Top Trends in Middle Market Private Equity Harris Smith, MP Private Equity and Strategic Relationships December 9, 2008

1. Top Trends in Middle Market Private Equity Harris Smith, MP Private Equity and Strategic RelationshipsDecember 9, 2008

2. Top Trends • Impact of credit crunch • Explosion of cross-border M&A • Proliferation of operational partners • Emergence of sovereign wealth funds • Middle-market compensation squeeze • Three hot sectors for investment • Natural evolution of private equity firm

3. 1. Impact of the credit crunch • August 2007, credit markets began contraction • Slowdown in M&A activity • M&A activity for large deals decreased more than middle-market deals • Likewise, middle-market private equity investments decreased less than largest buyouts in first half of year • PE firms moving downstream doing smaller deals requiring little or no leverage • Mezzanine debt has become more prevalent • Strategic buyers now more competitive

4. 2. Explosion of cross-border M&A • Cross-border deals increasingly important for large middle-market PE firms • Reasons: • Geographic diversification • Good acquisition candidates outside US • Portfolio company outsourcing • Consumer growth in emerging markets • Cross-border M&A has grown dramatically over last decade • Middle-market has become increasingly involved

5. 2. Explosion of cross-border M&A • ACG-Thomson Reuters Mid-Year 2008 DealMakers Survey: • 28% of middle-market firms did cross-border deal in first half 2008 • 55% say will do cross-border deal in next six months • 40% say cross-border deals will become more important to their firms • Private equity deals outside of the US by US firms reached highest level in 2007, $194 billion • Trend expected to continue

6. 3. Proliferation of operational partners • A competitive edge in deal flow • Sector expertise • Added value to portfolio companies, best practices • Work with management, or replace them if necessary

7. 4. Emergence of sovereign wealth funds • Growing in size and influence • U.S. investments popular: political stability, transparency • Provided much-needed capital, but recent pullback • National security questions: Dubai Ports World • SWFs estimated at more than $2.5 trillion • SWFs could eventually invest in middle-market firms

8. 5. Middle-market compensation squeeze • Widening pay gap between largest buyout and middle-market firms • Smaller pay increases at smaller firms • More funds mean more options for associates • Recruiting, retaining talent tougher for smaller firms • Faster path to partnership helps small firm recruiting

9. 6. Three hot sectors for investment: Energy, Healthcare & Technology • Energy • Growth opportunities fueled Q1-Q3 dealmaking • Credit crisis, drop in energy prices have slowed M&A • Long-term outlook positive • Alternative energy especially promising • Fragmented industry • Healthcare • Pharma, biotech and medical devices lead active year • Growth sector – baby boomers • Historically recession-resistant, but not immune to downturn • Risks: changes in regulations and reimbursements • Technology • Ranked 1st in the U.S. and 2nd globally in number of deals Q1-Q3 • Significant slowdown in fourth quarter • PE tech firms have cash on hand but credit crunch hampering dealmaking • SaaS and Cleantech are bright spots

10. 7. Natural evolution of PE firms • Blurring of line between private equity, other asset classes • Largest firms diversifying into different sectors, hedge funds • Easier for LPs to invest in fewer firms with multiple fund types • Coming consolidation • Specialization for smaller firms • Some skepticism among middle market firms

11. Conclusion • Private equity ever-changing asset class • Private equity maturing • Savvy private equity investors re-inventing business • Large PE firms continue to enter middle-market • Private equity remain attractive to LPs, employees, companies