Private Equity and Mezzanine Finance: How to Create Value

Punta del Este, UruguayMarch 31, 2006

DARBY INVESTMENTS

By Pedro Batalla

Managing Director Mezzanine Group

Darby Overseas Investments , Ltd.

DEVELOPING MEANINGFUL RELATIONSHIPS

DEG – FMO – KBC Bank DBA Corporate Finance

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DARBY INVESTMENTS

Finding Investment Opportunities in Emerging Markets

Overview

Darby Overseas Investments, Ltd. is a global emerging markets investment firm that manages private equity and mezzanine funds for institutional investors, multilateral agencies and high-net-worth individuals. Nicholas F. Brady, former U.S. Treasury Secretary, established the firm in 1994 and continues to serve as Chairman. Richard Frank, CEO of Darby, joined the firm in 1997, after a distinguished career as a World Bank Managing Director and as CFO of the International Finance Corporation (IFC). In October of 2003, Franklin Templeton Investments, one of the largest global investment management organizations, with over $440 billion in assets under management, acquired Darby. 

• $1.2 Billion in managed capital• 9 office locations• 62 full-time employees

Darby Overseas Investments, Ltd.

Darby Americas

Darby Emerging Markets Fund $150m committed $170m returned 5 comp remaining Divesture modeDarby-BBVA LatAm PE Fund $176m committed 4 companies Investment modeDarby US/Hispanic PE Fund $250m target size (fundraising)ProBanco Fund $26m committed 3 companiesDarby Tech Ventures $25m committed 7 companies

Darby LatAm Mezzanine Fund $196m committed $25m returned 12 companiesDivestiture modeDarby Brazil Mezzanine Fund $100m target size (fundraising)Darby LatAm Mezzanine Fund II$300m target size (fundraising)

Darby Europe

Emerging Europe Private Equity Fund $143m committed 2 companies Divesture mode

Darby Converging Europe Mezzanine Fund€300m target size First close 10/05 (fundraising)

Asian Infrastructure Mezzanine Capital Fund $246m committed 9 companies Divestiture mode Darby Asia Mezzanine Fund II $300m target size First close 10/05 (fundraising)

Private Equity Funds Mezzanine Funds Private Equity Funds Mezzanine Funds

Darby Asia

Korea Emerging Infrastructure Fund ₩500b target size (fundraising)

Mezzanine Funds Private Equity Funds

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DARBY INVESTMENTS

Darby’s investment staff is highly skilled in investing in businesses and building value within their respective regions of expertise. This regional expertise is further supported by a local presence in all significant markets.

Darby Office Locations

Overview

Key: Darby Office Planned Office

Hong Kong

Washington, D.C.

Sao PauloMiami

Mexico City

ViennaIstanbul

Budapest

Warsaw SeoulLos Angeles

(planned)Mumbai

(planned)

Austin(Advisor)

• $1.2 Billion in managed capital• 10 office locations• 52 full-time employees

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DARBY INVESTMENTSOverview

Mezzanine is a flexible and adaptive form of risk capital that can be tailored to meet specific financing needs and cash flow profiles

• A financing layer that sits between senior debt and equity in a company’s capital

• Long term source of largely unsecured risk capital with debt repayment characteristics

• Senior lenders and banks generally consider mezzanine as part of equity

• Flexible amortization and interest payment.

• If well structured, mezzanine will lower the average cost of capital and improve the returns of existing shareholders

• Cost of mezzanine between that of senior debt and equity

• As provider of risk capital, the lender shares in a company’s financial success but without significant dilution of existing equity

Senior Debt

Subordinated Debt

Subordinated Debt with warrants, conversion rights

or profit participation features

Redeemable

Preferred Equity

Equity

Capital Structure

Mezzanine

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DARBY INVESTMENTS

Debt Component

• Long-term loans with a 6–12 year final life that are generally subordinated

• Dollar-denominated loans, with fixed or floating interest rates

• Base coupons generally at higher rates than senior debt

• Possibility of payment-in-kind (rolled up interest)

