• Pros and cons of public equity Boards offer some:

• Superior access to capital and liquidity;

• More extensive and transparent approach to governance and more explicit balancing of stakeholder interests.

126

Public versus Private: differences in ownership structures and governance

• Public companies have arm’s length shareholders:

• Need for accurate and equal information among shareholders and capital market (audit, remuneration, compliance, risk);

• Management development across the board.

• Private equity companies have more efficient processes:

• Stronger strategic leadership;• More effective performance oversight;

• Manage only key stakeholders’ interests.

127

Rating of public and private Boards of Directors

4.3

4.8

3.8

4.8

3.8

4.6

3.33.1

4.1

3.3

4.2

3.5

Strategic leadership Performancemanagement

Development/successionmanagement

Stakeholdermanagement

Governance (audit,compliance and risk)

Overall effectiveness

Private equity Boards Public companies Boards

Source: McKinsey Quarterly, The Voice of Experience Public vs. Private Equity

128

Strategic leadership in PE companies

• Joined efforts of all Directors;• Usually, defined and shaped dring the due

diligence (prior acquisition);• Boards approve management strategic decision

(in M&A for example);• PE funds stimulate management’s ambition and

creativity;• Executive management reports on the progress

of the latest strategic decision implemented.

129

Strategic leadership in public companies

• Boards only oversee, challenge and shape the strategic plans, accompanying the management in the implementation;

• The executive management takes the lead in proposing and developing it; it is mainly a formal reporting.

130

Performance management in private equity companies

• Private equity have one focus: realisation of their investment;

• Consequently, PE Boards have a « relentless focus on value creation drivers »;

• Performance indicators are clearly defined and focus on cash metrics and speed of delivery.

131

Performance management in public companies

• High level performance managment, no real detailed analysis;

• Focus on quarterly profit targets and market expectations;

• Need to communicate an accurate picture of short-term performance;

• Budgetary control, short-term accounting profits;• Public companies Boards focus on information

that will impact the share price.

132

Management development and succession in private companies

• PE companies mainly focus on top management (CEO, CFO) and replace underperformers very quickly;

• Very little efforts deployed on long-term challenges such as development of management, succession, etc

133

Management development and succession in public companies

• Efficient thorough management-review: top management and their successors;

• Focus on challenges and key capabilities for long-term success: management development and remuneration policies;

• However, public Boards have weaknesses:• Slow to react and their voice is more (perceived as) advisory

than directive;• Remuneration decisions sometimes more driven by

public/stakeholders expected reaction than performance

134

Stakeholder management in private companies

• Executive management can clearly identify a majority shareholder;

• PE funds are locked-in for the duration of the fund;

• PE fund represent a single block and are much more involved and informed than public shareholders;

• Less onerous and constructive dialogue;• No or little experience dealing with media and

unions (see Walker report and debate over PE in 2007)

135

Stakeholder management in public companies

• Shareholding struture is more complex and diversified than private companies:

• Institutionals, minority individuals, growth investors, long-term strategic, short-term hedge funds.

• Different priorities and demands: CEOs need to learn to cope with this very diverse range of investors;

• In case of P2P, HF can block the privatization (95% threshold to delist): Alain Afflelou purchase by Bridgepoint.

136

Governance and risk management in public companies

• Where public companies score the best: consequences of Sarbanes-Oxley legislation and Higgs Report;

• Several subcommittees to scrutinize remuneration, audit, nomination, etc…

• Overall Board supervise and can rely and decide on the sub-committees’ recommendations;

• Important factor of investor confidence;

• Downside: expensive, time-consuming, inefficient sometimes (“The focus is on box-ticking and covering the right inputs, not delivering the right outputs”)

137

Governance and risk management in private companies

• Lower level of governance than in public companies: only audit committees are needed in PE’s approach;

• More focus on risk management than risk avoidance;

• Not perceived as a pure operational factor.

138

Top priorities

18

11

5 5 5

0 0

5

0

9

4

0

9

7

Value creation Exit strategy Strategic initiatives(inclu. M&A)

External relations 100-day plan Governance, complianceand risk

Organization design andsuccession

Private equity Boards Public companies Boards

Source: McKinsey Quarterly, The Voice of Experience Public vs. Private Equity

Sample of 20 UK-based directors who have served on the boards of both private and public companies, most with an EV of >£500 million.

139

Survey’s conclusion

• Public companies Directors are more focus on risk avoidance than value creation:

• They are not as well financially rewarded as PE Directors by a company’s success but they can still lose their hard-earned reputations if investors are disappointed.

• Greater level of engagement by nonexecutive Directors at PE-backed companies:

• In addition to formal meetings, PE nonexecutive Directors spend an additional 35 to 40 days a year to informal communication with the management.

