U. S. Competitiveness and Private Equity Karen G. Mills Council of Foreign Relations December 13, 2005 The rise of private equity in Asia: opportunity or threat?

2 Asia will become an increasingly viable venue for private equity deals OpportunityInfrastructure Environment/ Market Support Available companies or technologies Strong end markets Brokers to deliver deal opportunities Experienced investors Consortiums to share risk Support Industries  Legal  Accounting  Investment Banking  Industry Associations Regulation IPO Market M & A Market

3 1% 65% 34% Asia: Capital Invested 5.1 (6) (77) (15) No. of Deals Investments are growing but little is venture Asian Private Equity 2005 January-June ($Billions) 58% 28% 14% Venture Expansion/ Growth Buyouts 55% growth vs. YAG Asia: Funds Raised 5.6 Source: Asian Private Equity Review Other 1.6 India.5 Korea.7 China.8 Japan 1.5 Investment: By Country 5.1 No. of Deals (11) (22) (2) (42) (11)

4 Firms raising funds or investing funds in Asia in the first half of 2005: Specific Asia Funds $650 – 2 Billion Allocating Existing Funds to Asia Affinity Capital CVC Capital Partners (Citicorp Venture) Castle Harlan CRCI HSBC Private Equity CCMP (Formerly JP Morgan) Mitsubishi SAIF (Formerly Soft Bank Asia) Unison Blackstone Carlyle General Atlantic KKR T. H. Lee Warburg Pincus Ripplewood Holdings Source: Venture Capital Journal

5 Latest news for foreign investors is mixed CountryRecent Actions ΘKoreaCurrent civil and criminal investigations of seven U.S. and European private equity firms ΘChinaNew regulation in November 2005 creates more restrictions on establishing foreign venture backed companies +IndiaLifted ownership restrictions by foreign investors in telecom +JapanRelooking at more positive treatments of foreign direct investment

6 Why do we care? The dynamism and transparency of American Capital markets have historically served as a powerful contributor to U.S. innovative capacity” - Scott Stern CFR 2005 We worry Will there be enough capital for U.S. opportunities? Will Non-U.S. innovative capacity grow to rival ours?

7 Last year $57 billion was invested in private equity Source: 2004 NVCA Year Book Capital Commitments to Private Equity Funds

8 Institutions not individuals provide most of the funds Source: 2004 NVCA Year Book Private Equity Commitments By Limited Partner Type

9 Private equity is beginning to operate as a global business Sources of Private Equity Capital Operating / Tax Home of Funds & Principals Geography of Investments Non-U.S. Government Non-U.S Private U.S. State Pension Funds Endowments Other Private Non-U.S. Government Non-U.S. Private U.S. based Other Markets Latin America Middle East Asia Europe U.S. Return of Capital Illustrative

10 Non-U.S. investments in private equity are accelerating Source: Greenwich Associates U.S.Continental Europe U.K.CanadaJapan Percent of institutions investing in private equity Now Invest Plan to Invest U.S.Continental Europe U.K.CanadaJapan Percent of Institutions that invest in Private Equity Now Invest Plan to Invest Now Invest Plan to Invest

11 DISCOVERY How does innovation translate into American jobs? Basic Research Invention Innovation CommercializationGrowth BUSINESS FORMATIONJOB CREATION Large Company Expansion Entrepreneurship

12 Venture Backed Growth Percentage Change 12% 7% -2% 7% 5 pp 9 pp Sales Growth Job Growth Venture capital backed companies grow faster and create more jobs Source: National Venture Capital Association; Global Insights study Venture Backed Total U.S.Venture Backed Total U.S.

13 Venture capital funding spurs innovation more powerfully than R&D * Innovation is measured by patent production Source: Samuel Kortum and Josh Lerner, RAND Journal of Economics, Winter 2000 VC Spending as a percent of R&D ( ) Percent of Industrial Innovation* accounted for by VC Backed Firms ( ) Percent accounted for in % 8% 14%

14 Venture and buyout investing are quite different VentureBuyout Small deal size Early stage High risk More likely technology driven More consortium investing Control stake Return comes from: Leverage Multiple expansion Growth

15 Capital Commitments to Private Equity Funds Buyouts and Mezzanine capital is also being used to grow businesses Source: 2004 NVCA Year Book Other Private Equity Capital Buyouts and Mezzanine Capital Venture Capital

16 The trend is clear; the effect on the U.S. is unknown but not worrisome 1.Non-U.S. capital will be increasing investments in private equity of all kinds. 2.Non-U.S. deal opportunities will be increasingly attractive to U.S. based capital. 3.Private equity skills and market support will increase rapidly in non-U.S. markets particularly Asia. 4.There is no evidence that U.S. interests will be harmed.

17 Karen Gordon Mills Karen Gordon Mills was a Founder and Managing Director of Solera Capital, a private equity fund based in New York City. She has been in the industry since 1983 and is an expert in investing and growing companies in traditional U.S. based industries such as food, textiles, media and industrial components. Some of these companies and brands include Telex Communications, Mrs. Fields Cookies, Bruce Hardwood Floors and Annie’s Macaroni and Cheese. Her background also includes consulting for McKinsey & Co. and product management at General Foods. Ms. Mills received her A.B. from Harvard University in Economics in 1975 and her MBA from Harvard Business School in 1977, where she was a Baker Scholar. She currently serves on the Boards of the Scotts Company and Arrow Electronics.