Private equity and hedge funds in capital markets today

Private equity and hedge funds in capital markets today BSCC Luncheon 24 May 2007 Alfred Gantner Executive Chairman Partners Group Speaker 2 Alfr...
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Private equity and hedge funds in capital markets today

BSCC Luncheon

24 May 2007 Alfred Gantner Executive Chairman Partners Group

Speaker 2

Alfred Gantner, Partner Executive Chairman Alfred Gantner is a founding partner of Partners Group and serves as the firm's executive chairman, leading the business strategy and corporate development of the firm. As a member of both the private equity and hedge fund investment committee, he has been instrumental in building the firm's private equity and hedge funds investment management business and participated in a large number of private equity (primary, secondary and direct investments) and hedge fund investments in Europe and the US. Prior to founding Partners Group, Mr. Gantner worked for Goldman Sachs & Co. where, after stays in New York and London, he built up an institutional client base in Switzerland. He started his career in the securities trading department of the UBS Private Banking Group (Cantrade) in Zurich and Geneva. He holds a MBA degree from the Marriott School of Management at Brigham Young University, USA.

Partners Group

Table of contents 3

I.

Introduction Partners Group

II.

Private equity

III.

Hedge funds

Introduction Partners Group

Partners Group - overview 4

Independent Ca. 70% owned by Partners, Principals & employees

Sophisticated Innovative structuring solutions and state of the art risk management

Proven Founded in 1996; over CHF 17bn AuM in private equity, private debt, private real estate, infrastructure, and hedge funds

Global

Track record significant outperformance of relevant benchmarks

Offices in Zug, London, Guernsey, New York, San Francisco and Singapore

Access & Network

Strong Resources

Invested with over 150 leading managers

Over 200 employees; listed at SWX (PGHN) with market cap of over CHF 4bn

Partners Group

Table of contents 5

I.

Introduction Partners Group

II.

Private equity

III.

Hedge funds

Private equity

Private equity firms have again moved into the public spotlight…

6

“Vulture Culture”

“Megadeal manoeuvres” “HCA Buyout Highlights Era of Going Private “

“Some financial investors don’t bother to think of the people whose jobs they destroy. They remain anonymous, don’t have a face, fall over companies like locust swarms, graze them and then move on.“ Franz Müntefering, former head of German Social Democrats

Private equity

… they raise bigger and bigger funds… 7

Year

Size/target size of latest/current fund (in USD bn) The Blackstone Group

20

2006

Goldman Sachs

20

2007

Kohlberg Kravis Roberts

16

2006

Texas Pacific Group

15

2006

Permira

15

2006

The Carlyle Group

15

2007

CVC Capital Partners

2005/2006

14

Providence

12

2007

Bain Capital

12

2007

Apax Partners

12

2007

Silver Lake

10

2007

Apollo Management

10

2006

Thomas H. Lee

9

2006

Cinven

9

2006

Hellman & Friedman

8

2007

Warburg Pincus

8

2005

Madison Dearborn

Source: Partners Group analysis based on various sources

7

2006

 European-based funds

 US-based funds

Private equity

… and are expected to raise even more capital in the years to come …

“Halusa, chief executive of Apax Partners, said that if the USD 100bn fund became a reality, it would put many of the world’s biggest companies within the grasp of private equity groups, opening a vast new marketplace for their investment activity. The USD 100bn fund would be ten times the size of the biggest private equity funds at present.” The Times / January 26, 2006

8

Private equity

… have lately done their ever-largest deals after the buyout of RJR Nabisco in 1989…

