Goldman Sachs Presentation

Overview of the Development of Capital MarketsOverview of the Development of Capital Markets

2

Topics to AddressTopics to Address

PurposePurpose

PlayersPlayers

InstrumentsInstruments

Trends in Capital Market DevelopmentTrends in Capital Market Development

3

Purpose of Capital MarketsPurpose of Capital Markets

Efficient Allocation of SavingsEfficient Allocation of Savings

Diversification of RiskDiversification of Risk

Catalyst for Productive Economic GrowthCatalyst for Productive Economic Growth

4

Issuer (MFI) UnderwriterExchange

Investor RegulatorRating Agency

Key Players in a Capital Markets TransactionsKey Players in a Capital Markets Transactions

5

Intermediaries Facilitate Capital FlowsIntermediaries Facilitate Capital Flows

Institutions Seeking Capital

Intermediaries Facilitating the Flow of Capital

Financing &Advisory

(Investment Banking)

Investors withCapital

Pension Funds Mutual Funds Endowments & Foundations Insurance Companies Private Equity Funds Hedge Funds

Institutional Investors

Debt Capital Markets

EquityCapitalMarkets

Investment Research

Principal Investing (Merchant Banking)

Investment Management

Sales &

Trading

Public Companies

Private Companies &

Funds

Governments & Agencies

High Net Worth Small Ticket Retail

Retail Investors

Governments & Agencies

6

A legal entity that develops, registers and sells securities for the purpose of financing its operationsA legal entity that develops, registers and sells securities for the purpose of financing its operations

Issuers are legally responsible for the obligations of the issue and for reporting financial conditions, Issuers are legally responsible for the obligations of the issue and for reporting financial conditions, material developments and any other operational activities as required by the regulations of their material developments and any other operational activities as required by the regulations of their jurisdictionsjurisdictions

The most common types of securities issued are bonds (notes, debentures, bills) and common and The most common types of securities issued are bonds (notes, debentures, bills) and common and preferred stockspreferred stocks

A company or other entity (investment bank, commercial bank or other financial institution) A company or other entity (investment bank, commercial bank or other financial institution) that administers the issuance and distribution of securities from a corporation or other issuerthat administers the issuance and distribution of securities from a corporation or other issuer

An underwriter works closely with the issuer to determine the offering price of the securities, buys An underwriter works closely with the issuer to determine the offering price of the securities, buys them from the issuer, and sells them to investors viathem from the issuer, and sells them to investors via the the underwriter's distribution network underwriter's distribution network

A company that assesses the credit-worthiness of corporations and countries and assigns credit A company that assesses the credit-worthiness of corporations and countries and assigns credit ratings. This company also provides a transaction rating of the finance structureratings. This company also provides a transaction rating of the finance structure

The credit rating is a financial indicator to potential investors of debt securities such as bondsThe credit rating is a financial indicator to potential investors of debt securities such as bonds

An exchange organization which provides facilities for brokers to trade company stocks and other An exchange organization which provides facilities for brokers to trade company stocks and other securities securities

Exchanges also provide facilities for the issue and redemption of securities, as well as other Exchanges also provide facilities for the issue and redemption of securities, as well as other financial instruments and capital events including the payment of income and dividendsfinancial instruments and capital events including the payment of income and dividends

Banks, Mutual Funds, Pension Funds, Insurance Companies, Asset Managers, Governments, and Banks, Mutual Funds, Pension Funds, Insurance Companies, Asset Managers, Governments, and Individual InvestorsIndividual Investors

A regulator provides supervision which subjects financial institutions and issuers to certain A regulator provides supervision which subjects financial institutions and issuers to certain requirements, restrictions and guidelines that aim to maintain the integrity of the financial systemrequirements, restrictions and guidelines that aim to maintain the integrity of the financial system

Underwriter

Rating Agency

Exchange

Investors

Issuer

Key Players in Capital Markets TransactionsKey Players in Capital Markets Transactions

Regulator

7

Capital Markets Instruments DefinedCapital Markets Instruments Defined

VehiclesVehicles DefinitionsDefinitions

StocksStocks Shares of ownership in a companyShares of ownership in a company

Money MarketsMoney Markets Short-term debt issued by corporations or governmentsShort-term debt issued by corporations or governments

U.S. Treasuries (UST)U.S. Treasuries (UST) Debt issued by U.S. governmentDebt issued by U.S. government

