TD Capital Private Equity Investors Providing innovative global private equity solutions for Canadia

1
TD Capital Private Equity Investors Providing
innovative global private equity solutions for
Canadian institutional investors
CONFIDENTIAL
Current challenges and opportunities in private
equity valuations, deal flow and exits By
Jeff Pentland, Managing Director October 29, 2009
2
Important Notices
The information contained herein is in summary
form for convenience of presentation. It is not
complete and it should not be relied upon as
such. The information set forth herein was
gathered from various sources which TD Capital
believes, but has not been able to independently
verify and does not guarantee, to be
accurate. The attached material is provided to
you on the understanding that you will understand
and accept its inherent limitations, you will not
rely on it in making any investment decision. Any
investment in private equity is subject to
various risks such risks should be carefully
considered by investors before they make any
investment decision and any prospective investor
should always consult its own advisors as to
legal, tax, accounting, regulatory and related
matters before investing. These materials may
contain forward-looking statements based on
experience and expectations about these types of
investments. For example, such statements are
sometimes indicated by words such as expects,
believes, seeks, may, intends, attempts,
will, should, and similar expressions. Those
forward-looking statements are not guarantees of
future performance and are subject to many risks,
uncertainties and assumptions that are difficult
to predict. Therefore, actual returns could be
much lower than those expressed or implied in any
forward-looking statements as a result of various
factors. Neither TD Capital nor any of its
affiliates nor any other entity has any
obligation to revise or update these materials or
any forward-looking statements set forth
herein. The information in the attached materials
reflects the general intentions of TD Capital.
There can be no assurance that these intentions
will not change or be adjusted to reflect the
environment in which TD Capital will operate.
Historic information on performance is not
indicative of future returns. Conclusions and
opinions do not guarantee any future event or
performance. Neither The Toronto-Dominion Bank
nor any of its subsidiaries or affiliates are
liable for any errors or omissions in the
information or for any loss or damage
suffered. This document, which has been prepared
solely for information purposes by TD Capital, is
confidential and is being provided to you on the
express understanding that it will not be
reproduced or transmitted by you to third parties
without TD Capitals prior written consent. If
you are not the intended recipient of this
material, you are hereby notified that the use,
circulation, quoting, or reproducing of this
report is strictly prohibited and may be
unlawful. This material was used by TD Capital
during a presentation it is not a complete
record of the relevant discussions. TD Capital
Group Limited is a wholly owned subsidiary of The
Toronto-Dominion Bank. TD Capital is the trade
name which TD Bank Financial Group uses to market
its private equity services globally.
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TD Capital provides innovative global private
equity solutions for institutional investors
Overview of TD Capital

• Active in private equity fund investing since
  1969
• Investments in more than 200 funds and direct
  co-investments with more than 70 fund managers
• Portfolio returns of 17.5 through June 30, 2009
• Started managing external capital in 2002
• Global private equity program with over 2.8
  billion under management
• Invests across the spectrum of private equity
  funds, with allocations for secondary investments
  and co-investments
• Institutional investor base through global fund
  of funds program and series of separately managed
  accounts
• Value added partner for private equity strategy
  development, portfolio construction and analysis,
  cross-border tax planning, portfolio
  administration and financial reporting
• Uniquely positioned and structured to serve
  Canadian institutional investors
• 40 person team with offices in Toronto, Canada,
  London, UK and Menlo Park, California

Effective October 31, 2009, TD Capital will
complete its collaborative spin-out from TD Bank
and will become Northleaf Capital Partners,
Canadas largest independent global private
equity fund manager and advisor
4
TD Capital is committed to building a long-term
professional partnership with each of its
investors
Mission Statement

• We are a global private equity investor with
  strong Canadian roots and a long history of
  superior investment returns
• We are committed to building long-term
  relationships with our investors, fund managers,
  business partners and colleagues based on trust,
  openness, respect and the highest standards of
  integrity and professionalism
• We will be the private equity partner of choice
  for our investors by
• generating superior, long-term investment returns
• ensuring that our interests are aligned with
  theirs
• working collaboratively and openly to exceed
  expectations through best-in-class private equity
  solutions, investor reporting and client service
• We will be a preferred investor for our fund
  managers by
• employing a professional, fact-based investment
  approach grounded in a deep understanding of
  private equity
• being a trusted, collaborative, long-term partner
• providing a global investment perspective
  informed by our long and successful history of
  private equity investing
• We will attract, develop and retain exceptional
  professionals by
• providing and reinforcing a one-team culture that
  is both supportive and challenging
• ensuring that our interactions are founded on
  honesty and mutual respect
• expecting, recognizing and celebrating excellence
  in everything we do
• supporting the professional, community and
  personal development efforts of every team member

