Private Equity Investing Professors Spiegel , Sunder & Tookes Dolores Arton Thomas Ghegan Founders Equity Inc. Nove

1. Private Equity InvestingProfessors Spiegel, Sunder & TookesDolores ArtonThomas GheganFounders Equity Inc.November 2007

2. The Private Equity Industry • The Private Equity Process • Founders Equity Portfolio Company Examples

3. 2% management fee Limited Partners Private Equity Fund General Partner 99% interest 80% of profits 1% interest 20% of profits (carry) Cash for 99% interest Cash or notes for 1% interest Equity Ownership Cash Portfolio Companies Private Equity Fund Structure • 10 years in total: 5 year investment period/5 year exit period • As portfolio companies are sold, distributions are made • Targeted IRR’s 25%+; 3x cash on cash return

4. Who Invests in Private Equity? Asset Allocation: Educational Institutions • Pension & Retirement Funds • Insurance Companies • University Endowments • Fund of funds • Family Investing Offices • High Net Worth Individuals • Hedge Funds Cash Fixed Income Domestic Equity Foreign Equity Private Equity Percent of Total Absolute Return Real Assets Source: The Yale Endowment 2006 Annual Report.

5. Fundraising has not slowed in 2007 despite the credit markets.$254 Billion Raised in 2006 $239 Billion Raised Through October 2007 $ Billions Source: Private Equity Analyst

6. Demand for Private Equity Funds Persists • Continued Strength in Buyouts • Buyout Funds dominated 2007 with 132 funds raising $155 billion YTD (up from $101 billion in 2006) • Distressed Funds were $29.6 billion of the Buyout Funds • Venture Fundraising remains sluggish • 102 firms raised $19 billion YTD • Large buyout firms currently in the market to raise their largest funds to date • Carlyle: Targeting $17.0 billion fund • Warburg Pincus: Targeting $12.0 billion fund

7. Private Equity Deal Environment • Correction in credit market led to slowdown in the number of transactions • Private equity firms announced $8.5 billion of new deals in October 2007, compared to $42.2 billion announced in October 2006 • Effects of weakening financial market: • Financing has become less available and more expensive • Increased use of Material Adverse Change (“MAC”) clauses • Increased time to complete deals (especially large deals dependent upon public credit markets) • Average purchase price multiples continued to climb through May 2007: • 9.18x EBITDA for $500+ million deals • 8.24x EBITDA for deals between $250 million and $499 million • 7.64x EBITDA for deals under $250 million

8. Private Equity Firms Various Strategies for Success • Buyouts vs. Growth Equity • Industry Specialization • Operational Expertise • Geographical Focus • Origination Focus • Focus on Particular Type of Transaction

9. Concept Stage Development and Initial Implementation of Business Model Successful “Beta” Version; Few Customers Successful Business Model Rolled Out Accelerating Growth, Profitable Business Potential IPO Turnaround Situations: Financial Restructuring Replacing Management, Altering Business Model, etc. $5-$100MM Acquisition With Targeted Follow-on Acquisitions $100MM- $500MM Above $400MM Founders Equity Investment Focus Venture Investing Buy-Out/Corporate Finance Seed Start-up Early- Growth Accelerat- ing Growth Later-Stage Growth Special SituationsGrowth/ Mature Small-Cap Market Middle- Market Large- Cap Market Founders Investment Focus

10. Founders Equity Lower Middle Market Focus $422 Billion Accumulated Under Management 97,000 Investment Opportunities 1 Billion + 3,100 cos (3.2%) Mega LBOs $144 Billion (34.17%) Large LBOs $77 Billion (18.3%) $500 Million - $2 Billion 4,376 cos (4.5%) $150 - $500 Million 10,754 cos (11%) Mid-Market $171 Billion (40.5%) $20 - $150 Million 79,000 cos (81.3%) Small Market $30 Billion (7.1%) Founders Equity Focus

11. 500 Potential Investment Opportunities Reviewed 100 Spend More Time on Book 50 Deeper Analysis 20 Real Interest 4-6 Deals ClosedPer Year Founders Equity Annual Deal Sourcing • Full due diligence • Does it meet our investment criteria? • Industry outlook • Opportunities for growth? • Identify risks • Reasonable valuation expectations • Quality of management • Management calls • Outside experts • Limited due diligence

12. The Private Equity Industry • The Private Equity Process • Founders Equity Portfolio Company Examples

13. The Private Equity Process Due Diligence Portfolio Company Monitoring/ Value Creation Initial Evaluation of Deal Exit/ Sale of Company Sourcing Deals Transaction Closing Financing Letter of Interest Letter of Intent Merger or Asset Purchase Agreement Agreements:

14. Sourcing Deals: Buy Right • Auction Process • Investment banks work with companies to create an Information Memorandum which is distributed to strategic and financial buyers • Investment bank’s process focused on achieving highest value for the Seller • Proprietary Sourcing • Contact companies directly (no intermediary) • Networking with business brokers, accountants, attorneys and other industry participants • Fundless sponsors

