1

A presentation to the Association of British Accountants in France

September 2008

www.3i.com

A presentation of the current credit market conditions & impact on the LBO market

2

Contents

• 3i general presentation

• Overview of the current LBO market today

– General Outlook

– Debt

– Valuation

3

The facts

• A world-leader in private equity

• €12.3bn total assets under management*

• Over 250 market-facing investment professionals in 14 countries across US, Europe and Asia

• Use sector knowledge and local relationships to deliver value

International scale and reputation

*As at 31 March 2008. Excludes 3i Group’s uninvestedcommitments to managed funds.

4

Active funding stages

An exceptional range of private equity and infrastructure solutions

*portfolio equity value including co-investment funds for Buyouts and Infrastructure

As at 31 March 2008

Growth capital

Minority investments in established businesses on a partnership basis

Typical investment up to €250 million in businesses with an EV of between €100m to €1bn

€3.0 billion portfolio*

Buyouts

Mid-market buyouts

Transactions valued up to around €1 billion. Aim to invest in 12-15 buyouts a year

€4.0 billion portfolio*

Infrastructure

All types of infrastructure projects

Investments of €70 million to €350 million

€0.7 billion portfolio*

QPE

Private equity solutions for quoted businesses

Investments in small and mid-cap companies, typically with an EV in the range €100m to €2bn

5

Internationally connected

Europe

As part of 3i Group, the Buyouts business taps into a wealth of resources. Our unique international network is a key differentiator and presence in Asia and North America enables our European investments to benefit from our truly global reach.

EuropeLondon

Paris

Madrid Barcelona

Zurich

StockholmHelsinki

Amsterdam Frankfurt

Milan

Manchester

Copenhagen

3i Offices

6

Leading presence in France for 25 years

• Established in 1983

• 20 investment professionals based in Paris

• c.400 deals across all sectors

2007- Medical Device

2007- Real Estate distributors

2004- Passenger transport

2005- Online real estate ads 2004- Yoghurt producer

2006- Online loan distributor

2002- Skin care

2006- Retail

2003- Consulting

2008- Diagnostic network

7

Recent buyout investments in Europe

Business Services – UK EV €1.1bn

Toys - ItalyEV €485m

Construction - SpainEV €75m

Network services -Finland

EV €615m

Consumer – ItalyEV €730m

Parking - UKEV €808m

Transport - UKEV €210m

Brands - UKEV €200m

Airport services -Benelux

EV €150-200m

Machinery - GermanyEV €70m

Healthcare - SwedenEV €185m

Retail - SpainEV €150m

Technology - GermanyEV €165m

Logistics -NetherlandsEV €300m

Baby products - UKEV €205m

Inspection – NordicEV €242m

Chemicals - Italy EV €315m

(Ex VNU)Media - Benelux

EV €350m

Logistics - NordicEV €537m

Educational products –Nordic

EV €140m

Waste - SpainEV €140m

Gas machines - GSEEV €363m

Transports - Nordic EV €1.4bn

CARES

Fashion - UKEV €98m

8

Contents

• 3i general presentation

• Overview of the current LBO market today

– General Outlook

– Debt

– Valuation

9

“We view derivatives as time bombs, both for the parties that deal in them and the economic system. The range of derivatives contracts is limited only by the imagination of man… or sometimes, so it seems, madmen”

Warren Buffet,2002

10

Annus horibilis for financial sectorE

urop

ean

Sto

ck In

dex

200

225

250

275

300

325

350

375

400

425

Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08

?

11

We are facing not only a credit crisis but also an economic crisis

• Financial instability (“credit crunch”) � Wider economic impact

• Credit – lower supply, higher cost

– Lending rates decoupled from base rate movements as near record spreads prevail

• Inflation rising– Energy, food & consumer goods, wage claims

• Consumer demand declining

• Unemployment levels set to rise

• GDP outlook mixed

– US

– Eurozone

– UK

– China / India

• Earnings will be hit

12

M&A: a dramatic slowdown since July 07

Yearly European M&A activity ($bn) - since 2000

Source ThomsonNote Deals announced

– European M&A activity divided by almost 2 (in value) over the last twelve months

– PEH activity divided by 3, now equal to levels of 2004

– The last 6 months had been more encouraging… until the current financial crisis

5%

9%

12% 12% 11%

16%

19%

8%7%

0

200

400

600

800

1 000

1 200

1 400

1 600

1 800

2000 2001 2002 2003 2004 2005 2006 2007 YTD 08

0%2%4%6%8%10%12%14%16%18%20%

LBO Non LBO LBO share

13%

9%7%

5%7%

11%

4%

0

100

200

300

400

500

600

Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08

0%2%4%6%8%10%12%14%16%

LBO Non LBO LBO share

Source ThomsonNote Deals announced

Quarterly European M&A activity ($bn) - since 2007

13

145 154

186207

14

30

48

43

112

159

184

234

250

126

61

50

103102 11

2310

2003 2004 2005 2006 2007 H107 H108

€100m-€1bn >€1bn

9%18%

18%

17%

21%

16%

9%

France was hit in line with the rest of Europe

In the first semester of 2008, PEH market share was divided by 2 in a shrinking market

