Private Equity: Where Risk Meets Opportunity Panel Detail: Tuesday, April 28, 2009 11:00 AM - 12:15 PM Speakers: Leon Black, Founding Partner, Apollo Management LP Jim Davidson, Co-Founder and Chairman, Silver Lake Thomas Lee, President and CEO, Thomas H. Lee Capital LLC Ted Virtue, CEO, MidOcean Partners Moderator: Duncan Goldie-Morrison, CEO, Calyon Americas
2008: second best year for private equity fundraising, but steep decline may follow Number of funds 2008 2007 Amount raised ($ billions) Number of funds Amount raised ($ billions) Buyout/ Corporate 143 $181.0 222 $244.6 finance Mezzanine 17 $40.2 18 $8.9 Venture capital 150 $24.7 182 $33.1 Funds of funds 34 $12.9 70 $28.7 Secondary and others 19 $6.7 14 $10.4 Total 363 $265.6 506 $325.7 Source: Dow Jones Private Equity Analyst.
Private equity activities slow globally Deal value announced (US$ millions) Fund raised (US$ millions) 2007 2008 2007 2008 United States 368,400 59,600 325,200 256,900 Western Europe 185,900 88,000 101,500 96,100 Asia 67,000 52,500 28,700 37,100 Middle East 898 1,700 5,000 6,400 Eastern Europe 27,900 8,000 14,600 5,400 Latin America 4,600 1,200 4,400 4,000 Africa 7,900 2,200 2,300 2,600 Total 662,598 213,200 481,700 408,500 Sources: Dow Jones, Dealogic.
Venture capital investment in the U.S. 1998-2008 US$ billions Thousands 120 100 80 Total venture capital investment (left axis) Number of deals (right axis) 9.0 7.5 6.0 60 40 20 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 4.5 3.0 1.5 0.0 Source: PricewaterhouseCoopers.
Fed funds rate at historical low Percent 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Effective federal funds rate Target federal funds rate Apr. 30, 2008: 2% Oct. 8, 2008: 1.5% Oct. 29, 2008: 1% Dec. 16, 2008: 0-0.25% 01 02 03 04 05 06 07 08 09 10 11 12 01 02 03 04 2008 2009 Sources: Federal Reserve, Milken Institute.
Corporate bonds were trading at deep discounts Market value to face value, percent 120 AAA corporate 110 100 90 80 BBB corporate 70 60 High yield 50 2001 2002 2003 2004 2005 2006 2007 2008 2009 Sources: Bloomberg, Milken Institute.
TED Spread reached historical high in 2008 Daily, December 31, 2005 March 31, 2009 Basis points 500 450 Historical high before 2008 November 1987: 255 bps 400 350 300 250 200 150 100 50 0 12/2005 12/2006 12/2007 12/2008 Sources: Bloomberg, Milken Institute. August 20, 2007: 240 bps Aug. 16, 2007: Countrywide takes emergency loan of $11 billion from a group of banks. Average since August 2007: 146 bps October 10, 2008: 463.6 bps Sept. 16, 2008: Fed rescues AIG for $85 billion. Average since 2005: 93 bps
Liquidity freeze: spread between 3-month LIBOR and overnight index swap rate Daily, July 1, 2007 March 31, 2009 Basis points 400 350 October 10, 2008: 364 bps 300 250 200 150 100 Average since December 2001: 31 bps 50 Average since July 2007: 94 bps 0 07/2007 09/2007 11/2007 01/2008 03/2008 05/2008 07/2008 09/2008 11/2008 01/2009 03/2009 Sources: Bloomberg, Milken Institute.
Price performance of major bond, equity and commodity indices Index, January 30, 2000 = 100 400 350 300 250 200 150 100 50 0 Sources: Bloomberg, Milken Institute. Lehman Bond Composite Index S&P GSCI Commodity Index S&P 500 Index 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Where to invest? Price-to-earning ratio of major equity market indices 50 40 2007 2008 30 20 10 0 U.K. China U.S. Japan India Europe Hong Kong Brazil Russia Sources: Bloomberg, Milken Institute.
Does low price-earning ratio imply great investment opportunities? Monthly, January 1954 March 2009 Price-earning ratio for S&P 500 index 35 30 Average since 1954: 16.4x June 1999: 29.7x 25 20 15 10 March 2009: 11.8x 5 April 1980: 7.0x 0 1954 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009 Sources: Bloomberg, Milken Institute.
