Private Equity –Where are we now?

Global Interdependence Centre Investment Panel, 17th June, 2010 Andrew Boyle Founder, London Capital Finance Limited www.ldncap.com

Private Equity – Where are we now? www.ldncap.com

London Capital Investment Partners

Overview • The private equity market is now emerging from a systemic failure.

• There has been a necessary reassessment of approach.

• As many players leave the market those firms that remained committed to the underlying principles of private equity continue to validate the asset class.

• Private equity now has a vital role to play in generating significant economic growth and investment returns.

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Capital Calls and Distributions Global Private Equity – All Types (Source Prequin - www.prequin.com) The mismatch in 2008 illustrates the systemic failure.

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Private Equity Fundamentals There are only three ways to generate returns in private equity.

Pre-Crisis

Now

1

Buy undervalued assets

Increasingly hard to find in size

Plentiful

2

Buy improving assets

Requires time and resources

Unchanged

3

Leverage

Plentiful

Severely restricted

Changing Focus •Pre-Crisis: Use of leverage •Now: Purchase of undervalued and improving assets

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Other Matters • There is significant resistance to the traditional fee model, which is a 2% p.a. management fee and a 20% share of returns above a target IRR. • Managers are creating alternatives to the traditional limited partnership structure, such as co-investment agreements and virtual funds.

• The valuation of portfolio companies is increasingly complicated, for example because of requirements to make reference to comparable companies in the quoted markets.

• A highly complex and rapidly changing regulatory environment will require rigorous monitoring and adaptation.

• Private equity will develop as a global business.

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Private equity has an important part to play in securing economic recovery.

Private equity is about wealth creation rather than capital preservation or index tracking.

• Wealth is derived from the creation of capital goods (both physical and intellectual property).

• The creation of capital goods depends on measured risk-taking and the support of entrepreneurs.

• Governments can create a conducive environment, but only the private sector can allocate efficiently capital for the creation of capital goods.

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Key Questions to Ask Fund Managers 1. What is the debt/equity ratio of each of your portfolio companies?

2. How many Limited Partners have failed to meet calls since 2008?

3. What are the likely follow-on funding requirements of your portfolio companies?

4. Do you have separate processes and teams for the management of existing portfolios and the sourcing of new investment opportunities.

5. Which of the three investment methods do you use to generate investment returns?

6. What is the nature of your involvement with portfolio companies?

7. What criteria do you use to select new investments?

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London Capital’s Investment Template Experienced Management  A management team including one or more industry relevant senior executives.  A properly structured and functioning board.

Strong Value Proposition  Robust intellectual property or know-how.  Opportunities to exploit this intellectual through multiple commercial applications.  A business that satisfies the unmet needs of its customers in economically quantifiable terms.  A significant portion of recurring revenues. A business model is quick to profit.

Corporate Development and Exit The potential for scalability in global markets. The prospect of corporate development via bolt on acquisitions. Having from the outset a business strategy that will be attractive to trade buyers and/or investors in the public equity markets.

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Summary • Private equity is emerging from a phase of recovery and work-out.

• Managers are by necessity returning to the fundamental principles of the business.

• Private equity must now contribute to economic recovery by supporting entrepreneurs and by financing the creation of capital goods.

• If it does so, investors will once again achieve attractive investment returns and have the opportunity to invest in an asset class with limited correlation to public markets.

• While larger firms are challenged by their legacy funds opportunities exist for specialist and more nimble players.

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Contacts Location

Telephone

Email

Andrew Boyle

London

44-20-7518 9895

awdb@ldncap.com

William Sheridan*

USA

1-941-301 7895

bill@wscapital.org

Mark Wolff

London

44-20-7518 9898

m.wolff@lcfresearch.com

*Affiliate and Partner of LCIP Websites www.ldncap.com www.lcfresearch.com

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