The Impact of the Financial Services

Meltdown on The Global Economy And The

Private Equity Industry

David Rubenstein, Co-Founder

Super Return Dubai
October 15, 2008
1
 The Meltdown

2
 How Did This Happen?

3
 Excesses in The US Housing And
Mortgage Markets Are A Root Cause
¾ Subprime loans accounted for 15% of the US
mortgage market in 2006 vs. 3% in 2002
Subprime Share of Total Mortgage Market(1)

4
(1) Source: Danske Bank. March 30, 2008.
 Excesses in The US Housing And
Mortgage Markets Are A Root Cause
¾ The more than $600 billion of subprime
mortgages that were issued in the US proved
riskier than anticipated
Mortgage Arrears Rates: Prime vs. Subprime(1)

Subprime Arrears
rate: ~20%

Prime Arrears
rate: ~3.75%

5
(1) Source: Chicago Fed Letter, August 2007.
 Excesses in The US Housing And
Mortgage Markets Are A Root Cause
¾ To compete with private lenders, Fannie Mae
and Freddie Mac lowered lending standards and
provided mortgage loans to subprime borrowers
GSE Mortgage Lending: Total Value & % of Market
$3,000 bn 100%

Private mortgage
Percent Fannie & lending
Freddie
$1,500 bn 50%

Fannie & Freddie

$0 0%

6
(1) Source: A Primer on the Mortgage Market & Mortgage Finance, St. Louis Fed. Reserve Bank. February 2008.
 Excesses in The US Housing And
Mortgage Markets Are A Root Cause
¾ Easy credit and lax lending standards fueled
an unprecedented bubble in house prices
Median US Home Price Relative to Owner’s Rent

7
 Mortgages Were Packaged Into
Structured Financial Products
¾ Trillions of dollars of asset backed securities
and CDOs were distributed throughout the
financial system
Global Issuance of Structured Financial Products(1)
($ billions)
1,000

800
(in $B)

600

400

200

‐
1 1 1 1 1 1 1 1 1 1 1 1 1 1
5 Q 6Q 7Q 8Q 9Q 0Q 1 Q 2Q 3Q 4Q 5Q 6Q 7 Q 8 Q
9 9 9 9 9 0 0 0 0 0 0 0 0 0
19 19 19 19 1 9 2 0 20 20 20 20 2 0 2 0 20 20
Total CDO Total ABS

8
(1) Source: Lehman Brothers, April 2008.
 Financial Institutions Dramatically
Increased Leverage Levels
¾ Investment banks, hedge funds, and even
commercial banks used borrowed money to
invest in structured financial products
Bank & Broker Leverage Levels (Assets/Equity)

9
(1) Source: Citigroup. September, 17 2008.
 Hedge Funds and Private Equity Firms
Increased Their Use of Leverage
¾ Hedge funds and private equity firms control ~$2.5
trillion of equity but borrowed several times this
amount to fund their investments
Private Equity Leverage Multiples(1) Estimated Hedge Fund Leverage(2)

6.5x 6.2x
6.0x Leverage
5.5x 5.3x 5.4x
5.0x 4.8x
4.6x
4.5x
4.0x
4.0x
3.5x
3.0x
2002 2003 2004 2005 2006 2007

10 Sources: (1) Morgan Stanley. September 2008. (2) McKinsey, October 2007.
 Sovereign Wealth Funds And Central
Banks Bolstered Global Liquidity
¾ Petrodollar inflows and exchange rate management
policies resulted in massive capital accumulations
throughout the developing world
Top Five Sovereign Wealth Funds(1) Global Foreign Exchange Reserves(2)
($ billions) $ billions
$875 4,987
5,000
4,309
4,000 3,822
3,112
3,000
2,475
2,093
$330 2,000
$250
$200
$108 1,000