5
Todays discussion

• How to invest in private equity
• Current market perspectives, challenges and
  opportunities

6
North American institutions typically allocate 5
to 10 to the asset class with market approach
dependent on scale

Target allocation to private equity varies
between 5 - 10 for different institutions in
North America
with go-to-market strategy dependent on
investor size and team resources
Hybrid model combination of direct investments,
direct fund investments and fund of funds
Endowments/ Foundations
Public Pension Funds
Partnership model preferred solution for
smaller and mid-sized institutions that do not
have the scale to build diversified PE exposure
in-house
Corporate Pension Funds
Source Russell Investment Group Alternative
Investing Report 2007-2008.
7
Private equity has delivered strong long-term
returns
Key success factors

• Rigorous due diligence to identify managers who
  build better businesses
• Sustainable value in core relationships
• Proactive identification of emerging managers
• Consistent exposure to venture, small, mid-market
  and large buyout
• Consistent investment across vintage years
• Opportunistic participation in secondary market
  transactions and direct co-investments

Horizon IRR ()1Period ended June 30, 2009
Years
Since inception
5
10
3
15
20
1
TD Capital Investments
17.53
9.95
10.44
2.63
16.79
15.42
-18.70
Venture Economics All Private Equity Index2
12.30
6.50
7.10
1.30
11.10
11.50
-24.40
SP 5003
9.43
-2.24
-2.22
-8.22
6.92
7.76
-21.26
1 The internal rate of return ("IRR") is an
annualized money-weighted return calculated using
periodic cash flows and end of holding period
valuations. Performance of all Fund Investments
and Direct Co-Investments made by TD Capital in
years 1969-2009 is measured as of June 30, 2009
after all fees, expenses and carried interest of
all the underlying partnerships but before fees
and expenses of TD Capital. 2 Source for
Private Equity Benchmark Returns Venture
Economics Thomson Financial Investment Horizon
Summary Reports and Cumulative Benchmark Summary
Reports run on September 21, 2009 for the US
Primary Market as at March 31, 2009. Database
last refreshed on August 1, 2009. Venture
Economics data is continuously updated and is
therefore subject to change. 3 Source for SP
returns Bloomberg L.P., Standard Poors, TD
Capital Private Equity Investors analysis. Total
returns for SP 500 Index figures assume
dividends are reinvested into the index. These
returns do not reflect the cash flows used to
calculated the Private Equity Benchmark returns
or the TD Capital returns and accordingly a
direct comparison may not be meaningful.
8
Sustainable out-performance in private equity is
dependent on successful implementation
Key success factors in private equity
Diversification
Sustainable Outperformance in Private Equity
Manager Selection and Access

• Successful participation in private equity
  requires that each of these key factors be
  considered and applied in building out a
  long-term investment program
• TD Capital Private Equity Investors fund of
  funds program successfully addresses each of
  these key considerations

Administration
Timing and Sequence of Allocation
9
In private equity, access to top quartile
managers is critical and limited
s
Manager Selection and Access

• Wide dispersion in returns makes focus on top
  performers imperative

Persistence of performance and limited
fundraising makes access a constant challenge
Percentage point spread between top and bottom
quartile performance, 1996-2007
Percent
73
63
52
Venture Capital
Top quartile
Follow-on fund performance
28
Buyouts
2nd quartile
Public Equity
Top quartile
2nd quartile
3rd quartile
Bottom quartile
Prior fund performance
Venture Economics U.S. Cumulative Vintage Year
Composite Performance (IRR) as of June 30, 2008
for vintage years 1996-2007 Morningstar.com N
ote Private equity returns are calculated as
internal rates of return ("IRRs"), while those
for the public markets are not. Direct
comparisons are therefore not possible
Source McKinsey Co.
10
A fund of funds approach provides investors
with an attractive risk profile and exposure to
best-in-class managers globally
Balanced Diversification
The Risk Profiles of Private Equity ()
Risk of some loss
Key private equity diversification parameters
Risk of total loss

