The Economic Environment and Investment Opportunities

1. The Economic Environment and Investment Opportunities Tel Aviv, Israel December 2008 Steve Ross MIT Ross Institutional Investors LLC Proprietary & Confidential

2. Disclaimer This document is confidential and may not be reproduced without the written permission of Ross Institutional Investors, LLC (RII). It is not intended for distribution and may not be distributed without the written consent of RII. The ideas and material herein are the intellectual property of RII. The information contained herein is believed to be reliable and has been developed in good faith but no representation or warranty, express or implied, is made by RII as to the accuracy or completeness of this information. This document is not intended to be an offer or a solicitation of an offer to buy or sell relevant securities. Historic results are no guarantee of future performance. Ross Institutional Investors LLC CONFIDENTIAL

3. An Unprecedented Time • Financial paralysis and volatility • Failures of Bear Stearns, Lehman Brothers, AIG, Merrill Lynch, Citigroup • Takeovers of WAMU, Wachovia, etc. • Government takeover of Fannie Mae and Freddie Mac • The end of the investment banking era as Goldman and Morgan become commercial banks • Government stakes in financial institutions could dramatically change how they operate and lower their risk appetites • Enormous strains on hedge funds as they are forced to delever and redeem • Daily moves of 4% in equity markets have become a weekly occurance – in earlier times there were years without such large moves • VIX ranging from 40% to 80%, up from 14% two years ago • World economic growth expected to slow • Consumption demand fueled by consumer optimism, high asset values and cheap and available credit to borrow against them is over • Restructuring of GDP long term forecast for US is for slower growth (less than 2%) • Long term trend of permanently higher energy price levels • Foreign economies slow as US led imports decline • Current forecast is for an actual decline in GDP beginning in the fourth quarter • Monetary stimulus is almost played out as in Japan • Only foreseeable relief would be from a fiscal stimulus such as major government infrastructure projects • The decline in the world markets has mirrored that in the US and the impact is world wide and across all sectors • Asian economies suffering from lower US growth and imports • Europe looks very similar to the US • Subprime and housing issues will take several years to work out • New “surprises” : • Commercial paper markets are currently nearly non functioning (government on A1/P1 is helping) • Large concerns about counterparties’ abilities to post collateral in the face of exploding credit default swaps levels • Credit cards and auto loans • Intermediate and smaller sized banks are weak • Regional real estate is very vulnerable • Industrial and consumer weaknesses and ‘near’ banks Ross Institutional Investors LLC CONFIDENTIAL 3

4. Some Longer Run Issues • Mature, “lower growth” US economy • GDP long term forecast for US is for slower growth (less than 2%) • Chronically weakened dollar • continuing budget deficits • continuing balance of trade deficits but slowing on current account • reluctance of Fed to raise interest rates • current actions will be inflationary in the long run • Credit will be tight and leverage constrained for next several years • Market disruptions are likely to continue • Natural resources will resume tightening after current recession • rising energy prices • rising food prices • rising water prices Ross Institutional Investors LLC CONFIDENTIAL 4

5. Challenges/Opportunities • Crises and challenges bring opportunities • multifamily housing after the S&L crisis • high yield bonds after the S&L crisis • arbitrage & credit strategies after the LTCM collapse • micro-cap equities after the Internet bubble • Investments that bet against the rise in house prices and loose credit returned greater than 50% in 2007 • However, some house prices continued to rise until recently, e.g., prices in oil rich areas, demonstrating the importance of being selective and not simply applying a given strategy across the board • The illiquidity of the markets and the loss of credit has left many good quality assets greatly under priced • Throughout 2008 it has been too early to invest in hedge funds as they have continued to perform poorly • Credit and market problems are clearly global and not simply US centric Ross Institutional Investors LLC CONFIDENTIAL 5