0
ADIA GIC KIA CIC Temasek 2001 2002 2003 2004 2005 2006
11 Sources: (1) Monitor. May 12, 2008. (2) McKinsey, October 2007.
 Rating Agencies Propagated The Illusion
of A Low Risk Investment Environment
¾ They assigned high, investment grade ratings to
opaque structured financial products and debt
issued by highly leveraged companies
¾ Since the outbreak of the credit crisis, they have
downgraded over $1.9 trillion of mortgage backed
securities
Rating Agency Downgrades: Mortgage Backed Securities(1)
($ billions)
1,000
841
800 739
600
400
237
200 85
0
Q3 2007 Q4 2007 Q1 2008 Q2 2008
12
(1) Source: Citigroup. September, 17 2008.
 The Bottom Line Is That Systemic
Leverage Rose To Unprecedented Heights
¾ Total U.S. Credit Market Debt Has Risen to 350% of GDP
Total Credit Market Debt / U.S. GDP (1)
%
350 Today
330
310
290
270 Great Depression
250
230
210
190
170
150
130
1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

13 (1) Source: Ned Davis Research, 2008.

 Warning Signs

14
 Default Rates Started to Rise

¾ Default rates on certain types of subprime

mortgages had risen to above 20% (vs. 6% at the
beginning of 2005)
Mortgage Default Rates(1)

15 (1) Source: Freddie Mac, March 27,2008.

 The Market Prices of Mortgage Backed
Securities Fell Precipitously
¾ Market prices of mortgage backed securities had
fallen dramatically by the end of last summer
Price Performance of Asset Backed Security Indexes(1)

16 (1) Source: BNP Paribas, September 15, 2008.

 Investment Banks Couldn’t Syndicate
High Yield LBO Debt
¾ Private equity deals started to fall apart as debt
markets re-priced risk and rejected complex
structures
Large LBO Failures
ƒ Sallie Mae ($25.5 billion)
ƒ Huntsman ($10.6 billion)
ƒ Affiliated Computer Services ($8.0 billion)
ƒ Harman International ($8.2 billion)
ƒ Alliance Data ($7.8 billion)
ƒ Penn National Gaming ($6.1 billion)
ƒ United Rentals ($4.0 billion)
ƒ Acxiom ($2.9 billion)

17
 Investment Funds Lost Billions Betting
on Risky Credit Instruments
¾ Two of Bear Stearns’ flagship hedge funds
collapsed in July 2007
ƒ The funds had invested $1.5 billion in subprime CDO’s
ƒ These failures were followed by the collapse of
Sowood Capital, a prominent $3 billion hedge fund

¾ Structured Investment Vehicles (SIVs)

announced billions of dollars of losses and were
liquidated
ƒ They had borrowed heavily in the short-term debt
markets to fund purchases of CDOs and other long-
term, risky debt instruments

18
 Systemic Risk

19
 Financial Institutions Announced Massive
Losses On Mortgages and Credit Instruments

¾ Financial institutions have sustained over $500

billion dollars of write-downs since the credit
crisis began
ƒ The IMF expects that total financial losses will exceed
those of any past crisis
IMF Comparison of Losses Across Financial Crises(1)
$ bil Minimum
1,000 Anticipated
800 Future
Losses
600
400
200
0
US Savings and Loan Japan Banking Crisis Asia Banking Crisis Credit Crisis
Crisis (1986-95) (1990-99) (1998-99) (2007- ??? )

20 (1)International Monetary Fund, “Global Financial Stability Report,” April 2008.

 Several Systemically Important
Institutions Have Failed in the US
¾ Victims of the credit crisis:
ƒ Bear Stearns (investment bank) ― Saved from
bankruptcy by government backed sale to JP Morgan
ƒ Lehman Brothers (investment bank) ― Bankrupt
ƒ AIG (world’s largest insurance co.) ― Bailed out
ƒ Washington Mutual (6th largest US bank*) ― Assets
seized by the government and sold to JP Morgan
ƒ Wachovia (3rd largest US bank*) ― Sold to Wells Fargo
after an aborted bid by Citigroup