Corporate DebtCorporate Debt Debt issued by corporationsDebt issued by corporations

Asset BackedAsset Backed Debt created by an underlying pool of assets, such as mortgagesDebt created by an underlying pool of assets, such as mortgages

Municipal SecuritiesMunicipal Securities Debt issued by state and city governmentsDebt issued by state and city governments

REITs (Real Estate Investment REITs (Real Estate Investment Trusts)Trusts) Shares in a company that invests in real estateShares in a company that invests in real estate

DerivativesDerivatives Contract whose value depends on the fluctuations in price by another asset, such as Contract whose value depends on the fluctuations in price by another asset, such as stocks, currencies, commodities, or interest ratesstocks, currencies, commodities, or interest rates

Mutual FundsMutual Funds Shares in a portfolio of stocks and/or bonds and other securitiesShares in a portfolio of stocks and/or bonds and other securities

Private Equity FundsPrivate Equity Funds Shares in a portfolio that buys stakes in privately held companiesShares in a portfolio that buys stakes in privately held companies

Hedge FundsHedge Funds Shares in a portfolio that actively buys and sells stocks, bonds, and other Shares in a portfolio that actively buys and sells stocks, bonds, and other investments investments

DebtDebt

8

StocksStocks

Individual

Investors

33%

Non-U.S.

Investors

13%

Mutual Funds

25%

Insurers

7%

Pension Funds

20%

Other

2%

Ownership and Market Size:Ownership and Market Size: Definition:Shares of ownership in a company

Purpose:Capital growth

Major U.S. Markets: New York Stock Exchange NASDAQ American Stock Exchange

Major International Markets: London Stock Exchange Tokyo Stock Exchange Euronext

Definition:Shares of ownership in a company

Purpose:Capital growth

Major U.S. Markets: New York Stock Exchange NASDAQ American Stock Exchange

Major International Markets: London Stock Exchange Tokyo Stock Exchange Euronext

$18.2 Trillion$18.2 Trillion

Indices and Returns (1996-2005):Indices and Returns (1996-2005):

S&P 500 15.6%

Dow Jones Industrial Average 16.2%

9

Bonds: Money MarketBonds: Money Market

Individual

Investors

48%

Insurers

6%

Pension Funds

25%

Other

21%

Ownership and Market Size:Ownership and Market Size: Definition:Short-term debt issued by corporations or governments

Purpose:Income from short-term liquid investment

Major U.S. Markets: Over the counter

Major International Markets: Over the counter

Definition:Short-term debt issued by corporations or governments

Purpose:Income from short-term liquid investment


Major International Markets: Over the counter



Lipper Money Market Fund Index 3.3%

10

Bonds: U.S. TreasuriesBonds: U.S. Treasuries

Individual

Investors

9%

Insurers

3%

Pension Funds

6%

Other

29%

Non-U.S.

Investors

47%

Mutual Funds

6%

Ownership and Market Size:Ownership and Market Size: Definition:Debt issued by the U.S. government

Purpose:Income from interest; highest credit quality; not subject to state taxes


Definition:Debt issued by the U.S. government

Purpose:Income from interest; highest credit quality; not subject to state taxes




Lehman Brothers Intermediate Term Government Index

5.5%

11

Bonds: Corporate DebtBonds: Corporate Debt

Individual

Investors

10%

Insurers

25%

Pension Funds

6%

Other

7%

Banks

9%

Non-U.S.

Investors

26%

Mutual Funds

12%

Fannie Mae and

Freddie Mac

5%

Ownership and Market Size:Ownership and Market Size: Definition:Debt issued by corporations

Purpose:Higher income from interest given credit quality less than U.S. Treasuries


Major International Markets Over the counter London Stock Exchange

Definition:Debt issued by corporations



Major International Markets Over the counter London Stock Exchange



Lehman Brothers Aggregate Bond Index

6.2%

12

Bonds: Asset BackedBonds: Asset Backed

Individual

Investors

10%

Insurers

8%

Pension Funds

9%

Other

15%

Banks

20%

Non-U.S.