9

Company TXU Equity Office

Deal size USD 45.0bn USD 40.0bn

Industry Electricity manufacturer Office building owner & manager

Sponsor TPG, KKR Blackstone

Year

HCA

USD 33.0bn

Hospital operator

incl. KKR, Bain Capital

2006

RJR Nabisco

USD 31.4bn

Consumer products

KKR

1989

First Data

USD 29.0bn

Credit card billing

KKR

2007

Clear Channel

USD 26.7bn

Media

TH Lee, Bain Capital

2006

Sallie Mae

USD 25.0bn

Student loan provider

incl. JC Flowers, JP Morgan

2007

BAA

USD 23.9bn

Airport operator

incl. Ferrovial, CDP

2006

Kinder Morgan

USD 21.6bn

Energy & natural gas pipelines

incl. Carlyle, AIG

2006

Freescale

USD 17.6bn

Semiconductors

incl. Carlyle, Permira, TPG

2006

Harrah's Entertainment

USD 17.1bn

Entertainment

TPG, Apollo

2006

TDC

USD 15.8bn

Communication

incl. Apax, Providence

2006

Thames Water

USD 15.2bn

Water & wastewater services

Macquarie

2006

Hertz

USD 15.0bn

Car rental

incl. CD&R, Carlyle

2005

Univision

USD 13.6bn

Media

incl. Providence, TPG

2006

SunGard

USD 11.3bn

Software

incl. Silver Lake, KKR

2005

VNU

USD 11.0bn

Media

incl. Carlyle, TH Lee

2006

2007 2007

Private equity

… and play a big part in our economy and life

10

Estimated revenues

Estimated No. of employees

Kohlberg Kravis & Roberts

> USD 60bn

> 300’000

Blackstone Group

> USD 50bn

> 300’000

Texas Pacific Group

> USD 40bn

> 250’000

The Carlyle Group

> USD 30bn

> 200’000

Apollo

> USD 30bn

> 200’000

Permira

> USD 20bn

> 150’000

CVC

> USD 20bn

> 150’000

Cinven

> USD 20bn

> 150’000

Apax Partners

> USD 20bn

> 100’000

Private equity Group

Selected portfolio companies

Source: Partners Group estimates, The Economist, KKR, The Carlyle Group

Private equity

The geographic investment spectrum is broadening, and…

100% 90%

11

Asia 0% Europe 14%

Asia 12% Asia 33%

80% 70%

Europe 40%

60% 50% 40%

Europe 33%

US 86%

30%

US 48%

20% 10%

US 33%

0% 1994

2006

Source: NVCA, EVCA, Asian Venture Capital Journal, Partners Group estimates

2014 +

Private equity

…and investing in ever more industries

12

100% 90%

Others 17%

80%

Building products / construction 8%

70%

Media 11%

60%

Consumer / retail 12%

Others 60%

50% 40% Media & telecom 11%

30% Industrials 52%

Consumer / retail 17%

20% 10%

Industrials 10% 0% 1994

H1 2006

Source: Buyouts Newsletter / TPG for 1994 figures (include only transactions over USD 200m); mergermarket „European Private Equity in Review“ and „North American Private Equity in Review“ (August 2006) for H1 2006 figures (value-weighted average of European and North American figures)

Private equity

…and investing in larger deals (public to privates)

13

S&P 500 ex-Financials

80%

11%

75%

10% Net debt to equity

9%

net debt to equity

65% 8%

60% 55%

7%

50%

6%

Cash % of assets

45%

cash in % of assets

70%

5% 40% 4%

35% 30% 2Q86

3% 4Q87

ƒ ƒ ƒ

2Q89

4Q90

2Q92

4Q93

2Q95

4Q96

2Q98

4Q99

2Q01

4Q02

2Q04

4Q05

Public companies have low leverage and excess cash on the balance sheets Higher quality assets with more diversified revenue base Significant cost improvement potential

0.0

Source: EVCA, Thomson Financial, PriceWaterhouseCoopers

Greece

Slovakia

Czech Republic

Ireland

Austria

Poland

6X

Switzerland

Belgium

Italy

New Zealand

China

Portugal

Canada

Hungary

India

Finland

Norway

Japan

Germany

2X

Denmark

Spain

France

Netherlands

South Korea

United States

Australia

Sweden

Israel

United Kingdom

Private equity investments in % of GDP

Private equity

The private equity industry still has room to accommodate strong future growth 14

12X

1.2

1.0

0.8

0.6

0.4

0.2

Private equity

European Buyout Valuations Entry EV / EBITDA Multiples

15

ƒ

Pricing across all size ranges has risen again in 2006, but there appears to be a leveling out

ƒ

Very similar to 2005, liquidity in the debt markets and the positive economic development in general drove valuations upward during 2006 9.5x 9.0x 8.5x 8.0x 7.5x 7.0x 6.5x 6.0x 5.5x 1999

2000

> EUR 250m

2001

2002

EUR 250 - 500m

2003

2004

> EUR 500m

2005

2006

> EUR 1000m

Source: Standard & Poor’s, as at December 31, 2006

High quality deals, availability of debt at low rates largely justify increased valuations

Private equity

Equity contribution remained stable at reasonable levels of 30% to 40%

16

Rolling 3-month average equity contribution 1997-2007 50%

40%

30%

20%

10%

0% 1997

1998

Source: Standard & Poor’s

1999

2000

2001

2002

2003

2004

2005

2006

2007

Private equity

Leverage is still much lower than historic highs reached in the 1980s

Source: Standard & Poor’s (global)

17

Private equity

Larger funds do not mean lower returns 18

ƒ

In 1999-2001, funds have been raised with never before seen record sizes: ƒ Apax Europe V:

EUR 4.4bn

ƒ Apollo V:

USD 3.7bn

ƒ Cinven III:

EUR 4.4bn

ƒ TPG III:

USD 3.4bn

ƒ

Back then, many people were afraid that these funds would have lower returns

ƒ

Today, the IRRs of these funds stand at around 30%

Private equity

Buyout value creation chain: reality 19

Value creation through

Key return drivers of active ownership

Company outperformance / “active ownership”

1.

