How We Work Across Business Playbook

How We Work Across Businesses Playbook Chris Hsu Brian Dillard Justin Sabet-Peyman

Amy Stuart Paul Sigfusson

July 18, 2012

CONFIDENTIAL

Executive Summary • This is an introductory guide to the different types of activities and transactions you might be involved with at KKR • We have characterized the different transaction types as “plays” and this is an introductory “playbook” • Today will discuss a common set of plays, but these six are by no means the full range of activities you will be involved with at KKR • The next page provides a rough overview of the commercial transactions we tend to undertake, with a highlight on the plays we will be discussing today • After the six generic plays, we have two more in-depth case studies, which we will discuss as a panel • We encourage questions and interactive discussion throughout the next two hours

2

Six Types Of Core Commercial Activity New Deals / Opening Positions

Selling / Closing Positions

• PE Buyout

• IPO

• KAM Deal

• Sale of whole company – Non-IPO

• Hybrid (e.g. Kodak) Operating Improvements • 100-day plan creation & execution • KKR Capstone involvement • Active ongoing governance • Interim management Client and Partner Interactions

• Refinance – e.g. “amend and extend” • Add-on equity • Hybrid – e.g. Sealy Syndication

• Fundraising

• Equity syndication

• Deal-specific communication

• Debt syndication

• Ongoing partner communication

3

Balance Sheet Improvements

The New Deal Process (PE Buyout) 1

2

Deal Team monitoring company notices opportunity, assigns Deal Team, performs initial diligence

1.

Deal Team identifies opportunity for a potential PE transaction, probably a buyout. Deal Team established, after consultation with [staffing] to determine Associate staffing. Perform initial round of more detailed outside-in diligence to confirm hypothesis. Develop initial “back-of-theenvelope” LBO model to confirm returns range. Initial meeting with CEO if fits the process.

2.

Deal Team prepares initial memo for IC – 10 pages or less, with deal thesis, relevant company and industry background, available financials, returns summary, and next steps (including budget)

Deal Team goes to IC with initial memo to seek approval for pursuing and continued work

a. Receive an NDA from the Company and work with KCM and Simpson Thacher to markup and finalize for signature by a Member 3.

If IC agrees to continue

To the extent that the IC deems it appropriate to proceed the deal team kicks off a more detailed diligence process based in part on the IC's guidance. Many possible options… route usually includes: a. Make initial contacts. For example: company CEO, board, company bankers. Third-party specialty advisors if needed, usually on an exploratory basis. Internally, deal team contacts:

3

i.

Deal Team kicks off more detailed diligence, contacts internal & external parties

ii. iii. iv. v.

4

b. Begin discussions with external banking advisors and financing sources – joint w/ KCM if the Deal Team signs off and the full team is “over the wall”

Deal Team goes to IC, joined by relevant internal parties (KCM, KKR Capstone, CPG, Sr. Advisors, etc)

c. Conduct more in-depth management discussions d. Create more detailed financial model, driving toward indicative valuation 4.

4

KCM – Capital Markets industry contact is notified to work along side deal team in order to identify the most efficient manner to finance the potential buyout, and execute the financing. (Please consult the syndication playbook to the extent that there is the possibility of the need for an equity or debt syndication) - KCM will also coordinate the wall crossing of KAM with compliance KKR Capstone, if there is a meaningful operational improvement angle CPG – determine LP sensitivities, fund details, potential LP/client co-invest from SMAs / other accounts, etc. Sr. Advisors, KAM, PA – if needed for specific aspects of deal

Deal Team prepares more fulsome IC memo, generally seeking approval for indicative bid. Relevant internal parties – KCM, KKR Capstone, CPG, Sr. Advisors, PA – join as needed. Become the Extended Deal Team.

The New Deal Process (PE Buyout) 5.

5

Deal Team quarterbacks effort and all expanded Deal Team resources have defined roles – from diligence through ownership

PE Deal Team quarterbacks all efforts of Expanded Deal Team to take deal from diligence to approval and acceptance to contract executed to closing. Specific roles tend to be: a.

Deal team work progresses in phases based on the lifecycle of the deal process. Throughout the diligence process, the deal team will remain in close contact with the related KKR teams to ensure effective coordination: i.

ii. iii.

6

Repeat process until final bid approved by IC and accepted by company or IC stops process.

iv.

If successful

7

8

9

5

b.

KCM focuses on assisting with financing negotiations, structuring, spearheading any syndication processes, and in general working to garner the most efficient access to capital for the deal

c.

CPG coordinates all communication of the transaction to LPs (generally post announcement)

d.

KKR Capstone generally focuses on detailed business diligence, focused on assessing the top 2 or 3 key drivers of value creation and underwriting the value to be achieved from those – to be included in the business case by the deal team.

e.

