EFTA00780284.pdf

Confidential Discussion Paper JEE, please note: In this document Private Equity (PE) stands for 3i Group plc and Mezzanine Fund (MEZ) stands for Intermediate Capital Group plc The structure is just an idea and your input required !! September 2010 EFTA00780284 PE can apply its proven asset management expertise to grow outside Private Equity and Europe ♦ PE has restructured its balance sheet and is now in a position to modify its strategic direction Pi Group • The Private Equity industry is affected by current low credit supply and the multiplication of failed past transactions Buyout Growth Capital Infrastructure consumed in the boom years Asset under management Asset under management Asset under management ♦ PE has exposure to Asia and North America but is still heavily £5,227m £2,sssnt £1,627m skewed towards Europe • PE has proven areas of expertise and strong brand that could be used to reinforce its presence outside Private Equity and Europe Diversify source of funding — Brand Declared strategic interest in acting as asset manager, — Sector expertise broadening activities — Business line expertise — Contacts and relationships ♦ PE has declared its strategic interest in broadening its activities to become an asset manager capable of attracting third parties fund % Exposure to Asia and Grow third party funds North America under management 2 EFTA00780285 Organic growth will not be fast enough to meet PE's objectives Choices between setting up a greenfield JV or buying an existing Fund Management Company Strategic decision Market research Entry options Representative office Greenfield JV FMC Buy into an existing FMC I II Greenfield JV FMC J Buy into an existing FMC Partner search Target search CSRC authorisation for JV FM Partner search Target search Negotiate & invest & fund launch I CSRC authorisation for JV FM Negotiate & invest Incorporate JV FMC Launch funds & fund launch I Incorporate JV FMC Launch funds 3 EFTA00780286 What class of assets to choose from when becoming an asset manager? Standard Asset Management Mezzanine Funds ♦ Increasing competition • Add product and revenue diversification and broaden business mix • Lack of opportunities at the top end of the LBO market is driving traditional large cap players to consider large mid- • Less sophisticated, younger market, especially in Asia, and market, minority interest and international (in particular Asian therefore might be easier to create a strong market position transactions) more actively • Channel to attract third-party funds seeking Western • Overhang of un-invested capital (total global Private Equity expertise commitments are in the region of $400bn) forces large cap players down in size • To some extent counter cyclical industry less affected by volatility ♦ Increasing interest from Private Equity players in minority interest investments • Lack of current bank financing favours hybrid equity where PE's Growth Capital business has enjoyed a products, therefore creating a larger market lower level of competition 4 EFTA00780287 Invests in Mezzanine Group ("MEZ") with INVESTOR Transaction Structure • PE acquires Mezzanine Group ("MEZ") at a premium to MEZ current share price through cash and share offer • £300 million cash underwritten by INVESTOR — Option one: INVESTOR puts money in in form of convertible • PE O00m Convenible loan note or equity INVESTOR loan note, 4% coupon Share offer ,C300m cash offer o Notes can be convened at