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1、Overview:Financial Services Industry-What Went Wrong&What Does it Mean?,P.Olivier SarkozyManaging Director&Financial Services Group HeadOctober 3,2008,Important Information,This presentation is made available on a confidential basis to sophisticated investors for the purpose of providing certain inf
2、ormation about TC Group,L.L.C.and its affiliates(“Carlyle”)and Carlyle-sponsored investment funds(each,a“Fund”).This presentation does not constitute an offer to sell or a solicitation of an offer to purchase interests in any Fund.Any such offer or solicitation shall only be made pursuant to a confi
3、dential private placement memorandum of Fund,which qualifies in its entirety the information set forth herein and which should be read carefully prior to investment in any Fund for a description of the merits and risks of an investment in the Fund.An investment in a Fund entails a high degree of ris
4、k and no assurance can be given that a funds investment objective will be achieved or that investors will receive a return of their capital.As used throughout this document,and unless otherwise indicated,“gross IRR”shall mean an aggregate,annual,compound,gross internal rate of return on investments.
5、In the case of portfolios of realized and unrealized investments,the gross IRRs are based on realizations and internal valuations of Carlyle as of the applicable date.Gross IRRs do not reflect management fees,carried interest,taxes,transaction costs and other expenses to be borne by investors in the
6、 Fund,which will reduce returns and in the aggregate are expected to be substantial;for a description of such management fees and carried interest,please see the final confidential private placement memorandum.While Carlyle believes that projected returns for unrealized investments are based on assu
7、mptions and valuation methodologies that are reasonable under the circumstances,the actual realized returns on Carlyles unrealized investments will depend on,among other factors,future operating results,the value of the assets and market conditions at the time of disposition,any related transaction
8、costs and the timing and manner of sale,all of which may differ from the assumptions on which the valuations used in the prior performance data contained herein are based.Accordingly,the actual realized return on these unrealized investments may differ materially from the projected returns indicated
9、 herein.Investors are encouraged to contact Carlyle representatives to discuss the procedures and methodologies used to calculate the investment returns and other information provided herein,and may upon request obtain an illustration of the effect of fees,expenses and other charges in the gross IRR
10、s presented.Past,targeted or projected performance is not necessarily indicative of future results and there can be no assurance that targeted or projected returns will be achieved or that the Fund will achieve comparable results.References to portfolio companies are presented to illustrate the appl
11、ication of Carlyles investment process only and should not be considered a recommendation of any particular security or portfolio company.Information about recommendations over the last year is available upon request.It should not be assumed that recommendations made in the future will be profitable
12、 or will equal the performance of past recommendations.Certain information contained in this presentation,including the values given for some assets,is non-public,proprietary and highly confidential information.Accordingly,by accepting and using this presentation,you will be deemed to agree not to d
13、isclose any information contained herein except as may be required by law.In addition,certain information contained in this presentation has been obtained from published and non-published sources prepared by other parties,which in certain cases have not been updated through the date hereof.While suc
14、h information is believed to be reliable for the purpose used in this presentation,Carlyle does not assume any responsibility for the accuracy or completeness of such information and such information has not been independently verified by Carlyle.Except where otherwise indicated herein,the informati
15、on provided in this presentation is based on matters as they exist as of the date of preparation and not as of any future date,and will not be updated or otherwise revised to reflect information that subsequently becomes available,or circumstances existing or changes occurring after the date hereof.
