Linkages between the Public

1
Linkages between the Public Private Markets

• Georgiana Fung
• Small Cap Strategist, MLPFS
• 212-449-9189 georgiana_fung_at_ml.com
• May 2007

Merrill Lynch does and seeks to do business with
companies covered in its research reports. As a
result, investors should be aware that the firm
may have a conflict of interest that could affect
the objectivity of this report. Investors should
consider this report as only a single factor in
making their investment decision.
Refer to important disclosures on slide 33.
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2
Outline

• Background
• Public Market Structure
• Relationship to Private Equity
• Private Equity Outlook
• Investments
• Exits

3
BACKGROUND
4
For Every Large Cap, there are 10 Smaller Cap
Names
Source Merrill Lynch Small Cap Research
5
The Linkages between the Public and Private
Equity Markets
Source Merrill Lynch Small Cap Research
6
Similarities of Smaller Cap Stocks and Private
Equity

• Characteristics of Smaller Cap stocks Private
  Equity vs. Large Cap stocks
• Less transparent
• Less recognized
• Less liquid
• Faster growth

7
Information Flow Reduces as Company Size Decreases
Source Merrill Lynch Small Cap Research, IBES
8
Managers of Less Liquid Assets are More Likely to
Provide Value Added
Source Merrill Lynch Small Cap Research, Lipper
9
Smaller and Less Liquid Assets have Outperformed
the SP 500
Source Merrill Lynch Small Cap Research, Venture
Economics
10
PRIVATE EQUITY OUTLOOK
11
Private Equity Outlook

• Investments
• Capital markets supportive of buyouts
• Opportunities in smaller cap public equities
• Exits
• IPOs expected to be healthy
• MA to remain a key driver

12
INVESTMENTS

• Capital markets supportive of buyouts

13
Fund Raising Has Gone from Strength to Strength
Source Merrill Lynch Small Cap Research, Venture
Economics
14
Investors are Suspect over High Expectations
among the Mega-50
Source Merrill Lynch Small Cap Research, I/B/E/S
15
Anything but Large
Source Merrill Lynch Small Cap Research, Lipper,
ML High Yield Strategy, Venture Economics ()
Bond issuance and PE data is Quarterly as of
Q4/06.
16
Capital Markets to Facilitate Deal Making
Source Merrill Lynch Small Cap Research, Merrill
Lynch High Yield Strategy
17
LBOs of Smaller Public Companies on the Rise
Source Merrill Lynch Small Cap Research,
Securities Data Corp.
18
Relative Values are Not Extreme
Source Merrill Lynch Small Cap Research
19
Cost of Being Public Weighs on Smaller Companies
Source Merrill Lynch Small Cap Research
20
More Opportunities in Small Cap Stocks
Source Merrill Lynch Small Cap Research
21
EXITS

• IPOs likely to be healthy MA to remain the
  driver

22
IPOs Expected to be Healthy

• Risk taking to curtail appetites for IPOs in the
  near-term
• However, healthy markets, a lower cost of capital
  and rising issuance go hand in hand

23
Over 400 Companies were Sold by VCs in Each of
the Past 3 Years, a Solid Figure
Source Merrill Lynch Small Cap Research,
VentureOne
24
Risk Appetites Unwinding and will Continue
Source Merrill Lynch Small Cap Research,
VentureOne
25
An Improving IPO Backdrop can Fuel a Spate of
Additional Fund Raising
Source Merrill Lynch Small Cap Research
26
MA a Key Driver

• Hunt for growth by larger firms through
  acquisition
• Especially true in Healthcare

27
Healthcare Increasingly becoming a more
Meaningful Part of the Consolidation Wave
Source Merrill Lynch Small Cap Research,
Securities Data Corp.
28
Expectations for Large Pharma Continue to Grind
Down
Source Merrill Lynch Small Cap Research, I/B/E/S
29
Micro Cap Healthcare Offers Higher Growth
Private Equity/Micro Cap Proxy
Source Merrill Lynch Small Cap Research, I/B/E/S
30
Smaller Biotech/Drug Sell Below Long-term Average
Valuations
Source Merrill Lynch Small Cap Research
31
Large Cap Healthcare Companies are Hunting for
Growth
32
Final Remarks
PUBLIC
PRIVATE
Source Merrill Lynch Small Cap Research
33
Disclaimers