A Presentation to
Thinking Outside the Stocks:The Private Equity Ecosystem
Thunderbird School of Global Management
April 2008
Presented byJORDAN ROBINSONVice President, Global Private EquityAIG Investments
This material must be read in conjunction with the Disclosure Statement.
2
Agenda
I. Where Are We Today? - Current Market Conditions
II. Portfolio Building Blocks
III. Where Are We Going Tomorrow? - Looming Questions
IV. Where We You Going Tomorrow? - Job Search Thoughts
I. Where Are We Today? - Current Market Conditions
4
The Ecosystem
Private equity has developed a true ecosystem
ec·o·sys·tem [ek-oh-sis-tuh m] –noun:the complex of a community of organisms and its environment functioning as an ecological unit
5
$16.4 $26.3 $40.2 $50.9 $53.1$72.5
$99.5
$204.6
$275.9 $296.7
$33.2
$25.8
$59.2
$6.5
$3.5
0
125
250
375
500
2003 2004 2005 2006 2007
US $billion
Developed Markets Venture Developed Markets Buyout Emerging Markets
Record Global Fundraising
Source: Venture Economics, EMPEA
3.8%
78.4%
17.8%
4.9%
75.3%
19.8%
9.5%
75.6%
14.9%
9.3%
76.6%
14.1%
14.5%
72.5%
13.0%
6
Emerging Markets Fundraising
Source: Emerging Markets Private Equity Association. Data as of March 2008.
2.20.4 0.4 0.4 0.1
2.81.8
0.7 0.5 0.6
2.71.3
2.73.6
19.4
3.3 2.7
5.3
2.6
28.7
14.6
4.4
7.4
4.1
15.4
0
5
10
15
20
25
30
35
Asia (Ex-Japan) CEE/ Russia LatinAmerica/ Caribbean
Africa / MidEast Pan EM
US $billion
2003 2004 2005 2006 2007
7
Allocations: expected to increase
Source: Coller Capital Global Private Equity Barometer Winter 2007-08, Citigroup Global Markets CIO Survey September 2007.
44%47%
49%47%
45%
0%
10%
20%
30%
40%
50%
60%
Winter2005-2006
Summer2006
Winter2006-2007
Summer2007
Winter2007-2008
Res
pon
den
ts (%
)
LPs planning to increase their private equity allocations over
the next 12 months(Winter 2005-2006 to Winter 2007-2008)
4.0%
6.3%
0%
1%
2%
3%
4%
5%
6%
7%
Current Allocation 3-Yr Target Allocation
Alloca
tion to P
riva
te E
quity
Current and Expected Allocation to Private Equity
Despite the recent slowdown in private equity deal-making, strong fundraising is expected to continue, driven by increasing allocations to private equity by institutional investors
8
Purchase prices pre-2008: have increased
4.15 3.80 4.02 4.18 4.885.72 5.62
6.62
3.252.842.702.642.732.682.53 2.60
0
1
2
3
4
5
6
7
8
9
10
2000 (21) 2001 (12) 2002 (14) 2003 (26) 2004 (50) 2005 (63) 2006 (87) 2007 (121)
Period (Observations)
Multiple of EBITDA
Equity Debt
6.68 6.406.70 6.91
7.52
8.42 8.46
9.87
37.8% 40.6% 40.0% 39.5% 35.1% 32.1% 33.6% 32.9%
6.28x for$250-499 MM
8.51x for$250-499 MM
Source: Standard & Poor’s. As of December 31, 2007.
Average LBO Purchase Price as a Multiple of Non-adjusted Pro Forma Trailing EBITDA for Total Sources of $500 million or More
9
0
2
4
6
8
10
12
14
16
2Q 2007 2Q 2008 (e)
Multip
le o
f LT
M E
BIT
DA (Pos
t Syn
ergi
es)
Purchase prices in 2008: have declined
Industry #2 in Mkt. Share(Revenues $10-20 Bil)
Sources: AIG Internal Data
What a difference a year makes!!!
