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Musings: Fall 2007

Ho hum! Another World Series. Getting a bit routine. Beat the Yankees to win the American League East. Beat the Angels to win the Division Series. Beat Cleveland to win the American League Pennant. Beat Colorado to win the World Series. Second time in 89 years (a detail as the first time was three years ago). Red Sox Nation is, well, delirious. And that includes us.

There are those who have suggested that some of us might find the warming climate a pleasant change rather than a horror of floods, hurricanes, tornadoes and rising oceans. An elderly Vermont farmer we know who keeps track of such things noted recently that the first killing frost of the fall season was the latest ever last year - October 7. But this year it was - October 26. Yes, a warm extended autumn with all of its glorious colors and the soft light of a waning sun has graced New England with its pleasures. Unfortunately, we haven't had much time here to notice much of these benefits of climate change (and increasingly we are mindful of the opportunities and challenges such change presents). So far in 2007 we have invested around $500 million in four new acquisitions as well as amending or refinancing the debt in our existing portfolio to take advantage of the terrific credit markets - while they lasted -- and doing the occasional add-on acquisition. And while since the middle of the year, the non-investment grade credit markets have been severely disrupted and with them the acquisition market, we have been able to successfully pursue transactions in which we have had an interest.

We kicked off 2007 with the acquisition of Masterplan. This company services diagnostic and biomed equipment supplied by a range of vendors to health care centers of all kinds. Over the last three years, its revenues have grown at a rate of 27% per year as it continuously has improved its capabilities. Masterplan is the first of what we hope will be many companies in our portfolio providing services to the dynamic and rapidly evolving health care market.

In the spring we were fortunate to add HMT to the portfolio. This Texas-based company is the leading provider of a variety of products and services to large diameter above-ground storage tanks which primarily store crude oil and refined products. As the installed base of tanks ages, and domestic demand for petroleum products continues to grow, there is increasing need for safe, well-executed and highly efficient services within the petroleum and petrochemical storage markets. HMT is a solidly managed player, taking advantage of this opportunity for growth both organically and through selective acquisitions.

In early summer we made a direct minority investment in Swiss-based Masai Group International (MBT). MBT designs and markets athletic, casual and professional shoes that provide orthopedic and fitness benefits. Our two partners, both highly accomplished Austrian entrepreneurs and sportsmen, and management have global ambition for the product line, already partially fulfilled. Developing and growing young consumer product companies has been a recurring theme in our portfolio for some years, and we hope to contribute to MBT's continued growth by supporting the development of its organization and execution of strategic initiatives.

Finally, this fall (as the Sox were doing their thing), along with Greenbriar Equity Group, we completed the acquisition of AmSafe, the leading producer of passenger and crew restraints (seat belts) for the aviation industry. To complete the AmSafe acquisition in the midst of the credit disruption, we needed some patience to allow a re-pricing of the business to take place; some great support from some of our longstanding limited partners, who provided subordinated debt for the transaction; and some creative work in developing a senior debt package, which we initially underwrote ourselves and then placed with non-bank lenders. AmSafe is another example of our continuing interest in supplying the aerospace industry.

During 2006 and 2007 we decided to reduce our investment in a number of portfolio companies that we had been blessed to own for some years. This effort coincided with the development of our seventh fund at $3.1 billion and the commencement of its investment period. In addition, during this period we decided to strengthen the capabilities of our staff in our private equity business through the addition of a general counsel (Shar Heslam), with the creation of a capital markets effort to focus on financing (Matt Janchar), and by adding a senior staff member full time to our deal generation activity (Raleigh Shoemaker). Our Portfolio Support Group has significantly assisted the management teams of several of our companies this past year. Two new senior associates, John Dickie and Tom Kuo, joined us this fall from business school, though each already possessed significant relevant investment experience. All have meaningfully improved our ability to source, evaluate, process, finance, and oversee new acquisitions. Portfolio company support and staff development are ongoing features of our Firm's evolution and have contributed in many important ways to our continued progress during 2007.

While we expect continued choppiness in credit markets to persist for some time, we think that for transactions south of $1 billion in value, markets remain viable, though on terms that look more like 2004 and 2005 than early 2007. We believe that our strong lending relationships and history of working constructively to solve portfolio issues as they have arisen will benefit our ability to finance transactions we are enthusiastic to pursue.

Berkshire's commitment to our mission and its execution through investment in and support for growing mid-sized businesses and the good results to come from it remain at the center of what we seek to do every day and plan to continue to do. We are very grateful for your interest in and long support for all of our activities. If you can stand the thought of being in a city that now has two World Series rings, we would be very happy to welcome you and promise no (or little) mention of it. And, we definitely won't bring up the subject of football...

BERKSHIRE PARTNERS

 

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