U. S. Competitiveness and Private Equity

Karen G. Mills kmills@mmpgroupinc.com

Council of Foreign RelationsDecember 13, 2005

The rise of private equity in Asia: opportunity or threat?

2

Asia will become an increasingly viable venue for private equity deals

Opportunity InfrastructureEnvironment/

Market Support

Available companies or technologies

Strong end markets

Brokers to deliver deal opportunities

Experienced investors

Consortiums to share risk

Support Industries

Legal

Accounting

Investment Banking

Industry Associations

Regulation

IPO Market

M & A Market

3

1%

65%

34%

Asia:Capital

Invested

5.1

(6)

(77)

(15)

No. of Deals

Investments are growing but little is venture

Asian Private Equity2005 January-June ($Billions)

58%

28%

14%Venture

Expansion/Growth

Buyouts 55% growth vs. YAG

Asia: Funds Raised

5.6

Source: Asian Private Equity Review

Other 1.6

India .5

Korea .7

China .8

Japan 1.5

Investment: By Country

5.1No. of Deals

(11)

(22)

(2)

(42)

(11)

4

Firms raising funds or investing funds in Asia in the first half of 2005:

Specific Asia Funds

$650 – 2 BillionAllocating Existing

Funds to Asia

• Affinity Capital• CVC Capital Partners

(Citicorp Venture)• Castle Harlan• CRCI• HSBC Private Equity• CCMP (Formerly JP Morgan)• Mitsubishi• SAIF (Formerly Soft Bank

Asia)• Unison

• Blackstone• Carlyle• General Atlantic• KKR• T. H. Lee• Warburg Pincus• Ripplewood Holdings

Source: Venture Capital Journal

5

Latest news for foreign investors is mixed

Country Recent Actions

Θ Korea Current civil and criminal investigations of seven U.S. and European private equity firms

Θ China New regulation in November 2005 creates more restrictions on establishing foreign venture backed companies

+ India Lifted ownership restrictions by foreign investors in telecom

+ Japan Relooking at more positive treatments of foreign direct investment

6

Why do we care?

The dynamism and transparency of American Capital markets have historically served as a powerful contributor to U.S. innovative capacity”

- Scott Stern CFR 2005

We worry

• Will there be enough capital for U.S. opportunities?

• Will Non-U.S. innovative capacity grow to rival ours?

7

Last year $57 billion was invested in private equity

Source: 2004 NVCA Year Book

Capital Commitments to Private Equity Funds 1979-2003

8

Institutions not individuals provide most of the funds

Source: 2004 NVCA Year Book

Private Equity Commitments By Limited Partner Type

9

Private equity is beginning to operate as a global business

Sources of Private Equity Capital

Operating / Tax Home of Funds & Principals

Geography of Investments

Non-U.S. Government

Non-U.S Private

U.S.•State Pension

Funds•Endowments•Other Private

Non-U.S. Government

Non-U.S. Private

U.S. based

Other Markets

Latin America

Middle East

Asia

Europe

U.S.

Return of CapitalIllustrative

10

Non-U.S. investments in private equity are accelerating

Source: Greenwich Associates

U.S. Continental Europe

U.K. Canada Japan

41

3

27

9

20

8

14

14

4

4

44

28

28 28

8

Percent of institutions investing in private equity

Now Invest

Plan to Invest

U.S. Continental Europe

U.K. Canada Japan

41

27

20

14

4

9

8 14

4

3

44

28

28 28

8

Percent of Institutions that invest in Private Equity

Now Invest

Plan to Invest

Now Invest

Plan to Invest

11

DISCOVERY

How does innovation translate into American jobs?

Basic Research

Invention

Innovation

Commercialization Growth

BUSINESS FORMATION JOB CREATION

• Large Company Expansion

• Entrepreneurship

12

Venture Backed Growth2000-2003 Percentage Change

12%

7%

-2%

7%

5 pp

9 pp

Sales Growth Job Growth

Venture capital backed companies grow faster and create more jobs

Source: National Venture Capital Association; Global Insights study

Venture Backed

Total U.S. Venture Backed

Total U.S.

13

Venture capital funding spurs innovation more powerfully than R&D

* Innovation is measured by patent production

Source: Samuel Kortum and Josh Lerner, RAND Journal of Economics, Winter 2000

VC Spending as a percent of R&D(1983-1992)

Percent of Industrial Innovation*accounted for by VC Backed Firms

(1983-1992)

Percent accounted for in 1999

3%

8%

14%

14

Venture and buyout investing are quite different

Venture Buyout

Small deal size

Early stage

High risk

More likely technology

driven

More consortium

investing

Control stake

Return comes from:

• Leverage

• Multiple expansion

• Growth

15

Capital Commitments to Private Equity Funds

Buyouts and Mezzanine capital is also being used to grow businesses

Source: 2004 NVCA Year Book

Other Private Equity Capital

Buyouts and Mezzanine Capital

Venture Capital

16

The trend is clear; the effect on the U.S. is unknown but not worrisome

1. Non-U.S. capital will be increasing investments in private equity of all kinds.

2. Non-U.S. deal opportunities will be increasingly attractive to U.S. based capital.

3. Private equity skills and market support will increase rapidly in non-U.S. markets particularly Asia.

4. There is no evidence that U.S. interests will be harmed.

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Karen Gordon Mills

Karen Gordon Mills was a Founder and Managing Director of Solera Capital, a private equity fund based in New York City. She has been in the industry since 1983 and is an expert in investing and growing companies in traditional U.S. based industries such as food, textiles, media and industrial components. Some of these companies and brands include Telex Communications, Mrs. Fields Cookies, Bruce Hardwood Floors and Annie’s Macaroni and Cheese. Her background also includes consulting for McKinsey & Co. and product management at General Foods.

Ms. Mills received her A.B. from Harvard University in Economics in 1975 and her MBA from Harvard Business School in 1977, where she was a Baker Scholar. She currently serves on the Boards of the Scotts Company and Arrow Electronics.