• Manager
• Fund type (buyout venture capital)
• Sector focus
• Geography
• Investment type (primary secondary,
  co-investment)
• Vintage year

Direct investment in single private company
Investment in single private equity fund
Investment in private equity fund of funds
Number of portfolio company investments
1
6 - 12 (Buyout) 20 - 40 (Venture)
400 - 1200
Note Comparing the risk profiles of venture
capital investment vehicles. Data contains about
5,000 direct investments (US data - no European
data available), 300 European funds and 50,000
simulated European fund of funds. Source Weidig
and Mathonet report, The Risk Profiles of
Private Equity, January 2004.
11
A successful private equity program requires
efficient administration
Administration
Institutional investor in private
equity (Indirect exposure to portfolio of 40
funds)
Clear and concise communication
(Portfolio of 40 funds)
800-1200 administrative events/notices per year
Capital calls/ distributions
Quarterly and annual reporting
Administrative/legal amendments
Annual meetings
Monitoring and risk management
12
Private equity funds draw down and distribute
capital over time
Timing/Sequence of Allocation
Single 10 million commitmentUS Millions
ILLUSTRATIVE

• Target Private Equity allocation of 10 million
  never reached with single fund commitment given
  net cash flows
• Amount of net invested capital in each fund
  declines rapidly after year five or six
  depending on investment pace

13
An ongoing investment program is required to
achieve and maintain a full allocation to private
equity
Timing/Sequence of Allocation
US Millions
ILLUSTRATIVE
Cumulative net invested capital
Fund I
Millions
Fund II
Fund III
Fund IV
Fund V
Years
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Todays discussion

• How to invest in private equity
• Current market perspectives, challenges and
  opportunities

15
While the current economic climate has impacted
valuations and led to a slow down in deal flow
and realizations, it is also creating
opportunities

• As public company comparables erode across the
  global capital markets, the shift to
  mark-to-market accounting rules has put
  pressure on interim fair value valuations
  across the private equity industry
• At the same time, valuation compression is
  creating opportunities for fund managers with
  capital to invest as pricing moderates and
  sellers motivation increases
• Despite reports of compelling buying
  opportunities, our managers remain cautious,
  focusing on protecting value in their existing
  portfolios and only acting on the most attractive
  deals
• While we have seen a slow down in the investment
  pace across the portfolio, and a reduction in the
  number of capital calls over the past few months,
  TD Capital has continued to successfully source
  attractive fund investments, including secondary
  market opportunities
• Broader challenges in the economic environment
  have also led to an ongoing slowdown in exit
  opportunities and realizations
• While we have seen a reduction in distributions
  across the portfolio in recent quarters, some of
  TD Capitals managers have completed successful
  public offerings over the past several weeks

Valuations

• History demonstrates that periods of economic
  dislocation hold significant promise for private
  equity firms that adhere to patient strategies
  anchored in creating value through building
  better, more profitable businesses
• In the 1991 downturn, top quartile fund managers
  were demonstrably more patient in putting capital
  to work as the economy came out of the recession
  - and outperformed bottom quartile managers by
  30 on a net IRR basis

Deal flow
Exit opportunities
Source TD Capital analysis Cambridge Associates
LLC
16
In the new fair value era, best-in-class
managers are developing clear, concise and
consistent approaches and communicating them
clearly to investors
Valuations
EXAMPLE
Quarterly valuation process under FAS 157
Inputs
Methods
Weighting
Output

• Company performance and forecasts
• Public peer group/market metrics
• Corporate MA transactions
• Leverage market conditions/assessment

• Trading comparables
• Transaction comparables
• Leveraged buyout model

• Company-specific weighting among 3 methods
• Fixed over time

• Quarterly company valuations
• Results of individual methods tracked over time

• Quarterly updates performed by deal teams for
  each portfolio company
• Reviewed by senior management and CFO
• Three primary valuation methods used
• Default weighting each method equally
• Modified weighting used in minority of cases to
  reflect company-specific issues

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In theory, under FAS 157, private equity
valuations should more accurately reflect changes
in enterprise value over time

