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July 16, 2012
KKR Capstone OverviewDean B. Nelson
CONFIDENTIAL
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What Ill be talking to you about today
Context: The start of KKR Capstone
Todays Focus: How and where KKR Capstone operates today
Q&A: What questions do you have for me?
Time permitting: Oriental Brewery case study
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In 99/00, it was clear that the PE market was changing
More PE firms with more capital Historically high returns led to rapid increases in PEcompetitors and capital
More aggressive corporate management Corporations were running their businesses more
aggressively, making it increasingly difficult to
quickly create value in LBOs
Private equity wasincreasinglycompetitive
Deal sourcing andvalue creation
efforts had to beredoubled
Required additional resources with a broader setof skills and an even tighter workingrelationship with the management team
Restructuring became table stakes - necessarybut no longer sufficient
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KKR responded to these market conditions by innovating on theindustry standard model with three new additions
PortfolioManagement
Committee (PMC)Senior Advisors KKR Capstone
Responsible for oversight &management of entireportfolio
Work closely with seniormanagement and KKR onoperational issues andopportunities
Works as the operatingarm of KKR to directlyimprove companyperformance throughtargeted projects
New Additions
Additional Changes
Realignedinvestment teams
into 9 industrygroups
Hired dealexecutives with
operatingexperience
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KKR Capstone was started to capitalize on three insights
Late 90s areas of opportunities KKR Capstone
Belief that investing behind , andexecuting against , improvement-oriented opportunities would createcompetitive advantage
More operational resources wererequired to diligence opportunities and
consistently drive results
External consulting firms couldntconsistently meet KKRs requirements Wide variance in the quality of teams
and output Objective of creating dependence vs.
building capability and independence Focus on planning & strategy, with
limited experience in implementation
Experience and talent: all teams are led bypartner-equivalent executives, who also
possess meaningful industry experience Focus: teams do not monitor, but rather
execute against opportunities that are critical toKKRs investment thesis and the CEOs agenda
Approach: working with management teamsas a trusted partner
Overall Mission : To work, in partnership withmanagement over the lifetime of ourinvestments, to address the most importantoperational value-creation levers and help KKRgenerate top-tier returns for our investors
Integration: Capstone is integrated withinKKRs value creation business model
Alignment of incentives: all executives holdKKR stock as part of KKRs One Firmcompensation model
Better results, faster : Emphasizeimplementation and transfer of skills
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What Ill be talking to you about today
Context: The start of KKR Capstone
Todays Focus: How and where KKR Capstone operates today
Q&A: What questions do you have for me?
Time permitting: Oriental Brewery case study
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Support late-stage due diligence
KKR Capstones operating model
Help develop 100-Day Plan and operating metrics
Put resources on the ground, working with management
Involve outside resources with specific, deep expertise
Build capabilities to sustain improvement
Move On!
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Key success factors: working with a right-sized team on themost important initiatives in order to get better results, faster
Appropriate team size and skills
Well defined initiatives
Focused use of outside resources
Define Test
Implement
Move on
Results
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KKR Capstone priorities
In our portfolio work Help drive profitable growth Convert revenue growth into disproportionate EBITDA growth Upgrade talent Make the improvements stick
In our model Build scale and expertise Expand capabilities internally and through external relationships Evolve and extend our model portfolio and due diligence Extend our cross-portfolio efforts
Within KKR Be responsive to opportunities where our expertise is helpful Strengthen our ties to the rest of the firm
Driveswhere andwhat weare workingon in the
portfolio
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Note: Portfolio companies identified above may not be representative of the entire portfolio.(1) Percentage calculated by dollars of KKR equity invested rather than by number of KKR portfolio companies. Includes companies in funds subsequent to the 1996 Fund, which was not contributed to KKR in
the Combination Transaction, excluding Harman, Legg Mason, and CICC.
Modern
Dairy
Weve partnered with ~90% of KKRs Portfolio (1)
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We have an intensive focus on driving revenue growth
Material Revenue Growth Drives Higher Returns
9.7%
14.0%
1Revenue EBITDA
2.8x
2.0x
1MOIC of
Companies withRevenue Growth
>4%
MOIC of KKRInvestments
Since Inception
While much of our work helps our companies with cost and capital efficiency, enormousemphasis is placed on initiatives to grow revenues
Revenue growth is critical: you cant cost -cut your way to sustainable high returns
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(1) Portfolio companies with greater than 4% revenue growth, located in the U.S. with annual revenue greater than $500mm, and originalinvestment made between 1/2005 and 12/2007.