6. Alternative Asset Classes • Absolute Return – ‘Hedge Funds’ • equity long/short • commodity trading advisors • mortgage and fixed income • event driven • convertible bond arbitrage • multi strategy • Real Assets • real estate • energy, commodities and timber • Venture Capital • Private Equity • Specialized long-only funds • Foreign and Domestic Ross Institutional Investors LLC CONFIDENTIAL 6

7. The History of Alternatives Investing Managers focused on particular strategies and expertise Available capital constrained relative to perceived opportunities Alternative investments have historically produced superior returns for institutional investors risk adjusted returns are high correlations are low with equity markets and to each one of the categories hedge funds private equity venture capital real estate commodities 7 Ross Institutional Investors LLC CONFIDENTIAL

8. The Model for Investing in Alternatives has Changed Institutional demand has matured and alternatives have become the preferred asset classes for sophisticated investors Capital constraints have given way to capital surpluses Smaller more focused managers have evolved into mega managers Fees are now a major source of income rather than an offset to costs Fundamental departures from the basic business models that were associated with successful investment strategies Changes in the environment for many of these sectors 8 Ross Institutional Investors LLC CONFIDENTIAL

9. Evolution of Hedge Funds • Typically founded by one or two principals with expertise in a specialized sector • Good performance attracts more assets • the marginal return to the marginal dollar drops • the space becomes crowded • The founders expand to new sectors to deploy the added capital • the larger the fund, the larger a given investment needs to be to have an impact and many attractive smaller investments are not considered • lack of nimbleness: size often means more layers of decision making • “style drift” • allegiance to in house managers for multi-strategy funds • business model becomes less entrepreneurial • risk control of new efforts limits risk capacity • pressure to maintain asset base and fees lessens overall risk capacity • Today • large macro firms with multiple strategies • but many small niche and newer firms Ross Institutional Investors LLC CONFIDENTIAL

10. Private Equity Evolution • Industry leaders have grown into mega funds • too much equity - the industry is over capitalized • too much capital is available for too few attractive investments • mega funds do mega deals - smaller investments don’t ‘move the dial’ • tactical: the decline in available credit means that a greater percentage of equity is required for an investment, thereby further reducing the rates of return • GP compensation is shifting in favor of fixed fees as against performance (carry) • historic private equity returns of over 20% • current generation returns optimistically estimated in the mid teens • despite reduced LP economics, GP economics are still attractive • an economic incentive to focus as much on fund raising as on investment returns Ross Institutional Investors LLC CONFIDENTIAL

11. PrivateEquity Today • The industry is bifurcated between mega firms and smaller firms • smaller managers tend to be more focused • middle market firms • specialized industries • Globally the industry is less developed • fewer regional managers • tailored to their markets and the acquisition of family owned firms • emerging market economies • higher growth rates • less efficient markets • a greater reliance on private capital • fund manager’s economics generally more driven by results to investors than by fixed fees Ross Institutional Investors LLC CONFIDENTIAL

12. History of Venture Capital Past ten years have seen very poor returns – negative since 1998 Elite funds provide significant and persistently higher returns Success of these funds is less a function of the franchise itself and more of the abilities of the top managers who attract, choose and access the most attractive investment opportunities Given poor average performance, fixed fees are the main attraction to remaining GP members Ross Institutional Investors LLC CONFIDENTIAL

13. Venture Capital Today • Changes similar to those in private equity • a big influx of capital • many premier funds are very large relative to the opportunities • Holding periods have lengthened from 3-5 years to 5-9 years • need for an increased market cap for an IPO to acquire institutional sponsorship • demise of Wall Street firms oriented to smaller IPOs: Robinson-Stephens; Montgomery; Hambrecht & Quist • A different response than private equity • star managers are now exiting the industry • deal sizes are inherently limited by size of start ups • emphasize later round financings and deemphasize start ups • increased capital brings forth a greater supply of venture candidates and companies – demand creates its own supply • net result is a dilution in the average success Ross Institutional Investors LLC CONFIDENTIAL

