Private Equity for Surety Professionals: What you Need to Know Presented by: Helen Lally Westfield Insurance

1. Private Equity for Surety Professionals: What you Need to Know Presented by: Helen Lally Westfield Insurance February 4, 2014

2. PRESENTER BIOGRAPHY SLIDE (a paragraph for each presenter) Helen Lally is the Commercial Surety Leader of Westfield Insurance. She is a surety veteran with over thirty years of active industry experience. She has specialized in Commercial Surety for more than 20 years. She has been a presenter at various NASBP Seminars, Webinars and at the William Angell Surety School. She is a member of the NASBP Commercial Surety Committee and is the liaison between our association and the SFAA Commercial Surety Committee. 2 February 4, 2014

3. Definition of Private Equity • Private Equity is an asset class consisting of equity securities and debt in operating companies that are not publicly traded on a stock exchange 3 February 4, 2014

4. Common Forms of Private Equity • Private Equity Firm • Angel Investor • Venture Capital 4 February 4, 2014

5. Definitions • Private Equity Firm – an investment manager that makes investments in the private equity of operating companies through a variety of affiliated investment strategies including LBO, VC and growth capital. 5 February 4, 2014

6. Definitions • Angel Investor – an affluent individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity. Pattern is to see some angel groups or angle networks to share research and pool their capital 6 February 4, 2014

7. Definitions • Venture Capital – financial capital provided to early-stage, high-potential, high risk, growth startup companies. The VC fund makes money by owning equity in the companies it invests in, which usually have a novel technology or business model in high technology industries 7 February 4, 2014

8. The Early Years • 1946 – American Research and Development Corp and J.H. Whitney & Co were founded • JHW is still thriving and remains privately owned by its investing professionals and they continue to provide private equity capital to small and middle market companies. They introduced the world to Minute Maid Orange Juice 8 February 4, 2014

9. The Early Years • ARDC’s claim to fame was the first major venture capital success story when their 1957 investment of $70,000 in equity and $2 million in loans in Digital Equipment Corp turned into a fortune when DEC’s IPO in 1966 was such a success. ARDC was founded to encourage investments by soldiers returning from WWII. Ultimately sold to Textron in 1972. 9 February 4, 2014

10. Legislative Actions • Business Development Companies were authorized by the US Congress as part of the Small Business Incentive Act of 1980. A benefit here to investors was the tax pass-through set up to avoid double-taxation on dividends 10 February 4, 2014

11. History of Private Equity • Leveraged Buyout – LBO – were active in the 1980’s. LBO’s usually had a ratio of 90% debt to 10% equity. The bonds were usually referred to as junk bonds. In the 1980’s several prominent buyouts led to the eventual bankruptcy of the acquired companies. One of the largest was the acquisition of HCA by KKR, Bain and Merrill Lynch for $33 billion. LBO’s were regarded as ruthless and predatory 11 February 4, 2014

12. Legislative • Sarbanes Oxley Act of 2002 was a factor in many publicly traded companies going private. The expense factor of compliance, especially on smaller companies was not favorable. • Hertz, MGM, and Toys’R’Us were a few that private equity firms invested in and removed them from the public market 12 February 4, 2014

13. Legislative In 2012 , Congress passed the JOBS Act, which directed the Securities and Exchange Commission (SEC) to implement rules that, among other things, allow general solicitation and advertising of private placement offerings that are made in reliance on Regulation D, Rule 506. Those rules allow companies and promoters to offer securities through means such as direct mail, cold calls, free lunch seminars and media advertisements. The SEC has implemented some changes here about disclosure for investors that may have an impact on investors path of support for developing and mature companies. February 4, 2014

14. Forms of PE Investment • Senior Debt • Borrowed money that a company must repay first if it goes out of business. Even though senior debtholders are the first in line to be repaid, they will not necessarily receive the full amount they are owed in a worst-case scenario • Senior Subordinated Debt • In the case of default, creditors with subordinated debt wouldn’t get paid out until after the senior debtholders were paid in full. • Preferred Stock • Have no voting privileges but have priority over other subordinate forms of equity for dividends and claims on the company’s assets in the case of liquidation 14 February 4, 2014

15. Largest Private Equity Firms NameHeadquartersCapital Raised @ 5/2013 TPG Capital Fort Worth $35.73 bn Carlyle Group Washington, D.C. $32.82 bn The Blackstone Group New York $29.56 bn Kohlberg Kravis Roberts New York $28.41 bn Warburg Pincus New York $26.00 bn G S Principal Investment New York $24.63 bn Advent International Boston $23.06 bn Apollo Management New York $22.07 bn Bain Capital Boston $19.36 bn CVC Capital Partners London $17.99 bn 15 February 4, 2014

