Pearl_e.qxp:e_Pearl 31.10.2008 18:30 Uhr Seite 1 QUARTERLYREPORT for the period from 1 July 2008 to 30 September 2008 Pearl_e.qxp:e_Pearl 31.10.2008 18:30 Uhr Seite 2 QUARTERLYSTATEMENTOFTHEINVESTMENTMANAGER REPORT INVESTMENTMANAGER’SREPORT PEARLNAVREMAINSFAIRLYSTABLE During the third quarter of 2008, the net asset value (NAV) of the Pearl convertible bond managed to largely escape the turmoil in the international financial markets, easing by 2% to 120.47%. The slight decline in the NAV was due, among other things, to valuation adjustments, especially in relation to the large- cap buyout funds in the portfolio: the prevailing market sit- uation has seen the valuations of comparable public com- panies across most sectors fall sharply, and the general The convertible bond issued by Pearl Holding Limited provides access to the private partners have had to make valuation adjustments to certain investments in this sector. The valuation adjustments equity asset class. For the first time, investors have the opportunity to buy into the reported by the general partners during the reporting peri- od had a negative impact on the NAV of Pearl of 1.5%. earnings potential of a broadly diversified private equity portfolio, while enjoying In order to reflect the fair market value, according to IFRS, capital protection and a 2% coupon. Its tailor-made structure makes the convertible further valuation adjustments had to be carried out to indi- vidual companies in the Pearl portfolio because of height- bond suitable for German private and institutional investors (i.e. “sicherungs- ened market uncertainty in the third quarter, reducing Pearl’s NAV by 0.9%. vermögens- und spezialfondsfähig”). Due to the dislocations in the international stock markets and irrespective of the quality of the underlying invest- ments, the listed private equity companies, which account for around 4% of the Pearl portfolio, also decreased in value during the past quarter, reducing the NAV by 0.5%. By contrast, thanks to healthy fundamentals and progress made on the operating front, the valuations of certain direct This document is not intended to be an investment advertisement or sales instrument; it constitutes neither an offer nor an attempt to investments in the Pearl portfolio could be written up and solicit offers for the product described herein. This report was prepared using financial information contained in the company’s books made a positive 0.3% contribution to the result for the and records as of the reporting date. This information is believed to be accurate but has not been audited by any third party. This report quarter. The strong appreciation of the US dollar against the describes past performance, which may not be indicative of future results. The company does not accept any liability for actions taken euro also had a positive impact of 2.0% on Pearl’s NAV on the basis of the information provided. development in the third quarter. 2 Pearl_e.qxp:e_Pearl 31.10.2008 18:30 Uhr Seite 3 MID-MARKETPRICEEASES CONTINUOUSCOMMITMENTACTIVITY third quarter of 2007. A larger capital call was made by Polish Enterprise Fund VI to finance its acquisition of Eastern The mid-market price of the Pearl convertible bond stood at In line with its long-term commitment strategy, Pearl made European soft drinks producer Kofola-Hoop. 99.00% at the end of September. This represents a year-to- three new capital commitments during the third quarter, date decline of just 4.6%. At the end of the quarter, the namely to: Value Enhancement Partners Special Situations Despite the challenging exit environment, EUR 13.9 million Pearl convertible bond was trading at a discount of 17.8% Fund I, which specializes in turnaround situations; Avista in realization proceeds flowed back into the Pearl portfolio to the NAV. Given recent stock market developments, the Capital Partners (Offshore) II, which focuses on health and during the third quarter. Permira proved that it is still possible mid-market price of the convertible bond had to be adjust- communications companies; and Candover 2008 Fund in the current environment for private equity companies to ed significantly at the beginning of October, as a result of Limited Partnership, a fund focused on investments in Great exit individual portfolio companies at very attractive prices, corrections in stock markets around the world. However, Britain and Continental Europe. when it sold Jet Aviation from its Permira Europe III portfolio Partners Group, the Investment Advisor to Pearl, believes in August for CHF 2.5 billion. Permira stands to make a return that the market maker’s recently adjusted price does not BRISKINVESTMENTACTIVITY of approximately four times its original investment. reflect the quality of the underlying portfolio or the value of the structure. During the past three months, Pearl received a total of EUR OUTLOOK 42.5 million in capital calls to finance new investments, which is almost on a par with the investment volume for the Given the current market situation, Partners Group, the Investment Advisor to Pearl, is satisfied with the develop- ment of the portfolio. However, moderate valuation adjust- MID-MARKETPRICEANDNAVDEVELOPMENT(LASTTHREEYEARS) ments, especially diversified large-cap buyout portfolios of 150% recent vintage years, may have to be made in the short to mid-term, principally because of the use of valuation and 140% accounting principles that are based on fair market value. 