Ten Key Questions Facing the Private Equity World

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David Rubenstein Co-founder & Managing Director February 27, 2008

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1. Will Leverage for Buyouts Return in Time for PE Investors and Professionals to Stay with the Industry?

Leveraged Loan Volumes Will Recover

200  US Leveraged Loan Volumes Bounced Back after the Downturn of 2000-2001

US Buyout Leveraged Loan Volume ($Bn)

189.0

4 150

+ 1,929%

121.5

100 50 0 64.5

47.1

17.8

18.6

30.8

30.2

22.3

9.8

11.1

20.1

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Source: S&P Leveraged Buyout Review

Leveraged Loan Volumes Will Recover

150  While European Issuance has Grown Every Year Since 1999

European Buyout Leveraged Loan Volume ( €Bn)

140.0

115.8

102.9

100 5 50 15.3

0 1999 18.8

2000 24.7

2001 28.4

2002 29.5

2003 44.4

2004 2005 2006 2007 Source: S&P LCD

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But This Will Not Happen Overnight

 In the US, it took roughly three years for leveraged loan volumes to match their previous highs after 2000  And those three years were challenging for private equity investors  In 2001 and 2002, US leveraged loan issuance fell to approximately 1/3 of its 1998 total  But when the recovery came, it exceeded all expectations   Leveraged loan issuance more than doubled between 2002 and 2004 and again between 2004 and 2006 Issuance jumped 20x between 2001 and 2007 Source: S&P Leveraged Buyout Review

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2. Are There Going to be Major Defaults from Buyouts Completed within the "Golden Age"?

Leverage Levels Are at Historical Highs Average Large LBO Leverage Multiples (Debt/EBITDA) 6.2x

6.0x

5.0x

5.7x

5.4x

5.3x

5.4x

4.7x

4.6x

4.8x

4.0x

4.2x

4.1x

4.0x

8 3.0x

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Source: S&P Leveraged Buyout Review Note: Includes issuers with EBITDA of $50MM or more

3.0x

And Credit Ratios Are Depressed (EBITDA – Capex) / Cash Interest

3.1x

2.9x

2.8x

2.5x

2.0x

1.8x

1.8x

2.0x

1.9x

2.1x

2.0x

1.7x

1.0x

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 9 Source: S&P Leveraged Buyout Review

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Default Rates Have Remained Low Over the Past Three Years Percentage of Outstanding Leveraged Loans in Default or Bankruptcy

10.0% 9.9% 10.0% 8.0% 7.0% 7.4% 6.0% 4.0% 4.0% 2.0% 0.0% 1.0% 1.0% 0.0%

Y E1 9 96 Y E1 9 97 Y E1 9 98 Y E1 9 99 Y E2 0 00

2.6% 3.6% 1.9% 0.6% 1.0%

Y E2 0 01 Y E2 0 02 Y E2 0 03 Y E2 0 04 Y E2 0 05 Y E2 0 06 Y E2 0 07 2/ 8/ 2 00 8 Avg. 3.80%

Source: S&P LCD

And Remain Below Levels Seen During Past Market Downturns

 Leveraged Loan Default Rates During Recent Market Downturns: Historical Correction Year Default Rate Russian Default / LTCM Tech. / Telecom Meltdown 9/11 and Recession Corporate Defaults vs. Credit Crunch 1998 2000 2001 2002 Current 1.5% 7.0% 9.9% 10.0% 1.0% 11 Source: Morgan Stanley

But the Trading Levels of Many LBO Debt Deals Suggest Defaults are Likely

 A Spread vs. Treasuries of Above 1,000 Indicates Significant Distress H C I A M D Bond G G R F U Face Value ($MM) 2,500 2,000 1,700 1,598 1,500 1,000 825 800 750 725 700 Type senior senior senior sub senior senior senior senior senior sub senior Price 92.90

86.71

70.25

70.75

70.50

60.25

81.00

80.00

86.00

81.75

64.25

Spread T+1,002 T+1,045 T+1,587 T+1,303 T+1,389 T+1,134 T+1,222 T+1,057 T+1,004 T+1,208 T+1,342 12 Source: Merrill Lynch High Yield Master II Index

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3. What is Going to Happen to All of the Buyout Debt Still Held by the Major Syndicating Banks?

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A Massive Backlog Remains

  Approximately $200 billion of leveraged loans are still sitting on banks’ balance sheets  This represents a decrease of only $75 billion from last year’s peak Every bank is affected Bank Bear Stearns Goldman Sachs Lehman Brothers Merrill Lynch Morgan Stanley Citigroup J.P. Morgan Bank of America UBS Wachovia Exposure $2.5 billion $26.0 billion $23.8 billion $19.0 billion $20.0 billion $43.0 billion $26.4 billion $12.0 billion $11.4 billion $9.1 billion Sources: The Wall Street Journal, Morgan Stanley

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4. What Areas Will PE Firms Pursue to Achieve the Types of Returns Sought by Their Investors?