140

Credit crisis: impact and consequences on private equity

141

Before July 2007 (1/3)• Growth of the institutional loan market, CDOs and second lien

loans;• Intermediaries/brokers underwrote debt to sell to other investors for

syndication fee: became less demanding in terms of potential risk/reward;

• Multiplication of highly rated structured credit products (CDOs/CLOs) although their inherent value was increasingly complex to calculate;

• Increasing interest from investors for LBO funds led to higher leverage;

• New loans were issued as “covenant lite arrangements”: DONNER DES EXEMPLES DE COVENANT A RESPECTER DANS UN LOAN TYPE

142

Before July 2007 (2/3)

• Increasing leverage loan activity but decline of credit quality of the new debt due to:

–Covenant lite;–Rising ratio of debt to earnings for US

and EU LBOs;–Mid and large LBO debt/EBITDA ratios

were at all time high in 2007 (and were even higher for large than mid LBOs).

143

Before July 2007 (3/3)

• Three indicators of a bubble:– Debt/EBITDA ratio at all time high in 2007: a

decline of operating performance will expose the company to the risk of default;

– Companies under LBOs have less liquidity to serve their debt;

– Interest coverage ratio decreased since 2003 reaching a ten-year low of 1.7x in 2007.

• More equity + more debt = bigger deals and bigger leverage;

144

After July 2007 (1/5)

• Sudden increase in credit spreads makes the debt more expensive and more in line with the real risk held by the debt holder;

• Banks and debt underwritters could not distribute their debt to other investors: had to keep it on their balance sheet while their value was declining;

– A number of transactions collapsed and could not be closed;

– Banks that did not distribute their debt had to report significant losses on their books.

145

After July 2007 (2/5)– Slowing buyout activity in US and Europe

(almost no activity in 2008);

– Debt was repriced and more difficult to access;

– Default rate was historicaly low as of July 2007;

– Meant to rise sharply since then, starting with construction, airline and retail industries as global recession is impacting our economy;

146

After July 2007 (3/5)

– Increase in the issuance of junk bonds: in the past four years, almost half of the newly issued bonds have been rated as “junk” at their outset;

– Default risk (according to Moodys and Edward Altman (NYU Salomon Center)):

– CCC 4-year default risk: 53.6%;– CCC 10-year default risk: 91.4% in 10 years;– B default risk: 25.2% after four years.

– In reality, the default rate over the last years is much lower that those predictions;

147

After July 2007 (4/5)

– Reasons for the low deafult rate: – Given the lareg amount of liquidity, bonds that

would have defaulted have been refinanced;– The rise of covenant lite means that any event

short of a failure to pay interest would not result in a default;

– Private equity deals should be seriously impacted very soon;

– Deals signed in 2005, 2006 and H1 2007 are the most risky deals;

148

After July 2007 (5/5)

• The crisis opens doors to new investment opportunities:

– Distressed debt and special situation funds;– Need for leverage should benefit mezzanine

funds;– Credit dislocation funds: purchase loans at a

discount from lenders;– Small to mid-market buyout funds will benefit

from desaffection for mega buyout firms;– Secondary funds: some large institutions need

cash.

149

ConsequencesJune 2007 June 2008

Top of the cycle Recession

• Prices are too high • Prices are falling. More to go

• Risk levels are extraordinary • The risk profile has changed fundamentally

• Liquidity is driving behaviour • Lack of liquidity is driving behaviour

• Seller’s market • Buyer’s market but must proceed carefully and beware the falling knives

• No distressed opportunities • Some interesting distressed situations (and even more to come)

150

Crisis = opportunities

• Recession years have produced the best vintages for private equity;

• Although some LPs are facing liquidity crisis, more money should be deployed now and in 2009 !

• Recession years considered to be 1991 + 2 years and 2001 + 2 years.

151

Recession years are usually good vintage years

152

Recession vs Non-recession

153

Case study: Baneasa

154

Investment rationale

• Market leader in French retail (#1 in Footwear and #2 in clothing);

• Experienced management team: Bogdan Novac has a long standing experience of the sector and the group;

• Strong financial performance and strong growth in sales expected over the next 3 years;

• Resilient business model: lower end of the market and diversified range of products;

• Diversified offering: geography (city centre or out of town, France and overseas, apparel and footwear);

• Potential growth prospect: organic growth (new stores openings) and consolidation (fragmented industry).