16、Certain information contained herein constitutes“forward-looking statements,”which can be identified by the use of terms such as“may”,“will”,“should”,“expect”,“anticipate”,“project”,“estimate”,“intend”,“continue,”“target”or“believe”(or the negatives thereof)or other variations thereon or comparable
17、terminology.Due to various risks and uncertainties,actual events or results or actual performance of the Fund may differ materially from those reflected or contemplated in such forward-looking statements.As a result,investors should not rely on such forward-looking statements in making their investm
18、ent decisions.No representation or warranty is made as to future performance or such forward-looking statements.,Executive Summary,What Happened?What Role Will Private Equity Play?,I.What Happened?A Crisis by Many Names,August 2007,Today,To Come,Money Market FundsAuto LoansCredit Card Lending Commer
19、cial Real Estate Liquidity,and One Underlying Common Theme,LEHAIG WaMu,WachoviaHypo REFortisB&BDexia,TARP?,Leverage!,Reversal of Glass-Steagall in 1999 set off a leverage race on Wall StreetLeverage outside the banking system largely unregulated/misunderstoodExplosion of credit markets allowed each
20、segment of risk to be isolated and further leveragedTiering of risk allowed for multiple layers of leverage with limited transparency Investors became complacent while regulators became overwhelmed,While Current Crisis in Many Ways Mirrors Past Credit Cycles,Inflated housing&realestate valuesLax mon
21、etary policy that lasted too longFlat yield curve Cheap credit compounded by loss of investor disciplineWeak regulatory framework,Loss of confidence,Extent of Leverage is a Differentiating Feature of this Particular Cycle,Government Debt 1,Federal and Consumer Debt as%of GDP 2,(1)Office of Managemen
22、t and Budget,Budget of the United States,FY 2007(2)U.S.Chamber of Commerce as of 8/27/08,Bank Leverage 2,%,Extent of Leverage is a Differentiating Feature of this Particular Cycle,Share of Intermediation Through Banks&Securities Markets 1,(1)Morgan Stanley.“Levered Losses:Lessons Learned from the Mo
23、rtgage Market Meltdown”2/08(2)SNL Financial.Data as of 7/31/08,Total Assets of Top 5 Brokers 1($tril),6%CAGR,16%CAGR,(1)SNL Financial.Top brokers traded on the NYSE and NASDAQ(2)Source:Lehman Brothers.Data provided 8/28/08,Global Issuance of Structured Finance Products 2,Extent of Leverage is a Diff
24、erentiating Feature of this Particular Cycle,Anecdotes of Leverage,$2.3 tril in“AAA”guarantees supported by six monolines with less than$20 bil in equity(0.8%)(1)In June 2007,financials made up 20.9%of S&P 500Implies that approximately 30%of every dollar earned by an S&P 500 company was earned by a
25、financial services firm Total assets of the top 5 brokerage houses in the U.S.equaled approximately 35%of the total U.S.annual GDP.Balance sheets were levered on average 30:1(3)In 1998,failure of Long Term Capital brought markets to their knees,based on a loss of$4.6 bil.(4)To-date system has incurr
26、ed approximately 75x(5)this amount.Industrys capital base increased by only 2.5x that during this time(6),Pershing Square Capital Management.“How to Save the Bond Insurers,”11/07Company Reports.Data as of Q4 2007SNL Financial.Data as of Q4 2007Financial Times.“Bank bailout shows need to intervene,”6
27、/08Loss estimate to-date of$460 bil provided by Goldman Sachs.Data provided on 8/28/08.Inflation data provided by the U.S.department of Labor.SNL Financial.As measured by tangible capital base of top 25 U.S.financial institutions(excluding insurance companies,from 1998 to Q2 2008),Mortgages,Mortgage
28、s,Mortgages,Cash,Cash,Cash&Fees,AAA,Cash,Cash,AA Below,Notes,Cash,10 to 1,50 to 1(Warehouse),50 to 1,15 to 1,30 to 1,Consumer,Loan Origination,Wall Street,Structured ABSRatings Agencies,70%FNMAFHLMC,30%BankInsuranceCompanies,CDOs,AAAs,AA,A,BBB,BB,Equity,Wall Street,Source:Wachovia Securities,“Lifest
29、yles of the Rich and Living Rich,A Tale of Two Consumers,”2005,400 to 1Leverage,The Leverage Game,Notwithstanding the existing underlying leverage,banks could lever AAA securities by over 100:1!,Risk vs.Information,Originator,Warehouse Provider,Senior Bonds,Mezzanine Bonds,Sub Bonds,Residual Notes,C
30、DO Equity,Performance Risk,Underlying Collateral Knowledge,Least,Most,Efficient Frontier,Source:Wachovia Securities,“Lifestyles of the Rich and Living Rich,A Tale of Two Consumers,”2005,Those who knew the most held the least amount of the risk,while those who knew the least ended up holding the most
31、 risk,As shown by the inability of the nations 10 largest banks to deleverage,transition will take time,Make No Mistake We Are at the Beginning of This Crisis,Credit markets point towards significantly more pain to comeConsumer slow to react&has yet to adjust to new realitiesWe are not even talking
32、about large looming issues:autos,credit card&commercial REWeak political leadership will prolong recovery,Total Assets of Top 10 Banks$(tril),Source:SNL;Top banks traded on the NYSE and NASDAQ,$,Still in Early Innings,Industry has taken less than 50%of losses estimated by most responsible analystsIM
33、F$0.9 tril(1)Pimco1.0(2)Federal Reserve1.2(3)Paulson&Co.1.3(4),International Monetary Fund,“Global Financial Stability Report,”4/08 Bill Gross of Pimco.“Investment Outlook:Mooooooo!”7/08Federal Reserve Board,“Foreign Exposure to Asset-Backed Securities of U.S.Origin”8/08 Bloomberg,“Paulson&Co.Says W
