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Private Equity Europe

Confidential. Presentation to:. Private Equity Europe. Vittorio Pignatti Morano, Vice Chairman. 26 September 2007. What is Private Equity?. Private Equity funds are pools of capital managed by professional investors who make equity investments in private companies

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Private Equity Europe

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  1. Confidential Presentation to: Private Equity Europe VittorioPignatti Morano, Vice Chairman 26 September 2007

  2. What is Private Equity? • Private Equity funds are pools of capital managed by professional investors who make equity investments in private companies • Private Equity funds align the economic interests of three key players: • Investors looking for higher risk / return equity exposure • Companies seeking financing to complement or replace traditional sources of capital • The investment professionals / venture capitalists • Types of Private Equity • Corporate Buyouts • Merchant Banking • Co-Investment • Infrastructure • Venture Capital • Fund of Funds • Real Estate • Mezzanine Products • The performance of the fund is defined by the investment’s internal rate of return (“IRR”); the IRR of a fund is the return on the investment 1

  3. (1) (2) (2) (2) (2) (1) (2) (2) (2) (2) Private Equity Returns Private Equity has outperformed public equity over the last 10 and 20 years Net IRRs Ending 31 December 2006 20-Year 10-Year ___________________________ • Historical trends do not imply, forecast or guarantee future results. Thomson Venture Economics’ US Private Equity Performance Index is based on the latest (31 December 2006) quarterly statistics from Thomson Venture Economics’ Private Equity Performance Database analysing the cash flows and returns for 1,860 US venture capital and private equity partnerships with a capitalisation of over $679bn. Sources are financial documents and schedules from limited partner investors and general partners. All returns are calculated by Thomson Venture Economics from the underlying financial cash flows. Returns are net to investors after management fees and carried interest. • Source: Bloomberg, LP. Represents quarterly total returns for the period. S&P 500 & Dow Jones exclude dividend reinvestment. NASDAQ and Russell 2000 exclude dividends. 2

  4. Strong Industry Growth The market for LBOs has increased more than ten times in the last five years Total US Leveraged Buyout Volume ___________________________ Source: S&P Global Leveraged Loan Review 4Q06. Historical trends do not imply, forecast or guarantee future results. 3

  5. Increasing Deal Sizes The average size of an LBO reached over $1bn in 2006 Average LBO Size ___________________________ Source: S&P Global Leveraged Loan Review 4Q06. Historical trends do not imply, forecast or guarantee future results. 4

  6. Globalisation of Private Equity The industry has expanded outside the US Funds Raised Investments ___________________________ Source: International Financial Services London (ESFL) estimates based on Thomsan, PwC and EVCA data. 5

  7. Global Fundraising Environment Rapid growth of private equity in recent years is capturing the attention of many investors who have never invested in the asset class Commitments to Global Private Equity Partnerships ___________________________ Source: Thomson Financial, through December 31, 2006. Includes Buyout and Mezzanine funds. 6

  8. European Fundraising Environment As in the U.S., 2006 was a record year for private equity fundraising in Europe • Fundraising has predominately been in the buyout space as traditional venture capital investing is relatively less important • The list of the largest funds raised in Europe in 2006 is dominated by: • Pan-European funds, headquartered in London; or • Nordic funds headquartered in Stockholm • Many investors believe middle-market European funds, which tend to be most often country-specific, are more likely to generate outsized returns Observations Commitments to Asian Private Equity Partnerships1 10 Largest European Funds Ever Raised • ___________________________ • Source: Thomson VenturExpert. 7

  9. Resurgence Growing Bull Market Recession Recession Developing Evolution of the Buyout Market Growing Level of Sophistication Robust Credit Market Club Deals Non US Buyouts Developing HY Market Sarbanes-Oxley Overheated Stock Market More Sophisticated Financial Engineering Mega Buyouts Recapitalisation Through Equity Markets Valuation Decline Tech / Telecom Bubble Low Interest Rates Increasing Deal Size Loan Market Tight Credit Focus on Growth Investments Strategic Buyers Less Relevant Multiple Contraction Growing M&A Under Exploited Balance Sheets Management Focus Abundant Fundraising Globalisation of Business Limited Equity HLT Regulation Underperforming Economy Increased Equity EconomicBoom Vintage Performance Early to Mid ’80s Late ’80s Early ’90s Late ’90s 2000–2002 2003–2007 Excellent Strong Good Poor Good Strong 8