In 83% of the best deals, investors secured privileged knowledge on the company before actually investing

2.

Successful deal partners institute substantial and focused performance incentives: usually a system of rewards equalling 15 – 20% of the equity

3.

Successful investors craft better value creation plans at the beginning and execute them more effectively:

64%

Arbitrage

5%

McKinsey Quarterly, 2005 Number 1, pages 24 – 26

Sceptical review of current business; development of new business plan

ƒ

92% of successful investors implemented performance management tools

4.

The most effective investors devote more hours to the initial stages of a deal: in the best performing companies, deal partners spent around half their time on the company during the first 100 days

5.

In over 80% of the best deals, firms strengthened the management team before the closing of the transaction

Market / sector appreciation 32%

ƒ

Private equity

Private equity firms create jobs and revenue growth Employment growth ƒ Employment by UK private equity-backed companies grew by an average 14% annually and thus nearly five times the rate of FTSE 100 & FTSE Mid-250 companies in the five years until 2004/05 (1) ƒ In Europe, employment by private equity-backed companies grew by an average of 5.4% annually – or eight times the average of the EU 25 (0.7%) in the period 2000-2004 (2)

20

UK employment growth 15% 12%

14%

9% 6% 3% 0% Private equity-backed

Growth of revenues and investments ƒ

ƒ

Revenues of private equity-backed companies in the UK grew by 20% annually on average (for the five years until 2004/05) (1) R&D expenditure by private equity-backed companies in the UK increased at an average rate of 19% annually (1)

(1)

3%

3%

FTSE 100

FTSE Mid-250

UK revenue growth

(1)

25% 20% 15%

20%

10% 5%

8%

7%

FTSE 100

FTSE Mid-250

0% (1) (2)

BVCA study “The Economic Impact of Private Equity in the UK 2005” EVCA study “Employment contribution of Private Equity and Venture Capital in Europe”, November 2005

Private equity-backed

Private equity

Relative attractiveness of various private equity segments

Source: PG Alternative Assets Navigator H1 2007

21

Partners Group

Table of contents 22

I.

Introduction Partners Group

II.

Private equity

III.

Hedge funds

Hedge funds

Hedge fund market has been growing significantly

23

Hedge fund assets tracked by Tremont (in USD bn)

919 813 674

Source: Q4 2006 TASS Asset Flows Report, Data until 1992 from Hennessee Hedge Fund Manager Survey

2006

2005

2004

2003

310

2002

264

2001

2000

197 209

1999

1998

1986

145 154

1997

1974

99

1996

1971

1995

1960

1994

2

1993

3

1992

1

1991

0

72 50 50 57 35 20

1950

490

Hedge funds

Hedge fund returns have been decreasing

24

Rolling three-year performance 50%

40%

30%

20%

10%

0%

-10% 1992

1994

1996

Convertible arbitrage Event Driven Fixed Income Arbitrage

1998

2000

Long/Short Equity Global Macro

Source: Bloomberg, Hedge Fund Research data, monthly data as of 31.3.2007

2002

2004

2006

Equity Market Neutral Distressed Securities

Hedge funds

Hedge fund “Alpha” has been decreasing

25

The development of Alpha for various strategies based on a rolling regression over a 60 month time window. 1.0%

Monthly Alpha in percent

Equity Hedge Event Driven Merger Arbitrage Convertible Arbitrage

0.8%

0.6%

0.4%

0.2%

-0.2% Data Source: HFR, Bloomberg. Calculation: Partners Group

6 l- 0

06 r-

Ap

Ju

06

5

n-

Ja

-0

5

ct

l- 0

O

05

Ju

Ap

r-

05

4

Ja

n-

4

-0 ct

l- 0

O

04

Ju

Ap

r-

04

3

n-

Ja

-0

3

ct

l- 0

O

03

Ju

03

Ap

r-

2

n-

Ja

-0

2

ct

l- 0

O

02 r-

Ap

Ju

02

1

n-

Ja

-0

1

ct

l- 0

O

01

Ju

Ap

r-

01

0

Ja

n-

0

-0 ct

l- 0

O

00

Ju

r-

Ap

Ja

n-

00

0.0%

Hedge funds

High fee load lowers net returns further 26

Hedge Fund Return Gross of Fees

12.0%

Management Fee HF (2%)