Valuations
ESTIMATES
PRA International Total Value and Estimated
Mark-to-Market Value As at December 31,
2004(Amounts in US Millions)
CONFIDENTIAL
Genstar exit via IPO (Nov /04)
Genstar actual holding value
Mark-to-market estimate
Genstar investment (Jun/01)
10M Dividend Distributed from Recap (Feb/04)
Source PRA International prospectus 2004
Capital IQ Genstar reports
18
However, history demonstrates that interim
mark-to-market valuations may bear little
resemblance to ultimate exit values
Valuations
ILLUSTRATIVE
Select BCP III (1997-2004) investments
(representing 43 of invested capital) Millions
Trough valuation MOIC1
At exit/ current MOIC
Invested capital
Investment
Date
Premcor Centennial Comm. Republic Services (fka
Allied Waste)2 Sirius PaeTec Axtel2 German
Cable3 Universal Orlando2 Adelphia Comm. Total
Nov 97 Jan 99 Jul 99 Jan 00 Feb 00 Mar 00 Jul
00 Jul 00 May 02
276 138 350 227 50 62 238 266 118 1,725
0.3x 0.4x 0.6x 0.1x 0.5x 0.4x 0.3x 0.2x 0.6x 0.3x
5.9x 2.8x 1.2x 0.9x 2.4x 1.4x 1.3x 1.9x 1.7x 2.2x
Note Represents the gross MOIC, which would
ultimately be reduced by management fees, carried
interest and other fees and expenses
1 Estimated realized/unrealized FAS 157
valuations at investment low point, however FAS
157 valuations were not conducted at such time 2
Partially realized or unrealized investments.
Valuations as of December 31, 2008 3 Includes
investments in Ish, Primacom, Kabel BW and
Kabelnetz NRW
19
The number and volume of defaulting loans have
reached unprecedented levels in the first three
quarters of 2009
Deal Flow
Institutional Loan Defaults by Initial
Institutional Loan Amount and Count( millions)
Source SP Institutional Loan Default Review
Q3-09
20
However, LBOs have experienced lower default
rates and a longer time to default than non-LBOs
3

Deal Flow
Average Time to Default by Transaction
Type(Years)
Cumulative Institutional Loan Default Rate by
Transaction Type( of all loans)
LBO1
Non-LBO2
Non-LBO2
LBO1

• Possible explanations for the lower default rates
  of LBO loans include
• Selection of top-quality companies with healthy
  cash-flow profiles
• Ability of PE fund managers to create capital
  structures that allow for greater flexibility
  during economic downturns
• Covenant-light loans offered to PE fund managers
  during the credit boom of 2005-2007

Source SP Institutional Loan Default Review
Q3-091 44 loans valued at 30.6 billion 2 213
loans valued at 92.4 billion
21
Recent months have seen a pickup in investment
activity, with TD Capital fund managers
participating in a number of high profile
transactions
Deal Flow
Fund Manager
Company
Amount Invested/ Enterprise Value
1.9 billion
475 million
10.4 million
18.8 million
Source GP Reports
22
Investing in the secondary market can drive
significant return and portfolio construction
benefits
7
Deal Flow
ILLUSTRATIVE
Return characteristics of a private equity fund
the j-curve
Harvest Period
Net cumulative cash flow

• Benefits of secondary investments
• J-curve mitigation
• Avoidance of start-up costs and fees in early
  years
• Favourable prices
• Accelerated investment program and shorter time
  to distributions
• Able to diligence and value underlying
  investments
• Able to augment and manage portfolio
  diversification of strategy, geography, vintage
  year and industry

Value Creation
Portfolio Construction
Typical Secondary
Investment Period
Time (yrs.)
23
TD Capitals recent secondary investment in MHR
illustrates the potential for strong returns in
the current market

Deal Flow

• TD Capital proactively identified MHR as a
  manager and portfolio that we wanted to add to
  through the secondary market
• Existing relationship focused on distressed debt
  for control
• Attractive portfolio of undervalued assets
• Actively sourced an LP looking to sell a
  commitment to MHR II and a commitment to MHR III
  purchased interests as a co-investor with the
  general partner
• With a portfolio comprised of mostly public
  companies, the December 2008 NAV was already a
  good value, upon which a discount was negotiated

