Workshop A: State of the Art Structuring for Infrastructure Funds and Investments

1. Workshop A: State of the Art Structuring for Infrastructure Funds and Investments PEI -- Infrastructure Investor: New YorkOctober 22, 2008 James FurnivallAlterna Capital Partners LLC(203) 557-9021Jim.Furnivall@alternacapital.com Bruce Gelman, P.C.Kirkland & Ellis LLP (312) 861-2370bgelman@kirkland.com Thomas Geraghty Kirkland & Ellis LLP (312) 861-2317tgeraghty@kirkland.com Ben Heap UBS Global Asset (Americas) Inc. (212) 882-5255Ben.Heap@ubs.com

2. Overview • Introduction and Convergence • Fund Structuring • Deal Structuring • Hot Topics 1

3. Introduction and Convergence Why invest in infrastructure? Monopolistic entities Low correlation with traditional investments Inflation protection Relatively high and reliable cash flows • A distinct asset class with compelling investment characteristics • More institutional investors are creating separate allocations for infrastructure 2

4. Introduction and Convergence Investment options? How can you invest? Operating Greenfield 12% - 15% pa 16%+ pa • Direct investment • Unlisted funds investing in direct infrastructure and/or in listed infrastructure companies • Listed funds investing in direct infrastructure and/or listed infrastructure companies • Funds of infrastructure funds Emerging Markets <10% pa 12% - 15% pa OECD Source: UBS estimates of expected market returns 3

5. Introduction and Convergence Core Capital Assets = Infrastructure+ Long lived “beating heart” assets High quality committed cash flow Inflation hedge Multiple exit opportunities Private equity like returns 4

6. Private Equity Infrastructure Real Estate Convergence Private Equity Infrastructure utilities Real Estate REITs (cell towers, electric lines) parking lots stadiums Introduction and Convergence Traditional View 5

7. Fund Structuring • Challenges • Direct investment - tax-inefficient for non-US investors • Pay U.S. income tax at a rate of up to 35% • 30% branch profits tax for non-US corporations • File US income (and potentially state) tax returns • Direct investment - UBTI for US tax-exempt investors • ERISA-related limitations on investors and/or structure • Goals • Minimize US tax on US structure • Interest expense and D/A normally reduce US tax in the first few years of investment • Minimize US tax on gains from sale of infrastructure assets • FIRPTA may apply • No direct filing of US tax returns by investors • Convert current income into income more favorably taxed under US tax laws or treaties • Maximize ability of Fund to raise capital from ERISA investors • Ensure Fund remains exempt from ERISA 6

8. Fund Structuring • FIRPTA -- “Foreign Investment in Real Property Tax Act” of 1980 • Gain recognized by non-US investors on sale of US real estate subject to US tax • If a US corporation has a majority of its assets as US real estate, stock in that corporation likely to be treated itself as US real estate for tax purposes • FIRPTA tax: generally 35% (15% for non-corporate persons on long-term gains) • Tax is enforced via a withholding regime imposed on purchasers of US real estate • Critical Issue: Are infrastructure assets US real estate? • Power plants, transmission towers, etc. -- sometimes treated as US real estate • Toll roads and other concessions that have a real estate component -- answer unclear (highly fact-specific) • Foreign Pension Funds Organized as Trusts: May qualify for 15% FIRPTA tax • May require a ruling from the IRS for this result 7

9. Non-UBTI Sensitive US Investors UBTI Sensitive US Investors and Non-US Investors US L.P. (Delaware) Int’l L.P. (Delaware) Blocker Entities treated as corporations for US purposes Direct assets (and pass-through entities) Fund Structuring Non-US Investors -- Basic Parallel Fund Structure • Blocker set up for each deal (where necessary), so that non-US investors should not receive ECI (subject to the application of FIRPTA) and tax-exempt investors should not receive UBTI • There is flexibility to put a loss-generating asset into a blocker along with profitable assets to optimize US tax savings • For portfolio investments that are operating partnerships or other pass-through vehicles (such as toll roads), depreciation, amortization and interest expense may result in tax loss position for a number of years • Result is little or no US tax “drag” on returns other than the potential impact of FIRPTA on the terminal value • For portfolio investments in corporations (e.g., utilities), due to inherited inside basis, there will be less available depreciation and amortization, and thus a shorter potential tax loss period • Effect on IRR can be modeled 8

