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Private Equity Distressed Debt Market

June 2009

Distressed Debt

Table of Contents

Page Executive Summary .................................................................................................. 1 Distressed Debt Investing ........................................................................................ 2 Private Equity Distressed Debt Funds ................................................................... 5 Distressed Debt Market ......................................................................................... 12 Private Equity Fund Managers Angelo, Gordon & Co. ................................................................................... 16 Apollo Advisors, L.P. ..................................................................................... 17 Avenue Capital ............................................................................................... 18 Black Diamond Capital Management ............................................................ 19 Blackstone Group - GSO ................................................................................ 20 CarVal Investors ............................................................................................. 21 Catalyst Capital Group ................................................................................... 22 Centerbridge Partners ..................................................................................... 23 HIG Capital .................................................................................................... 24 KPS Capital Partners ...................................................................................... 25 Littlejohn & Co. .............................................................................................. 26 MatlinPatterson Global Advisors LLC .......................................................... 27 MHR Fund Management LLC ....................................................................... 28 Oaktree Capital Management ......................................................................... 29 Pegasus Capital Advisors ............................................................................... 30 Wayzata Opportunities Fund .......................................................................... 31 WL Ross & Co LLC ....................................................................................... 32

Distressed Debt

Executive Summary

Over the past thirty years the high-yield "junk" bond market and securities of distressed companies has become an important alternative asset class for many institutional investors. In 1978 the high-yield market was less than $10 billion ­ the market has since grown to more than $1 trillion in high-yield bonds outstanding in the U.S. in 2008.(1) For the past two to three years, it has been difficult for managers of funds investing in distressed securities to find many investment opportunities as the number of bonds defaulting or being "stressed" had been at record lows. A major factor creating the docile distressed market was the enormous amount of available liquidity in the lending markets. The presence of so many investors with large amounts of money to deploy in the debt sector has, in the short run, lessened the incidence of defaults. 2009 has seen continued dramatic change in the credit markets. In 1Q 2009 the volume of new issues below B- decreased to just 6% of all new issues, down from 15% in 2008.(2) These factors have attracted the attention of a flock of private-equity investors and hedge funds, who are seeking investment opportunities as debt-laden companies run into trouble. There has been considerable demand for distressed funds currently in the market and considerable capital chasing upper-echelon names. Institutional investors are committing to distressed debt funds now so that they will be in a position to invest when the next cycle turns. The U.S. economy has been in a recession since December 2007(2), and leading analysts are predicting default rates to increase more in 2009 and continue to increase in 2010. There has been a significant increase in the supply of distressed and defaulted paper in the first quarter of 2009, and estimates are for more significant increases in the next 12 to 24 months.(3) The estimated face value of the distressed and defaulted debt markets remains high at $3.3 trillion in 1Q 2009, this down slightly from $3.6 trillion in 2008, but is still up considerably from $867 billion at the end of 2007. The increase has been mainly caused by the rise in the distressed ratio. The market value estimate of distressed and defaulted debt also remained high, at approximately $2.0 trillion, down from the $2.2 trillion at the end 2008, but again much higher than the $708 billion at the end of 2007.(4) As corporate defaults are on the rise, and prospects for more are growing increasingly dire by the day, there has been a surge in distressed investing. Year to date, as of June 1, 2009, 68 companies have defaulted for a record high $123.9 billion (including GM). Compared with the 82 companies and $49.2 billion in defaults in all of 2008 and the previous high of $64.1 billion in defaults in 2001.

(1) NYU Salomon Center. (2) National Bureau of Economic Research. (3) JPMorgan. (4) NYU Salomon Center.


Distressed Debt

Distressed Debt Investing

Distressed debt is a subgroup of the high-yield bond market. It is defined as securities that yield at least 10 percent (1000 basis points) above the risk-free rate benchmark. Defaulted debt is defined as securities that trade after the issuing firm has missed an interest payment and/or has filed for bankruptcy. In the United States alone, it is estimated that the size of the distressed debt market is $3.6 trillion in face value and $2.2 trillion in market value at the end 2008.(1) Distressed debt investing is the practice of purchasing the debt of troubled companies. These companies may have already defaulted on their debt or may be on the brink of default. Distressed debt may be the debt of a company already under bankruptcy protection. The key to distressed debt investing is to recognize that the term "distressed" has two meanings; 1. It means the issuer of the debt is troubled; its liabilities may exceed its assets, or it may be unable to meet its debt service and interest payments as they become due. Distressed debt investing almost always means that some workout, turnaround, or bankruptcy solution must be implemented for bonds to appreciate in value. 2. "Distressed" refers to the price of the bonds. Distressed debt often trades for pennies on the dollar. This affords the investor the opportunity to make a profit by identifying companies with a viable business plan but short-term cash flow problem, as well as analyzing the industry down cycle and identifying the potential for companies to appreciate from being in the trough of an economic down cycle. Distressed debt investors are basically value investors, trying to buy an asset for a price well below its intrinsic or fair value. They look long and hard at distressed companies to see if their securities have been oversold, even accounting for the problems the companies face. Distressed investing often focuses on a firm's bonds, since bondholders have priority claims on a company's assets compared with shareholders. The sequence of events often runs something as follows: 1. A firm looks on the verge of defaulting on bond interest payments, or actually defaults. The market price of the bond falls far below its par value as existing investors jump ship. 2. A distressed debt investor becomes involved. As part of their investment analysis, distressed debt investors will calculate what the bonds are actually worth, given the firm's assets and the claims on those assets from other creditors. If the distressed debt investor sees an opportunity - if the bonds are trading well below what the investor thinks they are worth - he may make an investment. 3. Following a turnaround in the company's fortunes, typically through a restructuring either within or outside bankruptcy, the investor sells the bonds or exchanges them for a package of equity and debt in the relaunched business. The package can then be sold. If all goes well, the distressed debt investor turns a profit.

(1) NYU Salomon Center. Source: "A Primer on Distressed Debt Investing"; Mark J.P. Anson; The Journal Of Private Equity, Summer 2002.


Distressed Debt

Distressed Debt Investing

Distressed debt investing is most evolved in the U.S., as a result of its highly developed bankruptcy laws. A firm receives legal protection from creditors under Chapter 11 of U.S. bankruptcy code and can continue to operate as a "going concern" while its management team works out a reorganization plan with a committee of its creditors. In many other countries, bankruptcy involves simply shutting up shop and liquidating assets to pay back creditors - an option the U.S. code explicitly fences off under Chapter 7 of its bankruptcy law. Distressed debt investors buy the debt of troubled companies including subordinated debt, junk bonds, bank loans, and debt obligations. Their investment plan is to buy the distressed debt at a fraction of its face value and then seek or often times, affect improvement of the company. From an investor's standpoint, the portfolio diversification benefits often outweigh risks. Although distressed debt opportunities are cyclical, and are typically predicated by factors that lead to economic slowdowns, the time taken to profit from them depends on how long a firm takes to restructure, which varies from one case to another. The process can be lengthy - for instance, if the negotiations between a firm's management team and its creditors start to drag. Alternatively, it can be expedited in a matter of months. Professor Edward Altman of New York University's Stern School of Business put the overall market value of distressed and defaulted debt at $2.2 trillion in 2008. The face value of the paper was about 64% greater. This makes distressed and defaulted debt taken together a significant asset class. By way of comparison, the U.S. high- yield bond market - which spawns most of the defaulted and distressed debt opportunities, is roughly $1 trillion in size. Consensus is that Europe still lags behind America in the opportunities it provides for distressed debt investors, but this situation is changing as its high-yield corporate bond market and national insolvency laws evolve. Europe's high-yield bond market only began to develop in 1997. Like the U.S. it experienced a rapid increase in issuance in 1999, as telecom firms issued paper to raise money during the technology, media and telecom boom. When boom turned to bust, the number of business failures rose. New issuance picked up again a couple of years later.(1) Meanwhile, experts report that developments in insolvency law in countries such as Germany and Italy, among others, are headed towards a system a bit more like the Chapter 11 process in America. Italy, for example, enacted the Marzano law following the collapse of Parmalat in 2003. A distressed opportunity typically arises when a company, unable to meet all its debts, files for Chapter 11 (reorganization) or Chapter 7 (liquidation) bankruptcy. Chapter 7 involves shutting a company's doors and parceling out its assets to its creditors. Chapter 11 gives the company legal

(1) Fund Strategy, Centaur Communications Ltd., April 2006. Source: "Distressed Securities Investing"; Magnum Funds public website.