2.0%

Performance Fee HF (20%)

2.4%

Hedge Fund Return Net of Fees

7.6%

Management Fee FoF (1%)

1.0%

Performance Fee FoF (10% above US LIBOR)

0.3%

FoF Return Net of Fees

6.3%

Hedge funds

Only small portion of HF returns is “alpha”

27

Traditional mutual fund

Hedge fund True Alpha (security selection, timing, execution)

Market Risk Premium

Hedge

Proclaimed Alpha Leverage

Leveraged proclaimed Alpha

“Alpha”

Currency Risk Premium Event Risk Premium Convergence Risk Premium Commodity Risk Premium Complexity Risk Premium Short Vega Risk Premium Liquidity Risk Premium Small Cap Risk Premium Value Stocks Risk Premium Term Curve Risk Premium Credit Risk Premium EmMa Risk Premium Equity Risk Premium

One of many investors’ most frequent mistakes is not looking deeper into a hedge fund’s proclaimed Alpha.

Hedge funds

“Traditional beta” vs. “Hedge fund beta” (“Alternative beta”) Traditional beta

Hedge fund beta (Alternative beta)

Exposure to:

Exposure to:

ƒ Broad equity market



ƒ Interest rates (duration) ƒ Credit risk ƒ Emerging markets

 







Style factors, such as small cap vs. large cap, value vs. growth (Long/Short Equity, Equity Market Neutral) Event risk (Merger Arbitrage) Volatility (Convertible Arbitrage, Volatility Arbitrage) Risks of commercial hedgers in futures markets (Managed Futures) Liquidity risk (Distressed Securities, Fixed Income Arbitrage, Reg D) Spread risk, e.g. carry trades (Global Macro)

Exposure to Hedge Fund Beta requires special investment techniques including short selling, leverage, and the use of derivatives. Thus, hedge funds have exclusive access to these Alternative Betas.

28

Hedge funds

ABS is very cost efficient for investors 29 Hedge Funds 2%/20% Hedge Fund Return Gross of Fees Management Fee HF Performance Fee HF

Fee savings on three levels:

Return net of Hedge Fund Fees

ABS 1.25%/15%

9% - 18% 2.00% 1.4% to 3.2%

9% - 18% 1.25% 1.2% to 2.5%

5.6% - 12.8%

6.6% - 14.2%

ABS Fee Saving on Hedge Fund level

ƒ

Eliminate one fee layer (fund of fund level)

Management Fee FoF (1%) Perf. Fee FoF (10% above US LIBOR)

Æ save 220-360 bps p.a.

ƒ

1.0% - 2.0% Fund of Fund 1%/10%

Return net of FoF Fees

1.00% 0.2% - 0.9%

0.00% 0

4.4% - 10.6%

6.6% - 14.2%

ABS Fee Saving on FoF level

1.2% - 1.9%

Total ABS Fee Saving Potential

2.2% - 3.6%

G ross G ro ss P e rfo rm a n c e P e r fo r m a n c e H edge Fund 1 H edge Fund 2

No asymmetric performance fee (performance netting benefit)

N e t P e r fo r m a n c e c o m b in e d : A fte r 2 0 % p e r fo r m a n c e fe e s

+12 %

+ 9 .6 %

Æ save 40-80 bps p.a. - 6%

Hedge Fund B pays Libor +45 bps for leverage

No financing costs for leverage

ABS Hedge Fund A receives Libor -35 bps for excess cash

(strategy cross-financing) Æ save 40-80 bps p.a.

=

+ 5 .1 %

HF B

Leverage without external borrowing External borrowing

Traditional fund of funds: No access to excess cash



HF A

+ 3 .6 %

ABS: A fte r 1 5 % p e rfo rm a n c e fe e s

- 6%

Exposure

ƒ

ABS zero

HF n

ABS has a total fee savings potential of 300-500 bps p.a.

