EFTA01452574

28 January 2014 Brokers. Asset Managers & Exchanges Alternative Asset Manager Initiation Earnings profiles in 2014 should also remain supportive, with increasing realizations generating good sequential distributable earnings growth for at least the next several quarters. However, longer-term as the economic cycle matures, fears of a slowdown or recession may percolate and this could become negative for the stocks if realizations begin to wane, especially if the Alts' valuations have improved significantly. This does not appear to be on the horizon for at least 2014 given current expectations for continued growth in the economy and a relatively benign interest rate backdrop. Longer-term however (-2017-19), we think it will become difficult to grow from potentially peak distributable earnings in 2015-16 for much of the group, given the firms will have likely exhausted a large portion of embedded gains through realizations. To combat this, the firms will need to maintain the current healthy pace of fundraising for at least the next 1-2 years and be able to deploy capital in attractive opportunities, which could become scarcer if capital markets remain robust. Growing fee-based assets and shifting the business mix toward traditional asset management will also help to reduce the negative cyclical impact to DE post the realization cycle. Other considerations and possible pushback on our generally bullish thesis (and discussed in more detail in the report) are: 1) higher interest rates will impede returns given higher financing costs for portfolio companies. 2) earnings are very difficult to model both in the short- and long-term, hence reducing conviction in stocks with low forecasting ability, 3) the corporate/partnership organizational and financial structure is complex & difficult to become comfortable with, 4) the units and their distribution structure are prohibitive for some investment portfolios, and 5) the public floats are low and there is long-term overhang as partners monetize stakes. Differentiating the companies As common as the industry trends are for these 5 Alts, the companies are each quite different in terms of business mix, heritage, management philosophies and earnings dynamics. Figure 3 shows a brief snapshot of key business mix differences - we provide a more detailed overview starting on the next page 'Figure 3: Alternative Manager Business Mir. by Reported Segment and Revenue Type APO EC( CG KKR Business Line Ftivate Equity 72% 27% 62% 42% 0% Credit 27% 14% 0% 0% 93% Real Estate 0% 46% 0% 0% 0% Capital Markets 0% 0% 0% 51% 0% RJblIC Market Strategies 0% 0% 18% 7% 7% Alternatives Advisory 0% 12% 11% 0% 0% Real Assets 0% 0% 9% 0% 0% Business Advisory 0% 2% 0% 0% 0% OAK Average Pretax Economic Income Mix (2012.148 41% 19% 16% 12% 5% 5% 1% 1% Revenue Type Revenue Mix by Type (2012.14E) Average Fees 34% 42% 46% 31% 48% 40% Carried Merest & hcentives 61% 48% 52% 41% 43% 49% Principal & other income 5% 9% 2% 28% 9% 11% Nett &a mangy repomf *eras% Pus ears me/ /a Ours is n .r.'t the es* n and ear , / 0-4,c "When nen'ea, w au San, Cmwrr mrr. al D.ScA• aw* Page 6 Deutsche Bank Securities Inc. CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) CONFIDENTIAL DB-SDNY-0 109692 SDNY_GM_00255876 EFTA01452574