French M&A volumes - by deal sizeN

umbe

r of

tran

sact

ions

French M&A volumes - LBO share 1

Num

ber

of tr

ansa

ctio

nsSource Thomson Source Thomson

Note1 Only deals of €100m or more

86

102

51

41

22

8

H107 H207 H108

Non LBO LBO

32%

68%

18%

82%14%

86%

14

Contents

• 3i general presentation

• Overview of the current LBO market today

– General Outlook

– Debt

– Valuation

15

Very difficult loan market conditions: Overview

Difficult primary market

Underwriting limited

• Debt Market almost close for the moment

• A large overhang of legacy LBO debt remains (albeit reduced)

• CLO and Hedge funds: opportunistic buyers / forced sellers

• 2L / PIK torpedoed and mezzanine liquidity stalling

Secondary market volatile • Unparalleled volatility and widening of spreads

• A key pricing reference point for finance providers

• Maximum bank underwriting appetite of c.€250 - 500m

• Market capacity for jumbo deals (>€1bn) remains limited

• Transactions up to €500m the “sweet spot”– commercial bank led

• Club and relationship banking approach still key

16

Difficult primary market: Debt overhang

• Financial Institutions have taken, and continue to take, heavy financial losses

Sub-prime asset write-downs in excess of $400 billi on to date

More pain to come…

• Citigroup $42.9bn

• UBS $38.2bn

• Merrill Lynch $37.1bn

• HSBC $19.5bn

• IKB $16.0bn

• RBS $15.4bn

• Bank of America $15.1bn

• Morgan Stanley $14.4bn

• JPMorgan $9.7bn

• Credit Suisse $9.6bn

• Washington Mutual $9.1bn

• Credit Agricole $8.3bn

• Lehman Brothers $8.2bn

• Deutsche $7.7bn

• HBOS $7.1bn

• Wachovia $7.0bn

• Bayerische Landesbank $6.7bn

• Fortis $6.6bn

• Canadian Imperial $6.6bn

• Barclays plc $6.4bn

• Société Générale $6.3bn

• ING $6.0bn

• Mizuho $6.0bn

• WestLB $5.0bn

• Goldman Sachs $3.8bn

• Dresdner $3.4bn

• Wells Fargo $3.3bn

• Bear Stearns $3.2bn

• Others: $70.0bn

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13 1519

2528 29

44

103

116

140

30

0

20

40

60

80

100

120

140

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

1Q 2Q 3Q 4Q

Liquidity of the debt market has dried up…

Source S&PNote Volumes of senior loans launched into syndication

Top of the bubble

Hopes of a partial recovery

?

Market almost closed until year-end

European LBO market – Senior loan volumes syndicated (€bn)

Subprime crisis

1

2

3

4

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High secondary market volatility

• Further pressures on bank balance sheets anticipated in Q3 / Q4 2008

• Overhang of unsyndicated loans destabilises primary market

• Average secondary market yield for senior debt >4.0%

• Trading volumes light – and widening spreads

• Buyers still in short supply

Average LevX Price

9 0

9 1

9 2

9 3

9 4

9 5

9 6

9 7

9 8

9 9

10 0

LevX price

Until buyers return, market will drift

19

0

100

200

300

400

500

600

700

800

900

Jun-07

Aug-07

Oct-07

Dec-07

Feb-08

Apr-08

Jun-08

Aug-08

+324

+482

+153+128

+83+63+49

Daily 5-year CDS for selected banks

Debt markets are almost closed for the moment

Source Bloomberg

– Interbank market has almost been shut over the past 2 weeks

– US banks are closed for new business (unaffordable refinancing rates)

– A few European banks are still “open” on a selective basis but:

• Primarily for club deals

• “Bankable” debt quantumsrarely exceed €300-400m

• Relationships with the sponsor and the target are key

• Local banks can have more appetite

Morgan

Stanley

Goldman

Sachs

RBS

Barclays

Calyon

HSBC

BNP Paribas

20

Structuring developments

Conservative structures

• Less leverage (1-2x less), with banks setting “no go areas” (e.g. cap of 6.0x) depending on credit, deal size and geography

• Equity contribution at least 40%

• Tranche “A” representing notable portion of senior debt

Pricing increased

• 2008 new pricing parameters established…

2007 H1 2008 H2 2008

Senior 225/250/300 bps 250/300/350 bps >275/350/400

2L 450 bps n/a n/a

Mezz 850 >950 bps >1050 bps

Fees 200 bps 250 bps >275 bps

Waiver Fees 12.5 bps 25 bps 50 bps

Tightening of terms

Intense credit process

Banking process

• Onerous market flex, full covenant package, limited equity cure, less covenant headroom