21 * By deposits
 A Radical Policy Response Seeks To
Prevent A Systemic Collapse
¾ Under the Troubled Asset Relief Plan (TARP), the
Treasury Department is:
ƒ Purchasing up to $250 billion in equity stakes in US financial
institutions, including $20-25 billion stakes in Bank of America,
Citigroup, and Wells Fargo and $10 billion stakes in Goldman
Sachs and Morgan Stanley
ƒ Purchasing up to $700 billion of financial sector assets
¾ The FDIC is guaranteeing certain types of bank debt
and has increased deposit insurance to $250,000
¾ The Federal Reserve has taken extraordinary steps:
ƒ Allowed banks to post unconventional assets as collateral
ƒ Begun purchasing commercial paper from corporations
ƒ Extended a $50Bn credit line to money market funds
ƒ Begun paying interest on bank reserves

22
 Europe

23
 The Credit Crisis Has Struck Europe
With A Vengeance
¾ Europe’s economies are in many ways as
vulnerable as America’s
ƒ Leverage levels are high, house prices are inflated,
and financial institutions have suffered deep losses
UK Household Debt/Income (%)(1) Bank Leverage: Europe vs. USA(1)
(Assets/Equity)
38x

21x

Europe USA
24 Source: (1) Citibank, “A Downward Spiral.” 17 September 2008.
 Large European Financial Institutions
Have Experienced Extreme Distress
¾ In the United Kingdom
ƒ RBS ― The British government is recapitalizing Europe’s largest
bank by assets
ƒ HBOS & Lloyds TSB ― The UK government is injecting capital
into both banks (Britain’s 4th & 5th largest), having already
engineered their merger
ƒ Northern Rock and Bradford & Bingley ― Two of the UK’s largest
mortgage lenders became insolvent and were nationalized
¾ In Germany
ƒ Hypo Real Estate ― Bailed out by the German government
¾ In France & Belgium
ƒ Fortis ― Europe’s 11th largest bank was sold off piecemeal and
partly nationalized
ƒ Dexia ― France and Belgium were forced to recapitalize
Europe’s 16th largest bank
25
 Other Systemically Important European
Banks Are at Risk
¾ Many of Europe’s largest banks operate at very
high leverage levels
ƒ One reason is that many of them have highly
leveraged investment banking operations
European Banks’ Leverage Ratio Compared With Citigroup(1)

Citigroup

26 Source: (1) Greed & Fear, 09 October 2008.

 European Governments Have Been
Forced To Take Radical Action
¾ European governments have pledged a total of
$2.5 trillion to guarantee bank debt and purchase
equity stakes in financial institutions
¾ Eurozone governments have agreed to guarantee
all new bank debt issuance through 2009
¾ Ireland, Germany, and Denmark have guaranteed
all consumer bank deposits
¾ European central banks are offering unlimited
dollar funding to banks in order to unclog
interbank lending

27
 European Governments Have Been
Forced To Take Radical Action
¾ Specific national policies include:
ƒ The UK Government is guaranteeing bank debt and
injecting ₤50 billion into banks including RBS, HBOS, and
Lloyds TSB
ƒ Germany is guaranteeing up to $544 billion of bank debt
and plans to buy equity stakes worth up to $109 billion
ƒ France is creating a state fund to buy stakes in financial
institutions and has guaranteed $435 billion of bank debt
ƒ Spain is guaranteeing up to $136 billion of new bank debt,
has set up a facility to purchase equity stakes, and plans to
buy up to $68 billion of bank assets
ƒ Iceland has nationalized its entire banking system and may
borrow billions of dollars from Russia and the IMF
28 Source: Wall Street Journal, 14 October 2008.
 Emerging Markets

29
 Emerging Markets Have Posted Steep
Stock Market Losses
¾ Heightened risk aversion, capital flight, and
deteriorating economic growth prospects have
produced dramatic equity price declines
YTD Performance of EM Equity Markets(1)
120

100
S&P 500:
(38.8%)

80 India:
(48.1%)
Asia:
60 (52.2%)
Lat. America:
(60.9%)
40 E. Europe:
May-08

May-08
Jan-08

Jan-08

Jan-08

Feb-08

Feb-08

Mar-08

Mar-08

Jun-08

Jun-08

Jul-08

Jul-08

Jul-08

Sep-08

Sep-08
Apr-08

Apr-08

Aug-08

Aug-08
(62.2%)

