Transcript Presentation Name

Thinking Outside the Stocks:
The Private Equity Ecosystem
A Presentation to
Thunderbird School of Global Management
April 2008
Presented by
JORDAN ROBINSON
Vice President, Global Private Equity
AIG Investments
This material must be read in conjunction with the Disclosure Statement.
Agenda
2
I.
Where Are We Today? - Current Market Conditions
II.
Portfolio Building Blocks
III.
Where Are We Going Tomorrow? - Looming Questions
IV.
Where We You Going Tomorrow? - Job Search Thoughts
I.
Where Are We Today? - Current Market Conditions
The Ecosystem
Private equity has developed a true ecosystem
ec·o·sys·tem [ek-oh-sis-tuh m] –noun:
the complex of a community of organisms and its
environment functioning as an ecological unit
4
Record Global Fundraising
US $billion
500
375
$ 2 5 .8
250
125
0
$ 3 .5
3.8%
$ 7 2 .5
78.4%
$ 1 6 .4
17.8%
2003
$ 6 .5
4.9%
$ 9 9 .5
75.3%
$ 2 6 .3
19.8%
2004
Developed Markets Venture
Source: Venture Economics, EMPEA
5
$ 5 9 .2
14.5%
$ 3 3 .2
9.3%
$ 2 7 5 .9
76.6%
$ 2 9 6 .7
72.5%
$ 5 0 .9
14.1%
$ 5 3 .1
13.0%
9.5%
$ 2 0 4 .6 75.6%
$ 4 0 .2
2005
14.9%
2006
Developed Markets Buyout
2007
Emerging Markets
Emerging Markets Fundraising
US $ billion
35
2 8 .7
30
25
1 9 .4
20
1 5 .4
1 4 .6
15
10
5
7 .4
2 .2 2 .8
0 .4
1 .8
5 .3
4 .4
2 .7 3 .3
0 .4 0 .7
1 .3
2 .7
3 .6
2 .7
0 .4 0 .5
4 .1
2 .6
0 .1 0 .6
0
Asia (Ex-Japan)
C EE/Russia
2003
Source: Emerging Markets Private Equity Association. Data as of March 2008.
6
Latin
America/C aribbean
2004
2005
2006
Africa / MidEast
2007
Pan EM
Allocations: expected to increase
Despite the recent slowdown in private equity deal-making, strong fundraising is
expected to continue, driven by increasing allocations to private equity by
institutional investors
LPs planning to increase their private
equity allocations over the next 12 months
Current and Expected Allocation to Private Equity
(Winter 2005-2006 to Winter 2007-2008)
60%
44%
47%
49%
47%
45%
40%
30%
20%
10%
0%
Allocation to Private Equity
Respondents (%)
50%
7%
6 .3 %
6%
5%
4 .0 %
4%
3%
2%
1%
0%
Winter
2005-2006
Summer
2006
Winter
2006-2007
Summer
2007
Winter
2007-2008
C urrent Allocation
Source: Coller Capital Global Private Equity Barometer Winter 2007-08, Citigroup Global Markets CIO Survey September 2007.
7
3 -Yr Target Allocation
Purchase prices pre-2008: have increased
Average LBO Purchase Price as a Multiple of Non-adjusted Pro Forma Trailing EBITDA for
Total Sources of $500 million or More
Multiple of EBITDA
9.87
10
6.28x for
$250-499 MM
9
8
7
6.68
6.40
8.42
6.70
6.91
7.52
6.62
6
5
4
8.51x for
$250-499 MM
8.46
5.72
5.62
2.84
33.6%
4.15
3.80
4.02
4.18
4.88
2.53
37.8%
40.6%
2.60
40.0%
2.68
2.73
39.5%
2.64
35.1%
2.70
32.1%
2000 (21)
2001 (12)
2002 (14)
2003 (26)
2004 (50)
2005 (63)
Period (Observations)
Equity
3
2
1
3.25
32.9%
0
Source: Standard & Poor’s. As of December 31, 2007.
8
Debt
2006 (87) 2007 (121)
Purchase prices in 2008: have declined
Comparable Deal Analysis
Industry #2 in Mkt. Share
Industry #3 in Mkt. Share
(Revenues $10-20 Bil)
(Revenues $5-10 Bil)
Multiple of LTM EBITDA (Post Synergies)
16 x
14.5x
14
12
10
Senior
Debt
46.1%
6.7 EBITDA
L + 170
8
6
Sub Debt
22.5%
3.2x EBITDA
Rate: 9%
9.6x
35.5%
3.4x EBITDA (And all asset
backed)
L + 200
16.1%
1.6x EBITDA
Rate: 12.5%
4
2
Equity
31.4%
48.4%
2Q 2007
2Q 2008 (e)
0
What a difference a year makes!!!
Sources: AIG Internal Data
9
Convergence: has slowed
Private equity & hedge fund convergence has slowed
10

