LATERAL FLIPBOOK 081206 MC

HWOWE
NGTOOOWT

A VISUAL THOUGHT PIECE ON
THE PRIVATE MARKETS



CHALLENGING, BUT NOT
UNPRECEDENTED TIMES

§§ We have been here before: look to the late 1970s
§§ Imperative to look outside traditional asset

allocation boxes

• U.S. IS THE EXCEPTION IN THE GLOBAL
ECONOMY: MACRO GROWTH IN
ABSOLUTE TERMS WHILE THE REST OF
WORLD IS A BASKET CASE

§§ Job growth, low unemployment – 14.4 MM
added, 75 months of increase

§§ Banking industry stability
§§ Strong dollar
§§ Rebirth of domestic energy industry

• TRADITIONAL ASSET ALLOCATION
MODEL IS BROKEN

§§ Hedge fund industry is getting shaken out
§§ Bond market is treacherous: illiquid, negative real

returns, no term premium
§§ Need for investors to look beyond 60/40 public

portfolio allocation, increased focus on private
market alternatives

70'S EARLY 80'S LATE 80'S 90'S

• ENERGY CRISIS IN 1973 AND 1979 - OPEC EMBARGO,
IRAN COUP AND HOSTAGE CRISIS

• GLOBAL UNREST - COLD WAR, VIET NAM AND THE FALL
OF SAIGON, WARS IN ISRAEL, COLD WAR

• NIXON ENDS BRETTON WOODS IN 1971, DESTABILIZING
GLOBAL FINANCIAL SYSTEM

Ayatollah Khomeini

Leonid Brezhnev Richard Nixon
NOW
2000 POST-2007

David Volcker Charles Keating

LATE 70'S EARLY 80'S LATE 80'S 90'S

• STAGFLATION - HIGH UNEMPLOYMENT, HIGH INFLATION,
LOW GROWTH

• “REAL ESTATE BANKRUPTS BANKS” EPISODE 1 - S&L CRISIS
REQUIRES FEDERAL BAIL-OUT

• CONGRESSIONAL SCANDAL INVOLVING KEATING FIVE
• EUROSCLEROSIS PLAGUES EUROPEAN GROWTH RATES;

THATCHER AND DELORS TUSSLE OVER SCOPE OF NEW EU
• LATIN AMERICAN DEBT CRISIS

Jacques Delors & Margaret Thatcher

2000 POST-2007 NOW

MISERABLE STOCK RETURNS, HIGH
INFLATION, HIGH BOND YIELDS

3200

1600 November
1968: 696

June 1981:
Volcker raises rates
Inflation-adjusted S&P 500 index
1/1/62800
1/1/64
1/1/66400
1/1/68
1/1/70Opportunity for
1/1/72Private Equity –
1/1/74200Low Volatility,
1/1/76Low Correlation,
1/1/78Attractive Risk/Reward
1/1/80
1/1/82
1/1/84
1/1/86
1/1/88
1/1/90
1/1/92
1/1/94
1/1/96
1/1/98
1/1/00
1/1/02
1/1/04
1/1/06
1/1/08
1/1/10
1/1/12
1/1/14
1/1/16
100 June 1982:
261 or 63% decline in
14 years

SOURCE: http://www.macrotrends.net/2324/sp-500-historical-chart-data’>S&P 500 - 90 Year Historical Chart

LATE 70'S EARLY 80'S LATE 80'S 90'S

• VOLCKER FED RAISES RATES TO FIGHT
INFLATION; STOCKS CRASH; BONDS ARE LOW

• OIL GLUT IN EARLY 1980S - DRAMATIC FALL
FROM HISTORIC HIGH TO LOW

• KKR, WELSH CARSON IN 1979; SUMMIT, BAIN
CAP IN 1984

• DEBT EXPENSIVE; EQUITIES ARE CHEAP: SPURS
GROWTH OF PE AND VC FIRMS

• NEED FOR PRIVATE EQUITY- ATTRACTIVE RISK/
REWARD, LOW VOLATILITY, LOW CORRELATION

George Roberts & Henry Kravis

Mitt Romney

2000 POST-2007 NOW

Michael Douglas as Gordon Gekko

LATE 70'S EARLY 80'S LATE 80'S 90'S

• PE GROWS UP INTO LBO, GROWTH OF
THE MEGA BUYOUT

• DEVELOPMENT OF JUNK BONDS AND
MORTGAGE BACKED SECURITIES
MARKETS

• KKR’S FIRST FUND WAS $31MM (1977)
Æ THEIR THIRD FUND $1B (1984)