MSCI Latin America MSCI Eastern Europe MSCI Emerging Asia

India (SENSEX) US (S&P 500)

30 Source: (1) Bloomberg, 10 October 2008.

 The Credit Crisis Has Disrupted Capital
Markets and Exposed Fiscal Weaknesses
¾ Regions and countries with major fiscal
imbalances have been hit hard
ƒ Many emerging markets rely on foreign capital
inflows to finance large current account deficits
ƒ They have funded domestic credit growth with
foreign borrowing
ƒ Some developing economies are heavily
commodity dependant and will weaken as
commodity prices fall
¾ Capital flight is a major risk for these
economies

31
 Certain Emerging Markets Are Vulnerable

¾ Emerging markets with high current account

deficits and tight banking sector liquidity could
experience full-blown financial crises
¾ Regions/Countries at risk include:
ƒ Central & Eastern Europe ― The Baltic states, Bulgaria,
Romania, Ukraine, and Hungary have large current
account deficits and have experienced unrestrained
credit growth
ƒ Latin America ― Countries including Brazil, Peru,
Argentina, and Venezuela could see their fiscal positions
deteriorate if commodity prices fall further
ƒ Pakistan ― The country’s credit ratings have been cut
due to its deteriorating external liquidity situation and
dwindling foreign reserves
32
 Certain Emerging Markets Are Vulnerable
¾ Eastern European current account deficits and Latin
American commodity dependency are key
vulnerabilities
ƒ Certain CEE countries will experience credit contractions,
reduced investment, and slower growth
ƒ Latin American governments may have to raise taxes or cut
spending as commodity related revenues fall
CEE Current Account Deficits(1) Lat. Am. Fiscal Balances Pro-Forma
(2007) for Commodity Prices at 10 Yr Avg.(2)
0%
2007 Actual 8.7%
-5%
-4.9% -5.3% 2007 Pro-forma
-10% 1.1% 1.8% 1.7%
-15% -13.7%
-20% -18.2% -2.0% -2.6%
-25% -22.0% -5.0%
-8.1%
Bulgaria Baltic Romania Hungary United
States States Argentina Brazil Chile Peru
33 Sources: (1) Economist Intelligence Unit, 13 October 2008; (2) Morgan Stanley, 30 September 2008.
 What About India?
¾ India has benefited from rapidly increasing capital
inflows since 2000, but these are set to fall
ƒ Capital inflows funded investment and boosted GDP growth
above its long-term sustainable rate
Capital Inflows Received by India(1)
$ billions
98
100

50 39
21
10
0
2000-2 Avg. 2003-5 Avg. 2006 2007

¾ But India should prove relatively resilient due to

growing domestic demand low reliance on exports
ƒ Growth is likely to moderate to a more sustainable rate of
~6-7% (from a 3-year average of 9.3% as of March 2008)
34 Sources: (1) Morgan Stanley, 30 September 2008; (2) Carlyle Analysis.
 What About China?

¾ Of the world’s major economies, China’s is best

positioned to weather the storm
Key reasons include:
1. China has amassed $1.8 trillion of foreign currency
reserves as a result of its persistently high current
account surpluses
2. The economy benefits from a very low level of leverage
and low external debt ― debt levels for households and
the government are only 13% and 33% of GDP,
respectively
3. Domestic banks remain awash with liquidity as a result
of deposit growth and reserve accumulation
4. The banking system in China operates on a conservative
basis with low leverage levels and without
securitization
35 Sources: (1) Morgan Stanley, 07 October 2008; (2) Carlyle Analysis.
 Recession in The West Will Affect
Chinese Growth Prospects
Transmission mechanisms include:
¾ Trade
ƒ Western economies are key consumers of Chinese
exports

¾ Investment
ƒ Western investors have supplied much of the capital
that has been used to grow China’s companies

¾ Opportunities for International Expansion

ƒ Many of China’s most successful companies – such as
Lenovo and Bank of China – are expanding abroad

