1

The Industrial Sector Through the Eyes of a Private Equity Investor

September 21, 2006

2

The importance of private equity

~70% of you work for companies that have been touched by private equity.

Not Touched byPrivate Equity

30.0%

Touched by Private Equity70.0%

3

Agenda

• How and why does private equity impact you?– Why is private equity important?– How does private equity work?

• How important is the industrial sector to private equity?

• What does private equity look for in industrial companies?

• What does a private equity firm look like?

4

Historical Perspective on Private EquityThe private equity industry has grown dramatically over the last 30 years and now has a major impact on all sectors of the economy.

Sources: Meketa Investment Group; Buyouts Magazine

1971 1978 1983 1984 1986 1987 1989 1994 1996 1997 2000 2004 2006

NASDAQ formed

Kohlberg Kravis,

Roberts & Co. (KKR) Founded

AT&T broken up by U.S.

regulators

First private equity

transaction over $1bn (Wometco

Enterprises)

Driven by Michael Milken

(Drexel Burnham Lambert), leveraged

buyouts first account for the

largest percentage of

high yield bond issuance

Black Monday

(S&P loses over

20% in one day)

“Barbarians at the

Gate;” KKR acquires

RJR Nabisco – largest

LBO to date

Netscape & Yahoo founded

Private equity funds raise over $50bn in a single year for the first

time

Asian financial

crisis

Private equity funds raise over $200bn;

stock market bubble bursts

Google IPO;

Carlyle Group raises $10bn

Numerous record-size funds raised (e.g. Blackstone Group ($15.6B)

Texas Pacific Group ($14.3B)

Permira Advisers ($14.1B))

$32bn deal for HCA

announced; largest private

equity deal in history

“Thirty years ago, the private equity industry was not really an industry at all. Today, private equity is mainstream, sophisticated and huge. It accounted for about $200bn worth of deals in 2005, and the vast majority of that sum was spent on buy-outs of established companies”

-The Financial Times

5

Private Equity in the Press

“Increasing emphasis lies on improvements in the fundamental performance [through] motivation of employees and managers of the acquired business [and] direct involvement of the acquiring buy-out group in the transaction. Importantly, some of these improvements persist even after the buy-out group re-sells the business.”

-The Financial Times

“Private-equity firms now possess more than $2 trillion in buying power. This year they have bought some of the world’s best-known brands, worth more than $347 billion, twice last year’s pace and roughly equal to the gross domestic product of Belgium. Private-equity firms spent $12.3 billion for Univision last month; $22 billion for Kinder Morgan in May; as much as $14 billion for General Motors’ finance unit, G.M.A.C., in April; and $17.4 billion for Albertsons, the grocery chain, in January.”

-The New York Times

“Private money is also playing a growing role in mergers and acquisitions, an area long dominated by companies. So far this year, buyout funds have been involved in 24% of mergers and acquisitions by value, according to Thomson Financial, up from the 14% in 1988, the peak of the previous buyout boom.”

-Wall Street Journal

6

Size of the Private Equity Market Relative to GDP

199019

9119

9219

9319

9419

9519

9619

9719

9819

9920

0020

0120

0220

0320

0420

050.0

0.5

1.0

1.5

2.0%

Private Equity Investmentas a % of U.S. GDP

Despite coming down from their peaks, the rates of private equity investment as a percentage of GDP and as a percentage of total M&A activity are still well above historical averages.

Source: Meketa Investment Group

199019

9119

9219

9319

9419

9519

9619

9719

9819

9920

0020

0120

0220

0320

0420

050.0

5.0

10.0

15.0

20.0%

Private Equity Investmentas a % of U.S. M&A Market

7

LBO volume and returns have surged in recent years

Deal volume is up sharply

Source: Buyouts Newsletter, Thomson Venture Economics; Bain & Company

0

50

100

150

$200B

95 96 97 98 99 00 01 02 03 04 05 06

Annu

aliz

edQ

1

LBO transactions byUS-based firms

8

New cycle of fund raising: Leads to a capital overhang

Note: Capital raised includes foreign funds raised by US-based LBO firmsSource: Buyouts Newsletter, Bain LBO fund database, S&P LCD

0

50

100

150

$200B

0

50

100

150

$200B

92

5

93

6

94

12

95

18

96

23

97

35

98

55

99

35

00

63

01

35

02

17

03

24

04

42

05

174

Capital raised vs.deal volume (equity portion)

Equityinvested

Creates a capital overhang of more

than $200B implying a lot of capital left to be

invested

9

Agenda

• How and why does private equity impact you?– Why is private equity important?– How does private equity work?