excess cash required collateral

Average Exposure of fund of funds

126

124

122

116

114

0 1 .1 0 .2 0 0 4 0 1 .1 1 .2 0 0 4 0 1 .1 2 .2 0 0 4 0 1 .0 1 .2 0 0 5 0 1 .0 2 .2 0 0 5 0 1 .0 3 .2 0 0 5 0 1 .0 4 .2 0 0 5 0 1 .0 5 .2 0 0 5 0 1 .0 6 .2 0 0 5 0 1 .0 7 .2 0 0 5 0 1 .0 8 .2 0 0 5 0 1 .0 9 .2 0 0 5 0 1 .1 0 .2 0 0 5 0 1 .1 1 .2 0 0 5 0 1 .1 2 .2 0 0 5 0 1 .0 1 .2 0 0 6 0 1 .0 2 .2 0 0 6 0 1 .0 3 .2 0 0 6 0 1 .0 4 .2 0 0 6 0 1 .0 5 .2 0 0 6 0 1 .0 6 .2 0 0 6 0 1 .0 7 .2 0 0 6 0 1 .0 8 .2 0 0 6 0 1 .0 9 .2 0 0 6 0 1 .1 0 .2 0 0 6 0 1 .1 1 .2 0 0 6 0 1 .1 2 .2 0 0 6 0 1 .0 1 .2 0 0 7 0 1 .0 2 .2 0 0 7 0 1 .0 3 .2 0 0 7 0 1 .0 4 .2 0 0 7 0 1 .0 5 .2 0 0 7

Hedge funds

PG ABS performance since inception 30

120

Outperformance annualized:

118

2.9%

PG ABS Hedge Fund Strategy Index PG ABS monthly

+22.8%** Correlation: 84.8%

+14.6%*

112

PG ABS Program net performance**

110

108

106

104

102

100

98

96

94

*)

Return: p.a. 8.2%

Volatility: p.a. 7.1%

Sharpe Ratio: 0.8

Maximum Drawdown: -7.2%

HF sub-indices with same strategies and weights like ABS over time (graph below), gross of any index fees (50-60 bps) **) Net of Management Fee: 1.25% & Performance Fee: 15%

Portfolio Solution

An optimal core satellite portfolio 31

Allocation by Managers Bridgewater Pantera3%

IIU 3%

AM Vol Arb 3%

Deephaven 3%

Group G 3%

Troob 3%

3% Argonaut 3% Ocean PE Investments 3% 2% Kevian 2% Campbell 2%

Wegelin 3% OMAM Global 3%

ABS 50%

Aphelion 3%

ABS Market Neutral 50%

Quattro 4% Argent 4%

ƒ1 “core” manager (Partners Group) with 21 replication programs ƒ17 different “satellite” hedge fund managers/strategies ƒ= 38 different equity-neutral and diversified return sources

Partners Group

Contacts 32

Partners Group

Zugerstrasse 57 6341 Baar-Zug Switzerland T: +41 41 768 85 85 F: +41 41 768 85 58

Partners Group (UK) Limited

Partners Group (Guernsey) Limited

Partners Group (USA) Inc.

Partners Group (USA) Inc.

33 Cavendish Square 16th Floor London W1G 0PW United Kingdom T: +44 20 7182 1870 F: +44 20 7182 1871

Tudor House, 3rd Floor Le Bordage St Peter Port GY1 1BT Guernsey T: +44 1481 711 690 F: +44 1481 730 947

450 Lexington Avenue 39th Floor New York, NY 10017 USA T: +1 212 763 47 00 F: +1 212 763 47 01

150 Spear Street 3 Church Street 18th Floor San Francisco, CA 94105 Samsung Hub #28-06 USA Singapore 049483 T: +1 415 537 85 85 T: +65 65 44 65 65 F: +1 415 537 85 58 F: +65 65 44 65 66

www.partnersgroup.net [email protected]

Partners Group (Alternative Investments Asia Pacific) Pte Limited

Partners Group

Disclaimer 33

This material has been prepared solely for purposes of illustration and discussion. Under no circumstances should the information contained herein be used or considered as an offer to sell, or solicitation of an offer to buy any security. Any security offering is subject to certain investor eligibility criteria as detailed in the applicable offering documents. The information contained herein is confidential and may not be reproduced or circulated in whole or in part. The information is in summary form for convenience of presentation, it is not complete and it should not be relied upon as such. All information, including performance information, has been prepared in good faith; however Partners Group makes no representation or warranty express or implied, as to the accuracy or completeness of the information, and nothing herein shall be relied upon as a promise or representation as to past or future performance. This material may include information that is based, in part or in full, on hypothetical assumptions, models and/or other analysis of Partners Group (which may not necessarily be described herein), no representation or warranty is made as to the reasonableness of any such assumptions, models or analysis. The information set forth herein was gathered from various sources which Partners Group believes, but does not guarantee, to be reliable. Unless stated otherwise, any opinions expressed herein are current as of the date hereof and are subject to change at any time.

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