capstone overview 2012

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July 16, 2012

KKR Capstone OverviewDean B. Nelson

CONFIDENTIAL


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What Ill be talking to you about today

Context: The start of KKR Capstone

Todays Focus: How and where KKR Capstone operates today

Q&A: What questions do you have for me?

Time permitting: Oriental Brewery case study

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In 99/00, it was clear that the PE market was changing

More PE firms with more capital Historically high returns led to rapid increases in PEcompetitors and capital

More aggressive corporate management Corporations were running their businesses more

aggressively, making it increasingly difficult to

quickly create value in LBOs

Private equity wasincreasinglycompetitive

Deal sourcing andvalue creation

efforts had to beredoubled

Required additional resources with a broader setof skills and an even tighter workingrelationship with the management team

Restructuring became table stakes - necessarybut no longer sufficient


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KKR responded to these market conditions by innovating on theindustry standard model with three new additions

PortfolioManagement

Committee (PMC)Senior Advisors KKR Capstone

Responsible for oversight &management of entireportfolio

Work closely with seniormanagement and KKR onoperational issues andopportunities

Works as the operatingarm of KKR to directlyimprove companyperformance throughtargeted projects

New Additions

Additional Changes

Realignedinvestment teams

into 9 industrygroups

Hired dealexecutives with

operatingexperience


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KKR Capstone was started to capitalize on three insights

Late 90s areas of opportunities KKR Capstone

Belief that investing behind , andexecuting against , improvement-oriented opportunities would createcompetitive advantage

More operational resources wererequired to diligence opportunities and

consistently drive results

External consulting firms couldntconsistently meet KKRs requirements Wide variance in the quality of teams

and output Objective of creating dependence vs.

building capability and independence Focus on planning & strategy, with

limited experience in implementation

Experience and talent: all teams are led bypartner-equivalent executives, who also

possess meaningful industry experience Focus: teams do not monitor, but rather

execute against opportunities that are critical toKKRs investment thesis and the CEOs agenda

Approach: working with management teamsas a trusted partner

Overall Mission : To work, in partnership withmanagement over the lifetime of ourinvestments, to address the most importantoperational value-creation levers and help KKRgenerate top-tier returns for our investors

Integration: Capstone is integrated withinKKRs value creation business model

Alignment of incentives: all executives holdKKR stock as part of KKRs One Firmcompensation model

Better results, faster : Emphasizeimplementation and transfer of skills

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Support late-stage due diligence

KKR Capstones operating model

Help develop 100-Day Plan and operating metrics

Put resources on the ground, working with management

Involve outside resources with specific, deep expertise

Build capabilities to sustain improvement

Move On!


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Key success factors: working with a right-sized team on themost important initiatives in order to get better results, faster

Appropriate team size and skills

Well defined initiatives

Focused use of outside resources

Define Test

Implement

Move on

Results


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KKR Capstone priorities

In our portfolio work Help drive profitable growth Convert revenue growth into disproportionate EBITDA growth Upgrade talent Make the improvements stick

In our model Build scale and expertise Expand capabilities internally and through external relationships Evolve and extend our model portfolio and due diligence Extend our cross-portfolio efforts

Within KKR Be responsive to opportunities where our expertise is helpful Strengthen our ties to the rest of the firm

Driveswhere andwhat weare workingon in the

portfolio


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Note: Portfolio companies identified above may not be representative of the entire portfolio.(1) Percentage calculated by dollars of KKR equity invested rather than by number of KKR portfolio companies. Includes companies in funds subsequent to the 1996 Fund, which was not contributed to KKR in

the Combination Transaction, excluding Harman, Legg Mason, and CICC.

Modern

Dairy

Weve partnered with ~90% of KKRs Portfolio (1)
http://www.toysrus.com/shop/index.jsp?categoryId=2255956


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We have an intensive focus on driving revenue growth

Material Revenue Growth Drives Higher Returns

9.7%

14.0%

1Revenue EBITDA

2.8x

2.0x

1MOIC of

Companies withRevenue Growth

>4%

MOIC of KKRInvestments

Since Inception

While much of our work helps our companies with cost and capital efficiency, enormousemphasis is placed on initiatives to grow revenues

Revenue growth is critical: you cant cost -cut your way to sustainable high returns

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(1) Portfolio companies with greater than 4% revenue growth, located in the U.S. with annual revenue greater than $500mm, and originalinvestment made between 1/2005 and 12/2007.

