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Private Equity Europe Vittorio Pignatti Morano, Vice Chairman

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Presentation on theme: "Private Equity Europe Vittorio Pignatti Morano, Vice Chairman"— Presentation transcript:

1 Private Equity Europe Vittorio Pignatti Morano, Vice Chairman
4/19/2017 9:42 PM Confidential Presentation to: Private Equity Europe Vittorio Pignatti Morano, Vice Chairman 26 September 2007

2 4/19/2017 9:42 PM 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 Private Equity Returns
4/19/2017 9:42 PM 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 (1) (2) (1) (2) ___________________________ 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
4/19/2017 9:42 PM 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 4/19/2017 9:42 PM 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
4/19/2017 9:42 PM 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
4/19/2017 9:42 PM 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, Includes Buyout and Mezzanine funds. 6

8 European Fundraising Environment
4/19/2017 9:42 PM European Fundraising Environment As in the U.S., 2006 was a record year for private equity fundraising in Europe Observations Commitments to Asian Private Equity Partnerships1 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 10 Largest European Funds Ever Raised Fund Name Location Year Amount (€mm) Permira IV London 2006 11,000 Cinven IV 6,500 3i Europe Partners V 5,000 EQT V Stockholm 4,250 CVC European Equity Partners IV 4,200 Charterhouse Capital Partners VIII 4,000 Terra Firma Capital Partners III In Market Nordic Capital Fund VI 1,900 TDR Capital Fund II 1,750 Altor Equity Partners II 1,150 {PRIVATE EQUITY}\MARKETING GROUP\THIRD PARTY FUNDS\PFMG QUALS\FINAL\CHARTS AND TABLES XLS!COMMITMENTS ___________________________ Source: Thomson VenturExpert. 7

9 Evolution of the Buyout Market
4/19/2017 9:42 PM Evolution of the Buyout Market Resurgence Growing Level of Sophistication Robust Credit Market Growing Bull Market Club Deals Developing HY Market Non US Buyouts Sarbanes-Oxley Overheated Stock Market More Sophisticated Financial Engineering Recession Recession Mega Buyouts Recapitalisation Through Equity Markets Valuation Decline Developing Tech / Telecom Bubble Low Interest Rates Loan Market Increasing Deal Size Focus on Growth Investments Tight Credit Multiple Contraction Strategic Buyers Less Relevant Under Exploited Balance Sheets Growing M&A Abundant Fundraising Management Focus Underperforming Economy Limited Equity HLT Regulation Globalisation of Business Economic Boom Increased Equity 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
4/19/2017 9:42 PM Lehman Brothers Private Equity Fund Performance First quartile performance in aggregate since inception of each asset class Fund Performance1 Asset Class Invested Capital Period Gross IRR Merchant Banking $3.5 billion 1989 – 2007 37% Venture Capital $699 million 1996 – 2007 28% Real Estate $4.7 billion 2000 – 2007 33% European Mezzanine $1.2 billion 2002 – 2007 17% CDO Opportunity $556 million 25% Fund of Fund Investments $2.9 billion 1997 – 2006 32% ___________________________ 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
4/19/2017 9:42 PM 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)
4/19/2017 9:42 PM 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
4/19/2017 9:42 PM 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
4/19/2017 9:42 PM 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
4/19/2017 9:42 PM 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 bps, versus 700 bps at the lowest point during Q2 2007, and 850 bps on average for H 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) Lowest spread in Q (700bps) Average spread in H (850 bps) Current spread in Q ( bps) Average duration in H1 2007 Expected duration as of Q3 2007 ___________________________ Source: 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 Assumes all-in Margin of 850 bps over Euribor 14

16 4/19/2017 9:42 PM Disclaimer This presentation (the "Presentation") is being furnished on a confidential basis to a limited number of sophisticated institutions on a "one-on-one" basis for informational and discussion purposes only and does not constitute an offer to sell or a solicitation of an offer to purchase any security in Lehman Brothers European Mezzanine Partners II ("Fund II"). Any such offer or solicitation shall be made only pursuant to the confidential private placement memorandum relating to Fund II, as amended or supplemented from time to time (the "Memorandum"), which describes the risks relating to an investment in Fund II as well as other important information about Fund II and Lehman Brothers. This Presentation is qualified in its entirety by all of the information set forth in the Memorandum, including without limitation the notice to investors set out at the front of the Memorandum and the section headed "Risk Factors and Conflicts of Interest". The Memorandum must be read carefully in its entirety prior to investing in Fund II. This Presentation does not constitute a part of the Memorandum. This Presentation is based on or derived from information which is believed to be reliable and no representation is made that it is accurate or complete. Past performance is no indication of future results. No reliance should be placed on the contents of this Presentation by any person who may subsequently decide to enter into a transaction with Lehman Brothers. Investors should determine for themselves the relevance of the information contained in this Presentation and any subsequent decision to invest in Fund II should be based on such investigation as they themselves deem necessary. An investment in Fund II is suitable only for sophisticated investors and requires the financial ability and willingness to accept the high risks and lack of liquidity inherent in such a transaction. The distribution of this Presentation in certain jurisdictions may be restricted by law. This Presentation is only directed at persons to whom it may lawfully be distributed and any investment activity to which this Presentation relates will only be available to such persons. It is the responsibility of any potential investor to satisfy itself as to the full compliance of the applicable laws and regulations of any relevant jurisdiction, including obtaining any governmental or other consent and observing any other formality prescribed in such jurisdiction. This Presentation is proprietary to Lehman Brothers and may not be disclosed to any third party or used for any purpose without the prior written consent of Lehman Brothers. 15


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