Where to start? The trends

1. Re-evaluating the PE model coming out of 2008Prof. Luc NijsFounder & Chairman Horizon Ltd Founder & Group CEO The Talitha GroupWarsaw September 7-8, 2009Buy-outs in the CEE – MarcusEvans 2009

2. Where to start? The trends • Despite the market conditions EM PE raised $ 66,5 bio in 2008, a 12% rise • Proportional share in total global PE fundraising raising for 5 years in a row now • Relative decoupling & economic power shifting to (some) emerging markets is reinforced by current recession • Cyclical recession became a structural one and the risk of L-shape recession is looming (cf. Ponzi economy) • Inflationary pressures despite current deflation trend having the potential to cause another downward leg over the next 12-18 months • Dynamics of the CEE region • Debt-driven model to growth gone • Erosion of financial infrastructure

3. Fundraising per region

4. Market Outlook • Argumentation for EM proposition: • Resilient growth • Less use of leverage • Remaining catch-up effect in the region sufficient to offset the loss of the debt-engine • If not, GDP growth will be limited to productivity growth • Labor-arbitrage as a strategy has lost most of its dynamics

5. Investors stay committed…but…

6. Some of the underlying fundamentals

7. What about the converts…

8. Market Outlook • Argumentation for refusal of EM proposition: • (Short-term) EM risk • Lack of experience in EMs • Only few quality GPs available in EMs • Quantitative easing and systemic risk? • Limited visibility of LT impact on economic fundamentals • If you broaden you monetary base….

9. Some of the underlying fundamentals

10. Av. risk premiums in EMs (%, 2008-2009)

11. Institutional investor views: EM versus developed (December 2008)

12. Institutional investor views: EM versus developed (April 2009)

13. Portfolio allocation

14. The dynamics of LT capital • The need for LT capital is beyond doubt in every economy based sustainable fundamentals • Patient capital is there to unleash human & business potential • Has PE ignored some of its fundamental DNA • Conflict of interest when engaged in multiple parts of the capital structure • Going back to the core of being an ‘activist shareholder’ • Semi-globalization = procession of Echternach

15. PE penetration as an asset class Source: Goldman Sachs, EMPEA

16. Portfolio exposure

17. Reasons for expansion or continuation Source: EMPEA 2008

18. EM Private Equity performance Source: Cambridge Associates LLC & prop. research,: pooled end-to-end returns, net of fees, expenses and carried interest

19. Impact on portfolio construction • In 2008 about 1/3 of the total pool of LPs had some kind of exposure to EMs • Portfolio weighting somewhere between 10-30% and total portfolio’s 3-5 % • Do or die for LPs the next couple of years: capture trend lines of GDP growth etc. • Systemic risk in Western markets are not reflected in risk premiums Source: Proprietary data

20. Smoke & mirrors… • BVCA and E&Y 2008 performance study

21. So now what… • If PE is an activist shareholders’ position than why have these funds been managed as investment vehicles • Demonstrate inept to manage companies • Focus on financial engineering • Models have to change • Fund structure • Terms & conditions • Exit modeling • Valuation and transparency

22. So now what…life after leverage • Value creation/operational side • Impact of average /holding periods • Massive room for improvement of private capital formation • Put capital to work • But do they have the right ‘human capital in place’?

23. What is considered important • Survey institutional investors by BNY Mellon (May 2009) • Alignment of interests • Transparency • Performance • …. • ….

24. Sunshine is the best disinfectant • US seems to understand that..registration and info • Europe does not …at least judging based on their April 30, 2009 proposal to manage the AIM industry • Ill-thought through • Politically compromised • Creates barriers-to-entry • Unnecessary conditions • Blocking 3rd country managers/funds • Erodes competitiveness of EU investors

25. Team • What is the DNA of your team? • What is the set-up of the team? Locations? • How is decision-making shared? • How is the carry shared? • Stability- How are you going to execute your strategy • Is your team ready for the ‘new normal’ ..i.e. generating returns by improving operations and creating synergies rather than leverage • Can your HC live up to that test?

26. Team • The HC rainmaker paradox • Human Capital center of excellence • Retention • Change management • Compliance • Organizational Development • Recruiting • Sourcing • Resource Development

27. Terms & conditions • Compensation • 2 & 20 • Alternatives? After the investment period? • Imputing transaction fees by GP? Source: SJ Berwin AS 2009

28. Terms & conditions • Compensation • Carry vs. hurdle rate Subject to delay until clawback unlikely Source: SJ Berwin AS 2009

29. Fund structure • Back to the open ended-structure? • Relevance of ‘permanent capital’ • Are we going to leave liquidity up to the ‘secondary market’ or contribute to that as an agent of change • Herding behavior and GP mushrooming

30. Regional versus country specific • Regional specific strategies more-difficult to execute unless industry focus • Macro-economics are going to drift among CEE countries more than in the past • Relation between performance, investment strategy and in-house specialists

31. Who do you want to be ? • Align you personal interest with the dynamics of LT capital • Mushrooming of GPs not necessary a blessing for the industry • Contribute to value creation in a world where too much money is chasing too little opportunities • Consider yourself an entrepreneur

32. Let gravity have its way

33. Conclusion • Re-thinking of PE model is very much needed • Live the talk… • No right or wrong, no good or bad • The LPs are at the centre of everything you do • EMs have become a relative game • CEE needs to show its bearings • Remaining catch-up in CEE needs to be supported by economic and financial maturity and permanent efforts re innovation & technical enhancements • PE needs to evolve towards being part of the mainstream finance environment

34. Contact Riga Graduate School of Law Law & Finance Chair Strelnieku iela 4k-2 Riga LV-1010 LATVIA luc.nijs@rgsl.edu.lv Tel. +37167039230