Distressed Debt

Distressed Debt Investing

protection to continue operating while working out a repayment plan, known as a plan for reorganization, with a committee of its major creditors. These creditors can be banks who've made loans, utilities and other vendors owed for their goods and services, and investors who own bonds. If in a bankruptcy a company does not have sufficient assets to repay all claims, the stock holders will be the last in line to receive any of the proceeds from the liquidation or reorganization. A distressed securities investor focuses mostly on the bank debt, the trade claims (claims held by suppliers owed for goods or services by the company), and the bonds (which can vary in terms of their place on receiving a bankruptcy-claim, with senior bonds paid ahead of junior, etc.) when looking for bargain-priced securities. The strategy is to capitalize on the knowledge, flexibility, and patience that a distressed securities fund manager has that the creditors of a company often does not have. Many institutional investors, like pension funds, are barred by their charters or regulators from buying or holding onto below investment-grade bonds (BBB or lower) ­ even if the company is a viable one. So they may sell at steeply discounted prices which have the effect of lowering prices further. In addition, banks often prefer to sell their bad loans (which are no longer paying interest) in order to remove them from their books and to use the freed-up cash to make new investments. In addition, a bank typically does not have the resources or the focus to become actively involved in a reorganization process, which can last several years. Likewise, holders of trade claims are in the business of producing goods or providing services and have no expertise in assessing the likelihood of getting paid once a company has filed for Chapter 11.(1)

Source: NYU Salomon Center., Spring 2007.

According to a study out of New York University's Salomon Center and the Georgetown School of Business, newly distributed stocks emanating from Chapter 11 proceedings during the period 1980-1993 outperformed the relevant market indices by over 20 percent during their first 200 days of trading. Stocks emerging from Chapter 11 tend to have little correlation to the bond and equity markets. These stocks, instead, tend to move when company-specific events are significant and sustained enough to catch the eye of Wall Street. Distressed securities investing, then, has little dependence on or correlation to the performance of the stock market, as performance is the result of the investor's research and financial analysis on the particular distressed asset, their knowledge and experience in the reorganization process and overall familiarity with bankruptcy laws. Distressed securities investing allows the investor who has gained adequate knowledge through his research and due diligence to limit the downside of his investment by effectively buying $1 for 80 cents. This usually results in distressed securities investing yielding consistent returns to competent practitioners of the strategy.

(1) "Distressed Securities Investing"; Magnum Funds public website.


Distressed Debt

Private Equity Distressed Debt Funds

Fundraising in the distressed debt segment remained strong in 2008, as firms look forward to an improved distressed investment environment. Distressed debt funds raised $37.4 billion in 2008.(1) General Partners are finding institutional investors focused on this asset class in anticipation that a portion of the abundant supply of low-grade debt issued for leveraged buyout firms will soon fail or become stressed. The proportion of newly issued "junk" bonds rated B- or below has risen sharply starting in 2002, which would normally indicate increased defaults two to four years after issuance. The expected increase in defaults to which the data points to has started to occur. The high yield bond default rate was 2.3% in 2008, and has increased to 7.3% in the first five months of 2009. The leveraged loan default rate has also increased significantly to 10.3% through May 31, 2009, up from 3.9% in 2008.(2) New Issue Rated B- or Below as a Percentage of all New Issues








1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 1Q:09

Source: Standard & Poor's, Citigroup, and NYU Salomon Center.

The fundraising market has seen an increase in buyout and hedge funds new to the strategy. These funds are raising distressed funds in expectation that the current economic downturn and credit crisis will cause the buyout deals and refinancing bolstered by lower quality debt to decline in price.

(1) Private Equity Analyst. (2) JPMorgan.


Distressed Debt

Private Equity Distressed Debt Funds

Recent Distressed Debt Funds (US$Millions)

Firm Angelo, Gordon & Co. Apollo Advisors, L.P. Avenue Capital Black Diamond Capital Blackstone Group - GSO CarVal Investors Catalyst Capital Group Centerbridge Partners MatlinPatterson Global Advisors MHR Fund Management Oaktree Capital Management Wayzata Opportunities Fund Fund AG Capital Recovery Partners VII Apollo Credit Opportunities Fund II Avenue Europe Special Situations Fund Black Diamond Opportunity Fund II GSO Capital Opportunities Fund CVI Global Value Fund Catalyst Fund II Centerbridge Capital I MatlinPatterson Global Opportunities III MHR Institutional Partners III OCM Opportunities Fund VIIB Wayzata Investment Partners II Target $3,000 $1,100 1,500 $750 $1,500 $4,000 $600 $2,500 $3,500 $3,500 NA $3,000 $2,500 Raised NA $1,500 720 $983 $2,000 $5,750 $540 $3,200 $5,000 $3,500 $10,900 $3,400 $4,000 Status Open Closed Open Closed Closed Closed Closed Closed Closed Closed Closed Closed Closed Vintage 2009 2009 2008 2006 2008 2007 2005 2006 2007 2007 2008 2008 2007

WL Ross & Co WLR Recovery Fund IV Source: Private Equity Analyst, Private Equity Intelligence, Thomson Financial/NVCA.

Institutional investors are reacting positively to distressed funds in the market as a result of two factors: i. there is a lot of money chasing upper-echelon names; and ii. investors are committing to distressed debt to take advantage of the increasing distress in the current down-cycle. In recent years, with interest rates low and relaxed lending standards, U.S. companies have gorged on high-yield debt. There were more than $1 trillion worth of high-yield issues in the U.S. in 2008, up from $750 billion in 2002 according to the NYU Salomon Center. Record issuance levels have attracted the attention of a flock of private-equity investors and hedge funds, who seek investment opportunities as these debt-laden companies run into trouble. These investors target companies with distressed debt, typically companies that have either filed for bankruptcy or whose debt is considered "stressed". The hedge fund and private-equity groups are looking for fundamentally sound companies overburdened in debt, in order to restructure them and realize a profit.

Distressed Debt

Growth in defined benefit assets in distressed debt among the top 200 funds. Assets are in billions.








'97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08

Source: Pensions & Investments.


Distressed Debt

Private Equity Distressed Debt Funds

Defaults are forecast to continue to increase in the coming year across both bonds and leveraged loans. In 1Q 2009 the high yield bond default rate increased to 7.3%, up significantly from 2.3% in 2008 and a substantial increase from the record low 0.4% default rate in 2007.(1) Given the continued downward economic outlook, poor earnings guidance, a lending environment that remains weak, and current levels of distressed debt, analysts are looking for a meaningful increase in defaults in the coming year across both bonds and loans. High yield bond defaults are forecast to increase to 12% in 2009, and recover slightly to 10% in 2010, according to JPMorgan. Edward Altman, from the Salomon Center of New York University, forecasts the default rate for bonds only to be 13.50% in 2009. Dependent on the depth and duration of the global economic downturn, defaults may remain elevated through 2011. Bond Default Rate



Forecast Actual

13.5% 12.8%







5.8% 5.1% 4.7% 4.3% 4.1% 3.4% 2.7% 3.4% 3.6% 4.7%





1.5% 1.1% 0.2% 0.8%

1.7% 1.1%

1.9% 1.5% 1.2% 1.3%

1.6% 1.2% 0.8% 0.5%

0% 2009E 1Q:09 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Source: NYU Salomon Center, National Bureau of Economic Research. (2) Periods of recession (NBER) : 11/73 -3/75, 1/80 -7/80, 7/81 -11/82, 7/90 -3/91, 4/01 ­12/01, 12/07- ? .