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PE Firms Will Invest More in Emerging Markets

 Emerging Market Fundraising Has Grown Exponentially

Emerging Asia ($Bn) CEE/Russia ($Bn)

28.7

14.6

19.4

15.5

2.2

2003 2.8

2004 2005 2006

Latin America ($Bn)

2.7

2007 4.4

2.9

3.3

0.5

2003 0.8

2004 2005 2006 2007

Middle East & Africa ($Bn)

11.4

7.9

1.3

0.4

0.7

1.4

1.7

2.7

2003 2004 2005 2006 2007 2003 2004 2005 2006 2007 Source: EMPEA

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PE Firms Will Invest More in Emerging Markets

 As Has Deal Volume

Emerging Asia ($Bn)

51.1

54.5

27.3

21.4

9.0

11.1

27.3

2.6

CEE/Russia ($Bn)

2.2

1.6

4.0

10.5

5.3

5.3

2003 0.1

2003 2004 2005 2006

Latin America ($Bn)

1H 2007 4.1

5.9

2.9

0.2

2004 0.6

2005 2006 2.9

2007 2003 2004 2005 2006 1H 2007

Middle East & Africa ($Bn)

32.2

24.9

16.1

9.6

1.9

2003 2.9

2004 2005 2006 16.1

2007 Source: Morgan Stanley, Thomson

PE Firms Will Invest More in Emerging Markets

 A growing percentage of global private equity activity is dedicated to Emerging Markets  In 2001, they accounted for 4.5% of private equity fundraising and 3.3% of deal volume   In 2007, they accounted for 15.9% of fundraising In the first half of 2007, they accounted for 7.0% of global LBO deal volume 18 Source: Morgan Stanley, Thomson

Private Equity Firms Will Make More Minority Investments

 Private equity firms have increased their commitments to non-control investments: Period 1H 2007 2H 2007 Year-to-Date # of Deals 252 289 84 Deal Volume ($Bn) 25.0

31.0

5.8

 In the past six months, private equity firms have made large minority investments in companies including  Sprint Nextel, NC Numericable, MBIA, Global Hyatt, Antero Resources, Galaxy Entertainments, MoneyGram International, Legacy Hospital Partners, and Bharti Infratel 19 Source: Dealogic

And They Will Commit More Capital to Distressed Investments



$25

Distressed Debt Fundraising Anticipating Debt Maturity Schedule:

Distressed Debt / Restructuring Fundraising Below Investment Grade Debt $225 $20 $15 $10 $5 $0 '02 '04 '06 1H07 '08

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Source: Private Equity Analyst, data as of 6/30/07; Fitch Ratings, data as of July 2007 '10 $175 $125 $75 $25

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5. Should Investors in PE Expect Higher or Lower Rates of Return?

Top Quartile PE Returns Are Unrivalled Top Quartile US Buyout Returns

IRR %

Top Quartile U.S.

Buyout Top Quartile >$2Bn S&P 500 DJIA NASDAQ 0% 20.4% 21.8% 18.2% 18.4% 22.1% 28.5% 5.4% 8.7% 5.7% 7.7% 20.3% 19.9% 12.2% 6.1% 10% 10-year 20% 5-year 1-year 30% 32.1% 40%

22 Source: Thomson Venture Economics Note: PE data as of 30 June 2007; Bloomberg, market data as of 30 June 2007

Top Quartile PE Returns Are Unrivalled Top Quartile European Buyout Returns

78.6% Top Quartile Eu. Buyout 27.6% 37.0% FTSE 100 7.3% 3.5% 13.0% 32.5% CAC-40 10.4% 7.6% 1-year 5-year 23 Source: Thomson Venture Economics Note: PE data as of 30 June 2007; Bloomberg, market data as of 30 June 2007 10-year

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6. Is Now the Right Time for Investors to Pursue Private Equity Investments?

PE Funds Raised During Times of Market Distress Generally Perform Well

 Private equity investments have produced healthy returns during each of the three most recent global economic slowdowns

Top Quartile Private Equity IRRs by Vintage

1980 1981 1982 1990 1991 2001 2002 United States 21.6% 14.8% 9.1% 19.5% 25.5% 15.3% 16.0% Europe 11.3% 9.2% 15.1% 18.8% 17.4% 3.4% 13.5% 25 Source: Thomson Venture Expert Note: IRRs are cumulative and are calculated from inception to 9/30/07

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7. Will Regulators and Legislators Continue to Seek Changes in PE Regulation, Oversight and Taxation?

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The PE Industry Faces Various Legislative and Regulatory Proposals

 Several countries are considering or have introduced changes to the way that private equity returns are taxed  The industry is under pressure to increase disclosure and transparency  In some markets, foreign private equity firms are subject to limitations on their investment activity

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8. Will Sovereign Wealth Funds Replace PE Firms as Principal Sources of Capital for Corporations/Sellers Seeking New Capital?

