BARRIERS TO AND OPPORTUNITIES FOR INVESTMENT IN EUROPE

John Arney – Managing Partner

BORN OUT OF A DISTRESSED SITUATION

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2011

MBO

Today1980 - 2011

INVESTMENT PARTNERS

INDUSTRIAL PARTNERS

INNOVATIVE 4 + 4 MODELGP owned and led by a meld of Investment and Industrial Partners

Sir George Buckley Dr Fredrik Arp Dr Peter Goode Anders Pettersson

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John Arney Mark Dickinson Nils StoesserJavier Abad

BUILDING COMPANIES ACROSS THE ENR SUPPLY CHAIN

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Mid market, control LBOs of businesses with or capable of having international operations

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ARLE’S DEFINITION OF ‘DISTRESS’

Does not = turnaround of loss making businesses with ‘also-ran’ market position

Does =• Neglected, under capitalised businesses that could be better run and better

invested

• Businesses owned by a parent (individual, corporate, fund, bank or government) experiencing operational and/or financial difficulties

Commonly find a need for:> Refreshed strategy > Strong leadership> Heightened operational focus> Increased capital investment

i.e. a good company with a bad balance sheet or a troubled parent

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PAST BUYOUTS EMANATING FROM DISTRESS

LSE 6.9x63% IRR

Upstream Oil & Gas

4.1x97% IRR

2.3x58% IRR

5.7x472% IRR

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OPPORTUNITY IN EUROPEThe sovereign backdrop

European governments have become heavily over-levered in the past six years

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20120

20

40

60

80

100

120

140

160

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Germany Ireland Greece Spain FranceItaly Netherlands Portugal United Kingdom

Gove

rnm

ent d

ebt a

s a p

ropo

rtion

of G

DP (%

)

Maastricht requirement of total debt – less than 60%

Source: Eurostat

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INVESTORS FLOWING TO DISTRESSED FUNDSEuropean-based firms have raised €75bn for investment in distressed situations

No shortage of firepower

Investing through equity Investing through debt

Trend

Source: Prequin, €75 billion raised over 10 years

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SOURCES OF SUPPLYBut barriers to a strong flow of investment opportunities

Banks

Private Equity Funds

Corporates

Governments

Prone to ‘kick the can down the road’

Slow deleveraging process, banks aided by ECB’s liquidity measures

Some selected disposals on structured asset sales

High cash balances, low borrowing costs and ease of

refinancing have reduced the need to sell non-core assets

Reluctance to sell assets in ‘fire-sale’ for short-term liquidity

Selective sales at local and central level, e.g. Afandou sale in Greece, Civil Service properties for sale in

UK

Raft of failed exits shows firms are looking to realise at full value

70% of private equity’s AuM – (highest ever) tied up in portfolio

assets

Source: Pitchbook

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BANKS – THE PRIME OBSTACLE TO FLOWBanks have adjusted slowly to the need for constructive financing

Causes

• Spread and severity of ‘08 crisis necessitated triage • Regulatory and political pressure• Long-term benign interest rate environment• Europe heavily ‘over-banked’ with ‘Continental drift’ vs. the more regionalised US banking

sector

Effects

• Problems on balance sheet larger than US counterparts• Sub-optimal refinancings (‘zombies’)• Bond market rapidly filling the lending void• Down cycle prolonged by not taking pain early• Overall drag on economic growth

Real GDP Growth 2012-2017

Euro area 1.2%

United States 2.5%

Source: OECD

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SO WILL THE FLOW PICK UP?

Sources: Deloitte, Financial Times, PwC

Deloitte’s European Bank Survey, 2012De-leveraging timeframe for European banking sector

Financial Times, March 2013

“European banks will need to shed as much as another €3.4tn from their balance sheets over the coming years by reducing lending and selling assets”

Banks remain the most significant potential source but also obstacle

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IN CONCLUSION

• Macro suggests high potential in Europe

• Plenty of hot money to fund investment

• But actual supply strangled by constraints

• Flow of opportunity should increase

… but do not hold your breath