• Return to credit basics. Full and deep due diligence. No shortcuts

• Micro manage extended processes

• Potential for debt underwriting differentiates 3i

The market supports good quality, transactions but at a cost

21

Implications for Buyout companies

Banks on the offensive:

• Focus on Tier 1 relationships

• Little desire to see sponsors take cash off the table – recaps / secondaries sidelined

• Keenness to reduce “excess” ancillary lines and undrawn acquisition facilities

• Keenness to see rapid degearing / shorter maturities

• Greater scrutiny on performance and covenant compliance; waiver requests an opportunity to re-engineer terms, pricing and equity contributions

• Proactive selling of “underperforming” assets: leading to less stable syndicates

3i response:

• Careful selection of our syndicate banks

• A dedicated banking team

• Care and support of management of our portfolio companies

22

Contents

• 3i general presentation

• Overview of the current LBO market today

– General Outlook

– Debt

– Valuation

23

Average of selected FTSE sub-sector EBITA multiples

0

5

10

15

20

25

Mar

-99

Sep

-99

Mar

-00

Sep

-00

Mar

-01

Sep

-01

Mar

-02

Sep

-02

Mar

-03

Sep

-03

Mar

-04

Sep

-04

Mar

-05

Sep

-05

Mar

-06

Sep

-06

Mar

-07

Sep

-07

Mar

-08

EB

ITA

mul

tiple

Average

Where as pricing of quoted companies is at 2003 level…

31 A

ug-0

8

• General trend has been down

• Average multiples for selected sectors currently at 2003 levels

Average selected multiples based on target 3i secto rs

24

…prices of the few LBO completed recently have remained high

7,0x7,8x

7,3x 6,9x 6,7x 6,6x 6,5x7,2x

7,9x8,4x 8,7x

9,3x

10,5x 10,3x 10,4x 10,1x

0x

2x

4x

6x

8x

10x

12x

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Q107 Q207 Q307 Q407 Q108 Q208

(14) (35) (33)

(40)

(37) (52) (66) (77)

(87) (120)

(24) (36) (22)

(23) (19) (22)

Source S&P, Factset

European LBOs - Purchase price as a multiple of pro-f orma trailing EBITDA

The few deals closed recently are not representativ e of the stock of assets to be sold

9,0x

11,0x

13,0x

15,0x

17,0x

04/01/05 04/03/06 04/05/07 04/07/08

DJ Euro Stoxx P/E ratio

Observations

25

Main French PE transactions since the beginning of the year

Main recent deals on the French market

Size EV/ Debt/Date Target Acquirer Seller (€m) EBITDA EBITDA Sector

20/08/08 Socotec CDC Employees 470 10,2x 7,7x Building inspection

12/08/08 FoodVest Group Lion Capital LLP CapVest Equity Partners 1 100 10,1x 5,3x Food and beverages

29/07/08 CEPL Arcapita Sagard and management 563 13,2x 6,2x Supply-chain

29/07/08 Aerocan Barclays Capital PE NI Partners 124 6,7x 4,3x Aluminium aerosols

17/07/08 Photonis Astorg Partners AXA PE and management 260 10,8x 5,0x Electronic components

16/06/08 Converteam LBO France Barclays PE 1 700 13,0x 5,4x Power conversion

16/06/08 Tourexcel LBO FranceBridet Family, Avenir Entreprises Gestion, Windhurst Capital

96 7,8x 4,5xTourist "incoming" operator

16/06/08 Cegélec Qatari Diar LBO France 1 700 10,2x 5,9x Electrical engineering

15/05/08 Frial Alpha Group Founding family 126 7,3x 4,8x Food and beverages

06/05/08 Averys LBO France21 Centrale partners, Cogepa and Synergies Finance

180 7,0x 3,1x Storage systems

04/04/08 Maisons du MondeApax Partners et LBO France

Barclays PE, iXEN Partners, founders and management

435 9,1x 5,0xDecoration and furniture retail

06/02/08 Etanco IK Founding family 250 9,7x 5,6xFixing systems for buildings

Quality assets… or highly specific situations

26

Consequences for the Private Equity industry

Valuations will go down– Sales cannot be delayed eternally– Sellers’ expectations are adjusting to the new

climate

Value creation will have to be primarily driven by operational performance

– Lower leverage

– Higher equity contribution (50% in most cases)

Fierce competition in the €200m-€600m deal zone– Large caps PEH have already started to go down

in size

Challenges to the Private Equity model itself– LBOs are less attractive to debt providers than

before– Ability to deliver sufficient returns in the long run?

1

2

3

Re-opening of the deal pipeline

Fewer attractive targets for the Private Equity community

Not all PEH will be successful

4 Possibility that the model will have to adapt itself

27

Conclusion

A high risk market…

…with lots of opportunities to come

“Historically, investments made in this part of the cycle have been the best vintage years and you go back to 1990, 1987, 2001, and that's been true”

Blackstone,21 Apr 08