• Terms and conditions typically include security (usually second liens on assets/pledge of shares) and extensive covenant protection, some of which resemble bank covenants

• Loans are typically shadow rated within 6 months of commitment – generally credit ratings of B+ and above

Description of Mezzanine Capital

Mezzanine Finance — Asset Class Summary

Equity Component

• Upside participation via equity kickers in the form of warrants, profit participation, conversion features or additional interest linked to key operational variables

• Structured exit via redemption features, prepayment premiums and put options

• Alternative exit through sale to a strategic investor (via the exercise of drag and tag along rights) or initial public offering in local or international markets

• Mezzanine is a differentiated form of long term risk capital that combines elements of debt and equity

• Financial instrument that is generally subordinated to senior debt and senior to common equity

• A typical mezzanine investment has two components:

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DARBY INVESTMENTSMezzanine Finance — Asset Class Summary

A financing layer that has a risk-return profile intermediate between senior debt and equity

10

15

20

25

30

Risk (Volatility)

Typ

ical

An

nu

al R

etu

rn (

%)

Relative Risk Profile

Debt

Mezzanine

Equity

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DARBY INVESTMENTS

Mezzanine shares the characteristics of both debt and equity

Equity features

• Risk bearing through subordination

• Profit sharing and equity return participation through an “equity kicker”

• Security interest not always required

• Equity optionality through conversion rights or warrants

Debt features

• Interest payment and principal repayment

• Financial performance ratios

• Other covenants

•Mezzanine capital is largely unsecured risk capital which normally has to be repaid and serviced on an annual basis similar to a loan

•It fills the financing gap between equity and debt and can be structured so as to emphasis the features of either debt or equity thereby achieving an optimal combination that matches the specific situation and requirements of the company

•In a company’s capital structure, it can be a substitute for both debt and equity

•Negotiable and interrelated are: amortization schedule; equity and/or profit participation rights; current interest rate; collateral; value of the company; puts and calls; etc.

Mezzanine

Debt Component Equity Component• Long-Term

(Subordinated) Debt• Convertible Feature

• Equity Options

• Warrants

• Profit Participation tied into

- EBITDA

- Net Income

- Equity Value

- Other variable

Overview

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DARBY INVESTMENTS

Mezzanine finances expansion opportunities in the manufacturing and services sectors

• Higher demand for investments driven by economic growth and increased trade and capital movements

• Scarcity of senior and high yield debt for the region’s middle-market sectors

• Scarcity of equity capital from local sponsors

Mezzanine finances leveraged buyouts opportunities

• Growing merger and acquisition activity creates opportunities for acquisition finance

• Potential for partnerships with other providers of risk capital, including buyout firms

• Opportunities to finance management buyouts by qualified management teams

Mezzanine finances restructuring opportunities

• Substitution of short-term debt with long-term subordinated debt

• Opportunities to participate in distressed-debt situations and court-supervised restructurings

• Restructuring of shareholder contracts / sale and purchase transactions among shareholders

Mezzanine funds the development and modernization of infrastructure projects

• Pressing need to build out and upgrade critical infrastructure

• New government policies supporting Private-Public Partnerships

• Public budgetary constraints for needed infrastructure improvements

Wide array of applications

Applications and Demand Drivers

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DARBY INVESTMENTSMezzanine Finance — Asset Class Summary

Benefits to Companies

Mezzanine is a less dilutive form of risk capital

• Allows original shareholders to retain ownership as a result of its higher priority in the capital structure

• Facilitates partnership with strong sponsors and access to a broader and better quality deal flow

• Incentives aligned through tailor-made structures and performance-based pricing

Mezzanine is a highly flexible financial instrument that allows for the design of tailor made structures to meet particular needs of companies

• Debt and equity components can be adapted depending on the type of investment opportunity:

• Lower interest payment and higher equity component in growth plays

• Higher coupon and lower equity component in stable cash flow and/or value plays

• Flexibility in terms of the type of instrument (sub-debt or preferred stock), security, amortization schedule and payment of interest (cash or PIK)

• Equity kickers in the form of warrants, profit participation features, or additional interest linked to key performance variables (volume, output, etc.)

