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Corsair Capital Management, LLC

350 Madison Avenue, 9th Floor


New York, NY 10017

January 21, 2009

Dear Limited Partner:

For the fourth quarter ended December 31, 2009, Corsair Capital was up an estimated 3.2%* net,
after all fees and expenses, bringing our 2009 performance to 22.4%. Corsair Select was up an
estimated 4.1%* net, after all fees and expenses, bringing our 2009 performance to 33.4%. Since
inception in January 1991, Corsair Capital’s compounded net annual return is 15.4%. Since
inception in January 2004, Corsair Select’s compounded net annual return is 14.1%.

Corsair Capital (net) S&P 500 Russell 2000


4Q09 return 3.2% 6.0% 3.9%
2009 return 22.4% 26.5% 27.2%
Annualized since inception (1991) 15.4% 8.8% 10.0%
Total return since inception (1991) 1409% 400% 517%

Corsair Select (net) S&P 500 Russell 2000


4Q09 return 4.1% 6.0% 3.9%
2009 return 33.4% 26.5% 27.2%
Annualized since inception (2004) 14.1% 2.1% 3.3%
Total return since inception (2004) 121.0% 13.2% 21.4%

Equity markets finished 2009 on a positive note, rounding out a strong year. However, the
difficult math of compounding means that most investors are still well below the levels of 2007.
For example, the S&P 500 will need to advance another 25% to recover 2008’s losses. Corsair
had a solid year, particularly given conservative positioning. The funds were down much less
than the markets in 2008, and participated in 2009’s recovery. As a result, Corsair Capital and
Corsair Select have made up their losses and are now up about 4-5% since the start of 2008.

Taking a longer view as the decade comes to a close, it has been a rough ten years for the U.S.
economy and stock market investors. While real GDP grew by almost 25%, private sector
employment declined by about 1%. Median incomes stagnated and consumers made up the
difference by overleveraging themselves – a process that has recently started to unwind. The
annualized return of the S&P 500 including dividends was actually negative (-0.9%) over the
decade, or -9.1% cumulatively. The Russell 2000 fared somewhat better, increasing 3.5%
annually, or 42% cumulatively. Corsair Capital is now beginning its 20th year, and while the last
ten years lacked the market tailwinds that the previous decade provided, our relative performance

This letter is not a research report or recommendation to buy or sell the securities mentioned herein. Corsair Capital Management and its affiliates
may, at any time, buy or sell any of the securities mentioned in this letter and may change its long or short position at any time without providing any
notification of such changes.
improved and has been able to offset most of this market drag. As a result, Corsair Capital has
returned 12.6% annually over the past decade, or 228% cumulatively. We are proud of this
result, appreciative of your support, and working hard to continue to generate strong returns in
the future.

A cyclical economic recovery is taking hold, and capital markets continue to improve.
Corporations have access to capital at relatively low rates through the investment grade or high
yield bond markets. Many companies are taking advantage of an opportunity to “term-out” debt
to lock in low rates or de-risk their balance sheets from near term maturities. While the high
yield market issued a near record amount of debt, 70% of this was related to tenders, which
involve companies replacing existing bonds with new ones. The return of access to capital, and a
view that the economy is on the mend is causing corporate M&A to return. Warren Buffett
described his purchase of Burlington North Railroad as, “an all-in wager on the economic future
of the United States.” We suspect it also has something to do with succession planning and the
difficulty of achieving outsized returns when managing a $150 billion conglomerate, but the
point remains.

While federal government stimulus has been a key driver of growth, a deceleration in mid 2010
could transition it from a tailwind to a headwind. Meanwhile, state and local governments have
daunting financial challenges, some of which are still worsening. A recent report by the
California legislature’s nonpartisian analyst estimated that the state’s deficit would widen from
$6 billion in fiscal 2010 (July-June), to $14 billion in fiscal 2011. The cumulative deficit over
the next six years is estimated at $77 billion. For years, states gorged on rising tax revenues and
increased spending at a rapid clip. In many cases, “real” spending grew even faster than
revenues by paying employees and constituents with IOUs, such as generous retirement and
pension benefits. Fights are brewing as “high cost” states weigh the unattractive options of
cutting benefits, raising taxes, defaulting on debt, and losing residents to other states with better
demographics and/or fiscal management.

One of the strikingly positive features of 2009 was the impressive cost cutting by major
corporations. While down from peak levels, earnings outside of the financial sector have been
surprisingly resilient. Profits relative to GDP is one of the most reliably mean-reverting
relationships of which we are aware, and yet in the largest economic downturn since the Great
Depression profits troughed at above average levels.

