European private equity

outlook 2010

Munich, Vienna, Frankfurt, December 2009

Contents Page

A. European private equity market overview

What will come after the crisis? 3

B. The PE environment is remaining difficult

p g
How are the macro indicators developing? 9

C. A call for active PE performance improvement –

What kind of fund manager
g is needed? 20

© 2009 Roland Berger Strategy Consultants GmbH 2

A. European private equity market overview
What will come after the crisis?

3
The European private equity market volume declined by 27% to
EUR 54 bn in 2008 – 2009 looks even worse

European private equity investments [EUR bn]

% change p.a. 39.4 -30.6 14.0 5.1 26.8 27.3 51.1 4.2 -27.0

73.8
71.0
8.0
16.0
54.0
47.0 7.1

36.9 12 9
12.9
35.0
27.7 29.1 10.3 65.8
25.1 24.3 55.0 15-20
19.7 8.4 46.9 FY
9.8
Venture 10.7 12.2 34 1
34.1
26.6
17.9 20.7
Buyout 14.4 15.3 12.1 8.5

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 H1 20091)
Buyout Venture capital
1) No split in buyout and venture capital available – Full Year (FY) = estimate

Source: EVCA; Roland Berger Research 4

 Most national PE markets experienced significant setbacks in
2008 – market volumes in CEE still lag far behind WE

European PE investments by country, 2006-2008 [EUR bn]

4.3 4.2 3.4

23.48
20.90

13.75

5.53 5.75
2 67
2.67
10.60 9.21 0.30 0.68 0.63
7.23
0.35 0.17 0.44 0.02 0.02 0.03
10.80 11.86
9.08
0.26 0.86 0.33 0.73
0 73 0.49
0 49 0.48
0 48 0 11 0.48
0.11 0 48 0.27
0 27

0.04 0.56 0.09

4.92 5.41
3.58 4.23 2.34 3.17

2006 2007 2008

Source: EVCA 5
Strong focus remains on late stage buyout financing – Now and
in the future

European PE investments in terms of investment stage [EUR bn; %]

24.3 29.1 47.1 71.2 73.8 54.1

Seed 2 1 5 0 0 0 3 1
7 0 8 5 5
Start-up 15 0 0
7 14
G th
Growth 0 21 22 16 5
7
5 3
5
Expansion 33 8

Replacement
5
capital
80
68 71 70
63
Buyout 45

2001 2003 2005 2006 2007 2008

Source: EVCA; Roland Berger Research 6

Divestments will probably decline by 50% for the second year in
a row in 2009 – funds raised and divestments almost seized??

European PE activity flows [EUR bn]

112.3

-49%
81.4 79.6
71.8 71.0 74.0

54.0
47.0
36.9
29.8 33.1
27.0 29.1 27.5 27.1
19.6
13 6
13.6 13 9
13.9
5.7 6.9 2.8

2003 2004 2005 2006 2007 2008 H1 2009

Funds raised
Investments
Divestments

Source: EVCA; Press; Roland Berger Research 7

The question is: Will profits recover – or will the downturn
continue?

10-year rolling IRR (buyouts in Europe) [%]

19.3 19.6 19.1 REMARKS

17.4 17.1 17.4 17.1 > Only top funds can
15 7 15.9
15.7 15 9
15.3 15.4 meett the
th high
hi h
14.9
demands of
investors – the
11.2 11.7 11.6 spread between
10 4
10.4
9.6 ? well performing
funds and low
performers has
widened
> Private equity funds
need to take a
close look at levers
available for value
1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 creation

Source: EVCA; Roland Berger Research 8

B. The PE environment is remaining difficult
How are the macro indicators developing?

9
Judging by macroeconomic indicators, the PE environment will
remain difficult

Current situation

> The number and size of leveraged buyout deals has

decreased further due to limited availability of debt
financing
Will these
> Leverage levels have decreased from over 6 times
EBITDA to multiples below 5, reducing the return on equity trends
that PE firms are able to generate continue? –
> Many investments by PE firms are ready to go public, but Outlook for
stock exchanges are not
2010
> Profits remain under pressure – only top funds achieve
satisfactory returns

Source: Roland Berger Research 10

Market snapshot: The takeover market should have hit bottom
– Recovery expected in the next few months

European takeovers by financial investors since 20071)

200 189 187 25

184 183

151 156
20
150 143

15
100 97
78
10
63
55
50
27 5,0

0 0
Q1 2007 Q2 2007 Q3 2007 Q4 2007 Q12008 Q2 2008 Q3 2008 Q4 2008 Q12009 Q2 2009 Q3 2009 Q4 20091)

Total value in EUR bn [right scale]

Number of transactions [left scale]

1) Until November 23, 2009

Source: Thomson Financial 11

 Where is the PE market headed? From a macroeconomic
perspective, economic growth is needed

Private equity activity vs. economic development

Economic
PE development 1))
d
development
l
[annual change]
[annual change]
PE
400 Recession opportunity 15
Historically, PE fund investments
Historically
300 in times of low GDP growth were
10
more profitable
200
Real GDP 5
100

0
0

-100 -5
86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
1st wave: 1980s 2nd wave: 1990s 3rd wave: today
Breaking up
p B ll market and crash
Bull Again – bull
b ll market and
conglomerates another crash
1) M&A with PE involvement

Source: Roland Berger Research; Thomson One Banker; EIU 12

 Most European countries will achieve positive growth rates in
2010 – Will this be enough to fuel growth in the PE market?