(1)(1)
(1)
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but we also focus on a variety of opportunities across severalportfolio companies (North America example)
FDC Biomet Aricent Sealy Academy Capsugel Capital
Safety Go Daddy Ipreo Del Monte
Pricing x x x x
Promotion /
Merchandising x x
Sales Force
Effectiveness x x x
New geo / channels x x x x x
Online x x x
Product Innovation x x x x
Sourcing x x x
Manufacturing Process
Improvement x
IT
Working Capital
Carve-outs x
Operating Metrics x x x
Org Design / Talen x x
Portfolio [ ] x x x
KKR Capstone Deployment 1 2 1 1 3 3 1 3 2 2
P r o c e s s
Pre-2010
R e v e n u e
E f f i c i e n c y
Post-2010
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How to work with KKR Capstone most effectively in the portfolio
Regardless of context, we have found a few key conditions make a realdifference:
Advocacy from the deal team for our initial involvement
Not an alternative to McKinsey; instead, part of the KKR way
When possible, embed Year One fees in transaction close
Agenda focused on most important issues and Board visibility
Involvement in major decision-making forums (i.e. sufficiently close to themajor issues and debates and copied on all material)
Full members of the team and positioned that way with other sponsors andthe portfolio company management
If club deal, distinct initiatives from other sponsors (divide & conquer) andexpectations set upfront about our involvement
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What Ill be talking to you about today
Context: The start of KKR Capstone
Todays Focus: How and where KKR Capstone operates today
Q&A: What questions do you have for me?
Time permitting: Oriental Brewery case study
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3
4
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What Ill be talking to you about today
Context: The start of KKR Capstone
Todays Focus: How and where KKR Capstone operates today
Q&A: What questions do you have for me?
Time permitting: Oriental Brewery case study
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3
4
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Oriental Brewery: Overview
Purchased from AB InBev in 2009; KKRs 1 st investment in Korea
#2 beer producer in Korea; 41% national market share
One - firm KKR team, including KKR Capstone, KKR CapitalMarkets, and Global Public Affairs contributed to success
KKR not highest bidder; only non-local PE firm
Domestic Product International Product
Source: Oriental Brewery data.
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Operating Improvement Investment Thesis
Played key role indiligence; identifiedoperational improvementareas
On ground day 1 with OBteam executing keyinitiatives
Full team engaged for 24months post-acquisition
Monitoring sustainability ofinitiatives
KKR Capstone Role Value Creation
Carve-out to stand upbusiness
Procurement practices
Wholesaler managementprogram
New product development
Sales force effectiveness
Green Portfolio Program Inventory management
Export growth
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Which wholesalers should be prioritized?
Customer prioritizedbased on:
Total OB volume withcustomer
OB customer marketshare
Priority
Customers
OB MarketShare
HighLow
O B V o l u m
e
H i g h
L o w
Wholesale sales model Every wholesaler must
buy OB product No price or product
discrimination
Wholesaler Management
M a r k e t O v e r v
i e w
C u s t o m e r
F o c u s
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Balanced customer prioritization based on incrementalvolume by channel, customer profitability and OB total volume
(Focus)(Manage)
(Others) (Maintain)
Wholesaler Management
Source: Oriental Brewery data.
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Seoul/Sudo
Kyoungbuk
WS #1Incremental Volume: LowChannel: Pub
Chungnam
Chungbuk
Gangwon
Kyoungnam
Jeonbuk
JeonnamBusan
Before After
Cases SpendKRW/Case Cases Spend
KRW/Case
55k 44M 800 50k 35M 700
20k 7M 350 30k 12M 400
75k 51M 680 80k 47M 588
W S # 1
W S # 2
T O T A L
7% case growth; 8% spend decline;14% reduction in spend/case
Wholesaler Management in Action
WS #2Incremental Volume: HighChannel:Convenience Store
Source: Oriental Brewery data.
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0
200
400
600
2010
OBVolume
345
2011
509
Apr-Dec2010
268
Apr-Dec2011
450
0
100
200
300
400
2009
CassLight
Volume
208
2011
373
May '09 -Apr '10
198
May '10 -Apr '11
329
47% volume growth from 10 - 11; 68% growth 9 months post-launch
79% volume growth (40% CAGR)from 09 - 11;
66% growth 12 months post-launch
Product Development
OB Brand Volume 10 - 11 Cass Light Volume 09 - 11
Source: Oriental Brewery data.
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What Ill be talking to you about today
Context: The start of KKR Capstone
Todays Focus: How and where KKR Capstone operates today
Case study: How we create value in portfolio companies
Q&A: What questions do you have for me?
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