Concerns about liquidity (hedge funds)

Uncertain inflows (hedge funds)

Concerns about portfolios (private equity)
Global Summary

Lots of committed capital

Access to credit acute for large transactions

Convergence has slowed down

Emerging markets are hot

Returns holding up (so far)
11
II.
Portfolio Building Blocks
Ecosystem
Private equity has matured into a true ecosystem
ec·o·sys·tem [ek-oh-sis-tuh m] –noun:
the complex of a community of organisms and its
environment functioning as an ecological unit
13
Club
Deals
Convergence
Credit
Statistic
s
Funds
Flows
Alpha
Brazil
14
“Fire in
the Belly”
Distressed
Debt
Succession
Greed
KKR
IPO
Activist
Investors
Short
Durations
Leverage
China
Redemptions
Overhang
India
LBO
Purchase
BDCs Prices
Beta
Portfolio Company Lifecycle
Private equity investments address opportunities across company lifecycles
Buyouts
Venture Capital
•Seed Stage
15
•Early Stage
•Late Stage
•Pre-IPO •Growth
•Leveraged Buyouts •Distressed/“Turn-Around”
A Broad Menu of Private Equity Strategies
Indirect
Indirect
Direct
 Fund of Funds
 Buyouts
 Secondaries
 Venture Capital:
Early Stage
 Co-Investments
(Direct)
 Real Estate
 Bridge Funds
 Natural Resources
 Distressed Debt
 Co-Investments
 Venture Capital:
Late Stage
 Infrastructure
 Turnaround
 Growth Equity
 Mezzanine
16
Other
The Direct Investment Process is Relevant to Every PE Segment
Research
Insight-Driven Deals
Due Diligence
Access/Origination
Structuring/
Negotiations
Portfolio
Management/
Value Creation
Exit
 Research/Insight-Driven Deals – Top-to-Bottom; Opportunistic
 Access/Origination – Information Arbitrage
 Due Diligence – Intense Scrutiny
 Structuring/Negotiations – Governance; Shareholder Rights
 Portfolio Management/Value Creation – Management Oversight, Investor AddValue
 Exit – Timing; Multiple Options (IPO, Strategic Sale, Structured Arrangement)
17
Secondary Investment Process – Key Beneficiary of the Ecosystem Development
Global
Secondary
Investments
Relationships
18

Knowledge - Primary fund commitments, Coinvestments, direct equity investments and
mezzanine debt, Emerging markets direct
investments

Insight – Industry Performance, Sectors,
Regions, Facilitators, Blockers

Relationships - General Partners (quality of
portfolio, transfer process efficiency), Limited
Partners (Awareness of deals, Ability to
negotiate)
Information
Expertise
Portfolio Construction – Creating an Investment Framework
Analysis Framework

Develop a macro
“point of view”





Macroeconomic and capital
market conditions
Private equity capital flows –
segment, sector, country
Manager quality and availability
Fundraising cycles
Regulatory environment
Performance cycle analysis
Investment Framework
Rigorous analysis with flexibility to
capture attractive investment
opportunities as they present themselves
19
Analyze available
manager
opportunity set
Building a Private Equity Portfolio
Strategies
Primary Fund of
Funds
Diversified
Portfolio of
interests in top
performing funds
allows access and
administrative +
due diligence
efficiency
Direct
Indirect
Key Trends
Portfolio Guidelines

Access to closed managers

GP/LP Dynamics

Rigorous due diligence

Operational expertise

Market/sector specific funds

U.S. (all segments); Europe (country and “pan”), Emerging

Emerging Managers
20
Building a Private Equity Portfolio
Strategies
Primary Fund of
Funds
Secondaries
Diversified
Portfolio of
interests in top
performing funds
allows access and
administrative +
due diligence
efficiency
A tool to fill holes
in a private equity
program that
minimizes “jcurve” effects
with valuation
arbitrage
Direct
Indirect
Key Trends
Portfolio Guidelines