• Exit via scheduled amortization, prepayment (normally at a premium) or sale to a strategic investor or IPO

Mezzanine is generally less costly than other forms of long-term risk capital

• Reduced risk attributes of mezzanine allows it to offer a lower absolute cost of financing compared to private equity

• Deductibility of interest significantly reduces the after-tax cost of debt component

• Equity kicker component linked to performance measures

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DARBY INVESTMENTSExit from a Mezzanine Investment

The return on a $20 miilion, 5-year investment, with a base coupon of 12% p.a., and a total IRR of 20% would have the following components:

Exit in a Mezzanine Investments is done primaraly through the cash flows of the Company

$20.0 $20.0

$12.0

$11.0

Original Investment Proceeds

Repayment of Principal

Equity Kicker (Profit Participation, Redemption of shares Strategic sale/IPO)

Interest

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DARBY INVESTMENTS

Mezzanine Funds generate liquidity much earlier than private equity funds

Projected cash flows for a Mezzanine Fund and a Private Equity Fund

-150

-100

-50

0

50

100

150

200

1 2 3 4 5 6 7 8 9 10 11 12

Years

Capital Calls Returns to Investors

-100

-50

0

50

100

150

200

1 2 3 4 5 6 7 8 9 10 11 12 13 14

Years

$

Mezzanine Fund Cash Flow Private Equity Fund Cash Flows

Baseado na experiência da Darby com fundos existentes.

Cash Flows

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DARBY INVESTMENTSEmerging Markets

Asia

• 14 mezzanine deals totaling over $420 m in Asia (ex-Japan and Australia) since 1999. Mezzanine investments made by Darby: 6 deals $215 m. New Darby fund recently launched.

• Over 70% of the mezzanine finance transactions in Asia categorized as expansion / acquisition financing Buyouts transactions not yet a major source of deal flow for mezzanine players but expected to increase

• Geographically, the mezzanine transactions spread among China, India, South Korea, Singapore and Philippines

Central Europe

• Only €135 million in total, in two dedicated mezzanine funds raised for this region (vs. over €7 billion in private equity in multiple funds.)

• Strong market demand—long-term risk capital is sought both by middle market companies and infrastructure projects as well as by the established private equity industry and as a means to finance the growing buy-out, expansion, and acquisition activity in the region

• Strong demand from the Ascension Countries and Turkey

Latin America

• Since 199 Darby has invested $200 m in 12 companies with the first and only dedicated Fund in the Region. Successor Fund in fund raising stage. MDB have traditionally been active in this market. Several PE Funds are structuring their deals with mezzanine-type features e.g. Redeemable Preferred Shares.

• Opportunities exist in the infrastructure sector given pent-up demand, and in the manufacturing and services sector due to the lack of long term capital. Main uses are expansion, refinancing/restructuring and leveraged buyouts.

• Strong demand in Brazil, Mexico and Colombia. Chile’s buy –out market is developing quickly given well develop capital markets Darby launching a new und in local currency in Brazil.

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DARBY INVESTMENTS

Advantages of Mezzanine Format in Emerging Markets Investing

Emerging Markets

Advantages

• Built in exits

• Attractive current cash yields, typically above 10%

• Returns far less dependent on high valuation exits – IPOs, etc.

• Little competition and growing demand

• Can use leverage

• Can negotiate protection in the form of strong covenants and security interest

Challenges

• Not well known, often misunderstood

• Documentation intensive

• Inter-creditor issues complex

• Regulatory environment requires very close review

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DARBY INVESTMENTS

Darby Mezzanine Finance

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DARBY INVESTMENTSDarby Mezzanine Finance — Summary of Existing Funds

Darby Latin America Mezzanine Fund

Asian Infrastructure Mezzanine Capital Fund

Size $195 million $246 million

Legal Structure Cayman Islands LP Cayman Islands LP

Capital Structure 55% equity/45% debt 100% equity

Fund Life/Investment Period 1999 – 2011/5 years 1998 – 2010/6 years

Target Markets Latin-America Asia

Focus Sectors Infrastructure, energy, telecom, manufacturing Infrastructure, energy, telecom

Sponsor Investors Dresdner, Banco Bilbao Vizcaya Argentaria, Calyon, Corporacion Andina de Fomento

Prudential Financial, Asian Development Bank, Nippon Life Insurance

Lenders Inter-American Development Bank, Kreditanstalt für Wiederaufbau

n.a.