After several years of record deal volumes, and private equity's healthy appetite for leverage in their deals and the favorable financing markets, many private equity portfolio companies currently have onerous levels of debt on their balance sheets. The high debt loads built up over the past couple of years have become hard to service now that the economy has shifted into lower gear.

(1) JPMorgan.

(2) National Bureau of Economic Research.


Distressed Debt

Private Equity Distressed Debt Funds

New-issue risk trends are important factors in analyzing future default risk. For example, in the late 1990s, rampant demand for the asset class led to deterioration in new-issue quality, which ultimately affected default rates in subsequent years. Aggressive issuance trends began increasing in 2003, reaching the pinnacle in mid-2007 prior to the credit collapse. Aggressive characteristics, such as lower rated deals, fewer refinancings and increased acquisition financings, LBOs in particular, have added significant risk to today's market, planting the seeds for future defaults. In 2008, lower quality issuance (bonds rated Split B, CCC, or nonrated), accounted for 26.3% of total issuance, compared with a record-high 36.3% in 2007. During the last 16 years, lower rated deals have accounted for an average of roughly 15% of new-issue volume. In 1Q 2009 lower quality issuance was down to 7.1% of total issuance(1) Lower Rated Bond Issuance

as a percent of total primary market activity

40% 36.3% 35%

30% 26.3% 25% 20.5% 20% 17.4% 16.1% 15% 14.0% 10.1% 10% 7.6% 5% 3.6% 7.1% 3.4% 20.6% 20.9%

0% 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 1Q:09

Source: JP Morgan.

Private-equity firms have long played a central role in guiding distressed companies through bankruptcy and restructuring. With even more firms starting dedicated funds to invest in distressed debt, these investors have a better flow of information and an advantage in identifying the distressed opportunities as they arise.

(1) JPMorgan.


Distressed Debt

Private Equity Distressed Debt Funds

Distressed Debt Fund Strategies For investors able to marshal the appropriate skills, an "active control" strategy may offer an answer. So-called "control investors" seek to accumulate a large enough block of securities to influence the outcome of the reorganization, typically by controlling at least a blocking position if not a majority position - in the class of securities that will own the equity on emergence from bankruptcy or restructuring. This contrasts with more likely "passive" strategies in which investors seek to acquire undervalued securities relative to intrinsic value, but do not seek to acquire enough of a position to control the outcome of the restructuring. Profits are typically achieved in a strategy by selling a position at par or below ­ often a profit of pennies on the dollar. Both passive and control strategies may offer an opportunity for institutional investors. They require a different orientation and different skill sets from more traditional strategies. These differences create the opportunity - but also the challenges - for investors looking to capitalize on the strategy. There are at least three major differences: Difference One: Valuation Orientation and Time Horizon Passive investors play any level of the capital structure where they see a mis-pricing relative to intrinsic value. Many also pursue sub-strategies that might include long-short strategies or capital structure arbitrage strategies. Given their orientation as traders, they often have a much shorter time horizon and focus on the company's short-term (i.e., next 12 months') performance. Control investors, in contrast, usually seek to identify and buy the so-called "fulcrum" security, or the security that will be converted to equity when the target company emerges from bankruptcy. As investors interested in owning the company for a longer period of time, their focus is on a company's performance over a three- to five-year horizon. In short, this longerterm orientation forces them to think about factors that passive investors, with their shorter time horizons, do not have to consider. Difference Two: Attitude toward Liquidity and Control Passive investors typically make many smaller bets on companies expected to go through reorganization or in the midst of one. Typically spend less time conducting diligence on an individual opportunity and rely on a portfolio of opportunities to earn their returns.(1)

Source: Distressed Debt: Will Alternative Strategies Be Needed In The Next Distressed Cycle?"; High Yield Report; December 19, 2005.


Distressed Debt

Private Equity Distressed Debt Funds

In this respect, due diligence for passive investors is "wider but not as deep" as the due diligence process for control investors. Liquidity is of particular importance to passive investors because it allows them to cut their losses on the investments that do not work out. Given the larger number of opportunities passive investors are involved in, they typically do not have the time to play a role in actively shaping the outcome of the restructuring. Control investors, in contrast, usually place fewer, more concentrated bets. As such, their diligence tends to be "deeper but narrower" than the diligence process of a passive investor. Given the larger positions they take, there is typically less liquidity for their position. They offset the risk of less liquidity by looking for opportunities to have influence on the process and the outcome, and they often seek roles on creditor committees to shape the plan of reorganization and the capital structure of the company upon emergence.

Difference Three: Exit Timing Passive investors do not typically seek a role in the company post-reorganization. They often trade out of their positions in several months or when the details of the plan of reorganization become clear and differences between market prices and intrinsic value close. If passive investors hold securities through the reorganization, they typically sell upon emergence or shortly thereafter. As such, they confine their investment perspective to what is likely to happen to a company during the bankruptcy process. For control investors, in contrast, the bankruptcy process is a means by which to acquire control of the company and create value after the reorganization is completed. A control investor's work begins when the target company emerges from bankruptcy. Because most of control investors' returns come from post-reorganization value creation, they seek significant board representation, allowing them to influence the value creation plan, including any financial and operational restructuring initiatives. Of course, there are exceptions to these general rules, and the lines between passive and control investors have begun to blur recently. Not all passive investors have a short-term time horizon, and some active investors may not always seek control.(1)

Source: Distressed Debt: Will Alternative Strategies Be Needed In The Next Distressed Cycle?"; High Yield Report; December 19, 2005.


Distressed Debt

Private Equity Distressed Debt Funds

Private Equity Fund Distressed Debt Fund Universe Strategies Trading Strategy Passive

Angelo Gordon (Hedge Fund) Bay Harbour Management Blackstone Distressed Debt Advisors Cerberus Partners (Hedge Fund) Contrarian Capital Oak Tree Opportunities Fund Och Ziff Freidheim Triage Capital Whippoorwill Associates

Source: Park Hill Group.

Acquire the Issuer Active

Avenue Capital Ares Corporate Opportunity Fund Black Diamond Capital CarVal GSC Recovery Fund TCW Shared Opportunity Fund William Simon Angelo Gordon Capital Recovery Partners HIG Bayside Opportunities Fund Highland Capital MD Sass Corporate Resurgence Partners MHR Institutional Partners Oak Hill Special Opportunities Fund Oak Tree Principal Opportunities Fund Wayzata Opportunities Fund WL Ross Apollo Management Centerbridge Capital Partners Cerberus Institutional Partners MatlinPatterson Asset Management

Investment Styles and Target Returns in Distressed Debt Investing Passive

Invest in undervalued securities trading at distressed levels Sub-strategies: trading buyhold/senior or senior secured/sub debt/"busted converts"/capital structure arbitrage/long-short, value Trading oriented; sometimes get restricted Holding period of 6 months to 1 year generally; Longer sometimes

Source: Park Hill Group.