Industry #3 in Mkt. Share(Revenues $5-10 Bil)
14.5x
9.6x
31.4% 48.4%Equity
Sub Debt22.5%
SeniorDebt
46.1%
6.7 EBITDAL + 170
3.4x EBITDAL + 200
3.2x EBITDARate: 9% 1.6x EBITDA
Rate: 12.5%
35.5%
16.1%
(And all asset backed)
x
Comparable Deal Analysis
10
Convergence: has slowed
Private equity & hedge fund convergence has slowed Concerns about liquidity (hedge funds)
Uncertain inflows (hedge funds)
Concerns about portfolios (private equity)
11
Global Summary
Lots of committed capital
Access to credit acute for large transactions
Convergence has slowed down
Emerging markets are hot
Returns holding up (so far)
II. Portfolio Building Blocks
13
Ecosystem
Private equity has matured into a true ecosystem
ec·o·sys·tem [ek-oh-sis-tuh m] –noun:the complex of a community of organisms and its environment functioning as an ecological unit
14
Funds Flows
Convergence
Activist Investor
s
Distressed Debt
Succession
LBO Purchas
ePrices
China
India
KKR IPO
Club Deals
BDCs
BrazilOverhan
g
“Fire inthe
Belly”
Greed
Redemptions
Leverage Beta
Short Duration
s
Credit Statisti
cs
Alpha
15
Portfolio Company Lifecycle
Venture Capital
•Seed Stage
•Early Stage
•Late Stage •Pre-IPO •Growth •Leveraged Buyouts
Buyouts
•Distressed/“Turn-Around”
Private equity investments address opportunities across company lifecycles
16
A Broad Menu of Private Equity Strategies
DirectIndirect
Fund of Funds
Secondaries
Co-Investments
Buyouts
Venture Capital:Early Stage
Venture Capital:Late Stage
Growth Equity
Co-Investments(Direct)
Natural Resources
Infrastructure
Turnaround
Mezzanine
Indirect Other
Real Estate
Bridge Funds
Distressed Debt
17
The Direct Investment Process is Relevant to Every PE Segment
ResearchInsight-Driven Deals
Access/Origination
Due Diligence
Structuring/Negotiations
Portfolio Management
/Value
Creation
Exit
Research/Insight-Driven Deals – Top-to-Bottom; Opportunistic
Access/Origination – Information Arbitrage
Due Diligence – Intense Scrutiny
Structuring/Negotiations – Governance; Shareholder Rights
Portfolio Management/Value Creation – Management Oversight, Investor Add-Value
Exit – Timing; Multiple Options (IPO, Strategic Sale, Structured Arrangement)
18
Secondary Investment Process – Key Beneficiary of the Ecosystem Development
Global Secondary
Investments
Knowledge - Primary fund commitments, Co-investments, direct equity investments and mezzanine debt, Emerging markets direct investments
Insight – Industry Performance, Sectors, Regions, Facilitators, Blockers
Relationships - General Partners (quality of portfolio, transfer process efficiency), Limited Partners (Awareness of deals, Ability to negotiate)
Relationships Information Expertise
19
Analyze available manager
opportunity set
Develop a macro “point
of view”
Portfolio Construction – Creating an Investment Framework
Analysis Framework Macroeconomic and capital
market conditions Private equity capital flows
– segment, sector, country Manager quality and
availability Fundraising cycles Regulatory environment Performance cycle analysis
Investment Framework
Rigorous analysis with flexibility to capture attractive investment opportunities as they present
themselves
20
Building a Private Equity Portfolio
Strategies
Primary Fund of Funds
Diversified Portfolio of interests in top performing funds allows access and administrative + due diligence efficiency
Indirect Direct
Key Trends Portfolio Guidelines Access to closed managers
Rigorous due diligence
Market/sector specific funds
Emerging Managers
GP/LP Dynamics
Operational expertise
U.S. (all segments); Europe (country and “pan”), Emerging
21
Building a Private Equity Portfolio
Strategies
Primary Fund of Funds
Secondaries
Diversified Portfolio of interests in top performing funds allows access and administrative + due diligence efficiency
A tool to fill holes in a private equity program that minimizes “j-curve” effects with valuation arbitrage
Indirect Direct
Key Trends Portfolio Guidelines Portfolio rebalancing
Hedge fund liquidations
Manager concentration, Mega--deal fundraising
Coming Attraction: Emerging Markets
GP knowledge and relationships
Industry database
Global awareness
Accurate portfolio pricing
22
Building a Private Equity Portfolio
Strategies
Primary Fund of Funds
Secondaries Co-Investments
Diversified Portfolio of interests in top performing funds allows access and administrative + due diligence efficiency
A tool to fill holes in a private equity program that minimizes “j-curve” effects with valuation arbitrage
Flexibility to opportunistically participate in attractive private equity transactions
Indirect Direct
Key Trends Portfolio Guidelines Relationships matter; Art of saying “no” (quickly)
Active co-investments
Emergence of sovereign wealth funds, Permanent Capital
GP knowledge
Sector expertise
Diversified portfolio
23
Building a Private Equity Portfolio
Strategies
Primary Fund of Funds
Secondaries Co-Investments Direct Investments