Rating “BBB+”/"A" for senior debt (Fitch) n.a.

Target returns 15% – 25% p.a. 15% – 25% p.a.

Investments (as of Jan 05) $172 million in 12 companies in 6 countries $275 million in 9 companies in 6 countries

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DARBY INVESTMENTSDarby Mezzanine Finance — New Funds in the Market

Darby Converging Europe Mezzanine Fund

Darby Asia Mezzanine Fund IIDarby Latin America Mezzanine Fund II

Target Size €300 million $300 million $300 million

Legal Structure English L.P. Cayman Islands L.P. Cayman Islands L.P.

Capital Structure Sr. Debt 45%/Sub Debt 10% Equity 45%

Sr. debt 50%/Equity 50% Sr. debt 50%/Equity 50%

Target Markets New EU member countries and accession candidates

China, Korea, India, Southeast Asia

Mexico, Brazil, Regional

Focus Sectors Mid-cap expansion, buyouts and refinancing plus Infrastructure

Mid-cap expansion, buyout and refinancing plus buyouts

Infrastructure, Mid-cap expansion, and refinancing

Sr. Debt Rating (target) “BBB+”/"A" “BBB+”/"A" “BBB+”/"A"

Target Returns 12-20% 14 -18% 14 -18%

Target returns Investors 18% 18% 18%

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DARBY INVESTMENTS

Company (Sector)

Country/ Year Approved

Initial Investment

Expected 2005 1) Total Debt/EBITDA 2) Non-Sponsor Debt/EBITDA Current Loan Status and Investment Description

Exited

CCI Transportation (Toll Roads)

Argentina (1999)

6.0 1) N.A.

2) N.A.

Exited in 2005 through a private sale at an IRR of negative 30.4%. Floating rate loan with profit participation and conversion rights.

Tapsa** Environment (Water Treat.)

Mexico (2000)

8.3 1) 6.3x*

2) 5.3*

Exited 2004 with 18% IRR. Fixed rate loan with additional cash flow-based participation rights.

Protel* Telecom (Wireline)

Mexico (2000)

20.0 1) 7.1x***

2) 3.3x

Exited in 2005 with IRR of 3%. Senior secured floating rate loan with warrants.

PASA Environment (Solid Waste)

Mexico (2002)

16.0 1) 1.8x

2) 1.3x

Exited in 2005 with a realized IRR of 28% pursuant to PASA’s successful IPO on the Mexican Bolsa. The Fund retains 30% of its equity interest. IRR expected to increase to 35% when this residual equity is sold.

Remaining Holdings

Santos Brasil Transportation (Port)

Brazil (2000)

20.0 1) 1.2x

2) 0.8x

Current. Company performance exceeds plan; further expansion is underway. Fixed rate loan with conversion rights or profit participation rights.

Avantel Telecom (Wireless)

Colombia (2000)

19.3 1) 3.7x

2) 0

Defaulted in 2001 and converted into equity (15.6%); $1 million remains as senior debt. Senior debt and preferred shares.

GTB** Energy (Gas Pipeline)

Bolivia (2002)

16.0 1) 8.82x

2) 0.82****

Current, amortization payments began in 2004. Performing as per plan. Fixed rate loan.

Cecrisa Manufacturing (Ceramic Tile)

Brazil (2003)

16.0 1) 5.1x

2) 0

Current. Company performance in line with expectations. Fixed rate loan with additional PIK interest, penny warrants, profit participation rights and put.