Active / Non-Control

Senior secured, senior unsecured Active participation in restructuring process; Influence process Exit via debt or equity (post-chapter 11) markets Generally do not control Holding period of 1-2 years Large or Mid-small Cap focus

Active / Control

Requires 1/3 minimum to block and ½ to control; may require partner(s) Take control of company through debt/equity swap Restrictive or even purchase related businesses; roll-up Equity infusion; run company Exit 2-3 years Large or Mid-small Cap focus


Distressed Debt

Distressed Debt Market

For the past two to three years most fund managers have found investment opportunities in distressed debt to be relatively concentrated among a few private equity and hedge fund firms. In addition, solid economic growth and an abundance of cheap capital have enabled companies to repair balance sheets and stay healthy. The corporate bond default rate has been depressed. It fell to an all time low in 2007, according to Standard & Poor's. The default rate was in the double digits during 2001 and 2002, following the deep new millennium bear market and economic slowdown. As the U.S. fell into a recession in December 2007, and the subsequent credit crisis which impacted all financial institutions in 2008, default rates pushed up to 2% in 2008. JPMorgan forecasts high yield bond and loan default to increase to 8% in 2009, and Standard & Poor's forecasts the U.S. default rate for speculative grade companies to rise to about 13% in 2009. Based on these predictions, distressed debt investors are likely to be presented with new investment opportunities. In a report by Edward Altman, (director of the Credit and Debt Markets Research Program at the Salomon Center of New York University's Stern School of Business) money from nontraditional lenders that poured into the high-yield, leveraged loan and distressed debt markets in the past few years - known as "hot money" - likely will move to other asset classes. As a result, default rates and recovery models probably will return to levels of the past three decades, based on firm fundamental risk patterns, thus breaking away from the low default rates since 2002. In addition, given recent highly leveraged transactions, if companies are not able to reduce debt to manageable levels in two to four years, issuers may likely see a return to default levels similar to that of 1990-1991. These are the same levels being forecast for 2009 and 2010. Also, continued economic slowdown or a prolonged economic recession will only exacerbate this result. Liquidity and the Credit Crunch One reason that defaults in recent years have remained below forecasts was in part the result of ratings agencies' more stringent requirements, meaning that today's lower-rated credits actually are of higher quality than those in the past with the same ratings. However, the sharp increase in liquidity, due to lending from hedge funds and private equity funds, more likely was the main driver. Companies are expected to default on their debt in much higher numbers over the coming year as the effects of the credit crisis and economic downturn work their way through the U.S. economy. Edward Altman, a professor at New York University's Stern School of Business, says while the default rate remains on the low side, he expects that number will climb next year as more companies with covenant-lite loans and payment-in-kind notes run out of time. An increase in defaults and bankruptcies will create more opportunities for distressed investors, but choosing the right time to invest amid the unrest will be tricky. Investors will be looking at a greater number of companies that are worse off than ever before. Many distressed companies borrowed heavily during the days of easy credit and pushed off restructuring because their loan agreements carried few covenants or allowed them to issue more debt to cover interest payments.


Distressed Debt

Distressed Debt Market

Growth of Distressed Debt Market The size of the default and distressed debt markets has grown significantly since the late 1990's. This in part was due to several factors. First, there are many more types of commercial loans available in the market today. Second, many more banks and other lenders are managing their assets from a global portfolios basis. Third, debt loads continued to grow. We are now seeing a significant decline in the debt loads due to the lack of liquidity in the credit markets. Size of the U.S. Default and Distressed Debt Market (US$Billions)


$3,500 $3,000

Face Value Market Value


$2,000 $1,500

$1,000 $500


1990 1992 1993 1995 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 1Q:09

Source: NYU Salomon Center.

There has been a significant increase in the supply of distressed and defaulted paper in the fourth quarter of 2008, and estimates are for more significant increases in the next 12 to 24 months.(1) The estimated face value of the distressed and defaulted debt markets was at $3.3 trillion in 1Q 2009, this is still up considerably from $867 billion at the end of 2007. The increase has been mainly caused by the rise in the distressed ratio. The market value estimate of distressed and defaulted debt also remains high at approximately $2.0 trillion, down slightly from $2.3 at the end of 2008, but still well above the market value of $708 billion at the end of 2007.(2)

(1) JPMorgan. (2) NYU Salomon Center.


Distressed Debt

Distressed Debt Market

Size of U.S. High Yield Bond Market (US$Billions)








1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 1Q:09

Source: NYU Salomon Center.

Distressed and Defaulted Debt as a percentage of High Yield and Defaulted Debt Markets

90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

1990 1992 1993 1995 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Distressed Defaulted

Source: Citigroup estimates, NYU Salomon Center.


Distressed Debt

Distressed Debt Market

U.S. Leveraged Loan Market (US$Billions)


Leveraged Loan Market Size

New Leveraged Loan Volume




Leveraged Loan Market Size








1 990 1 991 1 992 1 993 1 994 1 995 1 996 1 997 1 998 1 999 2000 2001 2002 2003 2004 2005 2006 2007 2008


Source: Credit Suisse, LPC.

Leveraged Loan Default Rate

16% 14% 12% 10.% 10% 8.2% 8% 6% 4% 2.1% 2% 0% 2009E 2010E 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 5.3% 4.5% 2.7% 15.%

Actual Forecast


2.3% 1.1%

2.0% 0.8% 0.3%

Source: JPMorgan.

New Leveraged Loan Volume


Angelo, Gordon & Co.

STRATEGY · Active participant in restructuring, bottom-up credit based investment strategy with strict sell criteria. Acquires controller "blocking" positions, participates directly in creditor committees when possible · AG Eleven Partners, Angelo, Gordon's first vehicle, a distressed hedge fund, employs strategy in shorter-term investment opportunities · Capital Recovery Partners ­Makes opportunistic investments in troubled companies through an actively managed, diversified portfolio of distressed corporate bank debt and other debt obligations. · Capital Recovery Funds invest in longer term situations with higher return profiles TEAM · Founded by John Angelo and Michael Gordon in 1998 · Investment team worked together at LF Rothschild for approx 10 years prior to Angelo, Gordon COMPETITIVE ADVANTAGE · Considered one of the top players in the distressed space, Angelo, Gordon has $10 billion in management · Track record and reputation are result of intensity, conservatism and accuracy of its research FUNDS

Fund Name (US$Millions) AG Capital Recovery Partners VII ­ Raising AG Capital Recovery Partners VI AG Capital Recovery Partners V AG Capital Recovery Partners IV AG Capital Recovery Partners III AG Capital Recovery Partners II AG Capital Recovery Partners

N.B.: Data as of June 30, 2008.

Vintage 2009 2008 2006 2003 2002 2001 2000

Fund Size $3,000m $2,000m $750m $1,000m $1,000m $800m $600m

MOI -0.97x 0.99x 2.20x 1.77x 1.56x 1.68x

Net IRR ---28.5% 29.1% 19.2% 18.5%


Past performance is not necessarily indicative of future results. There can be no assurance that any fund will achieve its objectives or avoid substantial losses. Current results would likely be lower than the performance date which is listed here. Source: Private Equity Intelligence, CapitalIQ, Park Hill Group.


Apollo Advisors, L.P.

STRATEGY · Focuses on complex transactions requiring creative solutions Leveraged buyouts, minority investments and corporate partnerships, special situations which represent dynamic risk/reward opportunities consisting of higher growth investments, distressed or restructuring investments · Centered around flexibility to adapt to different market environments while also applying a rigorous investment discipline that is focuses on downside protection and preservation of capital In the form of Apollo's investment, Apollo's place in the capital structure, choices of partners with whom Apollo may share control TEAM · Founded in 1990, by Leon Black and a group of founding partners that have worked together in excess of 18 years, on average · All 19 Partners have worked together in excess of 10 years, on average COMPETITIVE ADVANTAGE · Quickly able adapt to changing market environments through its three-pronged buyout approach ­classic buyouts, distressed buyouts, and corporate partners buyouts · Strong capital markets expertise · "Hands-on" investor, actively involved with the operations of each portfolio company for the duration of each investment · Downside protection, demonstrated through investing in franchise assets at below-market multiples; building-in structural protection; using a hands-on approach to protecting and building value in portfolio companies · Experience and cohesiveness of the Apollo Investment team · Expertise pursuing complex situations, which enable it to minimize competition with both strategic and financial buyers · Substantial proprietary deal flow FUNDS

Fund Names (US$Millions) Apollo Credit Opportunities Fund ­ Raising Apollo Distressed Investment Fund

N.B.: Data as of June 30, 2008.