PA, Sr. Advisors, etc. – Help as needed on specific, focused aspects of the transaction

LP Communication/Capital Call

Deal Team Team will willsend send aa short short email email at Deal the of the transaction the end end of the transaction

Continued engagement engagement of Continued of management post postLBO LBO management

The first step is business diligence and working closely with the management team and internal (e.g. Senior Advisors, portfolio companies, Capstone) and external (consultants, strategic partners, banks) sources Depending on the investment opportunity, the upfront diligence can include additional business diligence workstreams such as corporate carveout and backoffice standup The business diligence will inform the financial model to develop multiple operating scenarios including a base, upside and downside cases The deal team also manages and coordinates all of the other deal related workstreams that occur anytime pre-announcement, post-announcement and post-close. These generally include financing (debt and equity), legal (purchase agreement, legal diligence, credit agreement, anti-trust approvals), accounting and tax (quality of earnings, purchase price adjustment, tax structure, cash repatriation, tax basis), employment agreements and management incentive plan, etc.

6.

Diligence, valuation, IC meetings, and bids repeat until a final bid is approved by the IC and accepted OR IC stops the process.

7.

Deal Team works with CPG and Finance to prepare transaction summary explaining the deal, capital call notice for funding, LP announcement (simultaneous w/ public deal announcement), call w/ CPG and PA teams etc.

8.

Deal Team should send a concise email to all execs summarizing the transaction and key highlights

9.

Post transaction close Deal Team and KCM to remain engaged with management in order to facilitate efficient access to capital markets

The Deal Process (KAM Deal) 1

2

1.

As part of the industry analyst’s ongoing monitoring of their universe of credits and management team discussions, the analyst will identify a potential opportunity (could be new issue, secondary or a proprietary origination)

2.

Once the opportunity has been identified, analyst qualifies the opportunity with appropriate PMs

Industry analyst identifies potential investment opportunity

a.

Initial opportunity qualification with Portfolio Manager

3.

3

4

5

6

7

8

6

Initial discussion with Firm resources (PE, Capstone, KCM, etc.)

KAM team assembles the appropriate deal team

Deal team perform initial due diligence

Deal Team reviews final diligence with IC and, if approved, executes the transaction/trade

Post qualification, the industry analyst reaches out to the various key teams within the firm to 1) understand what relevant knowledge the firm possesses and 2) make any key stakeholders aware of the potential opportunity a.

Private Equity deal teams are usually the first call from a diligence perspective

b.

Public Affairs and Capstone also play key roles in the diligence of many opportunities

c.

In proprietary transactions, KCM may be key if some part of the security needs to be syndicated

d.

In all cases, the KAM team will check with compliance prior to reaching across the wall to ensure there are no public/private conflicts

4.

Once the opportunity has been vetted, the KAM team (industry analyst and PM) will assemble the appropriate deal team (potentially including KCM, Capstone or other resources)

5.

Once the team has been assembled, an initial round of due diligence is performed

Deal team reviews the opportunity with KAM investment committee

Deal team performs follow up due diligence

In many cases, the analyst will also preview the opportunity with the IC to ensure any specific issues/concerns are identified early

a.

The process, in general, is very similar to the process employed for PE investments

b.

In addition to diligencing the opportunity, the team will also work with the broader KAM team to assess tax/structuring issues and identify the appropriate pool(s) of capital

c.

The specifics of the process will partially depend on the type of investment (e.g., mezzanine vs secondary opportunity)

6.

Post initial diligence, the team presents its findings to the IC and agrees on next steps

7.

Follow up diligence is performed and usually includes final diligence on key business items and finalization of key structuring issues and terms

8.

Once the follow up diligence is completed, the final findings are presented to the IC and, if approved the transaction is executed a.

In the case of a secondary trade, the trader will go out and try to source the security

b.

In the case of an originated transaction, the deal team proceeds to execute the transaction on agreed upon terms and KCM will syndicate any excess (as appropriate)

The IPO Process 1

2

3

4

Deal Team to maintain contact with KCM

Deal Team and KCM to maintain regular dialogue with management

1.

6

Combined team to present plan to management

7

Combined team to work together on IPO process

8

KCM to manage IPO execution and report to Deal Team

7

Post IPO Engagement

c. d.

Public Buy-side dialogue LP/SWF strategic investment dialogue

3.

Based on a combination of company progress, comparable company valuations, broader market health, company management support regarding IPO readiness, and KCM guidance, the Deal Team to make a determination as to whether it is appropriate to begin contemplating a public market sale

4.

Deal Team to present their views to the IC with assistance from KCM

5.

To the extent that the IC provides the PE Deal Team with approval to move forward, the PE Deal Team will work with KCM on the initial IPO plan, including: a. b.

Timing, including IPO checklist (key tasks and responsibilities to be completed by Company, PE Deal Team, KCM, Counsel, Underwriters) Comparable companies

c. d.

Valuation Optimal capital structure post-IPO

e.

Potential syndicate structure (considering sector/IPO experience, trading prowess, research prowess, relationship with the Company, etc)

6.

KCM and the PE Deal Team will jointly present these views to Company management in order to get organized and seek input

7.

PE Deal Team and KCM to work in conjunction on: a. Positioning thesis

8.

9

Balance sheet focused transactions IPO market updates

Deal Team and KCM to form a regular dialogue with Company management around the aforementioned topics

Deal Team to present to IC

5

a. b.

2.