ISA Advertising (Outdoor)

Mexico (2003)

16.0 1) 3.2x

2) 0

Current. Company performance has improved significantly in 2005, 70% increase in revenues vs. 2004. Fixed rate loan with penny warrants.

TEBSA Energy (Generation)

Colombia (2004)

12.3 1) 2.3x

2) 2.3x

Current. Distributions received during 1st year exceeded 90% of investment size. Subordinated debt and equity.

Fluviomar Transportation (Barge)

Regional (2004)

16.0 1) 5.0x

2) 0

Disbursed January 2005. Fixed rate loan with penny warrants, profit participation rights and put.

Pecsa Energy (Gasoline Distribution)

Peru (2005)

10.0 1) 3.5x

2) 0.5x

Disbursed in April 2005. Fixed rate loan with equity kicker linked to volume growth of liquid fuel products.

Total 175.9 18-20

* 2003 Data. ** Higher leverage ratios due to project finance nature of companies with pre-established revenue backed by government agencies (Banobras and Petrobras, respectively). *** Excluding Telmex debt. **** Excluding the Advance Payment Contract from Petrobras and shareholder loan.

Darby Latin American Mezzanine Fund — Portfolio Summary & Status

February 2006

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DARBY INVESTMENTSDarby Asian Infrastructure Mezzanine Capital Fund — Portfolio Summary & Status

December 2005

Company/Sector/ SubSector

Country/ Year Approved

Initial Investment

US $ million

Expected 2004 1) Total

Debt/EBITDA 2) Non-Sponsor Debt/EBITDA Current Status and Investment Description

Exited

Pollon Electric Energy (Power Generation)

China (1999)

45.0 N.A. Exited in 2001 with an IRR of 18.4%. Senior debt with warrants.

CITIC 21CN Internet

China (2000)

8.5 N.A. Exited in 2004 with IRR of 3.6%. Listed equity investment.

Pacific Energy Energy (Electric Power)

Regional (2000)

1.2 N.A. Exited in 2003 with an IRR of negative 17.3%. Listed equity investment.

Noida Transportation (Toll Bridge)

India (1999)

4.5 1) 17.8x 2) 13.8x

Exited in 2005 with an IRR of 24.9%. Equity investment.

Remaining Holdings

Spice Telecom

India (1999)

69.2 1) 5.3x 2) 3.7x

Defaulted in 2001. Exit underway with sales agreement executed in December 2005 with scheduled closing in early 2006. Recovery prospects high. Subordinated debt, equity and guarantee of bank loan.

PSNL / ACeS Telecom

Regional (1999)

30.0 N.A. Defaulted in 2002. Forbearance agreement executed. PSM to issue restructured new subordinated notes to be issued by PSN. Through December 2004, PSN met its debt service obligations pursuant to the restructuring terms, but further restructuring will be necessary following an anomaly in PSN’s satellite operations.

Enterprise Networks Internet

Korea (2002)

36.9 N.A. Defaulted in 2004. Reorganization plan approved in January 2005. Part of AIMCF claims converted into 24.3% EPN equity, KW6.2 billion of notes and KW400 million of the convertible notes to be repaid in 2014. Balance of AIMCF claims waived as part of the reorganization plan.

First Philippine Holdings Corp. Energy& Transportation (Power Generation & Toll Roads)

Philippines (2003)

35.0 1) 0.8x 2) 0.8x

Current. Company performance in line with expectations. IPO of FirstGen planned for the next 12 to18 months. Unsecured senior notes with call options.

Meiya Power Energy (Power Generation)

China, Korea, Taiwan (2004)

45.0 1) 3.5x 2) 3.5x

Company performance in line with expectations. IPO planned for 2006. Equity investment.

Total 275.3

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DARBY INVESTMENTS

Darby Overseas Investments, Ltd.

Pedro Batalla, Managing Director, pbatalla@doil.com

1133 Connecticut Avenue, NW

Fourth Floor

Washington, DC 20036

darbyoverseas.com