(1)(1)

(1)


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but we also focus on a variety of opportunities across severalportfolio companies (North America example)

FDC Biomet Aricent Sealy Academy Capsugel Capital

Safety Go Daddy Ipreo Del Monte

Pricing x x x x

Promotion /

Merchandising x x

Sales Force

Effectiveness x x x

New geo / channels x x x x x

Online x x x

Product Innovation x x x x

Sourcing x x x

Manufacturing Process

Improvement x

IT

Working Capital

Carve-outs x

Operating Metrics x x x

Org Design / Talen x x

Portfolio [ ] x x x

KKR Capstone Deployment 1 2 1 1 3 3 1 3 2 2

P r o c e s s

Pre-2010

R e v e n u e

E f f i c i e n c y

Post-2010


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How to work with KKR Capstone most effectively in the portfolio

Regardless of context, we have found a few key conditions make a realdifference:

Advocacy from the deal team for our initial involvement

Not an alternative to McKinsey; instead, part of the KKR way

When possible, embed Year One fees in transaction close

Agenda focused on most important issues and Board visibility

Involvement in major decision-making forums (i.e. sufficiently close to themajor issues and debates and copied on all material)

Full members of the team and positioned that way with other sponsors andthe portfolio company management

If club deal, distinct initiatives from other sponsors (divide & conquer) andexpectations set upfront about our involvement

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Oriental Brewery: Overview

Purchased from AB InBev in 2009; KKRs 1 st investment in Korea

#2 beer producer in Korea; 41% national market share

One - firm KKR team, including KKR Capstone, KKR CapitalMarkets, and Global Public Affairs contributed to success

KKR not highest bidder; only non-local PE firm

Domestic Product International Product

Source: Oriental Brewery data.


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Operating Improvement Investment Thesis

Played key role indiligence; identifiedoperational improvementareas

On ground day 1 with OBteam executing keyinitiatives

Full team engaged for 24months post-acquisition

Monitoring sustainability ofinitiatives

KKR Capstone Role Value Creation

Carve-out to stand upbusiness

Procurement practices

Wholesaler managementprogram

New product development

Sales force effectiveness

Green Portfolio Program Inventory management

Export growth


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Which wholesalers should be prioritized?

Customer prioritizedbased on:

Total OB volume withcustomer

OB customer marketshare

Priority

Customers

OB MarketShare

HighLow

O B V o l u m

e

H i g h

L o w

Wholesale sales model Every wholesaler must

buy OB product No price or product

discrimination

Wholesaler Management

M a r k e t O v e r v

i e w

C u s t o m e r

F o c u s


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Balanced customer prioritization based on incrementalvolume by channel, customer profitability and OB total volume

(Focus)(Manage)

(Others) (Maintain)

Wholesaler Management



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Seoul/Sudo

Kyoungbuk

WS #1Incremental Volume: LowChannel: Pub

Chungnam

Chungbuk

Gangwon

Kyoungnam

Jeonbuk

JeonnamBusan

Before After

Cases SpendKRW/Case Cases Spend

KRW/Case

55k 44M 800 50k 35M 700

20k 7M 350 30k 12M 400

75k 51M 680 80k 47M 588

W S # 1

W S # 2

T O T A L

7% case growth; 8% spend decline;14% reduction in spend/case

Wholesaler Management in Action

WS #2Incremental Volume: HighChannel:Convenience Store



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0

200

400

600

2010

OBVolume

345

2011

509

Apr-Dec2010

268

Apr-Dec2011

450

0

100

200

300

400

2009

CassLight

Volume

208

2011

373

May '09 -Apr '10

198

May '10 -Apr '11

329

47% volume growth from 10 - 11; 68% growth 9 months post-launch

79% volume growth (40% CAGR)from 09 - 11;

66% growth 12 months post-launch

Product Development

OB Brand Volume 10 - 11 Cass Light Volume 09 - 11



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Case study: How we create value in portfolio companies


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capstone overview 2012

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