Keynote Address - PEI Media

Impact of the Economic/Credit Crisis on
the World of Private Equity
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David Rubenstein, Co-founder
March 26, 2009
Trade Secret & Confidential

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How Private Equity in the Developed
World Will Change in the Short Term
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Short Term Changes in the Developed
Private Equity World
1. Private Equity will not be as visible as it was in the 2003-7
period ― far fewer large newsworthy occurrences
2. Investments will be smaller and fewer
3. Investments will require almost fifty percent equity in
levered transactions; non-levered transactions ― minority
stake transactions or investments into existing levered
structures ― will increase relative to earlier years
4. Distributions from earlier transactions will be fewer, and
less attractive to selling gp's/lp's; IRR’s for those
transactions will be lower than once projected
5. Funds raised and invested in 2005-8 8 period will have lower
IRRs ― returning capital may be top quartile performer
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Trade Secret & Confidential

Short Term Changes in the Developed
Private Equity World
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6. New funds will be smaller ― back to pre 2004 sizes ― with
terms much more favorable to lp's on fees, preferred
returns, and investment period lengths. As a result, some
firms will shrink their staffs and areas of focus
7. Focus of much of PE activity will be on maintaining existing
holdings’ viability if not value; re-purchasing debt will be a
principal activity for gp's
8. Some of the most visible transactions from 2005-8 8 will have
to be restructured dramatically
9. Investors will seek to reduce their private equity exposure
― fewer new commitments and reducing existing
commitments
10. Government will likely increase oversight and taxation of
private equity activity
Trade Secret & Confidential

How Private Equity in the Developed World
Will Change in the Longer Term
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Long Term Changes in the Developed
Private Equity World
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1. Flight to Quality will likely lead to a few very large PE
firms with well known brand names and proven track
records
2. New firms will have a harder time gaining traction and
funding
3. Investments made now and over next few years will be
at lower multiples and may produce very high returns in
time
4. Investors will return to private equity ― as best avenue
for alternative investing returns
5. Accounting rules will be modulated to avoid the
excessive upward and downward valuations that might
occur in a boom or bust period
Trade Secret & Confidential

Long Term Changes in the Developed
Private Equity World
6. Non-PE firms will return to PE ― will re-establish establish PE arms
and operations
7. Lending will increase to more normal levels ― though on
traditional lending terms
8. Claw-backs from earlier funds will begin to impact some
firms and funds
9. American/British firms will cease dominating global PE ―
though still major factors
10. Private equity will become part of the normal, rather
than alternative, investment world
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Trade Secret & Confidential

Challenges for Private Equity in the
Developed World
1. Getting from the short term to the longer term
2. Maintaining viability of investments made during the
2004-7 7 period
3. Maintaining strength of the PE organization
4. Retaining investor support for private equity
5. Finding new sources of capital ― equity and debt ― and
new investments ― ones which can provide the type of
return differential with public market indices so
essential to private equity investors’ interest and
support
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Trade Secret & Confidential

Opportunities for Private Equity in the
Developed World
1. Becoming the preferred form of alternative investing
2. Demonstrating the stability of the industry through bad
times
3. Improving the industry's image by working with
companies hurt by the economic turmoil ― and now in
need of private equity capital and skills
4. Working with governments to solve its problems ―
getting capital and investments back into the system,
and turning around companies of concern to
governments
5. Achieving returns for investors commensurate with PE at
its peak
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Trade Secret & Confidential

How Private Equity in Emerging
Markets Will Change in the Short Term
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Short Term Changes in EM Private Equity
1. Investors will cut back private equity investing
disproportionately to developed market investments
2. Developed market general partners will focus less on
emerging markets ― out of a concern for their developed
market portfolios and needs
3. Emerging market general partners will face portfolio
valuation issues and operating performance issues ― just
as in developed markets. But problems will actually be
less than in many developed markets ― leverage is often
not an issue; economies are still growing; populations
are still growing; additional capital needs may be
proportionately smaller
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Trade Secret & Confidential

Short Term Changes in EM Private Equity
4. The distinctions between various emerging markets will
become more apparent to all ― Asia, India, Brazil, and
Middle East will be seen as stronger. Africa, Russia,
Central and Eastern Europe, Spanish-speaking speaking Latin
America, and SE Asia will be seen as weaker
5. Traditional emerging market patterns will emerge, at
least for the weaker emerging markets ― developed
markets pull back; emerging markets get left behind in
resources and concerns
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Trade Secret & Confidential

How Private Equity in Emerging Markets
Will Change in the Longer Term
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Long Term Changes in EM Private Equity
1. The on-going strength and viability of emerging markets
― even weaker ones ― will be increasingly recognized
2. Emerging market investments ― by limited and general
partners ― will increase disproportionately to developed
market investments
3. Recognition will arise that less capital was lost
proportionately than in the developed markets; and that
emerging markets can yield higher returns than
developed markets over time
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Trade Secret & Confidential

Long Term Changes in EM Private Equity
4. Private equity will become a larger economic factor in
the more attractive emerging markets; and will actually
be encouraged by governments (even if the capital is
from abroad)
5. Indigenous private equity industries will blossom to a far
greater extent; and emerging markets will increasingly
get larger shares of private equity investments from
local and regional firms
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Trade Secret & Confidential

Challenges for EM Private Equity
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1. Convincing Investors that emerging markets are not going
to fall apart or evaporate
2. Proving the requisite additional capital and management
skills to stabilize portfolio companies impacted by
current economic downturn
3. Demonstrating that returns in emerging markets can be
far higher than in developed markets, with fewer
problems in many countries and sectors
4. Convincing governments that private equity will be long
term investors ― worth govt. support and attention
5. Distinguishing for investors the distinctions between the
stronger and weaker emerging markets ― avoiding the
trap of having all emerging markets lumped in one
basket
Trade Secret & Confidential

Opportunities for EM Private Equity
1. Placing the emerging market PE industry on a firmer
footing ― not as subject to market vagaries and investor
panic
2. Increasing the share of PE capital globally
3. Growing strong indigenous PE franchisees ― so local and
regional economies are not dependent on global or
developed market PE firms
4. Achieving extraordinary returns for investors from the
depressed prices that will be available in many countries
5. Having private equity become as important to emerging
market economies as it has become for developed
market economies
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Trade Secret & Confidential

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Key Messages

Key Messages
1. Emerging market private equity will grow, not decline
2. Emerging market private equity may yield higher returns
than developed market private equity
3. The age-old challenge of convincing investors that the
emerging markets are not to be abandoned in times of
stresses will still be with us for the short term
4. For the long term, emerging market private equity will
become a stable, large, industry, not dependent
principally upon developed market equity and firms
5. Emerging markets have emerged, and are here to stay ―
right alongside developed markets
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Trade Secret & Confidential

Impact of the Economic/Credit Crisis on
the World of Private Equity
21
David Rubenstein, Co-founder
March 26, 2009