GTCR A Fund Above the Rest Conference Annual Meeting 2010 February 25, 2011 April 28, 2010 1 Confidential Confidential 1 www.gtcr.com www.gtcr.com
2 Confidential 2 www.gtcr.com
• “Fundraising Troubles Mean Danger for PE Funds” - Institutional Investor • “One of the Least Amenable Fundraising Environments Ever” - Buyouts • “The Grimmest Capital - Raising Environment in Years” - Private Equity Beat 3 Confidential 3 www.gtcr.com
A Look at the Next Five Years • Historical Snapshot • Current Environment • Realistic Scenarios for the Future • What Investors are Looking for • GTCR’s Blueprint for Success 4 Confidential 4 www.gtcr.com
A Snapshot of the Last Thirty Years Average Number of U.S. PE Firms by Decade Commitments to U.S. Private Equity Partnerships ($ in billions) $350 700 $300 600 $250 500 $200 400 $150 300 $100 200 $50 100 $0 0 Source: Steven N. Kaplan (Chicago Booth), Pitchbook Data, Inc., GTCR. 5 Confidential 5 www.gtcr.com
What is Happening Today PE Callable Capital Reserves / Dry Powder vs. Investment Period Expirations Source: Prequin, Pitchbook Data, Inc., GTCR. Note: Cumulative Total Overhang for 2010 represents data through January 2011. Investment period expirations assume a 5-year commitment period for new investments. 6 Confidential 6 www.gtcr.com
Lots of Money Looking for Returns • Private equity dry powder (U.S.) = $446 billion • Cash of non-financial S&P 500 over $1 trillion • Both can and will be levered • Financing is available and CHEAP 7 Confidential 7 www.gtcr.com
Acquisition Capital vs. GDP Very High! ($ in billions) $15,000 Corporate balance sheet cash Addt’l corp. leveraged buying power (1) $11,830 $12,000 Private equity dry powder Addt’l PE leveraged buying power (2) $9,000 Non-Government Expenditures $6,000 $3,989 $900 $3,000 $446 $1,598 $1,045 $0 Buying Power U.S. Non-Government GDP Total buying power of $4.0 trillion represents ~34% of Non-Government GDP! Source: GTCR. 1. The S&P 500 had a Total Debt / EBITDA ratio of ~1.8x as of 9/30/10. Assuming 3.0x total leverage, the S&P 500 has an additional $1.6bn in buying power. 2. PE leveraged buying power assumes 35% equity minimum investments. 8 Confidential 8 www.gtcr.com
Prices Will Continue to Go Up Average LBO Transaction Multiple Transaction Multiple Source: S&P Leveraged Lending Review, “Large Corporate LBO Loans”. 9 Confidential 9 www.gtcr.com
Expect a Lot of Private Equity Exits in the Near Term Number of U.S. PE-Backed Companies 7,000 5,994 5,736 6,000 5,433 4,808 5,000 3,883 4,000 2008 - 2010 3,039 2005 - 2007 3,000 2,315 2000 - 2004 2,000 1,000 0 2004 2005 2006 2007 2008 2009 2010 Source: Pitchbook Data, Inc. 10 Confidential 10 www.gtcr.com
Remember the Stairs? PE Investment Period Expirations Source: Prequin, Pitchbook Data, Inc., GTCR. Note: Cumulative Total Overhang for 2010 represents data through January 2011. Investment period expirations assume a 5-year commitment period for new investments. 11 Confidential 11 www.gtcr.com
How is It Going to Play Out? “Re -ups are being closely scrutinized, and managers will need to think carefully about their terms and conditions in addition to their proposed strategies in order to achieve success.” – Tim Friedman, Prequin, January 12, 2011 “Funds haven’t performed as well as advertised, and the jury is still out on mega buyouts… In 2006, managers were showing 25 percent returns in marketing materials. Now they have to pitch for commitments with much less impressive numbers.” – Lawrence Schloss, CIO for NYC Pension Fund, January 24, 2011 “Increased competition will lead to a significant number of firms failing in the fundraising market and quietly ceasing to exist once their current vehicles are liquidated in the next few years.” – Tim Friedman, Prequin, January 12, 2011 12 Confidential 12 www.gtcr.com
PE Industry Gets Reshaped in the Next 2 – 3 Years Muddle Along Winners Emerge • Everyone survives • Firms culled • Fund sizes go down • Winning firms grow capital and people • Pressure on GP organizations • Firms can differentiate • Hard to differentiate • Returns rebound to levels seen in vintages between 1995 – 2005 • Returns rebound modestly from poor levels of 2005 – 2008 13 Confidential 13 www.gtcr.com
The Case for Muddling Along • Recovery of S&P 500 • Recent fundraising success • New sources of capital • Big firms targeting less capital 14 Confidential 14 www.gtcr.com
A Bull Case for “Winners Emerge” • 45% of firms that launched fundraising since the beginning of 2008 have not hit target • LPs doing more diligence than ever: • Returns and return drivers • Strategy • Organization • Per The Deal Magazine, the following funds are considered imperiled: ($ in billions) Imperiled: Sponsors Least Likely to Survive IRR (1) Sponsor Year Fund Closed Size % Invested Value / Cost J.C. Flowers & Co. LLC 2006 $7.0 100% 0.36 (39.7%) Candover Partners Ltd. 2005 $4.1 82% 0.50 (26.4%) Terra Firma Capital Partners 2007 $7.3 64% 0.27 (47.7%) Elevation Partners 2004 $1.9 80% 0.82 (9.9%) Source: The Deal Magazine. 1. Estimate as of 3/31/10. 15 Confidential 15 www.gtcr.com
What are Investors Looking for? • Great returns • Differentiated strategy • Well-run organization 16 Confidential 16 www.gtcr.com
Great Returns • Either you have them or you don’t • Surprisingly low realizations • Return drivers matter • Are the drivers replicable? 17 Confidential 17 www.gtcr.com
Differentiated Strategy • Sourcing deals • Having an edge • Differentiated knowledge • Differentiated performance • Pretty hard 18 Confidential 18 www.gtcr.com
Well-Run Organization • Investment teams • Investment process • Portfolio management • Back-office 19 Confidential 19 www.gtcr.com
GTCR’s Blueprint for Success: • Ratable pace • Focus on Great Returns • Bias toward contrarian • Differentiated Strategy • Leaders Strategy • Human capital development • Building investment teams • Well-Run Organization • Teams interaction with IC & functional areas • Partnership model 20 Confidential 20 www.gtcr.com
A Fund Above the Rest Winners Emerge • Emerge as winner • Dominate a strategy • Attract best from others 21 Confidential 21 www.gtcr.com
Summary • PE industry is under pressure • Industry will get re-shaped • Shake-out? • Winners will emerge 22 Confidential 22 www.gtcr.com
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