  10. Lehman Brothers Private Equity Fund Performance First quartile performance in aggregate since inception of each asset class ___________________________ Source; Lehman Brothers Inc. Past performance is not necessarily indicative of future results. There can be no assurance that future funds will achieve comparable results. • Returns are expressed in US Dollars. All returns are as of March 31, 2007 except for the Fund of Fund Investments return, which is as of 12/31/2006. Gross internal rates of return (IRRs) do not reflect the management fees, carried interest, taxes, transaction costs and other expenses to be borne by investors in each fund, which in the aggregate are expected to be substantial. 9

  11. Current Areas of Interest in Private Equity • Secondary Investments • Purchase of limited partnership interests from original investors • Access to relatively mature private equity investments often at favorable prices • Reduces the J-curve effect by hastening the time until portfolio investment gains are realized • Improved visibility pertaining to the underlying partnership portfolio companies • Co-Investment • Direct investment in private equity transactions • Selectivity in deals • Reduced GP fees • Lower fees and the immediacy of capital calls contribute to truncation of the J-curve • Beneficiary of limited “club deals” • Mezzanine • Through mezzanine debt, investors can acquire buyout equity exposure without paying high premiums • Historically, mezzanine debt has offered equity-like returns with fixed-income-like risk levels • Mezzanine also offers good diversification benefits vs. high yield (i.e., historical correlation = zero) 10

  12. Current Areas of Interest in Private Equity (cont’d) • Large Cap Buyouts • Mega cap deals (greater than $5 billion) can have less competition than the middle market and small market • This is largely an historically untapped market • Resale of subsidiaries to strategic buyers • Strategic buyers emerging in Asia and the Persian Gulf • Infrastructure • Hybrid investment between private equity and fixed income • Illiquidity risk premium plus long duration • Long-dated contracts • Inelastic demand • Municipalities, electric utilities • Distressed Debt in private equity • Slow deployment of capital from date of subscription • Opportunistic investment as distressed situations arise • Effective counterbalance and diversification to LBO equity investments 11

  13. 2008 – 2010 Opportunities • Real Estate – Asia, Emerging Europe • Mezzanine – Europe, U.S. • Buyouts – mid-cap globally • Secondary investments • Infrastructure investments – globally 12

  14. Mega Caps And Mezzanine LBOs: EBITDA Multiples ___________________________ Source: Factset, Lehman Brothers Attractive Risk Adjusted Performance Of Mezzanine Investing Source: Thomson, Bloomberg, Lehman; As of 12/06; Mezzanine data represents 25th %ile returns 13

  15. Impact of Recent Credit Market Repricing Favours Mid-Cap • The mezzanine market has experienced a widening of spreads. Current all-in new issue spreads are around 900-950 bps, versus 700 bps at the lowest point during Q2 2007, and 850 bps on average for H1 2007. • In addition, the market for leveraged dividend recapitalizations is shut, which leads to higher expected duration (from 2 years to 3 years). • As a result, on a Fund basis, projected Net Returns to investors are higher by 3% - 5% and Net Multiple of Cash by up to 0.2x. Returns on Invesments(1) Multiple of Capital Invested(1)(3) Average spread in H1 2007 (850 bps) Current spread in Q3 2007 (900-950 bps) Lowest spread in Q2 2007 (700bps) Average duration in H1 2007 Expected duration as of Q3 2007 ___________________________ Source: 1. Based on the assumption of Euribor of 4.75% and using the fund modelling assumptions for LBEMP II L.P. The base margin (from which the incremental margin is calculated) is 700 bps 2. Assumes all-in Margin of 850 bps over Euribor 14

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