An introduction to private equity

Milan - November 2007

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Essentially private equity is an alternative

way of owning a company

What is private equity?

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Benefits

• Works closely with management teams to ensure more efficient

capital structures are in place

• Away from the dividend requirements and short-termist gaze of

the public sector, it allows meaningful strategic and operational

changes to be made that benefit the longer term interests of

the company

• Provides facility to acquire businesses to merge with other

portfolio companies, benefiting from cost efficiencies

• Management’s long term interests are more closely aligned

with the other private equity owners

• Rewards are directly linked to the value created through

buying, building and ultimately selling businesses

What is private equity?

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Common Myths and the Reality

(…at least of the type of firms we invest with)

1. Private equity buys companies on the cheap, strips the assets and

then sells them on for a quick profit

Creates value for investors by buying at a fair price and building

businesses, not stripping them down

2. Private equity leverages up companies with unsustainable levels of

debt

Ensures businesses can pay interest payments required based on

the level of earnings the company produces on a deal by deal basis

3. Private equity operates in a shadowy and secret world

Maybe true of yesteryear but firms are becoming more open

What is private equity?

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• Buy Outs/Buy Ins: either providing the capital to enable

current operating management to acquire an existing business

or enabling an external manager to buy into a company

• Venture Capital: investments made at an early stage in a

company’s life

• Development Capital: financing provided for the growth or

expansion of a company

• Mezzanine Debt: typically debt capital giving the lender

rights to convert to an ownership or equity interest if the loan

is not paid back in time and in full

What is private equity?Categories of investment

Private equity broadly refers to equity investment in

companies that are not traded on public stock markets

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Private equityOutperformed other key asset classes over last five years

30 August 2002 to 31 August 2007. All Figures in USD.

Source: Reuter’s Hindsight

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100

140

180

220

260

300

Aug-02 Feb-03 Aug-03 Feb-04 Aug-04 Feb-05 Aug-05 Feb-06 Aug-06 Feb-07 Aug-07

LPX50

MSCI World

Lehman Global Aggregate Bond

Credit Suisse/Tremont Hedge Fund

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• The asset class has grown rapidly in recent years, with

estimated global commitments increasing from USD18 billion

in 1990 to around USD365 billion in 2006

• Record breaking deals over the last year – HCA, Equity Office,

TXU

• These mega-deals topped previous record of KKR’s USD31.3

billion buy out of RJR Nabisco in 1989

Growth of private equity

Source: Private Equity Intelligence; Financial News – Private Equity News

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• Problems arose in higher risk credit markets causing a serious

mispricing of risk.

• Risk Repricing

– Credit spreads widening

– Significant backlog of loans to be cleared

– Further corporate activity is halted until backlog is

cleared

– Fewer buyouts (particularly the larger ones)

– Refinancings limited and exits may take longer than

recent times

What the credit crunch means for private equity

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• Private equity firms can no longer rely on just cheap debt

– Think innovatively

• Leverage is still available (selectively!)

– Small to mid sized deals can still be done

• What of deals agreed prior to the “crunch”?

– Not so much of an issue for the private equity investors

What the credit crunch means for private equity

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• 2005 and 2006 are considered vintage years for the sector, so

has a peak in the cycle been reached?

• Many of the factors behind the sector’s success in the last two

years still apply:

– company balance sheets remain healthy

– further global economic growth is forecast

– equity valuations still not expensive on a historical

earnings basis

• Opportunities can now be found in other parts of the capital

structure

Private Equity – post credit crunch

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The extent of leverage

Level of gearing

• The amount of debt being put into

buyouts has been increasing

BUT

• It is not near the highs of the 1980s

1987 debt to equity ratio – 93:7

2006 debt to equity ratio – 70:30

• Interest coverage has improved

• Interest rates are still historically low

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• Avoid private equity firms involved in over

aggressive/unrealistic leverage and those paying too much for

companies

• Get a greater understanding of the whole market

• From the lenders point of view – fixed income fund

managers

• From sellers point of view – public equity fund

managers

• A diversified approach is all important

Invest with the best – and know the market

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Core Holding Example – Candover Investments plc

• Leading European houseStrong track record and portfolio

• In addition to portfolio of private equity, Candover Investments wholly owns Candover Partners

Receives fee income on all other funds Candover Partners runsA growing fund management business in itself

• Focuses on larger European buyouts

• Has enjoyed successful realisations since purchase

• A good spread of investments by vintage and sector and successful refinancings prior to credit crunch

Largest Holdings:− Ferretti− Gala Group− DX SMS− Dakota, Minnesota & Eastern

Railroad− Hiding Anders

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04/12

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04/01

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04/02

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Purchase

PurchasePurchase

Purchase

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Satellite Holding Example – Evolvence India Holdings

• A fund of Indian private equity funds and co-investments

• Experienced locally based team with hands on approach

• Focus on mid-sized companies

• Well diversified by vintage and geography

• Major sectors of investment include:

InfrastuctureEngineering & AutomotiveConstructionTechnologyLife Sciences

Largest Holdings:− GW Capital India Value Fund II− Barings (India) Private Equity Fund II− IL&FS India Leverage Fund− IDFC Private Equity (Mauritius) Fund

II− New York Life IM India Fund II

0.99

1.01

1.03

1.05

1.07

1.09

1.11

22/03

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05/04

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19/04

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03/05

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17/05

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31/05

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14/06

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28/06

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12/07

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26/07

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09/08

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23/08

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06/09

/07

20/09

/07

04/10

/07

Purchase

Purchase

Purchase

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• Private equity funds are generally difficult to access for the

everyday investor

• Like hedge funds, investors face a series of obstacles: lack of

access to funds, size of entry, ability to diversify and lack of

investment expertise

• Moreover, liquidity is extremely restrictive in this arena with

private equity funds commonly implementing long lock-ins in

excess of 3 – 5 years

How to invest in private equity?

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This presentation is by Crosby Capital Partners Ltd, which is authorised andregulated by the Financial Services Authority in the UK, and whichmanages a range of offshore funds (“the Funds”). Application for shares in the Funds can only be made on the basis of the currentProspectuses.  The Funds are unregulated collective investmentschemes in the UK and their promotion by authorised persons in theUK is restricted by the Financial Services and Markets Act 2000.  Theprice of shares and the income from them can go down as well as upand the value of an investment can fluctuate in response to changes inexchange rates.

Forsyth PartnersRegulatory matters