34、ritedowns May Reach$1.3 Trillion,”6/08,Source:Goldman Sachs Research.Data provided 9/26/08,Losses Realized To-date,Loss Estimates,(,figures in$bil),U.S.,Europe,Rest of,world,Total,Brokers,93,76,1,170,Banks,97,109,14,221,Specialty Finance,37,-,-,37,Insurance&Asset,Mgr,39,7,-,45,Total,266,191,15,473,H
35、ousing Market Weakness To Persist,Duration of Housing Downtown from Peak to Trough as Measured by Housing Starts,With Demand Dropping off Faster than Production,the Number of Vacant Units Ballooned,?,Housing market still materially weak due to significant over-supplyResets have yet to impact numbers
36、(2009/2010 issue)nor has the full impact of foreclosures been built into supply projectionsVacant-for-sale homes are near a record-high share of the housing stockForeclosures at their highest levels since recordkeeping began in 1974&likely to increase(1)Mortgage rates have not fallen,contributing to
37、 continued softness,Source:U.S.Census Bureau.Data as of July 2008,(1)Nouriel Roubini,“Prospects for the U.S.and Global Economy in 2008 and Implications for Financial Markets”4/08,%,Note:New home sales and housing completions include single-family units only.Sources:U.S.Census Bureau,New Residential
38、Construction&Housing Vacancy Survey,%Change 2005-2007,Housing Completions,Vacant Held Off Market,Vacant for Sale,New Home Sales,Government Intervention is Increasing,Macro measures:monetary&fiscal policyFed Funds:5.25%to 2.0%Discount Rate 5.75%to 2.25%Bush stimulus plan/tax rebate:$168BLiquidityNew/
39、expanding liquidity facilitiesExpanding collateral categoriesRegulatoryPaulson PlanAd hoc responsesBear StearnsFannie Mae/Freddie MacAIGWaMuWachovia,Purchase$700B of troubled assetsRemove toxic/illiquid assets from systemFocus on residential and commercial real estate MBS and whole loansExpanding to
40、 include several additional asset classesPricing mechanism will be keyReverse auction likely toolPrimarily targeting US financial firms,Previous Actions,Proposed Treasury Bailout(TARP),Additional Measures,Money market fund guaranteeShort-selling banIncreasing PE ownership limits to attract additiona
41、l capital into banks,Unintended Consequences,GSEs TakeoverLehman BrothersWaMuTARP,While dollar has been strong in the short term,have we created a longer term problem by doubling the size of the national debt?By focusing on avoiding the“moral hazard,”did we inadvertently create a run on the money ma
42、rket funds?Eradication of bank company debt forced Wachovia transaction and increased cost of funding system-wideTo be determined,but outlook is not good,Landscape of the Financial Services Industry Will Look Markedly Different,Financial services industry will unwind,slowly and painfullyInvestment B
43、anks,Specialty Finance Companies and Rating Agencies have the most to loseNon-traditional consumer borrowing will largely disappearWholesale funding models may never come backSector will shrink to be approximately 10%of the S&P 500Disintermediation will allow the banking industry to growConsumer and
44、 commercial financeRates will riseFlight to quality will(has)force(d)high level of consolidationHeightened levels of receivershipThose without differentiation will merge,II.What Role Will Private Equity Play?,A unique role in the recapitalization of theindustryHigh volatility/low transparency limits
45、 the role of the public marketsEquivalent of buying a lottery ticket absent an ability to complete significant due diligencePrivate equity has the capacity,competency and mandate to undertake due diligence&evaluate/structure transactionsHowever,limited financial services expertise currently exists i
46、n the industry,Private Equity to Play a Unique Role,Supply/demand imbalance to allow for outsizedreturnsIndustry likely to need close to$500 bil in new equityTop 3 PE funds dedicated to Financial Services have less than$20 bil in capacityWhile co-investment by LPs could increase available capital by
47、 2-3x,lack of available/advisable leverage limits available capitalShould allow PE to be thoughtful and demanding(has not been the case to date)Importantly,PE shops able to instill confidence(in addition to injecting capital)will be able to charge dearly for theircapital,Private Equity to Play a Uni
48、que Role,Anatomy of successful investments relatively straight forwardRecapitalization must solve the problem subsequent dilutiontoo expensive/onerousIn order to ensure that new capital solves the problem,adequate due diligence must be performedConvincing counterparties(investors,customers,regulator
49、s&other liquidity providers)that problem has been fixed as important as actually fixing the problem Which will place a premium on certain types of capital overothersIn addition to capital&confidence,responsible private equityshould be able to bring other elements to bear,including management,However
50、,New Approach Is Required,Traditional approval based on industrial experience simply does not workYouve got to do the workMay be boring,but its a sine qua nonReestablishing counterparty confidence is as important,if not more important,than the capital being infusedGood bank/bad bank structure,while
