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CORPORATE FINANCE

Private equity trends and outlook. Luxembourg 16 November 2009. CORPORATE FINANCE. Recent trends. AIFM directive. Change in EVCA guidelines. IV. Questions. Table of contents. CORPORATE FINANCE. Recent trends. ADVISORY. INTERNAL USE ONLY. Number of transactions. € billion.

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CORPORATE FINANCE

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  1. Private equity trends and outlook Luxembourg 16 November 2009 CORPORATE FINANCE

  2. Recent trends • AIFM directive • Change in EVCA guidelines IV. Questions Table of contents

  3. CORPORATE FINANCE • Recent trends ADVISORY INTERNAL USE ONLY

  4. Number of transactions € billion Source: unquote” Private Equity Barometer I.Recent trends • European Private Equity • The industry seems to have bottomed out with confidence rebounds. Deal numbers have increased in successive quarters since the low point in Q 1 2009. • Activity up almost 20% from 214 deals to 257 between Q1 2009 and Q3 2009 257 deals €9.6bn

  5. I.Recent trends • Number of transactions • Buyout activity grew by 57% from 47 to 74 deals between Q1 2009 and Q3 2009 • Growth capital activity grew by 17% from 90 to 108 deals since Q1 2009 • Early stage activity level decreased by 3% to 75 deals since Q1 2009 Number of transactions Q2 08 Q3 08 108 deals Q2 08 74 deals 75 deals Q3 08 Q2 09 Q3 09 Q3 08 Q4 08 Q4 08 Q2 08 Q1 09 Q4 08 Q1 09 Q3 09 Q3 09 Q2 09 Q2 09 Q1 09 Source: unquote” Private Equity Barometer

  6. I.Recent trends • Transaction value • Buyout: Increasing transaction value since Q1 2009 • Growth capital: Growth of 12% in terms of value since Q1 2009 • Early stage: Decrease of 5% in terms of value since Q1 2009 Transaction value (€bln) €8.0bn €1.3bn €0.3bn Source: unquote” Private Equity Barometer

  7. I.Recent trends • 4 obstacles to full recovery • Relationship with investors => harder to raise money • 42% of largest endowments are above their target allocation to PE investments • Without leverage, gap between the industry’s best and worst performers will become apparent • Investors are struggling to meet capital call • Buyout managers are under pressure to revise the standard fee structure • Refinancing burden • $378bn of PE debt will need to be refinanced in the next 4 years • Now there are a number of buyout restructuring in the market following defaults • The ability to refinance will depend on performance of the underlying portfolio. If economy falters or interest rate rises, refinancing will be hurt • Surging asset prices as economy rallies • Debt is scarce • Loading on debt is no longer an option. Banks are hoarding capital and cost of debt is more expensive

  8. I.Recent trends • What next? A massive reinvention of the PE business or back to business as usual? As high leverage can be pursued up to a point, it’s inevitable there’ll be a reversion to equity More specialist funds, e.g. turnaround, distressed will be more popular Smaller & niche deals Increasing focus on Asia-Pacific Real commercial value creation opportunities Flight to quality

  9. I.Recent trends • How to rebuild investor confidence? • Confidence seems to be on the rise but • Fund raising dropped by 60% during 2008 – 2009. • Leverage is hard to obtain • Regulatory uncertainties • Shift in balance of power from fund managers to investors • Investors demand more transparency and openness • Some funds of hedge funds will redeem investments regardless of past performance if the fund doesn’t provide full transparency • LPs demand more transparency from GPs on interim valuation even though it’s the exit value that matters

  10. I.Recent trends • How to rebuild investor confidence? (continued) How can higher confidence be achieved? EVCA developments AIFM Directive Whatever the cons of the new guidelines, there’s a need for more transparency Periodic independent valuation review can alleviate this problem and help regain investor confidence Segregation between portfolio management and valuation is key

  11. CORPORATE FINANCE II. AIFM directive ADVISORY INTERNAL USE ONLY

  12. Macro-prudential risks Acquisition of control of companies by AIFM Micro-prudential risk Investor protection Impact on market for corporate control Market efficiency and integrity II. AIFM Directive AIF with leverage: AUM of € 100 million or more Applies to: AIF with l no leverage & lock-in period of five years or more: AUM of € 500 million or more AIF key risk areas Objectives • Proper monitoring of macro & micro-prudential risks • Common approach to AIF investor protection • Enhance public accountability of AIF controlling stakes in companies • Develop a single market for AIF

  13. II. AIFM Directive: examples of requirementEmphasis on investor protection AIFM requires that funds: • Address conflicts of interest in fund governance, particularly on remuneration, valuation and administration • Demonstrate appropriate arrangement for the valuation and safe-keeping of the assets, system of regulatory reporting • Show robustness of risk management, particularly liquidity, counterparty (related to short-selling), conflict of interest, fair valuation, security of custodial arrangements • Separate portfolio management and valuation functions • Value assets at least once a year and each time shares of the AIF are issued or redeemed • Have valuation procedures, pricing models and methods that are appropriate, consistent, and disclose them to investors

  14. II. AIFM Directive: examples of requirementChanges in the second draft • Capital requirement • Valuation • Depositary • Delegation • Transparency • Third country regime

  15. II. AIFM Directive Pros & Cons • Effective basis for monitoring & • controlling risks • Reduction of risks (for investors, counterparties & financial markets) • Increase in transparency, disclosure & trust • Decrease in uncertainty for investors & counterparties • “One size fits all”- approach • Cutback of investment companies’ commercial flexibility • Higher costs • Tax issues Pros Cons

  16. II. AIFM Directive • Impacts • Significant impacts in terms of reduced investor choice and substantial compliance costs Source: Charles River Associates

  17. CORPORATE FINANCE III. Change in EVCA guidelines ADVISORY

  18. III. Changes to EVCA valuation guidelines After the crisis…. • September 2009 version • Same principal methodologies • New assessment of value has to be done at each reporting date • Stress on importance of consideration for current market conditions at each reporting date to assess the reasonableness of assumptions • More vague on marketability discount: Removed from all methods, except for Earning Multiples and Available Market Prices approaches. • Earning Multiples: No more recommendation as to when 10%, 20% or 30% is appropriate. Depends on valuer’s judgment • Available Market Prices: The old guideline recommended a marketability discount of 20% when there’s a lock-up period of six months. The new guidelines also recommends a discount but no specification on percentage size • Under Price of Recent Investment method, the general one-year guideline no longer applies. Time period would depend on specific circumstances of the investment and valuer’s judgment • May increase the carrying value of the investment if there’s an evidence of value creation. The old guideline didn’t provide for value increase. • New section on valuing fund interest

  19. CORPORATE FINANCE IV. Questions ADVISORY INTERNAL USE ONLY

  20. Thank you for your attentionFor additional questions, please contact us at:wenda.jacamon@kpmg.lu oryves.courtois@kpmg.lu

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