The purchase price discount and the
out-performance of MHR portfolio since closing
demonstrate the return profile of a successful
secondary investment
Investment Thesis
Risks/Considerations

• Exposure and volatility of publicly traded
  portfolios

• Strong, undervalued portfolio of companies

• Experienced team with a strong track record

• MHR often holds non-controlling stakes in
  publicly traded companies

• Increased distressed fund exposure in a
  favourable environment

71
-30

• Potential future underperformance of certain of
  the portfolio companies

• Secondary discount will allow for attractive
  returns

• Timing of the investment given public market
  exposure

Purchase price off Dec. 2008 net asset value
Net Asset Value Dec. 2008
Net Asset Value June 2009
24
Recent Inflexion investments demonstrate the
opportunities for accessing new relationships on
attractive terms

Deal Flow

• TD Capital was presented with the opportunity to
  make an investment in Inflexion Private Equity
  through a secondary transaction in the Inflexion
  2006 Buyout Fund and an investment in the
  Inflexion Co-Investment Fund
• The seller, a publicly traded private equity
  vehicle motivated to reduce their private equity
  exposure over the medium term, was looking to
  sell 3 million of their commitment in the 2006
  Buyout Fund
• The Co-Investment Fund was set up to invest
  alongside the 2006 Buyout Fund and has investor
  friendly terms

Investment Thesis
Risks/Considerations

• Inflexion identified as a high-potential manager
• Increased exposure to the UK small/middle market
  in a favourable investing environment
• Ability to invest in companies that are holding
  up well in the current environment at attractive
  valuations
• Secondary discount will allow for attractive
  returns

• Recent signs that the UK economy could be in for
  a protracted downturn leading to possible further
  write-downs in the portfolio
• Emerging management team and track record
• Successful completion of near-term investments

• TD Capital believes its investment in both the
  Secondary and the Co-investment Fund
  opportunities will provide an attractive return
  profile

Recaps of 7 on the secondary transaction and
18 on the Co-Investment Fund have already been
distributed
25
While IPO and MA activity is down
0
Exits
Capital raised (USB)
Global IPO activity by year
Number of deals
287
246
177
95
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
Value of announced U.S. transactions (USB)
1,708
1,638
Private equity
1,248
All US transactions
1,077
1,182
1,194
934
919
1,037
588
955
459
818
869
497
388
91
71
51
2008
2007
2006
2005
2004
2003
2002
2001
Sources Dealogic, Thomson Financial, Ernst
Young Thomson Reuters
26
there have been recent successful exits by TD
Capital fund managers, either through IPOs or
sales to strategic buyers
Exits
Fund Manager
Company
Purchase Price / Proceeds from IPO
Method of Realization
Listed on NASDAQ (AVGO) on August 5, 2009
648 million
Listed on NASDAQ (SIRO) on August 12, 2009
159 million
Listed on NASDAQ (GLDD) on August 13, 2009
168 million
Acquired by Abbott in September 2009 to close in
Q4 2009
400 million
Acquired by GlaxoSmithKline in September 2009
3.6 billion
Listed on NASDAQ (EDMC) on October 1, 2009
335 million
Acquired by Sanofi-Aventis in October 2009 to
close in Q4 2009
540 million
Source GP Reports
27
Periods of recession, economic turmoil and
capital scarcity have typically set the stage for
outsized returns in private equity
39.8

• Top quartile private equity vintage year
  performance (US)

Non-recessionary vintages
Recessionary vintages
Funds less than 5 years old are experiencing the
j-curve effect
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2008
2005
2006
2007
Source Venture Economics, vintage year returns
as of March 31, 2009. Recession period includes
the recession cycles of 1991 and 2001, including
the two year periods emerging from the
recessionary troughs.
28
TD Capital continues to focus on generating
attractive long-term returns from a diversified
portfolio of private equity funds and
co-investments
A selective, long-term investment approach
based on three fundamental themes

• Partner with experienced, responsible Fund
  Managers that have demonstrated the ability to
  profit from long-term investments across multiple
  market cycles

Funds reviewed last 12 months (to October 15,
2009) Global Program
Partner with the best
Proactive market and manager research
Number of funds/managers
310
Screening
Initial manager meeting
295
Investment team review
17
Formal due diligence
Investment Committee
7
7 investments
29

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