Vintage 2009 2004

Fund Size $1,100m $930m


Net IRR -7.4%


Past performance is not necessarily indicative of future results. There can be no assurance that any fund will achieve its objectives or avoid substantial losses. Current results would likely be lower than the performance date which is listed here. Source: Private Equity Intelligence, CapitalIQ, Park Hill Group.


Avenue Capital

STRATEGY · · · · Unique structure designed to take advantage of cyclical nature of distressed investing Post-reorganization leveraged equities Trade claims and secured lending Avenue U.S. funds focus on distressed debt and securities of U.S. companies with sustainable businesses and positive cash flows; Avenue Asia funds consider investments throughout Asia, focusing on single corporate credits and concentrated pools of nonperforming loans, and late or post restructured debt of viable companies. U.S. and Asia Funds are managed by two separate investment teams

TEAM · Founded in 1995 by Marc Lasry and Sonia Gardner · Partners and Portfolio Managers include: Marc Lasry, Sonia Gardner, Malcolm Robinson, Bruce Grossman, Jeffrey Greenblatt, Richard Furst, Richard D'Addario, Laurence Change, Julie Baumann, Julie Dien Ledoux, Michael Elkins, Ed Gellert, Francis Griffin, Rob Symington, Cambell Korff · Avenue maintains a diverse and highly talented team of more than210 employees world-wide COMPETITIVE ADVANTAGE · Create investments at low valuations · Maximize risk-adjusted returns through senior debt focus · Follow well-developed investment themes · Exploit trade claims dominance · Ability to opportunistically invest in European distressed situations · Prudent use of leverage FUNDS

Fund Name Europe Special Situations Fund ­ Raising Avenue Special Situations V Avenue Special Situations IV Avenue Asia Special Situations Fund IV Avenue Asia Special Situations III Avenue Special Situations III Avenue Asia Special Situations II Avenue Special Situations II

N.B.: Data as of June 30, 2008.

Vintage 2008 2007 2006 2006 2003 2003 2001 2001

Fund Size 1,500m $6,000m $1,680m $3,000m $628m $628m $275m $520m

MOI 1.57x 0.97x 1.13x 1.06x 1.19x 1.66x 1.85x 1.54x

Net IRR 57.4% (5.0%) 4.9% 5.3% 5.6% 17.4% 22.8% 18.4%


Past performance is not necessarily indicative of future results. There can be no assurance that any fund will achieve its objectives or avoid substantial losses. Current results would likely be lower than the performance date which is listed here. Source: Private Equity Intelligence, CapitalIQ, California Public Employees' Retirement System, Park Hill Group.


Black Diamond Capital Management

STRATEGY · Invest primarily in companies and situations that will typically be undervalued with respect to cash flow valuation or liquidation value through investments in such companies' debt, which may subsequently be converted to equity interests through financial restructurings or through reorganizations under the bankruptcy process · Also invests directly in equity securities of a portfolio company for purposes of making addon acquisitions to such portfolio company, or for strategic purposes, in certain sectors or industries · Multi-sector approach in the traditional loan and capital markets as well as having the capability to directly originate and negotiate special situations TEAM · Founded in 1995 by James J. Zenni Jr. and Stephen H. Deckoff · Other senior professionals include: Leslie Meier, William Bokos, Mounir Nahas · Stephen and several team members recently bought out Jim Zenni, who will no longer be a part of the firm COMPETITIVE ADVANTAGE · Focus on investments representing undervalued companies or situations where the fund has the ability to proactively influence the outcome of events through control or blocking position to create value · Focus on distressed investment situations of companies with $100 to $500 million of senior debt outstanding · Fund's active participation (through membership on steering committee) in the reorganization process · Fund's access to "private information" through its primary loan investments on behalf of its other investment vehicles, which should create early market intelligence · Advantage over distressed debt investors subject to limitations imposed on their participating in leveraged loan syndications as a result of their trading activities in the public debt markets · Knowledge of all other current lenders in each leverage facility Fund is invested in which provides firsthand knowledge of any potential sales or purchases FUNDS

Fund Name Black Diamond Opportunity Fund II BDCM Opportunity Fund

N.B.: Data as of June 30, 2008.

Vintage 2006 2003

Fund Size $983m $416m

MOI 0.92x 1.40x

Net IRR N/A 22.4%


Past performance is not necessarily indicative of future results. There can be no assurance that any fund will achieve its objectives or avoid substantial losses. Current results would likely be lower than the performance date which is listed here. Source: Private Equity Intelligence, CapitalIQ, Park Hill Group.


Blackstone Group ­ GSO Capital

STRATEGY · Blackstone/GSO Capital Solutions makes investments in companies facing financial distress. · The Fund will pursue an activist approach to "solve problems" for companies in need of liquidity or significant capital structure transformation. · Blackstone/GSO does require control in all its investments

- In certain instances, boards may be more receptive to non-control investments - In every case, Blackstone/GSO will have meaningful governance protections (e.g., board representation, veto rights, etc.)

· Blackstone/GSO will focus on companies in need of liquidity or significant capital structure transformation. · Where available, Blackstone/GSO will seek to exploit indenture and credit agreement provisions to best position the fund's investments. · Blackstone/GSO will target companies which are: (i) over-leveraged due to a failed leveraged buyout; (ii) misunderstood by the market; (iii) in a cyclical downturn; (iv) impacted by capital markets dislocation; (v) experiencing litigation claims/lost market credibility; and (vi) facing non-recurring issues/losses resolvable over time. · Blackstone/GSO does not use any leverage. TEAM · GSO was formed by Bennett Goodman, Tripp Smith and Doug Ostrover in July 2005, who have worked together for over 15 years. · Prior to forming GSO in June 2005, the founding Partners built the dominant leveraged finance and alternative capital franchises on Wall Street at Donaldson, Lufkin & Jenrette, and subsequently Credit Suisse, maintaining the number one market share for over a decade. · GSO has over 175 professionals in New York, London, Houston and Los Angeles, 45 of who are dedicated to sourcing and executing transactions. COMPETITIVE ADVANTAGE · Blackstone/GSO platform provides for opportunistic approach to distressed investing.

- - - - - Multiple industry expertise/experience; Enhanced deal flow; Full control or less influential investments (rescue financings); Public markets entree into distressed situations; and Greater Scale ­ ability to provide large capital commitments to companies of up to $1B. - Utilize creative structuring to obtain secured or structurally senior protections; and - Gain equity upside through conversion features or warrants.

· Size provides speed which is often crucial in distressed investing.

- Often the first group to reach capital commitment wins transaction.

Blackstone/GSO have a greater than 15-year track record for holding to commitments and closing (1) FUNDS

Fund Name GSO Capital Opportunities Fund Vintage 2008 Fund Size $2,000m MOI -Net IRR --

Source: Private Equity Intelligence, CapitalIQ, Blackstone Group, GSO Capital, Park Hill Group.


CarVal Investors (Cargill Value Investment "CVI")

STRATEGY · A global opportunistic value investor, CarVal Investors (formerly known as Cargill Value Investment) focuses primarily on investment opportunities in the distressed corporate securities, non-performing loan portfolios, real estate, and special situation asset classes · Within those areas of focus, CarVal works to acquire, restructure and sell assets typically within a 2-3 year time frame, and deploys an average $7 million per transaction · Distressed corporate securities investments currently comprise 37% of CarVal's managed assets, the largest investment strategy of focus. Primarily non-control oriented investments in bonds, bank debt, trade claims and other financial obligations · Within the corporate securities investment focus, recent targeted sectors include aviation, energy and the automobile industry TEAM · CarVal employs over 200 professionals in total, with 17 nationalities represented in its investment team · Headed by Jeff Leu, President of CarVal Investors, who has been with Cargill for 25 years · Senior investment team also includes eight Partners, who serve as group heads for each of the strategies and geographic locations · Senior investment professionals at CarVal have an average tenure of16 years with Cargill COMPETITIVE ADVANTAGE · Global reach ­CarVal has invested in over 35 countries to date through 12 offices in North America, South America, Europe and Asia · Unique network and sourcing ­relationships with over 125 asset management partners across the globe · Experienced and stable team ­the nine Partners have over 10 years average with CarVal. CarVal has 85 investment professionals in 12 locations and 11 countries FUNDS

Fund Name CVI Global Value Fund

N.B.: Data as of June 30, 2008.

