Financial Services: An Industry in Flux Creates Opportunities

Despite the turmoil within the financial sector during the last several years, General Atlantic continues to view the financial services industry as one of our core areas of investment activity. We believe that dramatic, ongoing changes in the industry will continue to provide outstanding investment opportunities for investors who are able to look beyond the current uncertainty in the marketplace, identify pockets of growth and build upon this dynamic industry landscape. With the exception of China, where the regulatory regime makes investing in financial services more challenging, GA has made investments in this vertical in all of the other geographies in which we are active within the last several years, and we expect that we will continue to be active in these same regions in the years to come.

The epic changes within the financial sector have given rise to a number of significant areas of growth. And as new regulatory guidelines are taking shape across the globe, technology continues to evolve and the market becomes more informed, several sector themes are emerging:

• A significant swing back to traditional banking-as new and untested financial models meet a nervous and skeptical customer marketplace, more and more people are looking toward more tried and true banking, with solid and stable capital foundations, a focus on customer service, and transparent transactions.

• A dislocation among participants as markets continue to shift-as the more successful new models work into the foreground, assistance and administration of transaction activity is needed to help clients make informed decisions. More specialized players with serve increasingly sophisticated customers.

• The need for transparency in the over-the-counter (OTC) markets-financial regulatory changes have yet to take full form; however, the need for more visibility in the OTC trade market is in high demand as clients look to reduce risk.

Based on these three themes, GA has made three new investments in financial services businesses in 2010:

First Republic Bank (co-lead equity sponsor of the management buyout from Bank of America) - A San Francisco-based private bank and wealth management firm with a focus on high net worth customers in a few select geographies with highly attractive demographics (San Francisco Bay Area, Los Angeles, New York City and Boston). FRB has a strong record of asset and deposit growth and produced a very strong credit history with losses far below those of other comparable banks. At a time when the majority of the banking industry is recovering from losses incurred due to aggressive lending practices and facing a period of significant regulatory uncertainty, we believe that First Republic's business model, which is predicated on relationship lending, traditional community banking, and providing outstanding customer service, should be able to grow its share of the most attractive customers, which should result in attractive returns on capital and attractive credit quality.

Pierpont Securities (start-up financing) - An institutional fixed income broker dealer focused on the US Treasury market founded in 2009 by a strong management team with over 25 years of industry experience. Pierpont facilitates clients' trading activity on an agency basis or by using its balance sheet as facilitation capital. The market opportunity for Pierpont is based on a combination of record government issuances, too few dealers and ongoing talent migration to independent platforms.

Markit (substantial minority equity investment) - A leading global financial information services company that provides independent data, valuations and trade processing across asset classes. As a financial information services industry leader, Markit is well-positioned to deliver the independent, high quality products and services that market participants need to help increase price transparency and liquidity. Additionally, we expect Markit to be a key participant in the transition of OTC markets to centrally cleared and traded, an area of focus for regulators after the financial crisis. We believe Markit will play a leading role in the provision of post-trade data and services.

In addition to these three investments, we continue to search for additional investment opportunities based on the several compelling macro themes including:

• Significant need for credit in developing markets - robust demand for credit and related financial services in emerging economies driven by increasing wealth/consumption and customer sophistication. Opportunities include both primary providers of credit (banks and specialty lenders) and derivative plays around credit infrastructure.

• Continued credit shortage in developed markets - lack of credit for borrowers with anything but highest credit scores, resulting in entire segments of the population without access to capital/credit. New models for delivering credit, improved credit scoring/analytics and the re-emergence of older lending/origination models are among a handful of potential opportunities.

• Need/demand for advisory services - with the tremendous destruction of wealth that has resulted from the ongoing global economic turmoil and which has had deleterious results for individual and institutional investors alike, investors are looking for different and better sources of financial advice. On the institutional side, investment consultants will see increased demand, but will have to prove that they can offer improved investment performance to keep mandates. Individual investors, whether previously self-directed or reliant on a broker for guidance, are demanding improved financial alternatives for financial advice.

While there is tremendous uncertainty given all of the change occurring within the financial services industry globally, such periods of transition should provide outstanding opportunities for companies to grow. The key will be access to capital, knowledge and the resources to gain market share and build market leadership over time. We are excited about the prospects ahead and look forward to partnering with outstanding growth companies in this sector.

If you would like further information on GA's activities in the financial services sector, please contact your GA team.