takeover premium plus 10% within 24 months — Option two: INVESTOR puts money in in form of equity with MEZ (shares with share price at takeover premium premium) Shareholding Structure As a minority investor, INVESTOR's potential benefits include: INVESTOR MEZ • Co-investment rights along with MEZ funds (minority) • Insight and expertise • Understanding of development of joint financial products • Joint new funds PE+MEZ Sea= likomling 5 EFTA00780288 Invests in MEZ with INVESTOR (Cont'd) Acquisition Shareholding Structure (pre & post conversion) - Option One Current share price: MEZ £2.98, PE £2.87 Purchase premium 15% Purchase premium 20% Purchase premium 30% • Purchase price: /3.43 • Purchase price: /3.58 • Purchase price: /3.87 • Conversion price: D.77 • Conversion price: /3.93 • Conversion price: /4.26 Pre-conversion Post-conversion Pre-conversion Post-conversion Pre-conversion Post-conversion 100% 27% 30% 80% — 26% 27% 29% 60% — 40% — 72Vo 20% — 0% • PE MEZ • PARTNER 6 EFTA00780289 Invests in MEZ with INVESTOR (Cont'd) Acquisition Shareholding Structure (pre & post conversion) - Option Two Current share price: MEZ £2.98, PE £2.87 Purchase premium 15% Purchase premium 20% Purchase premium 30% • Purchase price: £3.43 • Purchase price: £3.58 • Purchase price: £3.87 100% 80% 25% 27% 29% 60% 40% 20% 0% • PE MEZ • PARTNER 7 EFTA00780290 Mezzanine Group ("MEZ") PLC I EFTA00780291 Mezzanine Group ("MEZ") PLC Overview Financials • Mezzanine Group ("MEZ") PLC ("MEZ") is a UK based private — Income Statement equity firm specialising in mezzanine financing F17E - JI Mar (Is .6 es) 200M 2009A 2010A 2011E 2012E Interest Income Q37 QO4 Q74 a 82 1;97 • Investment criteria: Gin on Invesaneno 135 31 99 64 75 Fee Income 57 60 52 49 55 — Geography: European Union, Bulgaria, Romania, North Total Income 029 395 425 396 027 America, and Asia Pacific, including Hong Kong, South Korea, Growth % NA (8.0%) 7.6% (6.9%) 7.9% Singapore, Taiwan, Japan, Australia, and New Zealand BST 72.0 -67 106 122 162 — Investment size: €15 million — €500 million 14a gia % 53.5% NM 24.9% 30.9% 38.0% Net Income 155 -73 82 84 112 — Form of financing: subordinated loan with equity warrants, as Lfogia % 36.1% NM 19.2% 21.3% 26.2% preference shares, convertible loan, leveraged loans, mezzanine loans, and CDOs Portfolio Breakdown (2010A) Funds Under Management Breakdown (2010A) — Maturity period: between seven years and ten years with repayments to be made in one payment at final maturity — Investment cash yield: 3%- 4% 57°A. • Total funds under management: O0bn (Mar 2010) • MEZ was founded in 1989 and is based in London with additional • Mezzanine and 'dated funds offices across Europe, North America, and Asia • F. umpt t:rudit Fund Management Ownership & Management Ownership and Management ONtt tet..hip Board of Directors Aviva Plc 2°/o Justin Dowley, C..biumum BladcRodc Inc 6% Christophe Evain, CEO Baillic Gifford 6% Francois De de Mitty, Managing Director Isdlirabaud Investment Management 5% Tom Attwood, Managing Director Seam: Compare:. Partin Amcriprisc Financial Inc 5% Philip H. Keller, Finance Director 9 EFTA00780292 The attraction of MEZ • Income / product and geographic diversification; limited overlap PE Status Quo Acquisition of Mezzanine Group ("MEZ") • Buyouts 29% • Buyouts • Growth Capital ■ Growth Capital 12% 46% • Infrastructure • Infrastructure Non-core activities 4% Non-core activities 2% • Fund Management Max Financing 38% 8% 0% • UK • UK 