16. CDC Example - Corporate Capital Trust • Formed on June 9, 2010 and commenced operations on June 16, 2011. • Registered with SEC • @ 9/30/2013 – net assets $1.2 billion • Investment income $35 million • 1 billion shares authorized; 127 million issued and outstanding 16 February 4, 2014

17. Corporate Capital Trust Holdings • Senior Debt • Hubbard Radio, LLC; Guitar Center, Inc., Gymboree Corp, Avaya, Inc., Sabre, Inc., Office Depot, Inc., Bright Horizons Family Solutions, Inc. HUB International • Senior Subordinated Debt • E-Trade Financial Corp, Aramark Corp, Chesapeake Energy Corp, Neiman Marcus Group, Trans Union, J. Crew Group, Inc., Cablevision 17 February 4, 2014

18. Capital Raised 2009-2012 February 4, 2014

19. 2012 Investments under Regulation D Hedge Funds $386 billion Private Equity Funds $159 billion Venture Capital Funds $ 19 billion Other Investment Funds $165 billion February 4, 2014

20. Gymboree – Case to Analyze On November 23, 2010 (the “Transaction Date”), we completed a merger (the “Merger”) with Giraffe Acquisition Corporation (“Acquisition Sub”) in accordance with an Agreement and Plan of Merger (the “Merger Agreement”) with Giraffe Holding, Inc. (“Parent”) and Acquisition Sub, a wholly owned subsidiary of Parent, on November 23, 2010 (the “Transaction Date”), with the Merger funded through a combination of debt and equity financing (collectively, “the Transactions”). We are continuing as the surviving corporation and 100%-owned indirect subsidiary of Parent. Investment funds sponsored by Bain Capital Partners, LLC (“Bain Capital”) own a controlling interest in Parent. The following selected historical consolidated financial data are presented for the Predecessor and Successor periods, which relate to the periods preceding and succeeding the Transaction Date, respectively. February 4, 2014

21. Surety Program Needs • Multi million U.S. Customs Bond • Self Insurance Workers Comp Bond • Transportation needs – fuel tax, highway use • Various Compliance L&P Bonds • Financial Guarantee Bonds • Rhode Island Payroll bi-weekly • Utility Deposit Bonds – Con Ed et al • Program Total - $23 million February 4, 2014

22. THE GYMBOREE CORPORATIONCONSOLIDATED BALANCE SHEETS (In thousands, except share data) THE GYMBOREE CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands, except share data) February 4, 2014

23. THE GYMBOREE CORPORATIONCONSOLIDATED BALANCE SHEETS (In thousands, except share data) February 4, 2014

24. THE GYMBOREE CORPORATIONCONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) February 4, 2014

25. THE GYMBOREE CORPORATIONCONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) February 4, 2014

26. THE GYMBOREE CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands except per share data) February 4, 2014

27. THE GYMBOREE CORPORATIONCONSOLIDATED BALANCE SHEETS (In thousands except per shares) February 4, 2014

28. THE GYMBOREE CORPORATIONCONSOLIDATED STATEMENT OF INCOME(In thousands except per share data) February 4, 2014

29. Ratio Analysis • Post Merger Pre Merger • Tangible Equity ($1,078 million) $433 million • Stated Equity $441 million $438 million • Cash $ 33 million $257 million • Operating Cash Flow $ 73 million $176 million • Gross Profit Margin 38% 47% • Net Income Margin (.08%) 10% • Interest Expense $85 million $243 thousand • IBD/Equity (Tangible) 2.57 0 • Times Interest Earned .81 677 • Retained Earnings ($76 million) $239 million February 4, 2014

30. Going Forward • Agent and Surety need to fully understand the game plan • Intent and strength of the investor • Duration of the investment • Exit strategy of the investor • Outside factors to be aware of • Tax law changes • Environmental, Safety, Homeland Security February 4, 2014

31. The Future of Private Equity Average U.S. buyout fund performance has exceeded that of public markets for most vintages for a long period of time. The outperformance versus the S&P 500 averages 20% to 27% over the life of the fund and more than 3% per year. Average U.S. venture capital funds, on the other hand, outperformed public equities in the 1990’s but have underperformed public equities in the 2000s. February 4, 2014

32. Questions • If you do not have the opportunity to have your question answered during the Seminar, you may contact me directly • helenlally@westfieldgrp.com • 330-887-8971 February 4, 2014