Rank Country

#1 UAE #2 #3 #4 #5 #6 #7 #8 #9 #10

PE Firms Pale in Comparison to the Largest Sovereign Wealth Funds

Norway Saudi Arabia Kuwait Singapore China Russia Hong Kong Qatar Australia

Top Sovereign Wealth Funds Fund

Abu Dhabi Investment Authority Abu Dhabi Investment Council

Assets ($Bn)

875 Government Pension Fund No Designated Name Kuwait Investment Authority General Reserve Fund Future Generations Fund 328 > 300 300 Government Investment Corp.

Temasek Holdings China Investment Corp.

Oil Stabalization Fund Monetary Exchange Fund Qatar Investment Authority Australian Future Fund > 200 200 141 140 60 60

Active Investment Strategy?

X X X X

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Source: Citigroup

Sovereign Wealth Fund Investment Activity Has Increased Dramatically Sovereign Wealth Fund Deal Volume

30 Deal Volume ($Bn) 80 70 60 50 40 30 20 10 0 11.4

1997 11.0

1998 6.8

1999 Number of Deals Value of Deals 9.4

2000 13.0

2001

Sources: World Economic Forum, Thomson Financial

7.6

2002 5.6

2003

+ 1,151%

7.1

2004 16.8

2005 44.2

2006 # of Deals 300 69.8

250 200 150 100 50 0 2007

But These Investments Still Represent A Tiny Proportion of Total M&A Activity Breakdown of Global M&A Activity ($Bn)

4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 1997 1998 1999 2000 Sovereign Wealth Funds 2001 2002 2003 Private Equity 2004 2005 Strategic 2006 2007 31

Sources: World Economic Forum, Thomson Financial

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Sovereign Wealth Funds and PE Firms Are Forming a Productive Partnership

   Sovereign wealth funds have purchased substantial equity stakes in several alternative asset managers    China Investment Corp. invested $3 billion in Blackstone Abu Dhabi’s Mubadala invested $1.4 billion in Carlyle Dubai International Capital invested 1.3 billion in Och-Ziff They are among the private equity industry’s largest individual investors In the future, sovereign wealth funds and private equity firms are likely to pursue large investment opportunities through joint ventures  Sovereign wealth funds will benefit from PE firms’ deep pools of investment talent and deal expertise

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9. Can the PE Industry Improve its Image with the Public, Media, Governments, Unions, Environmental and Consumer Groups?

Private Equity’s Image Could be Better

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A Backlash Against Private Equity Grumbling by unions over post-deal job cuts has escalated into a public outcry –

Business Week

Gluttons at the Gate Private equity are using slick new tricks to gorge on corporate assets. A story of excess –

Business Week

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10. Is PE's Future Going to Be Better, Bigger, and Stronger than Before, Or Have We Already Seen the High-water Mark?

It’s Always Darkest Just Before Dawn

 As before, deal volume will rebound and yesterday’s records will be left far behind 36 Deal Volume ($Bn) 800 700 600 500 400 300 200 100 0 28 1995 31 1996 54 1997 65

Global LBO Activity

112

CAGR: 31%

102 1998 1999 2000 65 110 142 2001 2002 2003 247 291 670 # of Deals 2,500 715 2,000 2004 2005 2006 2007 1,500 1,000 500 0 # of Deals Deal Volume

Source: Dealogic

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What I Was Supposed to Talk About: “Giving Private Equity a Positive Image: Why is there such Disparity Between the Public’s Perception of the Industry and the Industry’s Perception of Itself, and What can be done to bring these Views into Alignment”

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The Current Situation

Perception of the Industry within the Industry Improved operation of companies Prevented job losses; created jobs Improved Economies Created High Returns for Investors/Pension Funds Paid Large Amount of Taxes Created an Industry Perception of the Industry outside the Industry Destroyed Jobs Relocated Facilities Overseas Focused Only on Short-Term Profits Left Companies in Worse Shape Made Too Much Money for PE Professionals Insufficient Level of Taxes Paid

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Why the Disparity in Perceptions?

 Industry Focused for Long Time Principally on Returns  Industry Spent Little Time Explaining its Actions to those Outside of Investor Base  Industry Lacked Data to Support its Views  No Industry Vehicle for Long Time  Other Problems of Industry Critics/Convenient and Attractive Target

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What Can the Industry Do to Improve Its Image?

 Continue to Produce Hard Data  Engage Industry Critics in Debate/Discussion  Consider Factors Other than Just Returns When Assessing/Overseeing Investments  Involve Portfolio Companies Directly in the Effort  Enhance Transparency/Public Focus  Recognize that Some Changes Can and Should Occur

Ten Leading Questions Facing the Private Equity World

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David Rubenstein Co-founder & Managing Director February 27, 2008