Private Equity Trends around Europe 14 March 2007

Corporate Finance

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Contents

Introduction Health check on the PE market Evolving equity markets Evolving debt markets Changing strategies employed by the PE investors Possible future developments

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Introduction

Having qualified as an auditor, I worked on secondment with Doughty Hanson in 1987/88 Since then advised management teams and equity houses to buy businesses Run a European-wide team who advise on more private equity investments than any other organisation Coupled with our market leading Transaction Services business, we have excellent visibility across the private equity landscape

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Health check on the PE markets

The private equity market

To Crown the Kings of Capitalism Real Deals, October 2006 Top (listed company) executives now queue up for a job managing a private equity-backed company Financial News, 9 October 2006 PE Firms raised $152 billion worldwide in profits on disposals in the past 12 months Times, 16 October 2006 PE funds have about $750 billion to invest worldwide Times, 16 October 2006 They fly in their own aircraft and some are billionaires. So are they criminals? Financial Times, 16 October 2006 The US Department of Justice has launched an investigation into possible anticompetitive practices by private equity firms The Wall Street Journal
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The private equity market

25 20 15 10 5 0 Three years Fiv e years
Private equity funds FTSE

Summary of UK Private Equity Performance versus the FTSE

% pa

10 years

Consistent outperformance globally against quoted indexes has attracted ever increasing flows of capital into the private equity asset class
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UK Buy-Out/Buy-In Trends 1985-2005

UK market is more mature than EU
800 40000

700

35000

600

30000

500
Number of Deals

25000
Total Value (m)

400

20000

300

15000

200

10000

100

5000

0
85 19 86 19 8 19 7 88 19 89 19 9 19 0 9 19 1 92 19 93 19 9 19 4 95 19 96 19 97 19 9 19 8 9 19 9 00 20 01 20 0 20 2 03 20 04 20 0 20 5

Total Number

Total Value (m)

Source: CMBOR/Barclays Private Equity/Deloitte & Touche PricewaterhouseCoopers LLP 6 *connectedthinking

What is happening across Europe?

Volume Mix of Buyouts by Geography
2% 3% 2% 5% 5% 27%
United Kingdom France Ger/Swi/Aut

10%

Nordic Benelux Italy Iberia CEE/CIS SEE

11% 19% 16%

Value Mix of Buyouts by Geography

3% 7% 2% 2% 2% 1%

Ireland

United Kingdom France Benelux

9% 47%

Ger/Swi/Aut Nordic Iberia Italy Ireland CEE/CIS SEE

12%

15%
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What sectors are hot?

Volume Mix of Buyouts by Industry Sector
4% 5% 6% 6% 28%
Indus trials & Chem icals Cons um er Bus ines s Services TMT Leis ure Cons truction Financial Services Pharm a, Medical & Biotech Trans portation

2%

7%

11% 13%

18%

Energy, Mining & Utilities

Volume Mix of Buyouts by Industry Sector

5% 6% 8% 17%
TMT Indus trials & Chem icals Trans portation Energy, Mining & Utilities

8%

14%

Cons um er Financial Services Bus ines s Services Leis ure Pharm a, Medical & Biotech Cons truction

9% 13% 9% 11%
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Development of market segments

Buyout deal size by volume

1400 1200 1000 800 600 400 200 0 Buyouts 2003 Buyouts 2004 Buyouts 2005 Buyouts 2006 >500 251 to 500 101m to 250 15m to 100 <15m Not disclosed 300000 250000 200000 150000 100000 50000 0

Buyout deal size by value

>500 251 to 500 101m to 250 15m to 100 <15m

Buyouts 2003

Buyouts 2004

Buyouts 2005

Buyouts 2006

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Evolving equity markets

Competition runs riot

Emergence of new players with different investment agendas Middle Eastern Institutional eg Investor AB Russian Hedge funds Infrastructure funds Increasing penetration of US sponsors Alternative forms of equity investments are increasing Integrated finance Growth capital Re-emergence of the trade buyers
Investment committees now ask Will we pay up to 20% over the fair market value?
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Reacting to competition
Lower base case returns Increased focus on portfolio management

Increased use of refinancing

Increased competition

Greater reliance on yield instruments

Tactical approach to auctions Expansion of the acceptable geographic markets

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Pro-active approach to due diligence

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Auction strategies and tactics

Four broad strategies

Quick decision walk away

Last Man Standing

Get comfortable paying the highest price? All about the angle, perceived or real

Go pre-emptive - break the process

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Pro-active approach to due diligence

Early investment in due diligence Commercial DD always done early by the buyer

Tailor DD to risks not box ticking Tie up detailed DD later for bank syndication

Use commercial and operational DD to create aggressive management plan Use DD to drive 100 day plans Look for parallel deals

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Integrated Finance
The difference Private Equity
Institution has majority share of the equity % Exit agenda driven by PE House Direct board participation No direct board participation One of several funders Majority of capital upside accrues to PE House The sole external source of funding Focus on contractual return

Integrated Finance
Management has majority share of the equity % (debt driven approach) Exit agenda driven by management

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Trend Toward One-Stop Buyouts in UK MidMarket