38% • Continental Europe • Continental Europe • Asia • Asia • North America • North America Rest of World Rest of World 58% 10 EFTA00780293 The attraction of MEZ (cont.) • Limited income volatility laconic Stability 200% 150% 100% 50% 0% (500/n) 2005 2006 2007 2008 (100%) (150%) (200%) (250%) PE ME/. PE+MEZ • Add different asset class O,000 L2,500 I'E Eurofund V 1 MEZ European O,000 I .44121tr, MEZ. MEZ Aria Picific £1,500 Mezzanine Fund 2. MEZ. • PE 0 Fund 2003 Minority Pinner' Fund 2008. MEZ ■ NIF.Z Recovery Fund 2008 L1,000 PE Eun)fund 111 Mtn:mint O00 MF.7. find 3)30 Mezzanine ■ Pacific Fund 1990 .00 1998 2000 2003 2004 2005 2006 2007 2008 11 EFTA00780294 The attraction of MEZ (cont.) ♦ Attractive valuation and propitious timing for acquisition Share Price and P/E Multiple 180 -MEZ Share Price tMEZ P/E multiple 14 160 • 12 140 10 120 100 • 80 6 rn 60 4 40 2 20 0 6FQ0 0/1 Ice Shanprier at f27 Stpiratinv; 2010 Somme: Moine% Cal>dallQ 12 EFTA00780295 The attraction of MEZ (cont.) • Lean cost structure Operating Expenses / Management Fees Operating Expenses / NAV 11 800% 16% 700% 14% 600% 12% 500% 4 10% 400% 8% 300% L4 6% et 200% 4% 100% C 2.4 0% a%) 2007 2008 2009 2010 2007 2008 2009 2010 ■PE • MEZ • PE • 3.1EZ • Higher growth potential ♦ Debt expertise 13 EFTA00780296 Mezzanine Group ("MEZ") PLC vs. PE's Share Price Performance Share Price — Past Five Years (Rebased) PE / MEZ Share Price Graphs (Rebased) 180 PE MEZ Current share price O.87 Current share pricca98 Market Cap (m): /C2,780 Market Cap (m): DJ 61.1 160 52 wk low/ high GO:147/ 3.10 52 wk low / high (Q 234/3.08 140 120 100 —PE —MEZ 80 60 40 20 0 00 4, r4 y cae Not Shan price as 127 September, 2010 .Team: Bloomer% CapialIQ 14 EFTA00780297 Pro forma PE and Mezzanine Group ("MEZ") PE Status Quo Acquisition of Mezzanine Group ("MEZ") 5% 45% ■ PE Eurofund III ■ PE Eurofund IV PE Eurofund III ■ PE Eurofund V ■ PE Eurofund IV • PE Eurofund V PE India Infrastructure Fund ■ PE India Infrastructure Fund PE Infrastructure ■ PEInfrastructure ■ ME7-7- Mezzanine Fund 1998 ■ ME7-7. Mezzanine Fund 2000 ■ ME7-7. Mezzanine Fund 2003 ■ ME7-7- Mia Pacific Mezzanine Fund 2005 • ME7-7- European Fund 2006 ■ ME7-7- Mia Pacific Fund 2008 • MF:7-7- Minority Partners Fund 2008 • MEZZ Recovery Fund 2008 15 EFTA00780298 Pro forma PE and Mezzanine Group ("MEZ") (cont.) Pro Forma — Key Financial Data 31-Mar-I0 30-Sep-09 31-Mar-09 (‘ millions, exre• rther) PE MEZ Combined PE MEZ Combined PE MEZ Combined Returns (iross Portfolio Return 843 99 942 316 44.4 360 (7,704) 32 (2,174) Profit before Tax 159 106 265 (57) 8.1 (49) (1,944) (67) (2,011) Portfolio & Assets Under Management Own Balance Sheet 17/ 5,787 2,684 8,471 3,780 2,851 6,631 6,909 2,923 9,832 External Funds 3,846 7,340 11,186 3,445 7,789 11,234 3,871 8,497 12,368 Total Assets Under Management 9,633 10,024 19,657 7,225 10,640 17,865 10,780 11,420 22,200 Balance Sheet Net Debt 258 1,504 1,762 854 1,609 2,463 1,912 2,053 3,965 Net Asset Value 3,068 1,184 4,252 2,746 1,112 3,858 1,862 776 2,638 Diluted Net Asset Value Per Share 3.19 2.99 2.86 2.81 2.81 3.72 Discount to Share Price 0.84x 0.95x 0.94x 1.01x 0.96x 0.77x Diluted Shares Outstanding 899.4 326.6 960.4 395.5 662.8 208.4 Share Price 2.69 2.85 2.69 2.85 2.69 2.85 Not (1)1ff 2010 Pf1apialedits dOthiot ofarsetr sratkr mamosemrst.. Ibis, mithittg it: &Orr oaw Mame Ara barthandfig:cm (both Mani 2009 aidMoab 2010 ;umbers areIan/ram the met a:ovum:rat) Somme: Compar9: ReseamS 16 EFTA00780299