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Ten Key Questions Facing the Private Equity World. David Rubenstein Co-founder & Managing Director . February 27, 2008 . 1. Will Leverage for Buyouts Return in Time for PE Investors and Professionals to Stay with the Industry?. Leveraged Loan Volumes Will Recover .

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ten key questions facing the private equity world

Ten Key Questions Facing the Private Equity World

David Rubenstein

Co-founder & Managing Director

February 27, 2008

slide2

1. Will Leverage for Buyouts Return in Time for PE Investors and Professionals to Stay with the Industry?

leveraged loan volumes will recover
Leveraged Loan Volumes Will Recover
  • US Leveraged Loan Volumes Bounced Back after the Downturn of 2000-2001

US Buyout Leveraged Loan Volume ($Bn)

+ 1,929%

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Source: S&P Leveraged Buyout Review

leveraged loan volumes will recover4
Leveraged Loan Volumes Will Recover
  • While European Issuance has Grown Every Year Since 1999

European Buyout Leveraged Loan Volume (€Bn)

1999

2000

2001

2002

2003

2004

2005

2006

2007

Source: S&P LCD

but this will not happen overnight
But This Will Not Happen Overnight
  • In the US, it took roughly three years for leveraged loan volumes to match their previous highs after 2000
  • And those three years were challenging for private equity investors
    • In 2001 and 2002, US leveraged loan issuance fell to approximately 1/3 of its 1998 total
  • But when the recovery came, it exceeded all expectations
    • Leveraged loan issuance more than doubled between 2002 and 2004 and again between 2004 and 2006
    • Issuance jumped 20x between 2001 and 2007

Source: S&P Leveraged Buyout Review

2 are there going to be major defaults from buyouts completed within the golden age

2. Are There Going to be Major Defaults from Buyouts Completed within the "Golden Age"?

leverage levels are at historical highs

x

Leverage Levels Are at Historical Highs

Average Large LBO Leverage Multiples (Debt/EBITDA)

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Source: S&P Leveraged Buyout Review

Note: Includes issuers with EBITDA of $50MM or more

and credit ratios are depressed

x

And Credit Ratios Are Depressed

(EBITDA – Capex) / Cash Interest

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Source: S&P Leveraged Buyout Review

default rates have remained low over the past three years

%

Default Rates Have Remained Low Over the Past Three Years

Percentage of Outstanding Leveraged Loans in Default or Bankruptcy

Avg.

3.80%

Source: S&P LCD

and remain below levels seen during past market downturns
And Remain Below Levels Seen During Past Market Downturns
  • Leveraged Loan Default Rates During Recent Market Downturns:

Source: Morgan Stanley

but the trading levels of many lbo debt deals suggest defaults are likely
But the Trading Levels of Many LBO Debt Deals Suggest Defaults are Likely
  • A Spread vs. Treasuries of Above 1,000 Indicates Significant Distress

Source: Merrill Lynch High Yield Master II Index

a massive backlog remains
A Massive Backlog Remains
  • Approximately $200 billion of leveraged loans are still sitting on banks’ balance sheets
    • This represents a decrease of only $75 billion from last year’s peak
  • Every bank is affected

Sources: The Wall Street Journal, Morgan Stanley

pe firms will invest more in emerging markets

11.4

PE Firms Will Invest More in Emerging Markets
  • Emerging Market Fundraising Has Grown Exponentially

Emerging Asia ($Bn)

CEE/Russia ($Bn)

2003

2004

2005

2006

2007

2003

2004

2005

2006

2007

Latin America ($Bn)

Middle East & Africa ($Bn)

2003

2004

2005

2006

2007

2003

2004

2005

2006

2007

Source: EMPEA

pe firms will invest more in emerging markets16

24.9

PE Firms Will Invest More in Emerging Markets
  • As Has Deal Volume

Emerging Asia ($Bn)

CEE/Russia ($Bn)

10.5

54.5

2003

2004

2005

2006

1H 2007

2003

2004

2005

2006

1H 2007

Latin America ($Bn)

Middle East & Africa ($Bn)

5.9

32.2

2003

2004

2005

2006

2007

2003

2004

2005

2006

2007

Source: Morgan Stanley, Thomson

pe firms will invest more in emerging markets17
PE Firms Will Invest More in Emerging Markets
  • A growing percentage of global private equity activity is dedicated to Emerging Markets
  • In 2001, they accounted for 4.5% of private equity fundraising and 3.3% of deal volume
    • In 2007, they accounted for 15.9% of fundraising
    • In the first half of 2007, they accounted for 7.0% of global LBO deal volume

Source: Morgan Stanley, Thomson

private equity firms will make more minority investments
Private Equity Firms Will Make More Minority Investments
  • Private equity firms have increased their commitments to non-control investments:
  • In the past six months, private equity firms have made large minority investments in companies including
    • Sprint Nextel, NC Numericable, MBIA, Global Hyatt, Antero Resources, Galaxy Entertainments, MoneyGram International, Legacy Hospital Partners, and Bharti Infratel

Source: Dealogic

and they will commit more capital to distressed investments
And They Will Commit More Capital to Distressed Investments
  • Distressed Debt Fundraising Anticipating Debt Maturity Schedule:

Source: Private Equity Analyst, data as of 6/30/07; Fitch Ratings, data as of July 2007

top quartile pe returns are unrivalled
Top Quartile PE Returns Are Unrivalled

Top Quartile US Buyout Returns

IRR %

Top Quartile U.S.