Vintage 2007

Fund Size $5,750m

MOI 1.07x



Past performance is not necessarily indicative of future results. There can be no assurance that any fund will achieve its objectives or avoid substantial losses. Current results would likely be lower than the performance date which is listed here. Source: Private Equity Intelligence, CapitalIQ, CarVal Investors, Park Hill Group.


Catalyst Capital Group

STRATEGY · The Catalyst Capital Group, Inc. ("Catalyst") is a Toronto-based Canadian distressed private equity firm with a strong history of capitalizing on the unique and evolving restructuring environment in Canada. - The firm invests in distressed and undervalued Canadian situations, providing operational, turnaround, financial and strategic expertise in part by creating unique legal/financial solutions. · Catalyst typically seeks to make control and/or influence investments in companies that historically have had adequate revenues, but that are experiencing structural, strategic, managerial and/or operational impediments. · The firm focuses on established companies with strong market positions that are undermanaged, undervalued and/or poorly capitalized. · Catalyst has a targeted portfolio composition of (i) 35-40% bank/secured debt, (ii) 35-40% of subordinated debt, and (iii) 15-25% of deeply subordinated securities. · While Catalyst will invest in many different sectors, it has particular expertise in the telecommunications, media, publishing, broadcasting, transportation, manufacturing, food services and financial services industries. TEAM · Catalyst Capital Group Inc. was founded by Mr. Newton G.Z. Glassman in 2002. · Mr. Glassman is joined by Gabriel de Alba, a Managing Director and Partner, who is responsible for leading restructuring committees and operations of portfolio companies. COMPETITIVE ADVANTAGE · Deep local knowledge and in-depth familiarity of local bankruptcy and restructuring system - Catalyst is only one of two significant Canadian owned and managed funds · Extensive experience with coordinating of multi-jurisdictional bankruptcy, restructuring and legal systems · Proven track record with superior and replicable, risk-adjusted returns. · Strict portfolio construction targets combined with a flexible and proactive investment approach maximize risk-adjusted returns. · Proprietary software ensures disciplined focus on both investment process and risk/return analysis. FUNDS

Fund Name Catalyst Investors I Catalyst Investors II Catalyst Investors III ­ Raising

N.B.: Data as of October 30, 2008.

Vintage 2002 2005 2008

Fund Size $300m $640m $1b ­ 1.25b

MOI 2.50x 1.40x --

Net IRR 54.3% 36.8% --


Past performance is not necessarily indicative of future results. There can be no assurance that any fund will achieve its objectives or avoid substantial losses. Current results would likely be lower than the performance date which is listed here. Source: Private Equity Intelligence, CapitalIQ, Park Hill Group.


Centerbridge Partners

STRATEGY · Opportunistic approach to buyout and distressed investing; ability to invest across all parts of a firm's capital structure and across all market cycles · Distressed investments made with the primary purpose of obtaining influence over or control of the restructuring of financially troubled companies · Seek to maximize returns by controlling restructuring to also protect against future financial distress TEAM · Founded by Jeff Aronson, former head of distressed securities investing at Angelo, Gordon & Co. and Mark Gallogly, former Head of Private Equity at The Blackstone Group · Investment team includes professionals with a variety of private equity, special situations and distressed securities, corporate finance and industry-specific experience COMPETITIVE ADVANTAGE · Messrs. Aronson and Gallogly bring over 30 years combined experience to Centerbridge Partners as well as experience successfully investing over $1billion together in the Adelphia and Charter Communications transactions · The Partners' experience and multi-strategy approach uniquely positions Centerbridge to take advantage of the most attractive investment opportunities across all market cycles, industries and asset classes FUNDS

Fund Name Centerbridge Capital I


Vintage 2006

Fund Size $3,200m

MOI --

Net IRR --

Source: Private Equity Intelligence, CapitalIQ, Centerbridge Partners , Park Hill Group.


HIG Capital

STRATEGY · Bayside makes equity investments in private and public companies. While they prefer to purchase a controlling stake in a business, they will consider attractive minority investments. · Actively seek to partner with existing management teams in management buy-outs and corporate divestitures. · Offers liquidity to non-traditional equity holders as a buyer of "reorganized" equity (e.g., equity received by creditors in a bankruptcy). · Debt Purchases: In the context of a recapitalization, Bayside will purchase bank and public debt (including senior bank debt, junior secured debt, mezzanine debt, bonds, preferred/convertible stock, trade claims, seller notes, capital leases and other obligations). TEAM · H.I.G. Capital was founded by Mr. Sami Mnaymneh and Mr. Tony Tamer in 1993. · Bayside possesses one of the most experienced teams in middle market investing. · Through its resources and its affiliation with H.I.G. Capital, Bayside can draw on over 150 investment professionals with deep levels of expertise in virtually any industry and type of investment. · Offices in Miami, Atlanta, Boston and San Francisco in the U.S., and affiliate offices in London, Hamburg and Paris in Europe. COMPETITIVE ADVANTAGE · Out of Court Restructurings/Turnarounds: Bayside possesses the necessary skills and experience to lead a restructuring of financially or operationally distressed companies outside of a bankruptcy process. · Bankruptcy: Bayside has extensive experience in all types of bankruptcy transactions including plans of reorganization and section 363 sales. · Debtor-In-Possession (DIP) Financing: Actively provide DIP financing to companies considering filing bankruptcy. · Special Situations Lending: Bayside is able to quickly provide a financing alternative in circumstances where obtaining traditional bank financing would be difficult. FUNDS

Fund Name HIG Capital Partners I HIG Capital Partners II HIG Capital Partners III HIG Capital Partners IV HIG European Capital Partners


Vintage 1993 1998 2002 2007 2007

Fund Size $125m $255m $450m $750m 600m

Source: Private Equity Intelligence, CapitalIQ, Park Hill Group.


KPS Capital Partners

STRATEGY · KPS Special Situations Funds is a principal investment firm specializing in turnarounds of underperforming or distressed businesses, financial restructurings, bankruptcies, employee buyouts, and corporate divestitures or spin offs. · KPS seeks to realize capital appreciation by making controlling equity investments in businesses engaged in basic manufacturing, transportation and service industries challenged by the need to effect immediate and significant change. · The firm also targets out-of-favor industries and failed auctions. It prefers to invest in companies engaged in manufacturing, transportation, and service industries. · The firm's investments are structured in the form of common stock or in securities that are convertible into common stock, including preferred stock debentures. TEAM · KPS Special Situations Funds was founded in 1998 by Mr. Eugene Keilin, Mr. Michael Psaros, and Mr. David Shapiro. · 19 investment professionals COMPETITIVE ADVANTAGE · Demonstrated Track Record in Turnarounds and Restructurings · KPS is one of the few private equity firms that focuses exclusively on acquiring control of assets or companies experiencing operational problems · KPS has strong relationships with a large number of investment and commercial banks, providers of mezzanine financing and other private equity funds. · Capitalizing on Market Inefficiencies · Unique Transaction Sourcing. Unions consistently provide KPS with a significant number of quality investment opportunities because of our long history of working cooperatively with unions to sponsor successful buyouts and our constructive approach to investing in Special Situations. Investment opportunities referred by unions are generally not widely marketed or available to the broader investment community. FUNDS

Fund Name KPS Special Situations Fund KPS Supplemental Fund KPS Special Situations Fund II KPS Special Situations Fund III

N.B.: Data as of June 30, 2008.