2000 POST-2007 Michael Milken
NOW

Clinton Family EARLY 80'S LATE 80'S 90'S
LATE 70'S

• DREXEL BANKRUPT IN 1990
• DECK CHAIRS REARRANGED AS

GLASS-STEAGALL REPEALED
• STRONG GDP GROWTH 3.6%

ANNUALLY
• PEACE DIVIDEND AFTER END OF COLD

WAR AND FIRST IRAQ WAR
• BULL MARKET AND DOT COM BUBBLE

2000 POST-2007 NOW

LATE 70'S EARLY 80'S LATE 80'S 90'S

Fron Left to right:
Henry Kraus, KKR
David Bonderman, TPG
Steven Schwarzman, Blackstone

2000 POST-2007 NOW

• 2000 MARKET CRASH, RECESSION AND GULF WAR 2
• STOCK BULL MARKET FUELS GROWTH OF ALTS: IN PE AUM

AND HEDGE FUNDS
• DEBT MARKETS BINGE AGAIN - LBOS AND MORTGAGES
• SYSTEMIC RISK - “TOO BIG TO FAIL” MEGA BANKS

LATE 70'S EARLY 80'S LATE 80'S 90'S

2000 POST-2007 NOW

• REAL ESTATE BANKRUPTS BANKS EPISODE 2
• “GOLDEN AGE” IN PE ENDS IN 2007 CRASH

LATE 70'S EARLY 80'S LATE 80'S 90'S

Fron Left to right:
Henry Paulson
Ben Bernanke
Tim Geithner

2000 POST-2007 NOW

• GLOBAL FINANCIAL CRISIS REQUIRES
UNPRECEDENTED GOVERNMENT
INTERVENTION

• LEHMAN BROTHERS FAILS
• 3 QUANTITATIVE EASINGS
• AUTO INDUSTRY, AIG BAIL-OUT
• LARGEST BANKS ARE TOO BIG TO FAIL;

COMMUNITY BANKS ARE NOT

LATE 70'S EARLY 80'S LATE 80'S 90'S

2000 POST-2007 NOW

• UNINTENDED CONSEQUENCES : REGULATION
LIMITS BANK LENDING TO UNRATED PRIVATE
COMPANIES

• BANKS ARE SAFER THAN EVER
• WALL STREET REBOUNDS, WHILE MAIN STREET

STILL STRUGGLES
• BULL STOCK AND BOND MARKET FUELED BY

FED’S ZERO INTEREST RATE POLICY

Margaret Thatcher

LATE 70'S EARLY 80'S LATE 80'S 90'S

2000 Theresa May
POST-2007 NOW (1980’s ALL OVER AGAIN)

• EUROSCLEROSIS ÆBREXIT
• GLOBAL COLD WAR ÆGLOBAL TERRORIST THREAT
• NEGATIVE REAL RATESÆNEGATIVE REAL RATES

MARIO DRAGHI, ECB NEGATIVE RATES AROUND THE
YIELDS FOR U.S. TREASURY BO
YIELD (%)
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
7/23/2015
HARUHIKO KURODA, BOJ 8/6/2015

8/20/2015
9/3/2015

9/17/2015
10/1/2015
10/15/2015
10/29/2015
11/12/2015
11/26/2015

SOURCE: Citi Velocity database, BLS,

LATE 70'S EARLY 80'S LATE 80'S 90'S

E WORLD, NEGATIVE REAL USA 10Y OTR Yield
ONDS USA 2Y OTR Yield
Japan 2Y OTR Yield
France 2Y OTR Yield
Germany 2Y OTR Yield
US Inflation