Data forecast for 2010 – Year-on-year GDP change

REMARKS
> Not all European economies are
back on track for recovery – e.g.
Spain
p will continue to suffer in
2010
Sweden
(1.3) Poland (1.9) > Economic stimulus packages in
UK many countries will support
(0.6)
C
Czech
hRRepublic
bli (0.9)
(0 9) reco er
recovery
Netherlands (0.5) Germany
(1.0) Slovakia (1.5) > The V shaped recovery seems to
Hungary be most likely
Romania (1.0)
France (0.9) Austria ((-1.0)
1.0) > Cost cutting and restructuring are
(0.8)
Bulgaria (1.0) key to securing returns especially
Spain Italy
(-0.8)
in low-growth industries
(0.6)

Trend: Influence:

Source: EIU 13
 Low interest rates are becoming increasingly crucial for
bearing the financing burden

Private equity activity vs. lending rates

Lending rate
PE development
d
development
l
[annual change]
[%]
PE
400 15

300
10
200

100
5
0

-100 0
86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
1st wave: 1980s 2nd wave: 1990s 3rd wave: today
Breaking up
p B ll market and crash
Bull Again – bull
b ll market and
conglomerates another crash

Source: Roland Berger; Thomson Financial; EIU 14

 Interest rates came down strongly to stimulate liquidity in credit
markets – However, restricted access to cheap debt for PEs

Lending rates in Europe and USA

Lending rates [%] REMARKS
> Interest rates will most likely start to
10
recover, increasing the price of
9 leverage for PE firms
8 > Increasing interest rates could lead to
USA
7 over-leveraged companies and
6 defaulting credits

5 > Due to the financial crisis banks froze

their lax credit policies (e.g. tightening
4
financial covenants) and thus
3 Europe g
negativelyy impacted
p the access of PEs
2 to cheap debt financing
1 > Investments will have to earn higher
0 returns to serve the credit lines; value
creation – e.g.
e g through restructuring –
2003 2004 2005 2006 2007 2008 2009 becomes more important
Trend: Influence:

Source: Roland Berger Research; Bloomberg; ECB 15

A lack of confidence in European banks made money
expensive in 2008 – Spreads back to normal in 2009

Development of interest spread [discount rate vs. 3-month Euribor]

5.5 Start of
5.0 subprime crisis Euribor, 3-month offered rate
4.5
4.0
3.5 Main refinancing rate
3.0
2.5
2.0
1.5
1.0
0.5
00
0.0
January 2007 July 2007 January 2008 July 2008 January 2009 July 2009

Source: Bloomberg 16
 Healthy stock markets normally provide exit options for PE
investments – In most cases with a time lag

Private equity activity vs. stock market development

Stock market
PE development
d
development
l
[Year-on-year change]
[Year-on-year
PE change]
400 100

300
50
200

100
0
0

-100 -50
86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
1st wave: 1980s 2nd wave: 1990s 3rd wave: today
Breaking up
p B ll market and crash
Bull Again – bull
b ll market and
conglomerates another crash

Source: Roland Berger Research; Thomson One Banker; Bloomberg 17

European stock markets not likely to boom in 2010 – Only
slight growth expected

Forecast data 2010 – Stock market

Stock market development (example: Euro Stoxx) REMARKS
Euro Stoxx, price development, since Jan 2007 [index]
> European stocks recovered
5,000 after hitting rock bottom in
March 2009
4,500
> IPOs for PE investments
4,000
remain difficult
3,500
> Restructuring investments
3,000 to ensure profitable exits on
the secondary market is
2,500 becoming increasingly
2,000 important

1,500
2007 2008 2009 Forecast
F
2010
Trend: Influence:

Source: Bloomberg; BayernLB 18

OUTLOOK: The PE environment remains difficult

Outlook
> GDP growth in Europe will recover starting in 2010 and thus positively affect private
equity industry performance
> However, as a result of the financial crisis, bank financing for new deals – but also re
re-
financing for existing portfolio companies – will be smaller in terms of volume,
covenants will be stricter and costs will be higher
> Restricted bank lending might also hit highly leveraged companies,
companies which will lead to
increased risk of default
> After the rebound in 2009, the outlook for European
p stock markets in 2010 remains
cautious – very limited options for profitable IPO exits

Value creation through

g thoroughg due diligence,
g active portfolio
p management
g and
restructuring will separate successful investments from the rest

Source: Roland Berger; DB Research 19

C. A call for active PE performance improvement –
What kind of fund manager is needed?

20
Where does the profit come from when the business
environment remains unfavorable?

Sources of profit
ACQUISITION HOLDING PERIOD EXIT

1. 2. 3.
Due diligence & Investment Selling price Investors have to
purchase price performance manage three
critical steps in
Assess target Actions designed to Selection of the right order to meet the
potentials in effective ensure and drive moment and exit high performance
due diligence; profitable growth channel to realize requirements –
Low purchase price in (cut costs, improve highest value focus on
relation to fair value; sales, reduce working acquisition and
high leverage capital improve liquidity)
capital, holding period