Investors

15%

Mutual Funds

8%Fannie Mae and

Freddie Mac

15%

Ownership and Market Size:Ownership and Market Size: Definition:Bonds created by an underlying pool of assets such as mortgages



Major International Markets Over the counter

Definition:Bonds created by an underlying pool of assets such as mortgages



Major International Markets Over the counter$6.3 Trillion$6.3 Trillion


Lehman Brothers Aggregate Bond Index

6.2%

13

Bonds: Municipal SecuritiesBonds: Municipal Securities

Individual

Investors

38%Insurers

15%

Other

5%Banks

7%

Mutual Funds

33%

Fannie Mae and

Freddie Mac

2%

Ownership and Market Size:Ownership and Market Size: Definition:Debt issued by state and local governments

Purpose:Higher income from interest given lower credit quality; interest payments untaxed



Definition:Debt issued by state and local governments

Purpose:Higher income from interest given lower credit quality; interest payments untaxed





Lehman Brothers Municipal Bond Index

5.7%

14

REITs (Real Estate Investment Trusts)REITs (Real Estate Investment Trusts)

Definition:Shares in a company that invests in real estate

Purpose:Liquid vehicle to invest in real estate

Major U.S. Markets: American Stock Exchange NASDAQ New York Stock Exchange

Major International Markets London Stock Exchange Tokyo Stock Exchange

Definition:Shares in a company that invests in real estate

Purpose:Liquid vehicle to invest in real estate

Major U.S. Markets: American Stock Exchange NASDAQ New York Stock Exchange

Major International Markets London Stock Exchange Tokyo Stock Exchange

$581 Billion$581 Billion


NAREIT U.S. Real Estate Index 6.5%

Ownership and Market Size:

• Individuals• Mutual Funds• Pension Funds


• Individuals• Mutual Funds• Pension Funds

15

DerivativesDerivatives

Definition:Contract whose value depends on the fluctuations in price by another asset, such as stocks, currencies, commodities, or interest rates

Purpose:Manage risk from price fluctuations in stocks, currencies, commodities, or interest rates

Major U.S. Markets: Chicago Board of Exchange Chicago Mercantile Exchange Over the counter

Major International Markets Euronext International Securities Exchange

Definition:Contract whose value depends on the fluctuations in price by another asset, such as stocks, currencies, commodities, or interest rates

Purpose:Manage risk from price fluctuations in stocks, currencies, commodities, or interest rates

Major U.S. Markets: Chicago Board of Exchange Chicago Mercantile Exchange Over the counter

Major International Markets Euronext International Securities Exchange


NA


Individuals Hedge Funds Commercial Banks Investment Banks Insurance Companies


Individuals Hedge Funds Commercial Banks Investment Banks Insurance Companies

16

Funds: Mutual FundsFunds: Mutual Funds

Individual

Investors

73%

Insurers

2%

Other

4%Pension Funds

21%

Ownership and Market Size:Ownership and Market Size: Definition:Shares in a portfolio of stocks and/or bonds and other securities

Purpose:Professional management and diversification

Definition:Shares in a portfolio of stocks and/or bonds and other securities

Purpose:Professional management and diversification



NA

17

Funds: Private EquityFunds: Private Equity

Definition:Shares in a portfolio that buys stakes in privately held companies

Purpose:Capital growth driven by fund managers ability to influence strategy and operational improvements

Definition:Shares in a portfolio that buys stakes in privately held companies

Purpose:Capital growth driven by fund managers ability to influence strategy and operational improvements


Thomson Venture Economics Private Equity Performance Index

12.3%


Endowment Funds High Net Worth Individuals Pension Funds


Endowment Funds High Net Worth Individuals Pension Funds

$330 Billion*$330 Billion*

*Estimate - total amount invested, 1996-2005, from PricewaterhouseCoopers/National Venture Capital Association Moneytree Report*Estimate - total amount invested, 1996-2005, from PricewaterhouseCoopers/National Venture Capital Association Moneytree Report

18

Individual

Investors

44%

Foundations

Endowments

7%

Pension Funds

7%

Corporations

14%

Fund of Funds

28%

Funds: Hedge FundsFunds: Hedge Funds

Definition:Shares in a portfolio that actively buys and sells stocks, bonds, and other investments

Purpose:Returns that are not correlated with the performance of the stock market

Definition:Shares in a portfolio that actively buys and sells stocks, bonds, and other investments

Purpose:Returns that are not correlated with the performance of the stock market


CSFB Tremont Hedge Fund Index

20.8%

Ownership and Market Size:Ownership and Market Size:


19

$12

$64

$93 $91 $95

$116$133

$140

$214

$0

$50

$100

$150

$200

$250

1980 1995 2000 2001 2002 2003 2004 2005 2010E

Year

($ in

Tri

llio

ns

)Scale of Global Capital MarketsScale of Global Capital Markets

Source: McKinsey Global InstituteSource: McKinsey Global Institute

20

0

50

100

150

200

250

1980 1995 2000 2005 2010F

Year

($ in

Tri

llio

ns

)

GDP GCM

Relative Value of Global Capital Markets to Global GDPRelative Value of Global Capital Markets to Global GDP


109%

218%

292%

316%

338%

21

0

50

100

150

200

250

300

350

Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06

S&P 500 Dow Jones FTSE 100 Nikkei DAX

Indices of Global Stock PerformanceIndices of Global Stock Performance

Source: Haver Analytics

22

Global Capital Markets by RegionGlobal Capital Markets by Region

USUS EuropeEurope AsiaAsia

EurozoneEurozone UKUKEastern Eastern EuropeEurope JapanJapan ChinaChina IndiaIndia

CAGR (1993-2004)CAGR (1993-2004) 8.8%8.8% 10.4%10.4% 10.9%10.9% 20.7%20.7% 4.7%4.7% 14.2%14.2% 13.2%13.2%

GCM Relative to GDPGCM Relative to GDP 4.1x4.1x 3.5x3.5x 3.5x3.5x 1.1x1.1x 4.2x4.2x 3.1x3.1x 1.8x1.8x

Source: McKinsey Global Institute; Reflects data as of 2004. Numbers may not add to 100% Source: McKinsey Global Institute; Reflects data as of 2004. Numbers may not add to 100% due to rounding.due to rounding.

100% =100% = 48%48% 32%32% 8%8% 1%1% 20%20% 6%6% 1%1%

23

Global Capital Markets Growth by Asset ClassGlobal Capital Markets Growth by Asset Class


27%29%

38% 27% 29%

30%

22%23%

21% 26%25%

27%

20%19%

15%17%

17%

16%

32%

29%

26%

30%

29%

27%

5353

6969

9696

118118

136136

228228

8.0%

CAGRCAGR1993 - 20041993 - 2004

7.5%

10.3%

9.8%

GCMGCM 9.0%9.0%

24

0

500

1,000

1,500

2,000

2,500

3,000

1988 1990 1992 1994 1996 1998 2000 2002 2004

Fo

reig

n M

arke

ts

4,000

5,000

6,000

7,000

8,000

9,000

10,000

11,000

12,000

US

A

ChinaHong Kong, ChinaKorea, Rep.SingaporeUnited KingdomUSA (RHS)

Number of Domestic Listed Companies

Source: World BankSource: World Bank

Future Directions:Future Directions:Emergence of New Financial Market CentersEmergence of New Financial Market Centers

25

0%

10%

20%

30%

40%

50%

60%

Mar-80

Mar-82

Mar-84

Mar-86

Mar-88

Mar-90

Mar-92

Mar-94

Mar-96

Mar-98

Mar-00

Mar-02

Mar-04

Mar-06

Glo

ba

l Ow

ne

rsh

ip (

% o

f T

ota

l)

U.S. Treasuries

Agency & GSE-Backed Securities

Corporate Bonds

U.S. Equity

Source: Federal Reserve Flow of Funds via Haver AnalyticsSource: Federal Reserve Flow of Funds via Haver Analytics

Future Directions:Future Directions:Greater Cross-Border InvestmentGreater Cross-Border Investment

26

Future Directions:Future Directions:Drivers of Innovation – Search for Excess ReturnDrivers of Innovation – Search for Excess Return

Hedge Fund Assets ($bn)Hedge Fund Assets ($bn) Financial Sponsor Capital ($bn)Financial Sponsor Capital ($bn)

GS Commodities IndexGS Commodities Index Credit Derivatives Outstanding ($bn)Credit Derivatives Outstanding ($bn)

2,000

3,000

4,000

5,000

6,000

7,000

8,000

Oct-00 Jan-02 May-03 Aug-04 Nov-05

Clo

sin

g P

ric

es

19891989 19951995 20052005

$13$13 $20$20

$315$315

$973$1,007

$820

$626$539

$491$456$374$367

1997 1998 1999 2000 2001 2002 2003 2004 1Q05

$5,442

$3,779

$270$560

$1,025$1,522

$2,192$1,971

1997 1998 1999 2000 2001 2002 2003 2004

Sources: Hedge Fund Research, ISDA, public market data.Sources: Hedge Fund Research, ISDA, public market data.

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