15. Initial Evaluation: The First Look Company Industry Financial • Management team (bench strength) • Value proposition and differentiation • Business model economics • Relationships with customers and suppliers • Organizational model (e.g., incentive compensation) • Competitive dynamics • Industry size and growth • Cyclicality • Fragmentation vs. consolidation • Identification of key risks • Comparable company analysis • Financial model (historical and projected) • Working capital • Capital expenditures • Capital structure and leverage • Investment security • Target returns • Valuation Development of the investment thesis

16. Valuation: In the Eye of the Beholder • IRR/ Multiple of Cost Analysis: “The Model” • Incorporates the theory of a Discounted Cash Flow analysis • Importance of sensitivity scenarios • Focus on Free Cash Flow and debt covenants • Public Company and Transaction Comparable Analysis • Only as good as the comparability of the companies used • May need to interpolate between multiple sets of comps • Value of Assets • Consider value based on assets rather than cash flow • Triangulation across multiple methods is critical • Valuation is an art not a science

17. Due Diligence: Trust but Verify • Accounting • Independent accounting review • Legal • Identify any outstanding litigation and potential liabilities • Intellectual property and patents • Insurance • Understand scope of coverage required and currently in place • Management • Background and reference checks • In-depth interviews • Employment agreements • Company and Industry • Speak with industry experts, customers and suppliers • Validate company value proposition and industry dynamics • Quantify possible risks

18. Financing: Establishing the Structure Sources and Uses in a Leverage Buyout • Type of security (preferred equity or common) • Pay-in-Kind (“PIK”) Coupon Key Terms $100.0 Million $100.0 Million Fees and Expenses Equity • Often a “bullet” loan • May ask for warrants • Often a “bullet” loan • May ask for warrants Subordinated Debt $ Millions Purchase Price • Term of loan • Amortization schedule • Rate • Covenants Senior Debt

19. Value Creation: Ideas into Action • Board of Directors representation • Identify new Directors with relevant experience who can assist the Company • Develop a “100 day plan” • Augmenting the Management Team • If necessary, recruit new CEO/ CFO • Identify functional areas to add additional talent • Incentive key players • Execution of the growth strategy • Buy and Build: Add-on acquisitions • Accelerating Growth: Investments in new products or markets • Transformation: Professionalize operations

20. Exits: Realizing the Investment • Initial Public Offering (“IPO”) • Sale to strategic buyer (e.g., industry competitor) • Sale to another Private Equity Fund (“Financial buyer”) • Sale to management (Management buyout or “MBO”) • Recapitalization (raise debt and provide a dividend to the equity sponsors)

21. The Private Equity Industry • The Private Equity Process • Founders Equity Portfolio Company Examples

22. Stone Source Investment Thesis: Transformation • Unique marketing focus with products sold thru architects and designer • Business model generates high margins with cash deposits upfront • Large, fragmented market with opportunity for geographic expansion • Excellent vendor relationships provide competitive advantage in product sourcing • Opportunity to transform company from entrepreneurial company to professionally managed company Company Overview • Headquarters: New York, NY • The Company sources and markets natural stone, ceramic tiles, glass tiles, engineered stone and other materials with decorative surfaces • Founded in 1988 by Jeff Green (CEO) and Mark Shedrofsky (COO • 2006 Revenue: $44.9 million Sourcing • Date Sourced: 10/26/2005 • Date Closed: 6/30/2006 • Source: Proprietary Referral: Fundless sponsor

23. In The Swim Investment Thesis: Accelerating Growth • The pool supply industry is a stable $3.8 billion market with a definable universe of 7.6 million residential pool owners and 260,000 commercial pools with recurring needs for pool supplies • The pool supply market is a particularly attractive industry for direct marketing due to the prosaic, consumable nature of the product lines and the repeatability of pool utility needs • Strong historical cash flow with high predictability • 60.0% of revenues visible from existing customers Company Overview • Headquarters: West Chicago, Illinois • In The Swim (“ITS”) is the leading direct marketer of pool supplies to residential and commercial consumers in the United States and is know as “America’s #1 Direct Source for Pool Supplies” • The Company’s product offering focuses on “need-based” consumable and periodic maintenance products utilized in swimming pool openings, closings and general maintenance • 2006 Revenue: $71.9 million Sourcing • Date Sourced: November 2004 • Date Closed: February 2005 • Source: Competitive auction / Proprietary referral

24. Richardson Foods Investment Thesis: Buy and Build • Opportunity to leverage underutilized manufacturing assets through operational improvement and synergistic acquisitions. • Base business operating at 30% capacity • Strong distribution channels • Professionalize management by partnering with seasoned industry executives • Reinvigorate old brands through new sales and marketing initiatives Company Overview • Headquarters: Canajoharie, NY • Richardson produces, markets and distributes bulk confectionary products and specialty sauces under the Richardson, Beechies, Dryden & Palmer and Gravymaster brand names • 2006 Revenue: $17.6 million Sourcing • Date Sourced: 3/21/2005 • Date Closed: 3/20/2006 • Source: Referral from deal broker