32.1%

20.4%

Buyout

21.8%

28.5%

Top Quartile >$2Bn

22.1%

18.2%

18.4%

S&P 500

8.7%

5.4%

20.3%

DJIA

7.7%

5.7%

19.9%

NASDAQ

12.2%

6.1%

0%

10%

20%

30%

40%

10-year

5-year

1-year

Source: Thomson Venture Economics

Note: PE data as of 30 June 2007; Bloomberg, market data as of 30 June 2007

top quartile pe returns are unrivalled22

7.6%

1-year

5-year

10-year

Top Quartile PE Returns Are Unrivalled

Top Quartile European Buyout Returns

Top Quartile

Eu. Buyout

FTSE 100

CAC-40

Source: Thomson Venture Economics

Note: PE data as of 30 June 2007; Bloomberg, market data as of 30 June 2007

pe funds raised during times of market distress generally perform well
PE Funds Raised During Times of Market Distress Generally Perform Well
  • Private equity investments have produced healthy returns during each of the three most recent global economic slowdowns

Top Quartile Private Equity IRRs by Vintage

Source: Thomson Venture Expert

Note: IRRs are cumulative and are calculated from inception to 9/30/07

7 will regulators and legislators continue to seek changes in pe regulation oversight and taxation

7. Will Regulators and Legislators Continue to Seek Changes in PE Regulation, Oversight and Taxation?

the pe industry faces various legislative and regulatory proposals
The PE Industry Faces Various Legislative and Regulatory Proposals
  • Several countries are considering or have introduced changes to the way that private equity returns are taxed
  • The industry is under pressure to increase disclosure and transparency
  • In some markets, foreign private equity firms are subject to limitations on their investment activity
slide27

8. Will Sovereign Wealth Funds Replace PE Firms as Principal Sources of Capital for Corporations/Sellers Seeking New Capital?

pe firms pale in comparison to the largest sovereign wealth funds
PE Firms Pale in Comparison to the Largest Sovereign Wealth Funds

Top Sovereign Wealth Funds

Source: Citigroup

sovereign wealth fund investment activity has increased dramatically
Sovereign Wealth Fund Investment Activity Has Increased Dramatically

Sovereign Wealth Fund Deal Volume

Deal Volume ($Bn)

# of Deals

+ 1,151%

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Number of Deals

Value of Deals

Sources: World Economic Forum, Thomson Financial

but these investments still represent a tiny proportion of total m a activity

Sovereign Wealth Funds

Strategic

Private Equity

But These Investments Still Represent A Tiny Proportion of Total M&A Activity

Breakdown of Global M&A Activity ($Bn)

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Sources: World Economic Forum, Thomson Financial

sovereign wealth funds and pe firms are forming a productive partnership
Sovereign Wealth Funds and PE Firms Are Forming a Productive Partnership
  • Sovereign wealth funds have purchased substantial equity stakes in several alternative asset managers
    • China Investment Corp. invested $3 billion in Blackstone
    • Abu Dhabi’s Mubadala invested $1.4 billion in Carlyle
    • Dubai International Capital invested 1.3 billion in Och-Ziff
  • They are among the private equity industry’s largest individual investors
  • In the future, sovereign wealth funds and private equity firms are likely to pursue large investment opportunities through joint ventures
    • Sovereign wealth funds will benefit from PE firms’ deep pools of investment talent and deal expertise
slide32

9. Can the PE Industry Improve its Image with the Public, Media, Governments, Unions, Environmental and Consumer Groups?

private equity s image could be better
Private Equity’s Image Could be Better

A Backlash Against Private Equity

Grumbling by unions over post-deal job cuts has escalated into a public outcry

–Business Week

Gluttons at the Gate

Private equity are using slick new tricks to gorge on corporate assets. A story of excess

–Business Week

slide34

10. Is PE's Future Going to Be Better, Bigger, and Stronger than Before, Or Have We Already Seen the High-water Mark?

it s always darkest just before dawn
It’s Always Darkest Just Before Dawn
  • As before, deal volume will rebound and yesterday’s records will be left far behind

Global LBO Activity

Deal Volume ($Bn)

# of Deals

CAGR: 31%

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

# of Deals

Deal Volume

Source: Dealogic

slide36

What I Was Supposed to Talk About: “Giving Private Equity a Positive Image: Why is there such Disparity Between the Public’s Perception of the Industry and the Industry’s Perception of Itself, and What can be done to bring these Views into Alignment”

the current situation
The Current Situation

Perception of the Industry within the Industry

Improved operation of companies

Prevented job losses; created jobs

Improved Economies

Created High Returns for Investors/Pension Funds

Paid Large Amount of Taxes

Created an Industry

Perception of the Industry outside the Industry

Destroyed Jobs

Relocated Facilities Overseas

Focused Only on Short-Term Profits

Left Companies in Worse Shape

Made Too Much Money for PE Professionals

Insufficient Level of Taxes Paid

why the disparity in perceptions
Why the Disparity in Perceptions?
  • Industry Focused for Long Time Principally on Returns
  • Industry Spent Little Time Explaining its Actions to those Outside of Investor Base
  • Industry Lacked Data to Support its Views
  • No Industry Vehicle for Long Time
  • Other Problems of Industry Critics/Convenient and Attractive Target
what can the industry do to improve its image
What Can the Industry Do to Improve Its Image?
  • Continue to Produce Hard Data
  • Engage Industry Critics in Debate/Discussion
  • Consider Factors Other than Just Returns When Assessing/Overseeing Investments
  • Involve Portfolio Companies Directly in the Effort
  • Enhance Transparency/Public Focus
  • Recognize that Some Changes Can and Should Occur
ten leading questions facing the private equity world

Ten Leading Questions Facing the Private Equity World

David Rubenstein

Co-founder & Managing Director

February 27, 2008