Darby Corp Summary

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(No Transcript)
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Finding Investment Opportunities in Emerging
Markets
Overview

• Darby Overseas Investments, Ltd. is a global
  emerging markets investment firm that manages
  private equity and mezzanine funds for
  institutional investors, multilateral agencies
  and high-net-worth individuals. Nicholas F.
  Brady, former U.S. Treasury Secretary,
  established the firm in 1994 and continues to
  serve as Chairman. Richard Frank, CEO of Darby,
  joined the firm in 1997, after a distinguished
  career as a World Bank Managing Director and as
  CFO of the International Finance Corporation
  (IFC). In October of 2003, Franklin Templeton
  Investments, one of the largest global investment
  management organizations, with over 440 billion
  in assets under management, acquired Darby. 

• 1.2 Billion in managed capital
• 9 office locations
• 62 full-time employees

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Darby Office Locations
Overview

• Darbys investment staff is highly skilled in
  investing in businesses and building value within
  their respective regions of expertise. This
  regional expertise is further supported by a
  local presence in all significant markets.

Washington, D.C.
Mexico City
Budapest
Vienna
Austin (Advisor)
Sao Paulo
Los Angeles (planned)
Miami
Seoul
Mumbai (planned)
Istanbul
Warsaw
Hong Kong
Key Darby Office
Planned Office

• 1.2 Billion in managed capital
• 10 office locations
• 52 full-time employees

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Overview
Mezzanine is a flexible and adaptive form of risk
capital that can be tailored to meet specific
financing needs and cash flow profiles

• A financing layer that sits between senior debt
  and equity in a companys capital
• Long term source of largely unsecured risk
  capital with debt repayment characteristics
• Senior lenders and banks generally consider
  mezzanine as part of equity
• Flexible amortization and interest payment.
• If well structured, mezzanine will lower the
  average cost of capital and improve the returns
  of existing shareholders
• Cost of mezzanine between that of senior debt and
  equity
• As provider of risk capital, the lender shares in
  a companys financial success but without
  significant dilution of existing equity

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Mezzanine Finance Asset Class Summary
Description of Mezzanine Capital

• Mezzanine is a differentiated form of long term
  risk capital that combines elements of debt and
  equity
• Financial instrument that is generally
  subordinated to senior debt and senior to common
  equity
• A typical mezzanine investment has two components

• Debt Component
• Long-term loans with a 612 year final life that
  are generally subordinated
• Dollar-denominated loans, with fixed or floating
  interest rates
• Base coupons generally at higher rates than
  senior debt
• Possibility of payment-in-kind (rolled up
  interest)
• Terms and conditions typically include security
  (usually second liens on assets/pledge of shares)
  and extensive covenant protection, some of which
  resemble bank covenants
• Loans are typically shadow rated within 6 months
  of commitment generally credit ratings of B
  and above

• Equity Component
• Upside participation via equity kickers in the
  form of warrants, profit participation,
  conversion features or additional interest linked
  to key operational variables
• Structured exit via redemption features,
  prepayment premiums and put options
• Alternative exit through sale to a strategic
  investor (via the exercise of drag and tag along
  rights) or initial public offering in local or
  international markets

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Mezzanine Finance Asset Class Summary
A financing layer that has a risk-return profile
intermediate between senior debt and equity
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Mezzanine shares the characteristics of both debt
and equity
Overview

• Mezzanine capital is largely unsecured risk
  capital which normally has to be repaid and
  serviced on an annual basis similar to a loan
• It fills the financing gap between equity and
  debt and can be structured so as to emphasis the
  features of either debt or equity thereby
  achieving an optimal combination that matches the
  specific situation and requirements of the
  company
• In a companys capital structure, it can be a
  substitute for both debt and equity
• Negotiable and interrelated are amortization
  schedule equity and/or profit participation
  rights current interest rate collateral value
  of the company puts and calls etc.

• Equity features
• Risk bearing through subordination
• Profit sharing and equity return participation
  through an equity kicker
• Security interest not always required
• Equity optionality through conversion rights or
  warrants
• Debt features
• Interest payment and principal repayment
• Financial performance ratios
• Other covenants

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Applications and Demand Drivers
Wide array of applications

• Mezzanine finances expansion opportunities in the
  manufacturing and services sectors
• Higher demand for investments driven by economic
  growth and increased trade and capital movements
• Scarcity of senior and high yield debt for the
  regions middle-market sectors
• Scarcity of equity capital from local sponsors
• Mezzanine finances leveraged buyouts
  opportunities
• Growing merger and acquisition activity creates
  opportunities for acquisition finance
• Potential for partnerships with other providers
  of risk capital, including buyout firms
• Opportunities to finance management buyouts by
  qualified management teams
• Mezzanine finances restructuring opportunities
• Substitution of short-term debt with long-term
  subordinated debt
• Opportunities to participate in distressed-debt
  situations and court-supervised restructurings
• Restructuring of shareholder contracts / sale and
  purchase transactions among shareholders
• Mezzanine funds the development and modernization
  of infrastructure projects
• Pressing need to build out and upgrade critical
  infrastructure
• New government policies supporting Private-Public
  Partnerships
• Public budgetary constraints for needed
  infrastructure improvements