36
 But China Will Continue to Grow Rapidly

¾ Domestic growth will offset weaker external demand

ƒ An increasing proportion of GDP derives from domestic demand
ƒ China’s growing middle class has rapidly increased its
consumption of items like cars and electronics
ƒ Abating inflationary pressures will allow China’s central bank
to further loosen monetary policy
Chinese Retail Sales (% Change YoY)(1)
24%

22%

20%

18%

16%

14%
Jun- Jul- Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar- Apr- May- Jun- Jul- Aug-
07 07 07 07 07 07 07 08 08 08 08 08 08 08 08

37
(1) Source: China Statistics Bureau, August 2007.
 The Middle East

38
 The Middle East Is Likely To Prove
Resilient
¾ The credit crisis is affecting the Middle East but not
as much as other regions
ƒ The IMF forecasts only a slight moderation of GDP growth to
6.0% in 2009 (vs. 6.5% in 2008)
¾ Nevertheless, the credit crisis in the West has
precipitated a regional liquidity contraction
ƒ Foreign banks in the region have stopped lending money
ƒ Regional stock markets have posted dramatic declines
ƒ Local banks are generally healthy
¾ This cloud has a silver lining
ƒ The credit down-cycle and falling food and energy prices
are moderating inflationary pressures

39 Sources: IMF World Economic Outlook, October 2008; Emerging Markets Monitor, 6 October 2008
 Oil Price Declines Are Significant But Not
Disastrous
¾ Economic growth is being sustained mainly by non-oil
sectors including construction, retail, transportation,
and financial services
Middle Eastern GDP Growth: Oil vs. Non-Oil Sectors (1)

40 Source: IMF World Economic Outlook, October 2008

 Oil Price Declines Are Significant But Not
Disastrous
¾ Most government budgets and investment programs
in the Middle East will remain intact unless oil falls
below $50/barrel
ƒ A prolonged drop below $50 is highly unlikely because
global demand for oil continues to rise while supply is
largely static
¾ Middle Eastern governments have amassed huge
reserve funds which they could deploy to support
regional growth if the outlook darkens
ƒ Middle Eastern government saved 70% of their surplus oil
revenues over the past five years
ƒ Sovereign wealth funds in the MENA region have over $1.5
trillion at their disposal
41 Sources: Monitor Group, “Sovereign Wealth Funds and the MENA Region,” 12 May 2008; Carlyle research & analysis.
 The Current Situation

42
 Central Banks Have Responded With
Coordinated Global Rate Cuts
¾ On October 8th, 21 countries around the world
simultaneously cut interest rates
ƒ The Federal Reserve cut the federal funds rate by 50
basis points to 1.50%
October 8th: Key Interest Rate Cuts(1)

43 Source: (1) Financial Times, 08 October 2008.

 Credit Market Stress Remains At
Unprecedented Levels
¾ But global interest rate cuts have done nothing
to encourage private sector lending
ƒ The spread between US Treasuries and the interbank
lending rate remains at all time highs
TED Spread: 3 month LIBOR – 3 month T-Bill(1)

44 Source: (1) BNP Paribas, 10 October 2008.

 Global Equity Markets Have Crashed

¾ Global stock markets are testing multi-year lows

ƒ The MSCI World index has fallen by over 40% since its
2007 high
MSCI AC World Index(1)

45 Source: (1) Greed & Fear, 09 October 2008.

 Commodity Prices Have Retreated

¾ The price of oil has fallen by 40% since its peak

in July 2008
Oil Price/Barrel Since January 1st (1)

150

140
130

120

110

100
90
80
8
8

8
8
8
8
8
8

8
8

8
8

8
8

8
8

8
b-0
b-0

b-0
r-0

r-0

y -0

y -0

l-0
l-0
n-0
n-0

n-0
n-0

t-0
p -0

p -0
r-0

r-0

g -0
g -0

g -0
Ju
Ju

Oc
Ma

Ma
Ja
Ja

Ju
Ju
Fe
Fe

Fe

Ap

Ap
Ma

Ma

Se

Se
Au
Au

Au
46 Source: (1) Bloomberg, 10 October 2008.
 Consumer Access to Credit Is Dwindling