Global IPO market froze in first quarter 2009 Amount raised, US$ billions 350 299 300 256 250 209 200 174 163 150 137 105 107 105 100 68 75 74 88 83 8 24 31 59 51 50 5 0 1990 1994 1998 2002 2006 2009* * 2009 number is annualized. Source: Dealogic.
Banks lend less, while businesses and individuals draw upon existing credit lines Quarterly, Q1 2000 Q4 2008 US$ trillions US$ billions 8 6 Unused loan commitments (right axis) Change from Q1 2008 to Q4 2008: -11% 600 500 400 4 2 Total loans and leases (left axis) Change from Q1 2008 to Q4 2008: -21% 300 200 100 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 0 Sources: Moody s Economy.com, FDIC, Milken Institute.
Corporate bond issuance started to catch up since Q4 2008 United States Quarterly corporate bond issuance, US$ billions 300 $260 $268 $265 250 $222 $202 200 $182 $169 $172 $177 $175 $156 $154 $136 $141 150 $170 $259 100 50 0 2005 2006 2007 2008 2009 $71 Sources: Dealogic, Milken Institute.
U.S. Household assets shrank by 16 percent from its peak in Q3 2007 US$ trillions 90 Other financial assets 75 60 45 30 15 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Life insurance and pension funds Mutual funds Corporate equities Credit market instruments Deposits Other tangible assets Durable goods Real estate Source: Federal Reserve.
Households leveraged up Percent 20 18 16 Household financial obligations as % of disposable income (left axis) Percent 15 13 11 14 12 10 Mortgage debt as % of disposable income (homeowners, right axis) 1980 1984 1988 1992 1996 2000 2004 2008 Sources: Moody s Economy.com, Milken Institute. 9 7 5
Thomas Lee slides
Timing of recovery - ARM resets Alt-A and Option ARM resets in 2010-2011 could prolong the housing recession for years Sources: Credit Suisse, IMF.
Duncan Goldie-Morrison slides
Senior loan default rate by number of issuers and by principal Percent of issuers Percent of principal 9.0% 9.0% 7.5% 6.0% 4.5% 3.0% 1.5% 0.0% Number of Issuers Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Note: Rates may decline because of changes in the Loan Universe. Sources: S&P/LCD and S&P/LSTA Leveraged Loan Index. Senior loan default rate by number of issuers and amount of principal outstanding (lagging 12 months) Amount of Principal Outstanding 7.5% 6.0% 4.5% 3.0% 1.5% 0.0%
Jan 1 1925 Jan 1 1930 Jan 1 1935 Jan 1 1940 Jan 1 1945 Jan 1 1950 Jan 1 1955 Jan 1 1960 Jan 1 1965 Jan 1 1970 Jan 1 1975 Jan 1 1980 Jan 1 1985 Jan 1 1990 Jan 1 1995 Jan 1 2000 Jan 1 2005 Jan 1 2010 US Baa corporate bond spread 80 year historic Spread (%) 10% 8% 6% 4% 2% 0% Source: Moody's & Credit Suisse.
Corporate bond yields Moody s Baa yields Source: Merrill Lynch index.
Historical cost of debt 1997-2009 2500 Overall investment grade and high yield bond spreads IG Index HY Index 2000 1500 1000 500 Source: Merrill Lynch index. 0 01/02/97 01/02/99 01/02/01 01/02/03 01/02/05 01/02/07 01/02/09
Historical cost of debt 1997-2009 25.0% Overall investment grade and high yield bond yields IG Index HY Index 20.0% 15.0% 10.0% 5.0% 0.0% 01/02/97 01/02/99 01/02/01 01/02/03 01/02/05 01/02/07 01/02/09 Source: Merrill Lynch index.
Historical cost of debt 1997-2009 (Continued) 1600 Bond spreads by rating A-Index BBB-Index BB-Index 1400 1200 1000 800 600 400 200 Source: Merrill Lynch index. 0 01/02/97 01/02/99 01/02/01 01/02/03 01/02/05 01/02/07 01/02/09
Historical cost of debt 1997-2009 (Continued) Bond yields by rating 18.0% 16.0% A-Index BBB-Index BB-Index 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 01/02/97 01/02/99 01/02/01 01/02/03 01/02/05 01/02/07 01/02/09 Source: Merrill Lynch index.