(Local Market)
Diversified Portfolio of interests in top performing funds allows access and administrative + due diligence efficiency
A tool to fill holes in a private equity program that minimizes “j-curve” effects with valuation arbitrage
Flexibility to opportunistically participate in attractive private equity transactions
LP interests in funds with direct control over portfolio companies in regions familiar to investor
Indirect Direct
Key Trends Portfolio Guidelines Middle-market deals have continued, Large will
re-start
Buy and Hold makes a comeback
Banking relationships matter
Buy vs. build
Sustainable strategy
Operational and sector expertise
24
Building a Private Equity Portfolio
Strategies
Primary Fund of Funds
Secondaries Co-Investments Direct Investments
(Local Market)
Direct Investments
(Offshore Mkts)
Diversified Portfolio of interests in top performing funds allows access and administrative + due diligence efficiency
A tool to fill holes in a private equity program that minimizes “j-curve” effects with valuation arbitrage
Flexibility to opportunistically participate in attractive private equity transactions
LP interests in funds with direct control over portfolio companies in regions familiar to investor
Ability to focus on high-growth markets or regions, or areas with a sustainable and proven private equity culture
Indirect Direct
Key Trends Portfolio Guidelines No longer simply a macro bet
Local presence, Use of trust
Coming Attractions: Real Buyouts
Buy vs. build
Manager selection is key
Look at opportunity, not macro statistics
25
Emerging Markets
Hot Macro Environment
Compelling GDP growth Stability of Political, Legal and Accounting Characteristics Trade Interdependence and Surpluses Lower/Stable Inflation and Interest Rates Improved Credit Ratings
Emerging Markets: Attractive PE Opportunity
Emerging markets companies competing and winning globally Capital markets growing quickly Strong IPO receptivity; Strategic Acquisitions Market correlations are lower Less competition (despite recent fundraisings) Large opportunity set
26
PE in Asia: Asset Class Penetration Potential
3.2%
1.8%
0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
U.S. Europe Asia- Pacific
Perc
ent
PE Deal Value as a % of GDP
Source: Bain study. Data as of end 2006.
6.9x
3.9x
27
Brazil – How to access these growing markets?
Consumer Non-
Cyclical
Source: Bovespa.
Ibovespa Index
Energy
Telecom
Financial
Basic Materials
Basic Materials & Energy account for 57% share of the Ibovespa index
Capital Goods & Services
Basic Materials
Construction &
TransportationConsumer
Cyclical
Sugar Industry Market Share in 2005
Others
49%
Top Five19%
Top Five
51%
Others81%
0%
20%
40%
60%
80%
100%
Brazil EU-25
35.3
41.5
47.552.5
68.0
26.7 24.627.0
37.1
53.0
0
15
30
45
60
75
2001 2002 2003 2004 2005
# o
f C
red
it C
ard
s (M
illi
on
s)
0
15
30
45
60
75
Tra
nsa
ctio
ns
(US
$ B
illi
on
s)
# of Credit Cards Transactions
Brazil Credit Card Market
Source: Bank of Brazil and Brazilian Association of Credit Card Companies and Services.
Source: F.O. Licht and LMC International.
28
Building a Private Equity Portfolio
Strategies
Primary Fund of Funds
Secondaries Co-Investments Direct Investments
(Local Market)
Direct Investments
(Offshore Mkts)
Direct Investments
(Sector, Style)
Diversified Portfolio of interests in top performing funds allows access and administrative + due diligence efficiency
A tool to fill holes in a private equity program that minimizes “j-curve” effects with valuation arbitrage
Flexibility to opportunistically participate in attractive private equity transactions
LP interests in funds with direct control over portfolio companies in regions familiar to investor
Ability to focus on high-growth markets or regions, or areas with a sustainable and proven private equity culture
Ability to focus on high-growth sectors, market segments, or industries/
segments fertile for private equity investments
Indirect Direct
Key Trends Portfolio Guidelines Regulatory environment (infrastructure, financial
services)
Sectors are no longer concentrated on one-theme
Relevant industry skill set
Using private equity-like skill sets (Operations, exit-strategies)
III. Where Are We Going Tomorrow - Looming Questions
30
Is Now a Good Time To Invest In Private Equity?
Source: Cambridge Associates, pooled mean and median net IRR to limited partners by vintage year as of 9/30/07.
-5%
0%
5%
10%
15%
20%
25%
30%
35%
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
IRR %
-5%
0%
5%
10%
15%
20%
25%
30%
35%
IRR %
Mean IRRs Median IRRs
Market dislocations create opportunity for private market investors
Private equity should generate a significant premium over public market equities
31
How will $500 Billion in Dry Powder Be Spent?
New
Old
Old New
Markets
Products
PIPES
?Emerging Markets
Base
32
Competition: Are Sovereign Wealth Funds Changing the Game?