130% 120% Yet the Investment Advisor firmly believes that the portfolio should be able to continue to develop positively in the long 110% term because it is able to benefit in the current market envi- 100% ronment from its significant diversification of vintage years, 90% regions, stages, industries, and size. Partners Group has high confidence in in the Pearl portfolio, with quality investments 80% and high levels of diversification, managed by top-quartile pri- 70% vate equity firms which Partners Group believes are well- equipped to weather the difficult economic environment. Sep. 2005 Sep. 2006 Sep. 2007 Sep. 2008 March 2006 March 2007 March 2008 NAV Mid-market price NAV incl. paid and accrued interest 3 Pearl_e.qxp:e_Pearl 31.10.2008 18:30 Uhr Seite 4 QUARTERLY REPORT MARKETTRENDS EXISTING PRIVATE EQUITY INVESTMENTS Private equity is typically less dependent on short-term fluc- tuations of the global financial markets but is rather linked to developments in the real economy. Even though private equi- ty sponsored companies are also affected by a softening, or Financial markets have been highly volatile, with equity markets showing a sharp cor- likely recessionary, environment, Partners Group is con- vinced that these are better positioned than their public rection recently, and consumer confidence has deteriorated. The current lack of liquidi- peers by the nature of the private equity business. ty, which was triggered by the subprime mortgage crisis, has resulted in a severe impact First and foremost, private equity financed companies do not have a broadly diversified shareholder base, but usually – on credit globally. and this is especially true for the buyout side – only one to two majority shareholders. These majority shareholders are close to the firm, often have a very hands-on approach to its development and management, have the ability to adjust In response to the current public market situation and the challenging economic envi- strategies or management very swiftly if necessary, and, most importantly, are not dependent on the short-term focus ronment, Pearls’ Investment Advisor, Partners Group, would like to provide an update of of public markets. Private equity firms build companies and generate shareholder value over the long term, through busi- its private market views and the expected impact on private equity portfolios. ness and market cycles. The Investment Advisor's leading private equity investment partners have been through such times before and Partners Group is convinced they will suc- cessfully adapt again to the current environment, as they In assessing the current environment’s impact on private equity portfolios, Partners have managed to in the past. Group differentiates between the impact on existing portfolios and the current environ- Secondly, many private equity backed companies are financed better than their public counterparts. In particular, ment’s influence on future investments. they benefited in the past from highly attractive financing terms and “covenant-light” structures, putting them in a much better position to weather a softening, or likely reces- sionary, environment. In most cases, significant refinancing activities for these transactions are not expected to start until 2011/12 or later. In addition, many private equity sponsors have substantial undrawn capital available for the further financing of their existing portfolio companies as needed. 4 Pearl_e.qxp:e_Pearl 31.10.2008 18:30 Uhr Seite 5 However, Partners Group expects that a few large, “high-pro- should only be temporary – to private equity portfolios, In summary, Partners Group has a high degree of confidence file” transactions could well fail – with an associated high in particular based on “fair market value” accounting and val- in Pearl’ portfolio, with its quality investments and high lev- level of publicity – investors though should bear in mind that uation principles applied to individual investments; the recent els of diversification, managed by top-quartile private equity these cases should not be representative of broader private