14. Implementation Implications:Manager Criteria for All Asset Classes • Smaller managers but experienced and seasoned • Between $200 million and $2 billion under management • enough to maintain a critical mass of personnel and systems • adequate fees to cover costs • Small because their strategy has limited capacity and not because they are unsuccessful or simply because they are new • Focus on performance • Niche specialization but nimble • Inverse relationship between the size of a fund & the number of investment opportunities that it can access per dollar of assets • Managers who can implement targeted strategies in separate accounts and with negotiated fees Ross Institutional Investors LLC CONFIDENTIAL

15. Examples of Strategic and Tactical Opportunities • Hedge funds • Real estate • Private equity • Venture Capital Ross Institutional Investors LLC CONFIDENTIAL 15 15

16. Hedge Funds Ross Institutional Investors LLC CONFIDENTIAL

17. Background Economics for Hedge Funds 2008 has seen a major reversal of prior years’ favorable hedge fund trends factors adversely affecting most hedge funds negative returns to broad equity and credit exposures large declines in liquidity of many securities in many markets unprecedented spikes in volatility and credit spreads significant changes and reversals in government policies regarding intervention in distressed companies and rules governing short selling such factors have led to extremely negative performance for many hedge funds Ross Institutional Investors LLC CONFIDENTIAL 17

18. Background Economics (cont’d) Redemptions from hedge funds have been growing some investors redeeming as a result of poor hedge fund performance many hedge funds previously sold as “absolute return” vehicles have disappointed investors many large funds of hedge funds had attracted hot money now fleeing negative returns other investors redeeming in order to fund cash needs of other less liquid investments current expectations for total hedge fund redemptions in 2008 range from 15% to 25% of hedge funds assets In order to fund actual and anticipated investor redemptions, individual hedge funds liquidate positions to raise cash because of overall leverage in hedge funds, more positions need to be liquidated than the amount of cash that needs to be raised commonalities across many portfolios held by individual hedge funds mean many hedge funds are on same side of liquidation trades in order to raise cash largely in-phase liquidation of positions to meet redemptions results in crushing downward price moves of many securities held by hedge funds negative virtuous cycle is created: bad performance => increase redemptions => increase liquidation of positions => even worse performance… may last until hedge fund redemptions moderate, as hedge funds are dominant, same-side investor in many securities Ross Institutional Investors LLC CONFIDENTIAL 18

19. Implications Going Forward Hedge fund landscape is changing rapidly many smaller funds will cease to exist negative performance and high water marks limits possibility of performance fees firms will have difficulty keeping investment talent investors not likely to allocate funds to small, losing hedge funds institutionally-friendly model of funds of hedge funds now strongly in question Hedge fund performance will be difficult so long as large redemptions (or expectations of them) persist difficult for many hedge funds to generate strong performance against the tide of redemption-based liquidations broad-based, popular strategies will have more difficulties as such strategies tend to represent largest commonalities of positions across many hedge funds strategies utilizing high amounts of leverage will need to liquidate relatively higher amounts of positions to fund redemptions Ross Institutional Investors LLC CONFIDENTIAL 19

20. Implications Going Forward (con’t) Unusual opportunities have been created in securities that have been held largely by hedge funds who have been liquidating positions to fund redemptions securities being sold in order to fund redemptions (or as part of financial institutions’ efforts to deleverage), not based on a manager’s opinion on the underlying economics most hedge funds and bank trading desks have been on the same side of many such trades (few natural buyers for other side of these trades at present) prices of various types of securities which have been driven down mostly by forced liquidation offer compelling value for investors who can now deploy capital with longer horizons than the liquidating investors who are facing 2008 redemptions structured products residential mortgage backed securities asset-backed securities convertible bonds preferreds high yield bonds municipal securities micro-cap stocks trading at or through cash levels closed-end funds Ross Institutional Investors LLC CONFIDENTIAL 20