¾ US Consumer credit fell by a record $7.9 billion

in August
ƒ This was the first drop since 1998 and the largest
monthly decline in history
Monthly Net Increase in Consumer Credit Outstanding(1)

47 Source: (1) Greed & Fear, 09 October 2008.

 The United States Is Falling Into Recession

¾ Unemployment rose to 6.1% in August from 5.7% in July

ƒ The 1.1% surge in the unemployment rate over the past 4
months is the fastest in 22 years
¾ Retail sales fell by 0.3% in August and were down 0.7%
excluding automobile sales
¾ The main index of US manufacturing activity fell 13% in
September
ƒ The current level has only been seen before during full-blown
recessions
¾ US GDP growth is slowing significantly, and outright
contraction is likely
ƒ Goldman Sachs forecasts US GDP growth of 1.5% in 2008 and
-0.2% in 2009 (vs. 2.0% in 2007)
48
 Much of the Rest of the World May
Follow in America’s Footsteps
¾ Economists are ratcheting down global growth
estimates
Key factors likely to suppress growth:
ƒ Decreased global liquidity
ƒ Lower capital flows to emerging markets
ƒ Reduced G-7 demand for imports
ƒ Lower demand for commodities

¾ Key 2009 GDP growth forecasts*

2009E 2008E 2007A
Euroland 0.5% 1.1% 2.6%
United Kingdom 0.4% 1.0% 3.0%
Japan 0.5% 0.7% 2.1%
China 8.7% 9.8% 11.9%
Brazil 3.3% 5.6% 5.4%
49 * Goldman Sachs, 10 October 2008.
 What’s Next?

50
 Markets Will Recover From Recent Lows

¾ Investor panic had driven valuations to levels

which were not warranted by fundamentals
¾ Monday’s rally may mark the beginning of a
medium term rally
ƒ It marked the largest ever one-day point gain for the
Dow Jones Industrial Average and the largest
percentage increase since 1933
¾ But this does not mean that equity markets
won’t touch recent lows again in the future
ƒ Volatility may return as the deleveraging cycle
continues and as a consumer recession sinks in

51
 A Broader Recession Will Ensue
¾ Tighter credit and lower house prices will severely
depress consumption
Home Price % Change % of US Banks Tightening
85% vs. Previous Cycle (1) Consumer Credit (2)
70%
66%
65%
50%
45%
30%
25% 20%

10%
5%
-17% -10%
-15%
-12%
00

01

02

03

06

07

08
04

05
20

20

20

20

20

20

20
20

20
-35%
1983-89 1990-95 1996-06 2007- Credit cards Other consumer loans
Present
52
Sources: (1) Zellman and Associates. September 2007; (2) The Federal Reserve Bank Officer Lending Survey, July 2008
 The Deleveraging Process Will Be
Unpleasant And Will Take Time
¾ Debt levels need to become more sustainable before an
economic recovery can ensue
% Total Credit Market Debt / U.S. GDP (1)

350
330
310
290
270
250
230
210
190
170
150
130
1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

53 (1) Source: Ned Davis Research, 2008.

 The Future Is Still Bright: Extraordinarily
Positive Long-Term Macro Trends Exist
¾ Rapid growth of emerging markets
ƒ Billions of people will achieve relative prosperity
ƒ Opportunities for investment and development will abound
¾ Technological innovation
ƒ Technology is evolving at a more rapid pace than at time in
human history
ƒ This will increase productivity and living standards globally
ƒ Improvements in science and medical technology will directly
benefit millions of people
¾ Global peace and stability
ƒ The world is a more stable place than it has been for most of
the past thousand years

54
 Impact on Private Equity

55
 Existing Investments Will Be Affected

¾ 2000-2005
ƒ LBO activity boomed but leverage levels and acquisition
multiples remained reasonable
ƒ Most deals done during this period will prove resilient

Global LBO Activity 2000-2005(1) Leverage vs. Acquisition Multiples(1)

(of EBITDA)
$ Billions 9.0x
300 291 Leverage 8.1
8.0x
247 Acquisition
250 7.0
7.0x 6.7
200 6.4 6.4
6.0x 5.8
150 142 5.3
102 110 5.0x 4.8
100 4.6
65 4.2 4.1 4.0
50 4.0x