10. Management team Investment Committee General Partner UBS CAYMAN GP LLC (Cayman) UBS GLOBAL ASSET MANAGEMENT (UK) LTD The Manager UBS IIF UBS International Infrastructure Fund UBS International Infrastructure (Netherlands) Fund UBS International Infrastructure (US Tax Exempt) Fund UBS International Infrastructure (No.4) Fund UBS International Infrastructure (No.5) Fund Nominee Entity Investment Investment Investment Fund Structuring -- Example UBS International Infrastructure Fund - a series of parallel English LPs Notes: Parallel fund structure provides flexibility to admit global capital 10

11. Taxable US investors UK investors German investors Tax-exempt US investors Fund Vehicle Fund Vehicle Fund Vehicle Fund Vehicle Non-US US Debt and equity Blocker Blocker Blocker US taxable investor vehicle invests only equity Pass- thruvehicle Pass- thruvehicle Pass- thruvehicle Fund Structuring Global fund structure • Structure permits fund vehicles to lend directly to blockers • No fund vehicle can own 50% or more of a blocker (to avoid earnings stripping rules) • No investor (looking through the fund vehicles) can be treated as owning 10% or more of a blocker in order to qualify for 0% withholding tax on interest (i.e., the portfolio interest exemption) 9

12. Fund Structuring Insurance company separate account Non-US investors • Advantages • Insurance company treated as tax owner of US property • Annuity income received by non-US investors may not be subject to US tax under treaties • FIRPTA may still apply • Annuity income received by government investors likely not subject to US tax (including FIRPTA) • Annuity income received by US tax-exempt investors not UBTI • Disadvantages • Customary investor controls (such as advisory committees, GP removal, key man rights, etc.) not permitted • All investors in fund must go through insurance company • Potential diversification rules Non-US US Variable annuity contract US investors Insurance Company Advisor Management contract Fund 11

13. Non-US investor Swap contract Counterparty Non-US US Fund Fund Structuring Non-US investors – total return swap • Advantages • No direct ownership of US property • Swap payments generally not subject to US withholding tax • Disadvantages • Tax ownership question not settled • Market not robust • Pricing difficult • No control over property • FIRPTA may still apply 12

14. Structure Example - Cell Towers Non-US investors Non-US US US investors Fund REIT TRS Deal Structuring • Use of a real estate investment trust (REIT) permits acquisition structure to look like a traditional private equity deal • However, a REIT (unlike ordinary corporation) can deduct distributions from income (and so can generally operate without entity level US tax) • Of course, the REIT must be properly structured and operated, and assets must be “REITable” • Many assets constitute operating businesses, which REITs cannot hold • As infrastructure and real estate markets converge, REITs are likely to become more common in infrastructure space • Electric lines pose interesting challenges • On exit, if the REIT is domestically controlled, non-US investors can exit without US tax on disposition of REIT shares (much like a traditional, non-real estate focused private equity investment) 13

15. Deal Structuring Example - Acquisition of Northern Star Generation • Northern Star Generation LLC ("NSG") is a privately held power generation company.  • NSG currently owns 13 plants, including seven gas fired combustion turbine plants and six steam turbine plants located across seven states • UBS IIF acquired 50% interest in NSG in 2007 • REIT structure not feasible in this instance due to large amount of active operating (as opposed to rental) income and inability to lease real estate components to unrelated operator • Instead, traditional private equity acquisition structure 14

16. Hot Topics • Global Capital -- How are the large offshore investors changing the market and increasingly dictating structure • Open versus closed-end funds -- getting the holding period right • Manager compensation • Alignment of interest between management and investors 16