U.S. INFLATION

12/10/2015
12/24/2015

1/7/2016
1/21/2016

2/4/2016
2/18/2016

3/3/2016
3/17/2016
3/31/2016
4/14/2016
4/28/2016
5/12/2016
5/26/2016

6/9/2016
6/23/2016

7/7/2016
7/21/2016

2000 POST-2007 NOW

• U.S. ZIRP EXPORTED TO WORLD, WITH
WEAK RECOVERY

• $13T OF NEGATIVE YIELDING BONDS
GLOBALLY

• U.S. HAS EXCEPTIONAL FUNDAMENTALS:
GROWTH, ENERGY INDEPENDENCE, LOW
UNEMPLOYMENT

CURRENT FED POLICY EXTREME -
ZERO INTEREST RATE POLICY

10-Year Treasure Bond Yield (%)18.00 June 1981:Volcker
16.00 anti-inflation policy
14.00 peaks
12.00
10.00

8.00
6.00
4.00
2.00
0.00

1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986

SOURCE: 'http://www.macrotrends.net/2016/10-year-treasury-bond-rate-yield-chart'>10 Year Treasury Rate - Interactiv

LATE 70'S EARLY 80'S LATE 80'S 90'S

Opportunity for Private Credit –
Low Volatility, Low Correlation,

Attractive Risk/Reward

9/11 attacks Sept 2008- Lehman
Afghan-Iraq Brothers bankruptcy
War

1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016

ve Historical Chart POST-2007 NOW

2000

• LOW RETURN OUTLOOK - “4 IS THE NEW 8”
• HIGH VOLATILITY, ALL TIME HIGH IN STOCKS

AND BONDS
• FLAT YIELD CURVE
• NEED FOR PRIVATE CREDIT - ATTRACTIVE RISK/

REWARD, LOW VOLATILITY, LOW CORRELATION

• ZERO INTEREST - RATE POLICY

PRIVATE CREDIT HAS POTENTIAL TO BE AN
ASSET CLASS ON PAR WITH PRIVATE EQUITY
AND HEDGE FUNDS

4500 PRIVATE EQUITY
4000
3500 4500 NON-SPONSORED PRIVATE CREDIT
3000 4000
2500 3500
2000 3000
1500 2500
1000 2000
1500
500 1000
0
500
0

2015 2025 2035

1980 1994

LATE 70'S EARLY 80'S LATE 80'S 90'S

Today, the PC market is the same
size as the PE market was 20
years ago

2000 2010 2015
2000 POST-2007
NOW

• PRIVATE EQUITY HAS GROWN FROM
$50BB TO $4T IN 20 YEARS

• PRIVATE CREDIT HAS POTENTIAL TO BE A
$1T ASSET CLASS IN THE NEXT DECADE

THE TRADITIONAL ASSET ALLOCATION
MODEL IS BROKEN
Blackrock’s 5-Year Outlook by Asset Class

10% Return Volatility
8%

6%

4% 6.0% 7.0%

2% 3.6% 4.0% 4.0% 4.0%
0% 1.0%
Expected Annualized5-Year
Returns or Volatility-2%

-4% US Treasuries
IG bonds
-6% HY bonds
HF
-8%
Real estate
-10% Mezzanine

PE

More Liquid Illiquidity More Illiquid

CHALLENGING MARKET DRIVERS

RISK

RETURN

LIQUIDITY

The forces that have driven exceptional investment
returns over the past 30 years are weakening, and
even reversing. It may be time for investors to lower
their expectations.

“Diminishing returns: Why investors may need to
lower their expectations”, April 2016

2016 OUTLOOK Parts of Europe and Asia may already be
in recession

Likely to see gating of hedge funds and
some major blow-ups

High yield market default risk returns

Low yield environment well into 2018
• Next rate increase unlikely before end

of year, after the election

Focus on investments that do well in a low-
growth or short recession
• Anti-cyclical versus cyclical industries
• Liquid and stable assets and long-term

contracts
• Strong collateral and structure for

downside protection
• Potential for higher returns to

compensate for increased risk

ROLE FOR PRIVATE CREDIT AS AN
ALTERNATIVE TO FIXED INCOME OR PRIVATE
EQUITY IN PORTFOLIOS

What it offers as a FI or PE alternative

nn Attractive risk-adjusted returns
nn Low correlation
nn Low volatility
nn Focused on U.S. market
nn Interim liquidity - 5 years

What it avoids

nn High valuations
nn Not tied to PE or other markets
nn Vulnerability to daily crises
nn Global contagion
nn Extended illiquidity >10 years

HOW WILL
HOW WILL YO

THIS END?
OU SURVIVE?

