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David Rubenstein Final V3

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Information about David Rubenstein Final V3

Published on February 27, 2008

Author: danprimack

Source: slideshare.net

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From www.peHUB.com
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Ten Key Questions Facing the Private Equity World David Rubenstein Co-founder & Managing Director February 27, 2008

Questions for Audience: 1. How many of you are GP’s? 2. LP's? 3. Service providers? 4. Media? 5. Labor unions? 6. Think the golden age is over and that the best days of private equity are behind us? 7. Think the best days lie ahead? 8. Think there will be buyouts of 5 or 10 billion this year? 9. Next year? 10. Think there will be visible bankruptcies? 11. Think returns will be better from deals done now? worse? 12. Think taxes will go up? Stay the same? Go down? 13. Think private equity’s image will improve? Worsen? 14. How about the next president? Who thinks it will be Obama, Clinton, McCain, Huckabee?

1. How many of you are GP’s?

2. LP's?

3. Service providers?

4. Media?

5. Labor unions?

6. Think the golden age is over and that the best days of private equity are behind us?

7. Think the best days lie ahead?

8. Think there will be buyouts of 5 or 10 billion this year?

9. Next year?

10. Think there will be visible bankruptcies?

11. Think returns will be better from deals done now? worse?

12. Think taxes will go up? Stay the same? Go down?

13. Think private equity’s image will improve? Worsen?

14. How about the next president? Who thinks it will be Obama, Clinton, McCain, Huckabee?

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

Leveraged Loan Volumes Will Recover US Leveraged Loan Volumes Bounced Back after the Downturn of 2000-2001 1996 1997 1998 1999 2000 2001 2004 2003 2005 2006 2002 2007 US Buyout Leveraged Loan Volume ($Bn) + 1,929% Source: S&P Leveraged Buyout Review

US Leveraged Loan Volumes Bounced Back after the Downturn of 2000-2001

Leveraged Loan Volumes Will Recover While European Issuance has Grown Every Year Since 1999 European Buyout Leveraged Loan Volume ( € Bn) Source: S&P LCD 2005 2006 2001 2002 2007 2000 2003 1999 2004

While European Issuance has Grown Every Year Since 1999

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

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

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

Leverage Levels Are at Historical Highs 1997 1999 1998 2002 2001 2000 2007 2006 2005 2004 2003 Average Large LBO Leverage Multiples (Debt/EBITDA) Source: S&P Leveraged Buyout Review Note: Includes issuers with EBITDA of $50MM or more x

And Credit Ratios Are Depressed 2004 2005 2003 1997 2006 2007 1998 1999 2000 2001 2002 (EBITDA – Capex) / Cash Interest Source: S&P Leveraged Buyout Review x

Default Rates Have Remained Low Over the Past Three Years Percentage of Outstanding Leveraged Loans in Default or Bankruptcy Source: S&P LCD Avg. 3.80% %

And Remain Below Levels Seen During Past Market Downturns Leveraged Loan Default Rates During Recent Market Downturns: Source: Morgan Stanley

Leveraged Loan Default Rates During Recent Market Downturns:

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 Spread vs. Treasuries of Above 1,000 Indicates Significant Distress

3. What is Going to Happen to All of the Buyout Debt Still Held by the Major Syndicating Banks?

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

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

4. What Areas Will PE Firms Pursue to Achieve the Types of Returns Sought by Their Investors?

PE Firms Will Invest More in Emerging Markets Emerging Market Fundraising Has Grown Exponentially 2007 2006 2004 2003 2005 Emerging Asia ($Bn) 2005 2004 2003 2006 2007 CEE/Russia ($Bn) 2006 2003 2004 2005 2007 Latin America ($Bn) 2003 2004 2005 2006 2007 Middle East & Africa ($Bn) 11.4 Source: EMPEA

Emerging Market Fundraising Has Grown Exponentially

PE Firms Will Invest More in Emerging Markets As Has Deal Volume Emerging Asia ($Bn) CEE/Russia ($Bn) Latin America ($Bn) Middle East & Africa ($Bn) Source: Morgan Stanley, Thomson 2003 2004 2005 2006 54.5 1H 2007 10.5 1H 2007 2003 2004 2005 2006 2003 2004 2005 2007 5.9 2006 2003 32.2 2005 2006 2007 2004 24.9

As Has Deal Volume

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

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

Private Equity Firms Will Make More Minority Investments Private equity firms have increased their commitments to non-control investments: Source: Dealogic 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

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

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

Distressed Debt Fundraising Anticipating Debt Maturity Schedule:

5. Should Investors in PE Expect Higher or Lower Rates of Return?

Top Quartile PE Returns Are Unrivalled Source: Thomson Venture Economics Note: PE data as of 30 June 2007; Bloomberg, market data as of 30 June 2007 Top Quartile US Buyout Returns IRR % 6.1% 5.7% 5.4% 18.2% 21.8% 12.2% 7.7% 8.7% 22.1% 20.4% 19.9% 20.3% 18.4% 28.5% 32.1% 0% 10% 20% 30% 40% NASDAQ DJIA S&P 500 Top Quartile >$2Bn Top Quartile U.S. Buyout 10-year 5-year 1-year

Top Quartile PE Returns Are Unrivalled Source: Thomson Venture Economics Note: PE data as of 30 June 2007; Bloomberg, market data as of 30 June 2007 Top Quartile European Buyout Returns 7.6% Top Quartile Eu. Buyout FTSE 100 CAC-40 1-year 10-year 5-year

6. Is Now the Right Time for Investors to Pursue Private Equity Investments?

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

Private equity investments have produced healthy returns during each of the three most recent global economic slowdowns

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

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

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

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 Top Sovereign Wealth Funds Source: Citigroup

Sovereign Wealth Fund Investment Activity Has Increased Dramatically Value of Deals 2007 Number of Deals 2006 Deal Volume ($Bn) # of Deals 1997 1998 1999 2000 2001 2002 2004 2003 2005 + 1,151% Sovereign Wealth Fund Deal Volume Sources: World Economic Forum, Thomson Financial

But These Investments Still Represent A Tiny Proportion of Total M&A Activity 2002 2001 2000 1999 1998 2007 2006 2005 2004 2003 1997 Breakdown of Global M&A Activity ($Bn) Sources: World Economic Forum, Thomson Financial Sovereign Wealth Funds Strategic Private Equity

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

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

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 Gluttons at the Gate Private equity are using slick new tricks to gorge on corporate assets. A story of excess – Business Week A Backlash Against Private Equity Grumbling by unions over post-deal job cuts has escalated into a public outcry – Business Week

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 As before, deal volume will rebound and yesterday’s records will be left far behind 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 # of Deals Deal Volume ($Bn) 1997 Deal Volume # of Deals 1996 1995 Global LBO Activity Source: Dealogic CAGR: 31%

As before, deal volume will rebound and yesterday’s records will be left far behind

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 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 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

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

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? 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

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 David Rubenstein Co-founder & Managing Director February 27, 2008

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