• How important is the industrial sector to private equity?

• What does private equity look for in industrial companies?

• What does a private equity firm look like?

10

What is private equity?It’s not as glamorous as “Pretty Woman”

11

What is private equity?It’s not as ruthless as “Wall Street”

12

What is private equity?And it’s a bit more complicated than…

13

What is private equity?

Private Equity investing is essentially the practice of…

1) raising money to invest

2) investing in companies with strong teams and growth opportunities

3) helping to build and grow companies over time, and

4) eventually, realizing a happy return for all of the shareholders

14

Purpose of Financing

Increasing leverage improves returns

Provide a cushion in the instance that things go wrong

Capital structure must fit company's needs

– Working capital– Capex– Seasonality– Add-on acquisitions

Financing must be "doable" in current market

– Interest rate pricing– Bond market– Amortization schedule

Maximize Returns While Minimizing Risk

Optimize Financing Given Market Conditions and Company Situation

Private equity firms use the equity that they have raised from limited partners along with debt (collateralized by the companies they purchase) to buy portfolio companies.

15

100 equity

147 equity

Year 1 Year 4

100

147

0

50

100

150

Ente

rpris

e Va

lue

10 equity

90 debt

57 equity

90 debt

Year 1 Year 4

100

147

0

50

100

150

Ente

rpris

e Va

lue

13.7% IRR1.5x

78.6% IRR5.7x

100% Equity 90% Debt/10% Equity

3 Years 3 Years

Value of LeverageLeverage enhances equity returns.

• Debt enhances the rate of return on an equity investment

• However, debt also increases the risk to equity holders by increasing the volatility of returns and risking debt default

16

How Private Equity Firms Interact with Portfolio Companies

Value added resource to our portfolio companies.

Work with management to build a board of directors.

Jointly develop a strategic plan for achieving growth, including key resources.

Jointly establish metrics to measure performance against plan.

Analytic and investment expertise to evaluate major operating and investment decisions such as new capital investments, acquisitions or new market initiatives.

Regular communication focuses on financial and strategic metrics.

Managers seek our counsel regarding people and organizational issues.

We draw on appropriate external professional resources.

We provide opportunities for sharing of experiences across Berkshire portfolio companies.

Berkshire’s role in a portfolio company Berkshire’s interactions with a portfolio company

Firms have a range of approaches to working with portfolio companies, but often take an active role in supporting them.

17

Agenda

• How and why does private equity impact you?– Why is private equity important?– How does private equity work?

• How important is the industrial sector to private equity?

• What does private equity look for in industrial companies?

• What does a private equity firm look like?

18

The Industrial sector represents 13% of GDP & $3.9T of Gross Output

0

1,000

2,000

3,000

$4,000B

Segments

Power/utilities 356

Chemicals 331

Capital Equipment 314

Home building 429

GeneralManufacturing 547

Automotive 442

Energy 432

Transportation 243

Pulp/Paper 88Mining 51Pipelines 31

Aerospace 122

Building Products 228Metals 152Packaging 128

$3,894B

2003 Revenues ($B)

* Excludes truck and rail transportation** Includes: Wood and non-metallic mineral products, printing and support activities, other services (excluded Government)Source: BEA, Department of Commerce; Bain & Company

$19,733B

0

2,500

5,000

7,500

10,000

$12,500B

2003 Value Added $B (GDP)

Sectors

AgricoltureComputer/electronic productsTransp & wareh*Food/beverage, textile/apparel

Other**Arts/entert.