155

• Banesa is #1 footwear retailer with 14.4% of the French market and #2 clothing retailer in France with only 3.7% of the French apparel market

• Fragmented industry, gives M&A opportunity/growth by acquisition

156

• 45% of OOT footwear market and 24% of OOT clothing market

• Indication about competition: Zara, H&M, Mango, etc… are city centres = Baneasa has a dominant position where those competitors are not present. Zara, H&M, Mango, etc… are thus the main city centre competitors;

157

• Historically, Baneasa has always been active in OOT: created suburban discount shoe stores in 1981 with Osier Chaussures; and in 1984 with Osier Vetements

• First mover advantage

158

• Clothing business: 44% sales and 43% of EBITDA and

• Footwear business: 56% sales and 57% EBITDA

• Well balanced, similar EBITDA margins in both segments

159

• France: 93% sales and 95% EBITDA;

• Out Of Town: 68% sales and 72% EBITDA

• Baneasa is diversified (but maybe not as much as the investor thinks);

• Sales and EBITDA indicates that city centres and overseas stores are more expensive (lower margins, Baneasa has lower performances abroad and in city centres where is the tough competition)

160

• Bogdan Novac was CEO of Baneasa from 2000 to 2003 and 2004 to today.

• EBITDA has grown from €231m to €365m (a CAGR of 16.4%)

• Good management team // experienced CEO

• Strong performance over the last years (since 2003)

161

• Nataf estimates sales and EBITDA in the financial year to 28 February 2007 of €237 million and €23 million respectively (9.7% margin).

• Berrilio had sales in the 12 months to 30 September 2006 of €64.5 million and EBITDA of €4.6 million (7.3% margin).

• Nataf and Berrilio offer potential margin improvements as the margin is 9.7% and 7.3% respectively versus 16.1% margin for Baneasa.

162

• French clothing market has been stable since 2000 with 0.2% CAGR

• The actors must gain market share to grow: no organic growth resulting from industry growth

163

• Average prices have decreased by 1.5% CAGR. Price-volume elasticity is high with declines in average prices driven by the pass-through of purchasing gains from lower-cost sourcing (Asia) to end-customers and from the increasing development of value retail.

• Pressure on cost, margins are difficult to increase and can only be increased through cost reduction (rather than price increase): price pressure on Baneasa + tough competition + need to keep production cost low (cost cutting and tough negotiation with suppliers)

164

• Womenswear represents the majority of the French market with 51% of sales. It was the strongest growing segment as well as the most competitive and innovative until 2002.

• Womenswear is the core business

165

• Menswear has experienced fast growth rates in recent years due to the introduction of semi-annual collections and has increased its share of the total French clothing market (from 31% in 2002 up to 35% in 2004).

• Menswear is a new business with high growth so absolute need to be active

166

• Baby and childrenswear are expected to remain broadly stable, with upside coming from increased spend per child and the emerging trend of higher-priced designer baby and childrenswear.

• Children wear is a good market with higher consumer spending

167

• Between 2001 and 2003, out-of-town banners saw their market share decline from 11.9% in 2000 to 10.9% in 2003. This reflected the impact of hard discount retailing and the growth of city-centre banners. Since 2003, however, OOT specialised chains have regained share and have returned to 11.7% market share, growing by 3.9% in 2004 and 4.7% in 2005, to €3.1 billion. This dynamism has been driven by new store openings and volume increases supported by increased price-competitiveness.

• Potential decline of OOT/inconsistent growth rate: risk.

168

• Specialist out-of-town (OOT) distribution has seen the strongest growth in share (2.3% growth per annum over 2003-05 and 3.2% over 1998-2003) and continues to gain market share on the food retailers and the lower-end city-centre players due to a broad product range and low prices.

• Footwear: OOT has a strong growth in share; OOT is where Baneasa is the best with 45% market share (with Osier Chaussures, Velo and Blue Shoes) while the closest competitor has only 10%.

169

• The Spanish footwear market is more dynamic than the French one (3.9% p.a growth since 2000) but experiences the same volume and price trends with volumes up 6.5% p.a while prices decreased by 2.6% p.a largely driven by growing Asian imports. The market is still dominated by independent city centre stores (40% market share vs 15% in France) and OOT footwear is gaining share (8.4% p.a between 1998 and 2003).

• Spanish market: active market at the time of the investment (quid now?) but city centres have more market shares than OOT (risk: Baneasa is better in OOT).

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• Suburban stores are typically large format value stores and account for the great majority of sales and profits, whilst city centre stores are more fashionable premium stores.

• OOT stores need high volume sales to be profitable // city centres are more fashionable products so potentially higher margins although probably higher costs (including marketing costs)

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• Over 2003-06, gross margin has grown at a 9.5% CAGR and EBITDA at 16.4% CAGR while sales CAGR was 5.8%, of which like-for-like sales growth of 3.7%.

• Indicates that Baneasa has grown organically and by acquisitions but acquisitions are the main growth factor.