1. Private Equity An Overview Clark L. Maxam, Ph.D. Director of Research – Braddock Financial Corporation and El Pomar Professor of Entrepreneurial Finance – University of Colorado, Colorado Springs

2. Private Equity – Broadly Defined Technically refers to any type of equity investment in an asset in which the equity is not freely tradable on a public market. Less liquid Long Term in nature

3. Private Equity – Categories and Players Angel –Early Stage: Seed, Start-up Professional Venture Capital –Early Stage, Expansion, Later Stage Private Equity –Later Stage, Buyout, Special Situations Hedge Funds –All Stages

4. The Private Equity Market

5. Venture Capital Private Equity Hedge Funds Angel Key Player Overlap

6. Traditional Private Equity – Primary Activity Professional pools of capital that buy all the publicly traded equity of target companies = “Go Private” Usually done with borrowed money –High degree of leverage Aka : Leveraged Buyout

7. The Basic Value Creation Formula Fundamental Ideas 1)Re-focuses acquired businesses resulting in lower costs and improved efficiency. 2)Value is created through basic finance that says debt can increase firm value if you can afford it! Exploits corporate aversion to debt (Henry McVey, Morgan Stanley). 3)Regulatory Arbitrage – Sarbanes-Oxley

8. The Basic Value Creation Formula Debt can increase Value Dupont Equation Leverage – Debt as % of Assets  Equity  Multiplier  ROE

9. The Basic Value Creation Formula Debt can increase Value Consider a company that takes on debt at a cost of $3 in Net Income, but changes NOTHING ELSE. Could drop NI to 4.8 and still match the previous ROE!!

10. The Basic Value Creation Formula An Example – Carlyle Group Leveraged Buyout Case 1 (5 years) – No Profit IncreaseCase 2 (5 years) – Profit Increase

11. Source: International Financial Services

12. Private Equity Investments by Country

13. Source: National Venture Capital Association,Thomson Venture Economics

15. Source: National Venture Capital Association,Thomson

16. Source: Cambridge Associates, LLC

17. PE as a new Model of General Management (Jensen) –Overcomes entrenched thinking, management and disjoint between manager incentives and capital markets. –Problematic Trends Publicly held Private Equity – oxymoron Fee Structures not tied to exit Hedge funds in the PE business – not a transaction business. Private Equity Issues Going Forward

18. 2007 estimate of$160B in dry powder  $750B  $590B in debt appetite. –Banking capacity is finite and already extended. –Potential regulatory limits Private Equity Issues Going Forward

19. PE Boom has been fueled by –Historically low rates –Regulatory arbitrage Both could reverse quickly and change the metrics dramatically Private Equity Issues Going Forward