Portfolio rebalancing

GP knowledge and relationships

Hedge fund liquidations

Industry database

Manager concentration, Mega--deal fundraising

Global awareness

Coming Attraction: Emerging Markets

Accurate portfolio pricing
21
Building a Private Equity Portfolio
Strategies
Primary Fund of
Funds
Secondaries
Diversified
Portfolio of
interests in top
performing funds
allows access and
administrative +
due diligence
efficiency
A tool to fill holes
in a private equity
program that
minimizes “jcurve” effects
with valuation
arbitrage
Co-Investments
Flexibility to
opportunistically
participate in
attractive private
equity
transactions
Direct
Indirect
Key Trends
Portfolio Guidelines

Relationships matter; Art of saying “no” (quickly)

GP knowledge

Active co-investments

Sector expertise

Emergence of sovereign wealth funds, Permanent Capital

Diversified portfolio
22
Building a Private Equity Portfolio
Strategies
Primary Fund of
Funds
Secondaries
Diversified
Portfolio of
interests in top
performing funds
allows access and
administrative +
due diligence
efficiency
A tool to fill holes
in a private equity
program that
minimizes “jcurve” effects
with valuation
arbitrage
Co-Investments
Flexibility to
opportunistically
participate in
attractive private
equity
transactions
Direct
Investments
(Local Market)
LP interests in
funds with direct
control over
portfolio
companies in
regions familiar to
investor
Direct
Indirect
Key Trends
Portfolio Guidelines

Middle-market deals have continued, Large will re-start

Buy vs. build

Buy and Hold makes a comeback

Sustainable strategy

Banking relationships matter

Operational and sector expertise
23
Building a Private Equity Portfolio
Strategies
Primary Fund of
Funds
Secondaries
Diversified
Portfolio of
interests in top
performing funds
allows access and
administrative +
due diligence
efficiency
A tool to fill holes
in a private equity
program that
minimizes “jcurve” effects
with valuation
arbitrage
Co-Investments
Flexibility to
opportunistically
participate in
attractive private
equity
transactions
Direct
Investments
(Local Market)
Direct
Investments
(Offshore Mkts)
LP interests in
funds with direct
control over
portfolio
companies in
regions familiar to
investor
Ability to focus on
high-growth
markets or
regions, or areas
with a sustainable
and proven
private equity
culture
Direct
Indirect
Key Trends
Portfolio Guidelines

No longer simply a macro bet

Buy vs. build

Local presence, Use of trust

Manager selection is key

Coming Attractions: Real Buyouts

Look at opportunity, not macro statistics
24
Emerging Markets
Hot Macro Environment
 Compelling GDP growth
 Stability of Political, Legal and Accounting Characteristics
 Trade Interdependence and Surpluses
 Lower/Stable Inflation and Interest Rates
 Improved Credit Ratings
Emerging Markets: Attractive PE Opportunity
 Emerging markets companies competing and winning globally
 Capital markets growing quickly
 Strong IPO receptivity; Strategic Acquisitions
 Market correlations are lower
 Less competition (despite recent fundraisings)
 Large opportunity set
25
PE in Asia: Asset Class Penetration Potential
PE Deal Value as a % of GDP
3.5%
3.2%
3.0%
Percent
2.5%
6.9x
1.8%
2.0%
1.5%
3.9x
1.0%
0.5%
0.5%
0.0%
U.S.
Source: Bain study. Data as of end 2006.
26
Europe
Asia- Pacific
Brazil – How to access these growing markets?
Sugar Industry Market Share in 2005
100%
Top Five
19%
80%
Top Five
51%
60%
Ibovespa Index
Others
81%
40%
Capital Goods &
Construction & Services
Transportation
Others
49%
20%
0%
Brazil
Consumer
Cyclical
Consumer
Non-Cyclical
EU-25
Source: F.O. Licht and LMC International.
Brazil Credit Card Market
75
68.0
Telecom
60
60
52.5
47.5
45
35.3
30
53.0
41.5
45
26.7
37.1
24.6
30
27.0
15
15
0
0
2001
2002
2003
2004
2005
Source: Bank of Brazil and Brazilian Association of Credit Card Companies and Services.
27
Basic Materials & Energy
account for 57% share of
the Ibovespa index
75
Transactions
Transactions (US $ Billions)
# of Credit Cards (Millions)
# of Credit Cards
Basic Materials
Energy
Financial
Source: Bovespa.
Building a Private Equity Portfolio
Strategies
Primary Fund of
Funds
Diversified
Portfolio of
interests in top
performing funds
allows access and
administrative +
due diligence
efficiency
Secondaries
A tool to fill holes
in a private equity
program that
minimizes “jcurve” effects
with valuation
arbitrage
Co-Investments
Flexibility to
opportunistically
participate in
attractive private
equity
transactions
Direct
Investments
(Local Market)
Direct
Investments
(Offshore Mkts)
LP interests in
funds with direct
control over
portfolio
companies in
regions familiar to
investor
Ability to focus on
high-growth
markets or
regions, or areas
with a sustainable
and proven
private equity
culture
Direct
Investments
(Sector, Style)
Ability to focus on
high-growth
sectors, market
segments, or
industries/
segments fertile
for private equity
investments
Direct
Indirect
Key Trends
Portfolio Guidelines