0 3.0x
2000 2001 2002 2003 2004 2005 2000 2001 2002 2003 2004 2005
56 Sources: (1) Dealogic. (2) Standard & Poor’s.
 Existing Investments Will Be Affected
¾ 2006-1H 2007
ƒ A bubble developed in the private equity market
ƒ Debt and acquisition multiples rose above historical norms
ƒ Some companies bought during this period may experience
financial difficulties
Global LBO Activity(1) Leverage vs. Acquisition Multiples(1)
$ billions
693 EBITDA Multiple
700 8.7x 10.0x
600 6.0x
8.0x
500 6.7x
5.8x
400 4.0x 6.0x
4.5x
300 4.0x
200 160 2.0x
2.0x
100
0 0.0x 0.0x
2000-2005 Avg. 2006-2007 Avg. 2000-2005 2006-7 2000-2005 2006-7
Avg. Avg. Avg. Avg.
57 Sources: (1) Dealogic, Standard & Poor’s, Morgan Stanley Financial Sponsors Group, Carlyle Analysis.
 Existing Investments Will Be Affected
¾ 2H 2007
ƒ After the credit crisis hit, many deals met with difficulty
ƒ Investment banks could not syndicate LBO debt and a
massive $389 billion debt backlog developed
ƒ Many deals were pulled; others were renegotiated on more
favorable terms
Busted Deals(1) Restructured Deals(1)
Company Value Company Value

Sallie Mae $25.5 billion ClearChannel $27.3 billion

Huntsman $10.6 billion First Data $26.3 billion
Harman Int. $8.2 billion Harrah's $26.2 billion
ACS $8.0 billion Biomet $11.4 billion
Alliance Data $7.8 billion HD Supply $8.5 billion
Penn National $6.1 billion Thomson $7.8 billion
58 Source: (1) Morgan Stanley Financial Sponsors Group.
 New Private Equity Deals Look Different

¾ Private equity deals are smaller

Average Deal Size (1)
$ Millions
600
519
500 Credit Crisis
422
400

300 294
251

200 171
143 155
134
97
100

0
2006 Q3 2006 Q4 2007 Q1 2007 Q2 2007 Q3 2007 Q4 2008 Q1 2008 Q2 2008 Q3

59 Source: (1) Dealogic.

 New Private Equity Deals Look Different

¾ Private equity deals involve more equity

Average Equity Contribution (% of Purchase Price) (1)
40%

38%

Credit Crisis
36%

34%

32%

30%

28%

26%
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 1H08 2Q08
60
 New Private Equity Deals Look Different

¾ Private equity deals involve less favorable debt terms

bps Average Spread of Leveraged Buyout Loans (1)
450 (vs. LIBOR)

400

Credit Crisis
350

300

250
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 1H08 2Q08
61 Source: (1) Standard & Poor’s.
 New Private Equity Deals Look Different

¾ Private equity deals are fewer in number

Number of Private Equity Deals
700
666 655 Credit Crisis
650
615 613 620
600 582 585 582
550
550

500
448
450
410
400

350

300
Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08
62 Source: (1) Standard & Poor’s.
 New Private Equity Deals Look Different

¾ Private equity deals are less debt-dependant

Minority Investment by Financial Sponsors (1)

Minority Investments % of Total PE
($ billions) Deal Volume
25 24 35%
% of Total PE Deal Volume
Minority Investments 30%
20
16 25%
15
15
13 20%

10 10 10 10 10 15%
10
7 8
10%
5
5%

0 0%
Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08
63 Source: (1) Dealogic.
 New Private Equity Deals Look Different

¾ More private equity firms are investing alongside

corporate partners or sovereign wealth funds
ƒ Recent examples include Blackstone and NBC Universal’s
$3.5 billion joint acquisition of the Weather Channel

¾ Holding periods will rise as private equity firms

spend more time improving portfolio companies’
operational performance
ƒ Many exits will be delayed until the financial crisis
subsides