InformationConstruction

Wholesale tradeRetail Trade

Education/health care

Prof svcs

Industrial

Government

Finance

$11,004B

GDP(Value Added)

Industrial Sector(Gross Output)

19

Other

Other rubber product mfgShip building/repairing

Other engine equipmt mfgSurgical appliance/supplies mfg

Surgical/medical instrument mfg

Machine shops

Plastics plumbing fixtures/ all other plastics products

OtherMV body mfgHD truck mfg

Tire mfg

Motorvehiclepartsmfg

Auto/lighttruck mfg

OtherDrilling oil/gas wells

Supp. activitiesoil/gas ops

Oil/gasextraction

Petroleumrefineries

New farm housunits/add's/alt's

New multifamilyhousing structures,

nonfarm

Newresidentialadditions/alterations,

nonfarm

Newresidential

1-unitstructures,nonfarm

Water, sewage/other sys

Natu

ral g

asdi

strib

utio

nPo

wer g

ener

atio

n/su

pply

Other

Organicfiber mfg

Photo film/chem mfgMisc chemprod mfg

Petrochemmfg

Soap/otherdetergent

Paint/coatingmfg

Other basicinorganic

chem

Toiletprep mfg

Plasticsmaterial/resin mfg

Otherbasic

organicchem mfg

Agri.equipmtConstruct/

miningequipmt

Electricalequipmt

Indu

stria

leq

uipm

t

FlowControl

Rail

Truck

Other

Met

alwi

nd/

door

mfg

Woo

dwi

nd/

door

mfg

Fabrstruc

mtl mfg

Glas

sex

cept

glas

sco

nt

Sheetmetal

work mfgReady-

mixconcrete

mfg

Saw-mills

Othe

r

Alum-inummfg Otherforg/stamp

Ferrousmetalfound

Iron

/ste

el m

illsOt

her

Plas

bottl

e

Metal can, box,/other container mfg

Coated/laminatedpaper/packagingmaterials

Plas

tics

pack

agin

gm

ater

ials,

film

/she

etPa

perb

oard

con

tain

er m

fg

Othe

rMiss

ile/

spac

e ve

h.Ai

rcra

ft Mfg

Airc

raft

engi

ne/

parts

Othe

rPa

per/

pape

rboa

rd m

ills

Othe

rCo

al m

inin

g Pi

pelin

e tran

sp.

Gen. Mfg Auto-motive

Energy HomeBuilding

Power/Utilities

ChemicalsCapitalEquipment

ansp

orta

tion

Build

ing

prod

ucts

Met

als

Pack

agin

gAe

rosp

ace

Pulp

/Pap

erMin

ing

Pipe

lines

547 442 432 429 356 331 314 243 228 152

128

122

88 51 31

Total =$3,894B

0

20

40

60

80

100%

2003 Revenues ($B)

Note: Revenues/Gross output represent the market value of an industry's productionSource: BEA, Department of Commerce; Bain & Company

The Industrial sector is comprised of multiple sub-segments

20

0

20

40

60

80

100%

Value of LBO deals

00

OtherHealth Care

Finl SvcsMedia

Services

CP &Retail

Tech &Tel

IndustrialProducts

&Materials

$44B

01

OtherEnergy &Utilities

Health Care

Finl Svcs

Media

Services

CP &Retail

Tech &Tel

IndustrialProducts &Materials

$25B

02

OtherEnergy & Utilities

Health CareFinl Svcs

Media

Services

CP &Retail

Tech &Tel

IndustrialProducts

&Materials

$47B

03

Other

Energy &Utilities

Health Care

Finl Svcs

Media

Services

CP &Retail

Tech & Tel

IndustrialProducts &Materials

$91B

04

OtherEnergy &Utilities

Health Care

Finl Svcs

Media

Services

CP &Retail

Tech &Tel

IndustrialProducts

&Materials

$136B

05

OtherEnergy & Utilities

Health Care

Finl SvcsMedia

Services

CP &Retail

Tech &Tel

IndustrialProducts &Materials

$194B

36%71%

174%

20%

37%

21%

63%

36%

00-05CAGR

LBO deals by industry

Source: Bain & Company

21

While automotive and capital equipment were the most popular industrial LBOs from 1995-2002 …

Note: 61 LBOs did not have disclosed deal values; Other recent losers include Essex Crane Rental Corp and Profile Metals; Bain & Company