One-stop buyouts have become more prevalent in recent years
Increasing number of deals
18 16 14
Number of Deals Average Deal Size (mn)

and average deal size

80 70 60 50 40 30 20 10 0

12 10 8 6 4 2 0 2001 2002 2003 2004

4 4 6

11 8 6

2005

2006 H1
Note:

2001

2002

2003

2004

2005

2006 H1

Note:

Include UK one-stop LBOs with 20-200m EV. 2006 H1 number of deals includes the 2 ECAS deals completed in July 2006 Source: CMBOR, Websites PricewaterhouseCoopers LLP 16

Include UK one-stop LBOs with 20-200m EV. 2006 H1 average deal size includes the 2 ECAS deals completed in July 2006 Source: CMBOR, Websites *connectedthinking

Evolving debt markets

Record volumes of leverage issuance

Ever increasing levels of secondary buyouts and recaps Debt capacity based upon Enterprise Value or expected proforma cashflows Focus on EBITDA multiple at the expense of cash flow

Substantial increase in syndicated loan volumes driven by institutional appetite Institutional investors (CDOs, Hedge Funds etc) represent >37% of the European debt market

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Record volumes of leveraged issuance

$'bn 80 70 60 50 40 30 20 10 0 Q103 Q203 Q303 Q403 Q104 Q204 Q304 Q404 Q105 Q205 Q305 Q405 Q106 Q206 Q306

European Leveraged Loan Issuance

Corporate
Source: LPC

LBO exc Recap

Recaps

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Leverage ratios have risen above the previous peak in 1998

Market bifurcation: <Eur250m 4.9x >Eur500m 6.0x

Total and senior debt to EBITDA
6.00 5.50 5.00 4.50

1Q03

2Q03

3Q03

4Q03

1Q04

2Q04

3Q04

4Q04

1Q05

2Q05

3Q05

4Q05

1Q06

2Q06

Deterioration in credit quality Average equity contribution constant at 30%-35%

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Total Debt to EBITDA

Senior Debt To EBITDA

Source: LPC and Fitch

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3Q06

Overall price of deals at a record high (8.8x compared to 7.0x -7.5x average 2000 to 2004)

4.00 3.50 3.00 2.50

Driving prices even higher

Healthcare Deals

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Mismatch between risk and pricing

Stable senior pricing masks underlying decrease due to higher proportion of back ended finance Average mezzanine pricing has fallen consistently over last two years but pricing on deals <Eur50m in H106 was in line with 2003

Average senior pricing

270 265 260 255 250 245 240 235 230
Q104 Q204 Q304 Q404 Q105 Q205 Q305 Q405 Q106 Q206 Q306

Average warrantless mezz pricing

12.0 11.5 11.0 10.5 10.0 9.5 9.0 2003 2004 <Eur50m
Source: Fitch

Declining credit quality of mezz portfolio

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2005 >Eur50m

LTM Q306

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Mezzanine is preferred junior instrument, but there are signs of convergence

Mezzanine volumes are three times 2004 level and 80% above 2005 considered sponsor friendly 59% of issuance relates to recycled transactions

Mezzanine and Second lien volumes

$'bn

10.0 8.0 6.0 4.0 2.0 0.0

Q104 Q204 Q304 Q404 Q105 Q205 Q305 Q405 Q106 Q206 Q306

Mezzanine

Second lien

Source: LPC

Trend to jumbo deals In contrast, HY issuance declined in 2005, although YOY volumes are 35% up in H1 2006
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$'bn

European High Yield Issuance

40 35 30 25 20 15

30

37

33 25

2003
Source: Fitch

2004

2005

H1 2006
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Current trends

No let up in debt levels often used to pump price through the staple

Beginnings of a focus by banks on lost capital situations will there be the emergence of a parallel senior debt market?

Increasing drive towards opco:propco or other asset based lending structures the embarrassment factor

As a matter of course, refinancing is the starting gun for an exit Increasing focus on controlling toxic elements in the debt structure
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What does the future hold?

Benign economic outlook for Europe for now Ongoing strong market liquidity : CDOs, hedge funds, mezzanine funds, PE fund raising Allows amortisation crunch points to be re-financed

Price flexibility : downward ratchets / auctions Institutional buyers of leveraged paper will lead to greater market instability Cycle means that some correction is inevitable : what will change sentiment?
Has correction started?
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Changing strategies employed by the PE investors

Changing strategies employed by PE investors

Focus on relationships rather than process

Smart use of due diligence

Investment in abort costs

Starting to consider corporate joint venturing

Drive for risk mitigation in the first 6 months

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Possible future developments

Future developments
Consolidation

Segmentation

Returns underperformance Debt availability Succession Strategy differentiation Top quartile performance

Size Sectors Geography Stage of investment Skills sets

Professionalism

Portfolio management Auction tactics Management change 100 day plans

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Corporate Finance

UKs Leading M&A Adviser Mergermarket, 2007* Mid-Market Adviser of the Year Acquisitions Monthly Awards 2007

*Number one by volume of UK announced deals, Mergermarket press release 22/01/07

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