Regulatory environment (infrastructure, financial services)

Relevant industry skill set

Sectors are no longer concentrated on one-theme

Using private equity-like skill sets (Operations, exitstrategies)
28
III. Where Are We Going Tomorrow - Looming Questions
Is Now a Good Time To Invest In Private Equity?
 Market dislocations create opportunity for private market investors
 Private equity should generate a significant premium over public market equities
IRR %
IRR %
35%
35%
30%
30%
25%
25%
20%
20%
15%
15%
10%
10%
5%
5%
0%
0%
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
-5%
-5%
M ean IR R s
M edian IR R s
Source: Cambridge Associates, pooled mean and median net IRR to limited partners by vintage year as of 9/30/07.
30
How will $500 Billion in Dry Powder Be Spent?
New
Emerging
Markets
?
Base
PIPES
Markets
Old
Old
31
Products
New
Competition: Are Sovereign Wealth Funds Changing the Game?
80
300
70
250
200
50
40
150
30
100
20
50
10
0
0
1997
1998
1999
2000
2001
2002
Deal Volume ($bn)
Sources: World Economic Forum, Thomson Financial
32
2003
2004
2005
Number of Deals
2006
2007
# of Deals
Deal Volume ($ bn)
60
Where are You Going Tomorrow? Job Search Thoughts
 Focus on satisfaction, right motives
 Private Equity is endgame; Doesn’t need to be first career move
 Experience not brand
 Industry or regional expertise helpful to eventually develop
 The Ecosystem has much to offer
33
Private Equity Endnotes
Interests in open funds (“the Funds”) are offered only pursuant to the terms of a Confidential Private Placement Memorandum (the “Memorandum”), which is furnished to qualified
investors on a confidential basis for their consideration in connection with the private offering of limited partnership interests (the “interests”) in the Fund. The Information contained in this
presentation may not be reproduced or redistributed without the written approval of AIG Investments.
No person has been authorized to make any statement concerning the Funds other than as set forth in the Memoranda, and such statements, if made, may not be relied upon. The
information contained herein is qualified in its entirety by the more complete information contained in the Memoranda. This presentation is not an offer to sell or a solicitation of interests
in the Funds. The Manager, its affiliates and AIG Equity Sales Corp. make no representation as to the accuracy or completeness of the information contained herein.
Additionally, investors should note the following regarding private equity investments:
They are not subject to the same regulatory requirements as mutual funds, including mutual fund requirements to provide certain periodic and standardized pricing and valuation
information to investors;

They are speculative and involve a high degree of risk;

Investors could lose all or a substantial amount of their investment;

Interests may be illiquid and there may be significant restrictions in transfer. There is no secondary market for interests, and none is expected to develop;

They may be leveraged, and their performance may be volatile;

They have high fees and expenses that will reduce returns;

They may involve complex tax structures;

They may involve structures or strategies that may cause delays in important tax information being sent to investors;

They and their managers/advisers may be subject to various conflicts of interest;

They may hold concentrated positions with a limited number of investments;

They, or their underlying fund investments, may invest a substantial portion of their assets in non-U.S. securities, which could mean higher risk;

The list set forth here is not a complete list of the risks and other important disclosures associated with such investments and is subject to the more complete risk and disclosures
contained in the applicable confidential offering documents;

The investment manager has total trading authority over fund investments. The use of a single adviser applying generally similar trading programs could mean lack of diversification
and, consequently, higher risk.
Certain materials contained herein constitute “projections,” “forecasts” and other “forward-looking statements” relating to certain investments and do not reflect actual results. These
projections, forecasts and other forward-looking statements are based primarily upon applying assumptions retroactively to certain historical financial information relating to the
investments. The projections, forecasts and other forward-looking statements presented herein are, therefore, valid only as of the date shown on the front page of this presentation.
AIG Equity Sales Corp., member FINRA, is acting as a placement agent for the Funds in the United States only.
AIG Investments Web Address: www. aiginvestments.com
Rev. 11/05/07
34
Disclosure Statement
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Rev. 7/13/07
35