Vintage 1998 1998 2002 2007

Fund Size $160m $50m $404m $1,200m

MOI N/A N/A 1.95x N/M

Net IRR N/A N/A 54.9% N/M


Past performance is not necessarily indicative of future results. There can be no assurance that any fund will achieve its objectives or avoid substantial losses. Current results would likely be lower than the performance date which is listed here. Source: Private Equity Intelligence, CapitalIQ, California Public Employees' Retirement System, Park Hill Group.


Littlejohn & Co.

STRATEGY · Primarily make control equity investment in middle-market companies that are restructuring or under-performing their potential. Target investments that would benefit from the group's operating, restructuring and turnaround skills ­ performance can vary from companies that need a complete restructuring to relatively healthy businesses that have not met their potential for further growth · Flexible and synergistic approach to maximizing value from underperforming companies and exploiting inefficiencies in the market for distressed or stressed securities: · Control Platform ­ Make control investments in middle market ($150 to $800 million revenues) companies underperforming their potential, undergoing a fundamental change in capital structure, strategy, or operations and that benefit from our operational and strategic approach, and · Distressed Securities Platform ­ Invest across the capital structure in debt and equity securities in a broad portfolio of underperforming securities with a view to increasing control or shared control investment opportunities for the organization as a whole TEAM · Littlejohn was founded in 1996 by Angus C. Littlejohn, Jr. who has been in the buyout and restructuring business for more than twenty years and who is also a founder and former general partner of Joseph Littlejohn & Levy · Angus Littlejohn and the other principals in Littlejohn; Michael I. Klein, Brian E. Ramsay, Edmund J. Feeley, Robert E. Davis, Richard E. Maybaum, David E. Simon and Steven G. Raich have, over the last twenty years, been instrumental in making control equity investments of approximately $1.4 billion of equity in 30 portfolio companies and numerous follow-on transactions while at Littlejohn, JLL, and their predecessors. · 20 investment professionals and 30 total employees with deep experience in special situations investing across multiple business cycles COMPETITIVE ADVANTAGE · Deep value investors ­ Problems lead to opportunities. Littlejohn role a "Change Agent" · Focus on strategic growth · Invest where our "Hands on approach" creates value · Opportunistic across industry groups ­ considerable experience in manufacturing, processing, services and distribution FUNDS

Fund Name Littlejohn Fund I Littlejohn Fund II Littlejohn Fund III

N.B.: Data as of June 30, 2008.

Vintage 1997 2000 2005

Fund Size $200m $530m $850m

MOI N/A 1.49x 1.56x

Net IRR N/A 12.5% 33.1%

(1) performance is not necessarily indicative of future results. There can be no assurance that any fund will achieve its objectives or avoid substantial losses. Past

Current results would likely be lower than the performance date which is listed here. Source: Private Equity Intelligence, CapitalIQ, Littlejohn & Co., Park Hill Group.


MatlinPatterson Global Advisors LLC

STRATEGY · Seeks to identify investments in severely discounted securities and obligations for which there are few competing bidders and through which the Fund can achieve effective corporate control or significant influence, generally through conversion of debt to equity · Global investment strategy differentiates MatlinPatterson from other control distressed investors · Attempts to affect not only the timing of a reorganization, but also the ultimate structure of the issuer's reorganized capital structure, and the resulting enterprise value TEAM · Founded in 2002 by David Matlin and Mark Patterson as the successor to the Global Distressed Securities Group of CSFB · Operates under the leadership of David Matlin, Mark Patterson, and Lap Wai Chan · Currently employs 15 investment professionals involved in research and investment management with over 170 years of experienced in the distressed securities market COMPETITIVE ADVANTAGE · Ability to identify and accumulate promising distressed positions which have been overlooked by other distressed securities investors · Expertise in actively managing deals before, during and after the reorganization process · Skill in obtaining and using corporate control to maximize exit values · Global investment approach with seasoned professionals in New York, Hong Kong, and London · Experienced investment team/value-added management · Proprietary deal flow · Innovative transaction structuring FUNDS

Fund Name MatlinPatterson Global Opportunities III MatlinPatterson Global Opportunities II MatlinPatterson Global Opportunities

N.B.: Data as of June 30, 2008.

Vintage 2007 2003 2001

Fund Size $5,000m $1,665m $2,200m

MOI 0.98x 1.44x 1.72x

Net IRR N/A 6.7% 17.0%


Past performance is not necessarily indicative of future results. There can be no assurance that any fund will achieve its objectives or avoid substantial losses. Current results would likely be lower than the performance date which is listed here. Source: Private Equity Intelligence, CapitalIQ, Park Hill Group.


MHR Fund Management LLC

STRATEGY · Capitalize on substantial experience by investing in the debt securities of distressed middlemarket companies in order to effectuate control or significant influence on such companies' reorganization or restructuring process · Majority of investment portfolio is comprised of distressed and defaulted high-yield debt, bank debt or trade claims · Additionally, considers opportunities to originate loans, often with attached warrants or other equity-related features, to companies lacking access to traditional sources of capital, provided that such securities meet the Partnership's investment parameters TEAM · Founded in 1996 by Mark Rachesky, M.D. and Hal Goldstein · Investment team comprised of 12 professionals, including two affiliates and three advisors COMPETITIVE ADVANTAGE · Disciplined investment process with an intense focus on fundamental valuation, comprehensive legal analysis and high degree of selectivity in its investments · Focus on the underserved middle market where there are more inefficiencies created by less research coverage and fewer buyers bidding up prices of potential investments · Preference for distressed debt securities more senior in the capital structure, often affording meaningful covenant protections, payment priorities upon liquidation as well as substantial current yield, all of which reduces the amount of capital risk FUNDS

Fund Name MHR Institutional Partners III MHR Institutional Partners II

N.B.: Data as of June 30, 2008.

Vintage 2007 2002

Fund Size $3,500m $850m

MOI 1.09x 1.94x

Net IRR 10.0% 24.5%


Past performance is not necessarily indicative of future results. There can be no assurance that any fund will achieve its objectives or avoid substantial losses. Current results would likely be lower than the performance date which is listed here. Source: Private Equity Intelligence, CapitalIQ, California Public Employees' Retirement System, Park Hill Group.


Oaktree Capital Management

STRATEGY · Invest in opportunities that provide substantial capital appreciation without subjecting principal to undue risk or loss · Seeks investments in debt and equity securities and other debt obligations of entities that are undergoing, are considered likely to undergo, or have undergone reorganization under U.S. federal bankruptcy laws or similar laws in other countries or other extraordinary transactions, such as debt restructurings, reorganizations and liquidations outside of formal bankruptcy proceedings · May also invest in undervalued instruments that are believed to be undervalued, focusing primarily on debt and equity securities relating to special event-driven situations TEAM · Principals of Oaktree (Howard Marks, Bruce Karsh, Richard Masson, Sheldon Stone, Larry Keele, and Stephen Kaplan) formed Oaktree in April 1995 · Deep investment team ­320-person team located in eight offices worldwide · Considered one of the top distressed debt investors COMPETITIVE ADVANTAGE · Importance of risk control ­achieving superior investment performance with less-thancommensurate risk · Emphasis on Consistency · Insistence on Market Inefficiencies · Benefits of Specialization ­ Each portfolio and each person practices a single investment specialty · Macro-forecasting not Critical to Investing ­ Superior knowledge of companies and their securities · Disavowal of Market Timing ­ Portfolios are fully invested whenever attractively priced assets can be bought FUNDS

Fund Name OCM Opportunities Fund VIIB OCM European Principal Opportunities Fund II OCM Opportunities Fund VII OCM European Principal Opportunities OCM Principal Opportunities Fund IV OCM Opportunities Fund VI OCM Opportunities Fund V OCM Principal Opportunities Fund III OCM Opportunities Fund IV-B OCM Opportunities Fund IV OCM Principal Opportunities Fund II

N.B.: Data as of June 30, 2008.(1)

Vintage 2008 2008 2007 2006 2006 2005 2004 2004 2002 2001 2001

Fund Size $10,900m 1,800m $3,500m $550m $3,328m $1,773m $1,180m $1,400m $1,505m $2,125m $1,275m

MOI 0.96x 1.02x 1.07x 1.37x 1.09x 1.35x 1.65x 1.64x 1.75x 1.60x 1.45x

Net IRR N/A N/A 13.6% N/A 11.5% 14.4% 17.4% 22.7% N/A 28.0% 17.9%

Past performance is not necessarily indicative of future results. There can be no assurance that any fund will achieve its objectives or avoid substantial losses. Current results would likely be lower than the performance date which is listed here. Source: Private Equity Intelligence, CapitalIQ, California State Teachers' Retirement System, Park Hill Group.