Source: Roland Berger 21

Today, the financial value creation drivers in buy-outs cannot
achieve satisfactory returns

Financial drivers for value creation

> Interest rates in Europe low but

expected to start rising
> Average
g leverage g on LBO transactions
today still at around 5*EBITDA
Leverage Increased risk of financial distress

> Returns for strategic

buyers
> Increased competition for VALUE > Most companies restructured
attractive deals among CREATION in recent years
PE players > Many secondary buy-outs
"Buy low, sell high" Realizing the improvement
Multiple Management
more and more potential is becoming
p g more
i
increase shareholding
h h ldi
difficult and more challenging

Source: Roland Berger 22

1. ACQUISITION – DUE DILIGENCE

To extract the full investment value, operational improvements

are necessary – Due diligence to assess potential

Operational value creation drivers

Generating synergies by Carefully selecting and

merging portfolio companies analyzing target
companies

REALIZING VALUE
Growing through Realizing stand-alone
strategic realignment improvements through
and sales
sales-up
up actions cost savings

Source: Roland Berger 23

1. ACQUISITION – DUE DILIGENCE

Revised business plans are the basis for company valuation

and decision making

Overview – commercial due diligence

Results of market
Market

MAKINGG THE RIGHT DECISIONNS

due diligence
COMM

Drivers, volume, growth

potentials, trends
MERCIAL

REVISED BUSINESS PLAN

Competitiveness
Corporate and business
strategy,
gy, pproducts,, competition
p
L DUE DILIGENC

P&L
Business plan Balance sheet
Plausibility checks (revenues, Cashflow
cost development)

Identification of improvement levers

Synergies, stand-alone cost savings,
CE

growth opportunities Improvement actions

Source: Roland Berger 24

1. ACQUISITION – PURCHASE PRICE

Leverage ratios are coming back down – In the first half of

2009, total debt to EBITDA was 4.9

Leverage ratios [total debt to EBITDA, European LBOs]

6.12
5.50
5.23 5.17
4.90
4 61
4.61
4.39 4.25
4.17 4.16

2000 2001 2002 2003 2004 2005 2006 2007 2008 H1 2009

Source: EVCA Barometer; S&P LCD; Roland Berger Research 25

2. HOLDING PERIOD

The holding period offers the largest potential for value

creation – This requires active PE investors

ROI improvement1) in 2 years, US restructuring cases [% points]

62.1 63.4 64.7

45.7 Active
involvement in
29.7 29.8 restructuring
secures higher
return for
investor
Without Passive "Blocking
Blocking Supervisory Active Executive
investor position" function (w/o board function
participation)

Investor influence
1) Operating profit to total assets

Source: Roland Berger 26

2. HOLDING PERIOD

Comprehensive restructuring definitely has a positive impact

on value creation

Development of cumulative abnormal return in comparison to CDAX

MINOR DOWNSIZING – SUBSTANTIAL DOWNSIZING –

FOCUS ON COSTS FOCUS ON COSTS AND GROWTH
500% 500%

400% 400% +483%

+245% Top 20%
300% 300%

200% Top 20% 200% +136%

Average
100% +54% 100%
Average
0% 0%
-100%
-100% -54% -100% Flop 20%
Flop
p 20%
-20 0 +1 +2 -20 0 +1 +2
days year years days year years

Source: Thomson Financial; Datastream; Dow Jones & Reuters; Factiva; Roland Berger Research 27
3. EXIT

Generating value through exit is rather limited within current

channel options

Exit channels by number of divestment [%]

23.9
Trade sale 23.0
> Trade sale to strategic investors
10.6 remains the most important exit
Secondary PE 11.7 channel
h l iin 2008
Total loss/ 6.6 > Sale to secondary PE investors
writeoff 10.9 remains difficult given restricted
Sale to mgmt. 7.4 availability
il bilit off d
debt
bt
(MBO) 7.5
> Writeoffs increased to over
9.4 10% of total exits
IPO 5.8
> IPO in current market conditions
Other (mainly 42.1
41.0 nearly impossible
repayments)

2007
2008

Source: EVCA Yearbook 2008; Roland Berger Research 28

Conclusion: A successful fund manager must be a company
dealer and a top manager rolled into one

Conclusion

> Private equity funds are facing high return expectations by their investors that only few in the industry
can meet
> Acquiring investments is becoming more and more difficult.
difficult Therefore
Therefore, creating value only by "dealing"
dealing
in companies is very difficult
> To stand out from industry average, all available value creation levers must be used, especially in the
holding period
> Established management approaches are the main tools – restructuring, portfolio management and
value management.
g In applying
pp y g these tools,, the pprivate equity
q y fund manager
g has to demonstrate that he
is superior to "normal" conglomerate managers
> A successful private equity fund manager must be a company dealer and a top manager rolled into
one – he must at least must be able to manage both sides of the business

29