64 Source: (1) Dealogic.

 Private Equity Returns May Rise

¾ Private equity deals done during periods of economic

difficulty tend to outperform
U.S. Buyout Funds - Vintage Year Returns
35 35

S&P 500 Annualized Return (%)

30 30
Vintage Year IRR (%)

25 25

20 20

15 15

10 10

5 5

0 0

-5 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000² 2001 2002 2003 2004 -5
Median Upper Quartile 5-Year Forward-Rolling S&P 500¹
65 Source: (1) Morgan Stanley Financial Sponsors Group.
 Private Equity Trends

66
 Several Key Trends Will Affect The
Private Equity Industry
¾ Fewer lenders will provide debt to fund acquisitions
¾ Private equity firms will face less competition from
investment & commercial banks
¾ Distributions to limited partners will fall in the medium
term
¾ Decreased global liquidity will result in reduced
commitments to new private equity funds
¾ There will be more co-investment opportunities
¾ There will be fewer PE commitments from high net worth
individuals
¾ The terms of private equity partnerships may change
¾ Public perceptions of the PE industry will improve
67
 Four Big Questions Confront The Industry

1. Will governments intensify the regulation of

the private equity industry?

2. Will tax rates on private equity distributions

rise?

3. How will the industry’s public image evolve?

4. Can the basic private equity business model

still work?

68
 Opportunity & Challenge

69
 Private Equity Now Has Its Greatest
Opportunity And Its Greatest Challenge
¾ Opportunity: To use its capital and expertise to
save companies and turn them around
ƒ An enormous number of companies will now need
fresh capital ― private equity has the necessary
capital
ƒ Low prices can yield attractive returns ― perhaps
the best ever

70
 Private Equity Now Has Its Greatest
Opportunity And Its Greatest Challenge
¾ Challenge: Overcoming the widespread
conception that private equity firms are short
term investors
ƒ The industry needs to recognize that turnarounds
will not be easy
ƒ Private equity firms will be operating under an even
greater level of public scrutiny
ƒ Maintaining investor confidence will be critical

71
 The Opportunity And The Challenge Are
Particularly Great In Financial Services
¾ Opportunity: To help strengthen financial
institutions around the world, often working
closely with governments in this endeavor

¾ Challenge: To restore confidence in financial

institutions during times of unprecedented
market disruption

72
 Private Equity Now Has Its Greatest
Opportunity And Its Greatest Challenge
¾ Bottom Line: This could well turn out to be
private equity's finest hour ― if the industry
moves carefully and skillfully to help with the
global economic turnaround, partnering at
times with corporations, sovereign wealth
funds, and governments

73
 Private Equity in the MENA Region

74
 Key Predictions

¾ Private equity activity may moderate but will remain

strong
¾ Demand for investment capital from companies in the
region will rise
¾ Local private equity firms will be the most active
investors
¾ Some new global players will enter the market
¾ Minority state transactions will predominate
¾ Investment opportunities will be better than before
¾ Sovereign wealth funds in the region will focus more of
their attention on the region

75
 Lower Stock Market Valuations Could Be
A Boon For Private Equity Investors
¾ Regional stock markets have fallen because they were
previously over-inflated
ƒ Investors had pushed up valuations to unsustainable levels
ƒ Many of them have withdrawn capital because the credit
crisis has increased risk aversion and demand for cash
GCC Stock Market Performance GCC P/E Ratios

76
 Lower Stock Market Valuations Could Be
A Boon For Private Equity Investors
¾ Private equity investors can now buy assets at
prices that are very attractive from a long-term
perspective
ƒ The MENA region’s robust growth prospects and
insulation from the credit crisis make it one of most
attractive areas in the world for private equity
investment

77
 Conclusions

78
 Key Conclusions

¾ The world of private equity will change – for

many years – as a result of the credit crisis and
the unfolding economic slowdown

¾ The MENA region will be affected by changes in

the United States and Europe

¾ The appeal of the MENA region will increase ―

although investment activity may moderate, it
will be higher than in many other regions

79
 The Impact of the Financial Services
Meltdown on The Global Economy And The
Private Equity Industry

David Rubenstein, Co-Founder

Super Return Dubai
October 15, 2008
80