ABOUT LATERAL
INVESTMENT MANAGEMENT

Lateral Investment Management provides growth financing to non-sponsored,
lower middle-market businesses, with $10MM-100MM in trailing 12-month
revenues. The Fund targets gross returns that are significantly higher than fixed
income and private equity benchmarks, with low principal risk, low volatility,
and low correlation to the public markets. We believe this opportunity to
generate superior returns results from long-term regulatory disruptions in the
U.S. banking system and bloated fund sizes of private equity firms which
collectively has resulted in reduced access to growth capital for lower middle
market companies.

The demand for capital far outweighs the supply to this segment. Lateral
provides short-term private credit and equity financing to owner-operated
or family-owned middle market companies as an alternative to the formulaic
limits of bank debt or the dilution of private equity.

Lateral offers a superior risk-reward to top quartile private credit and private
equity products. Lateral’s investments are structured for downside protection,
targeting a minimal loss rate while focusing on business building and exit
management through value-based underwriting and value-added portfolio
management:

• Collateral-based protection of principal and baseline returns: The Fund
is structured for downside protection, focusing on opportunities with
100-200% in collateral value at underwriting. The loans are at the top
of the capital structure and generate cash coupons of 12-16%.

• Reduced J-curve and term: The Fund generates current net cash yield of
8% which is paid out on a quarterly basis. The Fund’s investment period
is three years and the average tenor for loans is 2-3 years.

• Uncapped equity upside: Financing is required because of a well-
defined event-driven opportunity to accelerate growth by 50-100%.
Lateral provides business building support and benefits from upside
potential through 5-40% equity ownership stakes.

RICHARD DE SILVA
Managing Partner

Richard de Silva, Managing Partner and Portfolio Manager, was previously a
General Partner at Highland Capital Partners, a global venture capital firm with
$3 billion in assets under management. De Silva joined Highland in 2003 and
focused on growth investments. De Silva was a co-founder of IronPlanet, the $1
billion construction equipment marketplace and also has held operating roles
at four other companies as CEO or co-founder. De Silva holds an A.B. from
Harvard College, an M.Phil from Cambridge University and an M.B.A. from
Harvard Business School.

Contact Richard at [email protected]

KENNETH MASTERS
Managing Partner and CIO

Kenneth Masters, Managing Partner and Chief Investment Officer was previously
Co-Founder and Co-Portfolio Manager at White Oak Global Advisors, a
middle market direct-lending firm based in San Francisco with reported assets
under management of $1.5 billion. Masters served as Co-Portfolio Manager
and Investment Committee Member at White Oak from June 2007 to December
2012. Masters was previously a Director at KKR Financial LLC, the credit arm of
global private equity firm KKR, from November 2004 to August 2006. While
at KKR, Mr. Masters assessed and underwrote more than $1 billion in loans
to middle market companies across the insurance, media, pharmaceutical and
other industries. Prior to KKR, Mr. Masters was a senior investment analyst for the
High-Yield and Fixed Income Portfolio Group at Franklin Templeton from August
2000 to October 2004 where he led the representation of Franklin Templeton in
distressed situations, including WorldCom, MCI, and Charter Communications.
He received an M.B.A. from Harvard University, and a Bachelor of Science
from Cornell University.

Contact Ken at [email protected]

EOPMOUERRRTGFILNIOG

HARD MANUFACTURING GOODS
CONTROL MANUFACTURING

INFRASTRUCTURE
TRANSPORTATION

1825 South Grant Street, Suite 210
San Mateo, CA 94402

FOR INQUIRIES, PLEASE CONTACT:
Margret (Mags) Hardardottir, Director of Investor Relations

at [email protected]

www.lateralim.com
Phone: 650-396-2200