OtherJason IncAmerican Electric Auto Co Inc

Safelite Glass CorpSimpson Industries Inc

Knowles Electronics IncDelco Remy International Inc

MascoTech IncMark IV

Kumho TireTac-Trim

TRW

OtherMicron Custom ManufacturingAavid Thermal Technologies Inc

Details(Chase Capital)United Rentals Inc

Global Energy Equipment GroupWatkins-Johnson Co

P&H Material HandlingTidewater Compression Service

Juno Lighting IncAnthony Crane Rental LP

Nortek IncThermadyne Holdings Corp

Rexnord CorpTyco Intl-Pipe & Valve Op(2)

Amphenol CorpDresser Equipment Group

OtherUS Can CorpBWAY Corp

AppletonPapers Inc

HuntsmanPackaging

Corp

Tenn

eco-

Cont

aine

rboa

rd

Raytheon

Unite

dDe

fens

eNo

rthro

p Gr

umm

an-C

oml

Othe

rAr

nold

Indu

sNA

Van

Lines

Grea

t Lak

es

Dred

ge &

Doc

kAm

trol

CSX

Oth.

True

Tem

per

Neen

ahCo

rpCi

tatio

nCo

rpDa

yton

Supe

rior C

orp

Othe

rTr

emco

Inc

Atriu

m C

osOr

ius

Automotive Capital Equipment Paper,Packaging& Forest

Aero

spac

e&

Defe

nse

Dist

ribut

ion

Serv

ices

Min

ing/

met

als

Cons

truct

ion

and

build

ing

prod

ucts

$12.3B $11.9B $4.6B $2.4B $1.5

B$1

.1B

$0.6

B

Total =$35B

0

20

40

60

80

100%

Industrial deals with discloseddeal values > $50M (1995-2002)

LBO deals: 49 76 29 8 20 3523

22

0

20

40

60

80

100%

Aerospace &Defense

MTU Aero Engines

TransDigm Inc

Intelsat

Fiat Avio

Standard AeroOther

K&F Industries

DynCorp Intl

$13B

Automotive &Components

UIS: Auto Parts

Bombardier: Rec ProdtsProgress Rail Svcs

TRW: Auto Parts

Cooper-StandardAutomotive

Dana Corp's: Auto Grp

Stanadyne Corp

Advanced AccessoryEdscha

Other

Breed TechnologiesOxford AutomotiveDouglas Dynamics

$12B

DistributionSvcs

CSX Lines

Horizon Lines

Rexel SA

TDS Logistics

Other

Alpha Shirt CoBaker & Taylor

$8B

Paper,Packaging& Forest

AutobarGroup

ClondalkinGroup

BoiseCascade's

U.S.Timber-lands

Owens-Illinois:

containers

Landis Plastics

Other

KransonIndustries

DualesSystems

$6B

Mining &Metals

HorizonNatural

Resources

Rhodia:Phos-phates

Beth

lehe

mSt

eel

RAGAmericanCoal Hldg.

AutocamCorp.

RepublicEngr. Prdts

Other

Kia SteelBWAY

$6B

Maax

Formica

Ply-GemInd.

NortekHoldings

GeorgiaPac: Bldg.

Prodts

Ready MixedConcrete

Other

InfraSource

MW Mfrs.

N.ACnstrn

$6B

Capi

tal

Equi

pmen

tCul

li gan

I nt l '

Dre

sser

-Ran

dCo

A ea r

oCo r

p .

Other

BakerTanks

$3B

11 25 1713131017# LBO's

Total = $53B

Industrial deals with disclosed dealvalues > $50M (2003-1Q2005)

Cons

truc

tion

&Bu

ildin

gPr

dts

…since 2003, LBOs have been spread more equally across sectors

Source: Buyouts Magazine; Private Equity Analyst; Bain & Company

23

Agenda

• How and why does private equity impact you?– Why is private equity important?– How does private equity work?

• How important is the industrial sector to private equity?

• What does private equity look for in industrial companies?

• What does a private equity firm look like?