Sources: World Economic Forum, Thomson Financial
0
10
20
30
40
50
60
70
80
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
De
al V
olu
me
($ b
n)
0
50
100
150
200
250
300
# o
f D
ea
ls
Deal Volume ($bn) Number of Deals
33
Where are You Going Tomorrow? Job Search Thoughts
Focus on satisfaction, right motives
Private Equity is endgame; Doesn’t need to be first career
move
Experience not brand
Industry or regional expertise helpful to eventually develop
The Ecosystem has much to offer
34
Private Equity Endnotes
AIG Investments Web Address: www. aiginvestments.com
Interests in open funds (“the Funds”) are offered only pursuant to the terms of a Confidential Private Placement Memorandum (the “Memorandum”), which is furnished to qualified investors on a confidential basis for their consideration in connection with the private offering of limited partnership interests (the “interests”) in the Fund. The Information contained in this presentation may not be reproduced or redistributed without the written approval of AIG Investments.
No person has been authorized to make any statement concerning the Funds other than as set forth in the Memoranda, and such statements, if made, may not be relied upon. The information contained herein is qualified in its entirety by the more complete information contained in the Memoranda. This presentation is not an offer to sell or a solicitation of interests in the Funds. The Manager, its affiliates and AIG Equity Sales Corp. make no representation as to the accuracy or completeness of the information contained herein.
Additionally, investors should note the following regarding private equity investments:
They are not subject to the same regulatory requirements as mutual funds, including mutual fund requirements to provide certain periodic and standardized pricing and valuation information to investors;
They are speculative and involve a high degree of risk;
Investors could lose all or a substantial amount of their investment;
Interests may be illiquid and there may be significant restrictions in transfer. There is no secondary market for interests, and none is expected to develop;
They may be leveraged, and their performance may be volatile;
They have high fees and expenses that will reduce returns;
They may involve complex tax structures;
They may involve structures or strategies that may cause delays in important tax information being sent to investors;
They and their managers/advisers may be subject to various conflicts of interest;
They may hold concentrated positions with a limited number of investments;
They, or their underlying fund investments, may invest a substantial portion of their assets in non-U.S. securities, which could mean higher risk;
The list set forth here is not a complete list of the risks and other important disclosures associated with such investments and is subject to the more complete risk and disclosures contained in the applicable confidential offering documents;
The investment manager has total trading authority over fund investments. The use of a single adviser applying generally similar trading programs could mean lack of diversification and, consequently, higher risk.
Certain materials contained herein constitute “projections,” “forecasts” and other “forward-looking statements” relating to certain investments and do not reflect actual results. These projections, forecasts and other forward-looking statements are based primarily upon applying assumptions retroactively to certain historical financial information relating to the investments. The projections, forecasts and other forward-looking statements presented herein are, therefore, valid only as of the date shown on the front page of this presentation.
AIG Equity Sales Corp., member FINRA, is acting as a placement agent for the Funds in the United States only.
Rev. 11/05/07
35
Disclosure Statement
AIG Investments Web Address: www. aiginvestments.com
Rev. 7/13/07
AIG Investments is a group of international companies that provide investment advice and market asset management products and services to clients around the world.
AIG Investments is a service mark of American International Group, Inc. (AIG). Services and products are provided by one or more affiliates of AIG.
Readership: This document is intended solely for the addressee(s). Its content may be legally privileged and/or confidential.
Opinions: Any opinions expressed in this document may be subject to change without notice. We are not soliciting or recommending any action based on this material.
Risk Warning: Past performance is not indicative of future results. Our investment management services relate to a variety of investments, each of which can fluctuate in value. The value of portfolios we manage may fall as well as rise, and the investor may not get back the full amount originally invested. The investment risks vary between different types of instruments. For example, for investments involving exposure to a currency other than that in which the portfolio is denominated, changes in the rate of exchange may cause the value of investments, and consequently the value of the portfolio, to go up or down. In the case of a higher volatility portfolio the loss on realization or cancellation may be very high (including total loss of investment), as the value of such an investment may fall suddenly and substantially.
In making an investment decision, prospective investors must rely on their own examination of the merits and risks involved.
Unless otherwise noted, all information contained herein is sourced with AIG and/or AIG Investments internal data.
The content included herein has been shared with various in-house departments within the member companies of AIG Investments and/or AIG Private Bank Ltd., in the ordinary course of completion. All AIG Investments member companies comply with the confidentiality requirements of their respective jurisdictions.
Parts of this presentation may be based on information received from sources we consider reliable. We do not represent that all of this information is accurate or complete, however, and it may not be relied upon as such.
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Approved by AIG Investments Ireland Limited and AIG Investments Fund Management Limited, both regulated by the Financial Regulator in Ireland.
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