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Mezzanine Finance Asset Class Summary
Benefits to Companies

• Mezzanine is a less dilutive form of risk capital
• Allows original shareholders to retain ownership
  as a result of its higher priority in the capital
  structure
• Facilitates partnership with strong sponsors and
  access to a broader and better quality deal flow
• Incentives aligned through tailor-made structures
  and performance-based pricing
• Mezzanine is a highly flexible financial
  instrument that allows for the design of tailor
  made structures to meet particular needs of
  companies
• Debt and equity components can be adapted
  depending on the type of investment opportunity
• Lower interest payment and higher equity
  component in growth plays
• Higher coupon and lower equity component in
  stable cash flow and/or value plays
• Flexibility in terms of the type of instrument
  (sub-debt or preferred stock), security,
  amortization schedule and payment of interest
  (cash or PIK)
• Equity kickers in the form of warrants, profit
  participation features, or additional interest
  linked to key performance variables (volume,
  output, etc.)
• Exit via scheduled amortization, prepayment
  (normally at a premium) or sale to a strategic
  investor or IPO
• Mezzanine is generally less costly than other
  forms of long-term risk capital
• Reduced risk attributes of mezzanine allows it to
  offer a lower absolute cost of financing compared
  to private equity
• Deductibility of interest significantly reduces
  the after-tax cost of debt component
• Equity kicker component linked to performance
  measures

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Exit in a Mezzanine Investments is done primaraly
through the cash flows of the Company
Exit from a Mezzanine Investment

• The return on a 20 miilion, 5-year investment,
  with a base coupon of 12 p.a., and a total IRR
  of 20 would have the following components

Equity Kicker (Profit Participation, Redemption
of shares Strategic sale/IPO)
Interest
Repayment of Principal
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Mezzanine Funds generate liquidity much earlier
than private equity funds
Cash Flows

• Projected cash flows for a Mezzanine Fund and
  a Private Equity Fund

Mezzanine Fund Cash Flow
Private Equity Fund Cash Flows
200
200
150
150
100
100
50
50

0
0
1
2
3
4
5
6
7
8
9
10
11
12
1
2
3
4
5
6
7
8
9
10
11
12
13
14
-50
-50
Years
Years
-100
-100
-150
Returns to Investors
Capital Calls
Baseado na experiência da Darby com fundos
existentes.
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Emerging Markets

• Asia
• 14 mezzanine deals totaling over 420 m in Asia
  (ex-Japan and Australia) since 1999. Mezzanine
  investments made by Darby 6 deals 215 m. New
  Darby fund recently launched.
• Over 70 of the mezzanine finance transactions in
  Asia categorized as expansion / acquisition
  financing Buyouts transactions not yet a major
  source of deal flow for mezzanine players but
  expected to increase
• Geographically, the mezzanine transactions spread
  among China, India, South Korea, Singapore and
  Philippines
• Central Europe
• Only 135 million in total, in two dedicated
  mezzanine funds raised for this region (vs. over
  7 billion in private equity in multiple funds.)
• Strong market demandlong-term risk capital is
  sought both by middle market companies and
  infrastructure projects as well as by the
  established private equity industry and as a
  means to finance the growing buy-out, expansion,
  and acquisition activity in the region
• Strong demand from the Ascension Countries and
  Turkey
• Latin America
• Since 199 Darby has invested 200 m in 12
  companies with the first and only dedicated Fund
  in the Region. Successor Fund in fund raising
  stage. MDB have traditionally been active in
  this market. Several PE Funds are structuring
  their deals with mezzanine-type features e.g.
  Redeemable Preferred Shares.
• Opportunities exist in the infrastructure sector
  given pent-up demand, and in the manufacturing
  and services sector due to the lack of long term
  capital. Main uses are expansion,
  refinancing/restructuring and leveraged buyouts.
• Strong demand in Brazil, Mexico and Colombia.
  Chiles buy out market is developing quickly
  given well develop capital markets Darby
  launching a new und in local currency in Brazil.

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Emerging Markets
Advantages of Mezzanine Format in Emerging
Markets Investing
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Darby Mezzanine Finance
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Darby Mezzanine Finance Summary of Existing
Funds
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Darby Mezzanine Finance New Funds in the Market
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Darby Latin American Mezzanine Fund Portfolio
Summary Status
February 2006
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Darby Asian Infrastructure Mezzanine Capital Fund
Portfolio Summary Status
December 2005
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• Darby Overseas Investments, Ltd.
• Pedro Batalla, Managing Director,
  pbatalla_at_doil.com
• 1133 Connecticut Avenue, NW
• Fourth Floor
• Washington, DC 20036
• darbyoverseas.com