Deal Team to continually assess company progress and market

Deal Team + KCM to formulate IPO plan

Deal Team to have constant contact with KCM post-close of transaction in order to facilitate future capital markets transactions efficiently. Dialogue to include discussion of:

9.

b. c.

S-1 drafting Underwriter, Analyst and Roadshow presentations

d. e.

Research analyst vetting Buyside meetings

KCM to coordinate banks and provide management and the Deal Team with execution services including views on: a. Launch timing b. c.

Investor targets Roadshow Q&A prep

d.

Pricing and allocations

Post-IPO, KCM and Deal Team to remain engaged with management in order to facilitate orderly selldown of shares

The Balance Sheet Restructuring Process Deal team decides to explore a potential balance sheet restructuring

1

Deal Team makes initial contact with KCM

2

1.

Deal Team identifies opportunity for a balance sheet restructuring (e.g. amend & extend, refinancing, dividend recap, etc)

2.

The Deal Team should make initial contact with KCM as soon as the Deal Team is considering a restructuring

3.

Deal Team should provide KCM with background material on the specific opportunity (relevant financial impact, summary of capital structure including any relevant restrictions, relevant banking relationships and conversations, etc)

4.

A member of the KCM team will be partnered with the Deal Team based on regional/industry focus:

Deal Team provides KCM with summary overview materials

3

a. 5.

KCM Assigns Deal Captain

4

5

Deal Team + KCM approach PMC / IC

6.

Deal Team works with KCM to execute transaction

6

7

Deal Team coordinates with CPG, Legal & Public Affairs

8

Deal Team will keep all internal committees posted

9

Deal Team will send a short email at the end of the transaction

8

7.

KCM – US: Jeff Rowbottom, George Mueller, Cade Thompson; Europe: John Empson; Asia: Rex Chung; India: BV Krishnan

Deal Team + KCM Deal Captain discuss opportunity and present their recommendation to the PMC/IC a.

Dividend Recaps should be presented to the IC and PMC

b.

Refinancings and standard amend & extend situations should be presented to the PMC

c.

To the extent that the relevant committee provides initial approval to proceed KCM will coordinate with compliance to wall cross KAM

The Deal Team has primary responsibility for the restructuring plan, and will coordinate the relevant internal groups to: a.

Explore any potential legal considerations (Public Affiars/Legal/KCM)

b.

Determine the best strategy for optimal execution (KCM)

c.

Develop a syndication strategy, in the event one is needed. (KCM-CSC)

d.

Outline a restructuring timeline/action plan (KCM)

e.

Develop a game plan for approaching external financial institutions (KCM)

f.

Develop messaging for all investors (management, debt holders, LPs, etc) (KCM/CPG)

The Deal Team has responsibility for ensuring CPG, Legal and Public Affairs are briefed in advance of transaction to ensure consistent communication with external stakeholders (LPs, public investors, etc) a.

CPG will take the lead coordinating with our LPs (see “LP Communication Process”)

b.

Public Affairs will take the lead coordinating with the portfolio company on relevant press releases

8.

As the process progresses the deal team, along with the appropriate internal groups, will need to make regular appearances to brief the appropriate committees

9.

Deal Team should send a concise email to the investment professionals (“All Executives Private Side”) and KCM (“KCM Executives All”) summarizing the transaction and key highlights

The LP Communication Process 1

Communication on a new deal

2

Ongoing communication

3

Communication on exit

1.

Deal Team should contact CPG, PA and Finance about a new deal --- work together on transaction summary (typically sent out at the time of the capital call), capital call (at least 10 days to fund), press release (typically use one from the company), LP communication etc.

2.

CPG will reach out on a quarterly basis to update/create one-pagers which are distributed to LPs quarterly with our valuation. Additionally, time to time CPG will reach out for specific data requests (for LPs, portfolio company flash cards etc) but typically we will try to pull the information directly from the PMC reports. Co-investors may require separate reporting – to be discussed in syndication section.

3.

Deal Team should contact CPG and PA to prepare a release to LPs and a press release (typically use one from the company).

4

Regular marketing materials/ case studies

4.

From time to time CPG will need case studies for marketing decks or longer presentations on specific companies for discussions with our LPs. CPG will reach out to the appropriate parties as needed to obtain these materials.

5

In the heat of an active fundraise

5.

When we are actively fundraising CPG will need deal teams help in confirming information for all of the marketing materials (PPM, pitchbook, DD site etc). CPG will also include relevant deal team members in client meetings to discuss their deals.

6

Annual meeting materials

6.

Annual meeting season is by far the busiest time for deal teams in terms of LP communication. CPG will reach out to each deal team to prepare slides, talking points and other materials for the event.

9

The Syndication Process 1

Deal Team contacts KCM at the appropriate time

2

Deal Team provides KCM with appropriate background info

3

KCM to formulate initial syndication plan in conjunction with relevant internal parties

4

KCM and Deal Team to report back to IC

5

KCM and Deal Team then execute the transaction

6

KCM coordinates allocation discussion

7

Negotiation and Coordination of Ongoing Co-Investor Reporting

Note: Please reference additional slide materials on equity syndication process.

10