21. Hedge Fund Opportunities Create longer-horizon portfolios of certain securities whose prices have been crushed by liquidity-based hedge fund selling exploit substantial liquidity premium that now exists in such securities as a result of massive selling implement through separate accounts (where possible), run by managers with significant experience possible opportunities for co-investment Focus on unique alpha generating hedge fund managers niche managers with strategies not easily categorized into traditional hedge fund buckets managers formerly less popular with funds of funds and other hot-money investors, as a result now not as much subject to redemption liquidation issues managers whose returns depend less on broad market moves than most hedge funds Ross Institutional Investors LLC CONFIDENTIAL 21

22. Hedge Fund Opportunities (con’t) Once clarity on redemptions increases, hedge funds to be favored will include: CDO and mortgage specialists: managers who can identify extreme risk/reward among particular CDO and mortgage tranches and have no legacy problems capital structure arbitrage and convertible bond arbitrage: extreme cross sectional variation and volatility have increased opportunities for long/short trading within capital structure of individual companies financial services debt and equity specialists: extreme moves and volatility of financial services company valuations create opportunities for managers with skill differentiating between companies within industry CDS specialists: managers experienced with trading and hedging CDS exposure who can exploit current high levels of implied default risk and unburdened with legacy positions distressed debt managers: as actual default rates increase, more opportunities for investing in distressed debt will be created micro-cap equity managers: many stocks in this area now trading at or through cash levels Managers in above areas will ultimately benefit from high cross-sectional volatility of such securities’ prices increases in liquidity broad recoveries in credit spreads and equity prices Less emphasis on the crowded ‘stat arb’ space: avoid ‘medium’ frequency quant funds Ross Institutional Investors LLC CONFIDENTIAL 22

23. Real Estate Ross Institutional Investors LLC CONFIDENTIAL

24. Real Estate: The Environment House price declines are reaching unprecedented post war levels – nationwide is rivaling worst of California in 1980s Ross Institutional Investors LLC -- CONFIDENTIAL Ross Institutional Investors LLC -- CONFIDENTIAL 24

25. Real Estate: The Environment (cont’d) • The real estate credit market contraction that began in early 2007 is deepening and has spread to the commercial sector • available commercial mortgage leverage has decreased from 90% to 60% LTV • commercial mortgage spreads over Treasuries have increased from 90 bps to 300 bps • the market for new issue CMBS has disappeared • ‘A slowly moving train wreck’ • Defaults are rising and compounded by a slowing economy • Still early – many ‘vulture’ purchases are now having significant problems as values have dropped further – suggests equity opportunities in 2009 Ross Institutional Investors LLC -- CONFIDENTIAL Ross Institutional Investors LLC -- CONFIDENTIAL 25

26. Commercial Real Estate Credit Contraction Mortgage Purchase • A program of buying “toxic” CMBS • unlevered AAA CMBS yielding over 10% vs. historic yields of 80 – 120 bps over 10 year Treasuries • unlevered AJ tranches yielding near 16% based on implied losses of 40% • BBB CMBS trading at 15 - 20 cents on the dollar • A program of purchasing maturing whole unsecuritized mortgages from lenders • attractive discounts • expectation of conversion to ownership through foreclosure • Structuring • enhance initial acquisition discounts by offering back end compensation • selling mortgagee receives a kicker in the event that a minimum investment return is achieved by the buying mortgagee • back end contingent income to allow the selling mortgagee to defer the full loss that would be required at the time of the sale of the mortgage • Structured benefits to the selling mortgagee will favor a negotiated sale instead of an auction sale • greater volume for the purchasing mortgagee • better pricing for the purchasing mortgagee Ross Institutional Investors LLC CONFIDENTIAL 26

27. Commercial Real Estate Credit Contraction Equity Purchase • Many properties have intrinsic real estate value in excess of current debt • A program of purchasing whole or senior controlling equity positions from motivated sellers • developer/owners facing imminent foreclosure • developer/owners unable to refinance a maturing mortgage and facing possible foreclosure • developer/owners unable to carry properties as sales and lease ups slow down • Structuring • developer/owner may retain some equity stake • developer/owner may work under a management contract Ross Institutional Investors LLC CONFIDENTIAL 27