24

Investment themes

Under-managedfull potential

• Drive full potential from under-managed / under-invested players (often carve-outs)

Profitable niches

• Identify small, profitable players with highly defensible market positions

Cyclical plays

• Time entry and exit to shifts in industry cycle

Build-ups

• Drive consolidation where scale creates differential economics

Turnarounds

• Turnaround ailing player in fundamentally stable market

Sector evolution

• Identify businesses likely to benefit from

– Product/ technology substitution

– New market segments

– Regulatory changes

– Distribution shifts

25

Investment themes

Under-managedfull potential

• Drive full potential from under-managed / under-invested players (often carve-outs)

Profitable niches

• Identify small, profitable players with highly defensible market positions

Cyclical plays

• Time entry and exit to shifts in industry cycle

Build-ups

• Drive consolidation where scale creates differential economics

Turnarounds

• Turnaround ailing player in fundamentally stable market

Sector evolution

• Identify businesses likely to benefit from

– Product/ technology substitution

– New market segments

– Regulatory changes

– Distribution shifts

28

Key success factors- Build-ups

Build-ups

• Tangible cost-driven scale economies

• High-quality standalone platform

• First mover advantage

• Add-on acquisitions at the right price

• Management talent, depth, and bandwidth

29

Investment themes

Under-managedfull potential

• Drive full potential from under-managed / under-invested players (often carve-outs)

Profitable niches

• Identify small, profitable players with highly defensible market positions

Cyclical plays

• Time entry and exit to shifts in industry cycle

Build-ups

• Drive consolidation where scale creates differential economics

Turnarounds

• Turnaround ailing player in fundamentally stable market

Sector evolution

• Identify businesses likely to benefit from

– Product/ technology substitution

– New market segments

– Regulatory changes

– Distribution shifts

30

Due to its greater accumulated experience, PackCo should realize a cost advantage vs. competitors

B

PackCo

A

Cost $/M

Accumulated Experience

PackCo Experience Curve

Slope=85%

Note: Chart is in Natural Log (LN) scale

Source: Bain & Company

0.4B 0.5T$0

$88

$343

• D

• C

•E~$40MMopportunity

33

Key Success Factors – Full Potential

Full Potential

• Define “full potential” using outside-in, fact-based approach

• 100 day plan ready for day one of ownership

• Focused vision; aggressive management of assets

• Invest to support and grow the business

• Challenge management and organization

34

Investment themes

Under-managedfull potential

• Drive full potential from under-managed / under-invested players (often carve-outs)

Profitable niches

• Identify small, profitable players with highly defensible market positions

Cyclical plays

• Time entry and exit to shifts in industry cycle

Build-ups

• Drive consolidation where scale creates differential economics

Turnarounds

• Turnaround ailing player in fundamentally stable market

Sector evolution

• Identify businesses likely to benefit from

– Product/ technology substitution

– New market segments

– Regulatory changes

– Distribution shifts

36

Hexcel

37

Key Success Factors – Cyclical Plays

Cyclical Plays

• Understand drivers of cyclicality

• Build robust forecast of the cycle

• Understand competitor, customer and supplier behavior through the cycle

38

Investment themes

Under-managedfull potential

• Drive full potential from under-managed / under-invested players (often carve-outs)

Profitable niches

• Identify small, profitable players with highly defensible market positions

Cyclical plays

• Time entry and exit to shifts in industry cycle

Build-ups

• Drive consolidation where scale creates differential economics

Turnarounds

• Turnaround ailing player in fundamentally stable market

Sector evolution

• Identify businesses likely to benefit from

– Product/ technology substitution

– New market segments

– Regulatory changes

– Distribution shifts

39

Insights into industry changes can lead to successful investment decisions

Sector evolution

Product penetration

New product sales

Likely success

Potential disaster

40

Advanced Drainage Systems

41

Key Success Factors – Sector Evolution

Cyclical Plays

• Understand key trends affecting industry

• Realistic forecasting and scenario modeling

• Question straight-line projections of growth

• Know penetration curve and inflection point

42

Investment themes

Under-managedfull potential

• Drive full potential from under-managed / under-invested players (often carve-outs)

Profitable niches

• Identify small, profitable players with highly defensible market positions

Cyclical plays

• Time entry and exit to shifts in industry cycle

Build-ups

• Drive consolidation where scale creates differential economics

Turnarounds

• Turnaround ailing player in fundamentally stable market

Sector evolution

• Identify businesses likely to benefit from

– Product/ technology substitution

– New market segments

– Regulatory changes

– Distribution shifts

43

Ensuring there are defensible barriers to entry is critical in a niche play

ProprietaryAssets

High Switching

Cost

Heavy Prior Investment

FavorableRegulation

BestScale & Cost

Position

DefensibleNiche

• Patents• Proprietary

technology or process

• Long-term customer contracts

• No product substitutes

• Strong brand equity• Substantial capital

investments

• Licensing requirements

• National security/ environmental regulations

• Steep learning curve

• Proprietary access to low-cost inputs

Niche

44Note: Dashed lines indicate estimatesSource: Freedonia; Plastics World; Paine Webber; Company Financials; Bain & Company