Pegasus Capital Advisors

STRATEGY · The Fund employs a value-oriented strategy where unique structuring, conservative pricing, and creating optionality are fundamental to ensuring downside protection and generating equity returns · Attain significant capital appreciation while minimizing the exposure of principal to substantial risk by making special situation investments in middle market companies across a variety of industries · Target deals requiring $20 to $75 million of capital and offering the Partnership the ability to exert significant control or influence over the direction of underlying portfolio companies. TEAM · Established in 1995, Pegasus is currently managed by Craig Cogutand Rodney Cohen, who have worked together for 10+ years · Close to 40 experienced investment and advisory professionals COMPETITIVE ADVANTAGE · Currently manages approximately $1.1 billion in capital through three separate private equity funds · Value oriented strategy focused on special or complex situations in the middle market · Attractive returns with minimal downside due to unique structuring · Multi-faceted team approach that integrates and leverages skilled investment and strategic/operating professionals to actively manage portfolio holdings · Utilize opportunistic and thematic approach to industries to facilitate cyclical optionality · Obtain right to exert influence over the direction and management of portfolio companies, irrespective of securities employed · Avoid competitive situations where price is the principal determinant · Special situation focus, experience through investment cycles · Expertise in both highly structured investments and buyouts · Ability to execute highly complex transactions · Expertise in consummating bankruptcy purchases · Dedicated, experienced team of strategic/operating advisors FUNDS

Fund Name Pegasus Partners II Pegasus Partners III Pegasus Partners IV

N.B.: Data as of March 31, 2008. Past performance is not necessarily indicative of future results. There can be no assurance that any fund will achieve its objectives or avoid substantial losses. Current results would likely be lower than the performance date which is listed here. Source: Private Equity Intelligence, CapitalIQ, Pegasus Partners, Park Hill Group.

Vintage 1999 2005 2007

Fund Size $562m $316m $750m

MOI 2.15 N/A 1.05

Net IRR 19.6% 28.2% N/M



Wayzata Opportunities Fund

STRATEGY · Majority of fund investments are in assets of distressed companies · Wayzata takes an active creditor approach and targets investments in securities where it can expect to exert significant influence on the restructuring process or take outright control of the entity · Targets investments in securities of companies that have underlying physical assets · Investments will typically, although not exclusively, consist of secured and other senior debt of financially troubled companies(offers downside protection on investments) · Investments in the small-to middle-market sectors · Out-of-favor industries · Special situations TEAM · The Managing Partner, Pat Halloran, has been managing the Wayzata Funds since their inception in 1990 · Wayzata team currently has 21 professionals, including seven Wayzata Partners (Partners include: Pat Halloran, Steven Adams, John Foley, Joseph Deignan, Black Carlson, John McEvoy and Mary Burns) COMPETITIVE ADVANTAGE · Emphasis on controlling risk by targeting investments in the debt of companies with underlying physical assets · Focus on research and investments in the small-to middle-market sectors where opportunistic investors cannot withstand the illiquid nature of investments and which are not the focus of larger distressed investors · Willingness to champion the reorganization process through active involvement in the bankruptcy and restructuring process · Willingness to invest in both complicated situations and cyclical sectors in an effort to achieve superior long-term, risk adjusted returns FUNDS

Fund Name Wayzata Investment Partners II Wayzata Investment Partners I

N.B.: Data as of June 30, 2008.

Vintage 2007 2005

Fund Size $3,400m $1,250m

MOI 0.97x 1.17x

Net IRR (6.4%) 9.8%


Past performance is not necessarily indicative of future results. There can be no assurance that any fund will achieve its objectives or avoid substantial losses. Current results would likely be lower than the performance date which is listed here. Source: Private Equity Intelligence, CapitalIQ, Wayzata Investment Partners, Park Hill Group.


WL Ross & Co LLC

STRATEGY · Investing in and restructuring financially distressed companies · Focus on recovery of business and value creation through restructurings, buyouts, and consolidations · Research-driven strategy coupled with significant experience/relationships of team TEAM · Founded by Wilbur Ross in 2000 · Team consists of: 11 people on the U.S. investment team; 2 people on the Japan investment team; 5 support professionals COMPETITIVE ADVANTAGE · Small, focused team ­for larger transactions, works with select number of co-investors · Well-known for investment in U.S. Steel · In July 2006, AMVESCAP announced it had agreed to acquire WL Ross & Co for $100 million, with five annual earn-out cash payments capped at $55 million each FUNDS

Fund Name WLR Recovery Fund IV WLR Recovery Fund III WLR Recovery Fund II Asian Recovery Fund WLR Recovery Fund

N.B.: Data as of June 30, 2008.

Vintage 2007 2005 2002 2000 1997

Fund Size $4,000m $1,000m $400m $300m $200m

MOI 0.90x 1.21x 2.91x 1.55x 3.69x

Net IRR (13.1%) 10.6% 84.6% 10.7% 35.6%


Past performance is not necessarily indicative of future results. There can be no assurance that any fund will achieve its objectives or avoid substantial losses. Current results would likely be lower than the performance date which is listed here. Source: Private Equity Intelligence, CapitalIQ, California Public Employees' Retirement System, Park Hill Group.


The presentation is being provided on a confidential basis for informational and discussion purposes only and does not constitute an offer to sell or a solicitation of an offer to purchase an interest in any fund. Any such offer or solicitation may only be made by means of a Confidential Private Placement Memorandum of any fund, which will describe certain risks related to an investment in such fund, including without limitation, dependence on the General Partner, risk of loss and liquidity of the investment. The information contained herein should be treated in a confidential manner and may not be reproduced or used in whole or in part for any other purpose. Certain information (including economic and market information) contained herein has been obtained from published sources prepared by other parties. While such sources are believed to be reliable, Park Hill Group does not assume any responsibility for such information. Among the risks inherent in investments in troubled entities is the fact that it frequently may be difficult to obtain information as to the true condition of such issuers. Such investments may also be adversely affected by laws relating to, among other things, fraudulent transfers and other voidable transfers or payments, lender liability and the bankruptcy court's power to disallow, reduce, subordinate or disenfranchise particular claims. Such companies' securities may be considered speculative, and the ability of such companies to pay their debts on schedule could be affected by adverse interest rate movements, changes in the general economic climate, economic factors affecting a particular industry or specific developments within such companies.

Park Hill Group LLC is a U.S. Broker-Dealer registered with FINRA. Park Hill Group is represented in the United Kingdom by Park Hill Group International Limited., an Appointed Representative of The Blackstone Group International Limited, authorized and regulated by the Financial Services Authority. Park Hill Group is represented in Japan by The Blackstone Group Japan K.K., a financial instruments firm registered with Kanto Local Finance Bureau (Kin-sho) under No. 1785.



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