28. Private Equity Ross Institutional Investors LLC CONFIDENTIAL

29. PE Opportunities • More opportunities in debt of existing deals than in equity • Approximately $1.1 trillion in junk debt outstanding • Estimate of about 30% of leveraged PE deals will become distressed over next several years • distress can occur with technical covenant violations, even without skipped interest payments or a bankruptcy filing • bankruptcy will be avoided in some deals by restructurings, e.g., waived covenants and term extensions and equity infusions • Estimates of a 10x increase to 5% or higher money default rate in 2008 • will put approximately $50 billion in default • Over levered deals • equity deals were done, totaling over $230 billion (Chrysler,TXU, etc.) • opportunities are company specific and correlated to vintage and to debt seniority and terms • Opportunities in senior secured debt • selling at 60 to 70 cents on the dollar – i.e., as though 100% failure since the historical recovery rate is 65 to 70 cents on the dollar Ross Institutional Investors LLC CONFIDENTIAL 29

30. PE and Bond Opportunities • Opportunities for PE firms to make direct investments through convertible preferred • Secondary PE interests available at increasingly large discounts as existing investors struggle with capital calls and their own liquidity needs, e.g., UVA fund • Capital reorganizations • DIP loans, exit financing, prepacks, and bridges – low risk good returns • Opportunities for experts in corporate structure and bankruptcy • acquire defaulted debt to take over a company • acquire defaulted debt to control a creditor class with “blocking power” over a corporate reorganization to receive a disproportionate interest in a reorganized company • structured deals: CBO and CDOs • safer with whole loans than in synthetics • key decision: is the defaulting company: • a good business that was overleveraged which can be refinanced? • a bad business that was overleveraged which should be liquidated? Ross Institutional Investors LLC CONFIDENTIAL 30

31. Privatizing REITS • REIT pricing is at mid 2003 levels • 66% off 2/2007 high • continuing decline in real estate values in 2009 • credit contraction means financing difficulties will further erode REIT valuations • may require a 7 year holding period to realize underlying values • This will present attractive opportunities to privatize selected public REITs • traditional buyers are burdened with existing portfolios • traditional funding sources, e.g., banks, are unable to further extend lending • hedge funds cannot hold for the longer run but will offer buyers debt financing • competition largely only from longer run holders, e.g., endowments • partner with other buyers and with selected managers to take funds private Ross Institutional Investors LLC CONFIDENTIAL 31 31

32. Venture Capital Ross Institutional Investors LLC CONFIDENTIAL

33. Venture Capital Today • Changes similar to those in private equity • a big influx of capital • many premier funds are very large relative to the opportunities • Holding periods have lengthened from 3-5 years to 5-9 years • need for an increased market cap for an IPO to acquire institutional sponsorship • demise of Wall Street firms oriented to smaller IPOs: Robertson Stephens; Montgomery; Hambrecht & Quist • A different response than private equity • star managers are now exiting the industry • deal sizes are inherently limited by size of start ups • emphasize later round financings and deemphasize startups • increased capital brings forth a greater supply of venture candidates and companies – demand creates its own supply • net result is a dilution in the average success Ross Institutional Investors LLC CONFIDENTIAL 33

34. Venture Capital Tomorrow • Prognosis: a difficult and not optimistic period for VC as a class • past performance may well be a guarantee of future performance • excess funds have raised supply of VC opportunities but not quality • continued out performance of lead VC funds is questionable • Some possibilities • Improving supply of secondary positions • Attractive global venture opportunities • Eastern Europe • Soviet Republics • Asia • Israel Ross Institutional Investors LLC CONFIDENTIAL 34

35. ROSS INSTITUTIONAL INVESTORS LLC Please direct inquiries to: Michael Falker (505) 982 – 2417 mike.falker@rossinstitutionalinvestors.com Ross Institutional Investors LLC CONFIDENTIAL 35