Plastic Co had a highly profitable niche position in motor oil containers

PlasticCo

Motor Oil

Plastic CoTotalHDPE

Competitor 1

49%

35%

17%

0

10

20

30

40

50%

EBITDA MarginComparison(% of Sales)

Other

IHGFEDC

Plastic Co

B

A

Plastic Co

A

Other

A

Plas

tic C

o

HIC PersonalCare

Beveragesand food

Motoroil

1.3B 0.4B 1.6B 0.3B

Total = 3.5Blbs

0

20

40

60

80

100%

North American Blow-moldedHDPE Market - Total Pounds (%)

Other

E

F

Other

A

B

Plastic Co

Niche

46

Key Success Factors – Niche

Cyclical Plays

• Differentiate defensible niche vs. “bubbles”

• Identify switching costs for customers

• Evaluate adjacent niche businesses

• Know upside and exit opportunities

• Cost and cash management across value chain

47

Investment themes

Under-managedfull potential

• Drive full potential from under-managed / under-invested players (often carve-outs)

Profitable niches

• Identify small, profitable players with highly defensible market positions

Cyclical plays

• Time entry and exit to shifts in industry cycle

Build-ups

• Drive consolidation where scale creates differential economics

Turnarounds

• Turnaround ailing player in fundamentally stable market

Sector evolution

• Identify businesses likely to benefit from

– Product/ technology substitution

– New market segments

– Regulatory changes

– Distribution shifts

48

ElectroMotive Diesel

49

Key Success Factors – Turnarounds

Cyclical Plays

• Focus on core strategic platforms

• Act quickly to get control

• Exit unprofitable, non-core business

• Look to balance sheet for value

• Seek proven operators with turnaround experience

• Align management and staff incentives

50

Agenda

• How and why does private equity impact you?– Why is private equity important?– How does private equity work?

• How important is the industrial sector to private equity?

• What does private equity look for in industrial companies?

• What does a private equity firm look like?

51

Berkshire’s investments have been concentrated in six areas in both the U.S. and overseas.

Percent of invested capitalas of 12.31.05 Transportation: 12%

Communications: 10%

Business services: 19%

Other: 1%

Industrial manufacturing: 18%

Retailing: 25%

Consumer products: 15%

Berkshire Partners Overview

52

31%

21%

15%

10%4%9%

10%

Berkshire Partners Overview

Fund VI Investor Base - Representative Investors

Berkshire has experienced tremendous continuity in its investor base. Berkshire’s team invests significantly alongside our investors in each transaction we complete.

University Endowments:Dartmouth Harvard M.I.T.Univ. of MichiganUniv. of PennsylvaniaPrincetonStanford The CommonFundWilliams Yale

Special Relationships:Berkshire CEOs, etc.Other entrepreneurs

Foundations:Carnegie FoundationFord FoundationHewlett FoundationHoward Hughes Medical InstituteInvestment Fund for FoundationsRobert Wood Johnson FoundationMetropolitan Museum of ArtRockefeller Foundation

Insurance:AIG Global New York Life Northwestern Mutual Life

Pensions:Calpers/Grove StreetEDSIBM L.A. County EmployeesLockheed Martin Massachusetts PRIMState of Michigan Employees

Financial Institutions: Adams Street PartnersBank of AmericaGE CapitalGoldman SachsHarbourVest Partners

Non U.S. Institutions:Allianz Government of SingaporeOntario Municipal EmployeesWellcome Trust

53

Berkshire consistently exits its investments with management’s full support.

Full realizationsas of 12.31.05

Recapitalizations /sales to management: 10

Initial public offerings: 11

Sales to strategic buyers: 26

Sales to financial buyers: 8

Berkshire Partners Types of Exit

54

Berkshire Partners Portfolio Companies

55

Not Touched byPrivate Equity

30.0%

Touched by Private Equity70.0%