25. Richardson Foods: The Flood

26. Richardson Foods:Turning Adversity to Advantage • Improve Operations • Distinguishes the high performing employees • Opportunity to reconfigure equipment • Build relationships in the community • Upgrade Equipment with insurance proceeds • Improve infrastructure reliability • Re-build better than new • Replace with upgraded performance • Fix historical pesky problems • Change culture • Sense of urgency • Importance of a team • Pride of ownership

27. APPENDIX

28. Valuation - Cash Flow Analysis is Key • EBITDA • The more EBITDA that comes from EBIT the better • Embedded accounting assumption that D&A is a proxy for ongoing capital needs • OCF is a more conservative measure • Be skeptical of adjustments; think of as two types: • Simple add-backs • Synergies and cost savings on the come • EBITDA can be manipulated by changes in accounting practices

29. Impact of Cost Structure • Variable Costs • Move in a direct relationship with sales • Cost of goods sold and some SG&A (eg, cleaning supplies for production) machinery, payroll taxes for factory workers, gas for delivery trucks, etc.) • Warning: Some Variable Costs can become Fixed (i.e. hourly labor in a tight labor market) • Fixed Costs • Can increase or decrease unrelated to sales growth • Corporate overhead (eg, officers’ salaries, rent, office supplies, etc.) • Generally fixed costs grow at inflation as company grows – but can sometimes be lumpy as you add high-salary management, etc.

30. Leverage • Need to put in place proper Senior Credit Facility • Asset Based Lenders vs. Cash Flow Lenders • Focus on asset values vs. business value • Focus on liquidation value vs. potential sale price • Revolvers can be one of two types • Asset Based (Eligibility and Advance Rates) • Cash Flow Based (Typically subject to Senior Leverage and Total Leverage caps) • Term Loans • A Loans – straight amortization w/ possible payment holiday for first 6 months to one year • B Loans – Amortize 1% in the early years and remaining amount in last 1-2 years. • Helps provide greater operating flexibility –maturity 6-8 years

31. Overview of Credit Statistics • Role of credit statistics • Used to give a snapshot of the capital structure and the risk profile of deal • Helpful to use when determining the optimal capital structure • Necessary to analyze when setting covenants • Understand potential revolver availability issues • Certain benchmarks are particularly important (i.e. fixed charge coverage a minimum of 1:1)

32. Key Credit Statistics • Look at Trailing Twelve Month EBITDA/OCF to understand most recent actual performance • Always understand adjustments used to arrive as “adjusted EBITDA” • The following are key credit statistics and general guidelines as to their range Key Credit StatsGeneral Guidelines Total Debt/EBITDA <3.5x-4.75x Senior Debt/EBITDA <2.0x-3.25x EBITDA/Total Interest >2.0x Fixed Charge Coverage > 1.0x Other Covenants Minimum EBITDA Maximum cap ex Restricted Payments

33. Structuring Conclusion • Easy to get “lost in the analysis” – don’t forget to step back and assess the business thesis/rationale • A good capital structure can only partially offset a mediocre business.

34. Plain Vanilla Convertible Preferred • Simplest form of institutional private equity • Preference equal to face value; therefore, somewhat protected from loss of principal because “first equity out” (before common) • Convertible into common shares at conversion price • Example: • $10.0MM invested • $10.0MM redemption value/preference • $40.00 per share conversion price • Convertible into 250,000 common shares • Owns 25.0% of company

35. Participating Preferred Stock • “Double dip” equity – investor gets back principal invested plus ownership in the company (i.e., converts into underlying common stock) • Can be effective way to bridge valuation gaps as Investor willing to pay higher price per share for participating preferred • Mechanics • One unit is convertible into both: • For example, $10.0MM investment at $90MM pre-money value • $10.0MM of capital back redeemable preferred at liquidity event, plus • 10.0% underlying ownership stake

36. Dividends • Dividend can be paid in cash, stock, or paid-in-kind (PIK) • Cash/stock dividends • Usually 8-12% coupon • Compounding vs. non-compounding (usually non-compounding) • Usually accrue and paid at liquidity event (IPO, sale or liquidation) • Example: • $10MM invested at $10.00 per share; 8% compounding dividend for 3 years (e.g., $2.6MM) • Private Equity Firm gets either $2.6MM in cash or stock (i.e. 86,571 shares assuming $30.00 IPO price)

37. Dividends (cont.) • PIK dividends yield better results for Private Equity Firm • Usually compounding • Earn additional shares at deal price (e.g. above example would yield 259,712 shares vs. 86,571) • Earn additional shares of underlying security (e.g. participating preferred results in “triple dip”)

38. Overview of Typical Mezzanine Investment • Deal Size: $10 million to $100 million • Current Cash Coupon: 12% to 14% • Target IRR at 5 Years: Market pricing (typically 13% to 16%) • Prepayment Penalty: Scheduled payments and/or Treasury Makewhole • Transaction Fee: 0%-2.5% • Term: 6-8 years • Representation: Board seat or observation rights • Interest Can be PIK or cash or both, typically compounded on a quarterly basis • Warrants On a deal by deal basis