There are several potential explanations for this, but our guess is that it mostly relates to a
surplus of global labor. The relentless growth in productivity during the postwar era has made
the U.S. a rich country, and for much of this period the gains were widely distributed. However,
in recent years, a large segment of the population has stopped sharing in these gains. The highly
skilled who can produce a scarce good or service do extremely well. Shareholders of
corporations that have cut costs by off-shoring or raised returns by adopting a “platform
company” model (e.g. Apple, Wal-Mart, Marriott) do extremely well. However, many middle
class, low/moderate skill workers are struggling. Because this isn’t Lake Wobegon, and we can’t
all be above average, this problem cannot be easily fixed.

This letter is not a research report or recommendation to buy or sell the securities mentioned herein. Corsair Capital Management and its affiliates
may, at any time, buy or sell any of the securities mentioned in this letter and may change its long or short position at any time without providing any
notification of such changes.
With official unemployment in the U.S. at approximately 10% and the broader measure of U6
unemployment at over 17%, we are dangerously under-employed. However, the hundreds of
millions of individuals coming onto the global market from the developing world aren’t terribly
interested in the problems of the U.S. worker. China, the world’s manufacturing workshop,
responded to the global downturn with massive fixed asset investment, much of which will only
increase its manufacturing export capacity. Europe has it even worse, as the rising Euro further
erodes its competitiveness. There is huge discontent from the electorate, and “throw the bums
out” is a growing theme (who would have dreamed Ted Kennedy’s seat would be taken by a
Republican in deep blue Massachusetts?). In addition to a step-up in attacking Wall Street, we
suspect this means that the odds of protectionism are rising as the urge to “do something”
intensifies.

Thus far, trade action has been limited. While cases in the pipeline are growing, actual rulings
have been mostly limited to dumping duties on a few steel products. However, we wonder if
“Google-gate” could be a tipping point. Google is one of the world’s most respected companies,
and a beacon for the new economy. If Google is labeling Chinese government policies as “evil”,
will this rhetoric give politicians the cover they need to pursue tougher action? While there are
certain U.S. manufacturing companies that would benefit, this would be a generally negative
development for equity markets and the economy.

We made several new investments during the quarter. CapitalSource (“CSE”) is a specialty
finance company that is transitioning from a REIT with a liquidity crisis to a well funded bank
that is most of the way through its credit provisions. We acquired our position after the company
announced the sale of its non-core nursing home assets, thus taking liquidity risk off the table.
At approximately 0.5x tangible book, with credit loss provisions that are more conservative than
comparable regional banks trading near book value, we believe the investment has excellent
upside with limited risk. The stock ended the year at $3.97.

Comcast (“CMCSK”) is the largest cable provider in the U.S., and trades at a discount to other
companies in the (already cheap) sector because of concerns about capital allocation and
shareholder fatigue. We invested in the company when the stock traded down based on rumors
of an NBC Universal acquisition. Our analysis was that the deal was financially attractive,
strategically reasonable, and would clear the overhang, as CMCSK achieved sufficient scale in
“content” to be comfortable with its long term strategic position. We acquired the position at a
little over 5x EBITDA and a 13% free cash flow yield. The stock ended the year at $16.01. We
also made an investment in KAR Auction Services (“KAR”), which we discuss in the Appendix.

As previously described, Corsair performed well during the year despite being conservatively
invested. Stock selection added significant value, offsetting the headwind from lower market
exposure.

Globe Specialty Metals (“GSM”) was a large positive contributor, as the company completed its
U.S. listing through an IPO and commodities companies traded up. GSM has demonstrated a
stronger business model than most metals companies by maintaining profitability through the
bottom of the cycle during the first half of 2009. With end market demand recovering, and
supply still constrained, GSM now has the opportunity to demonstrate its upside exposure.

This letter is not a research report or recommendation to buy or sell the securities mentioned herein. Corsair Capital Management and its affiliates
may, at any time, buy or sell any of the securities mentioned in this letter and may change its long or short position at any time without providing any
notification of such changes.
Without price increases, we believe the company has approximately $0.80/shr of EPS based on
more normal operating rates. If silicon prices rise and the company executes on a couple of its
potential expansion plans, the company has earnings power of $2/share or more. The stock
ended the year at $9.40 and has $2.50/share of net cash from recent asset sales.

Sherritt (“S CN”) was a large positive contributor during the year. We invested in Sherritt, a
name we have owned in the past, at a discount to the value of its non-cyclical assets, and
received a “free look” at several billion dollars worth of commodity businesses. Because Sherritt
consolidates partner debt on its financial statements that is non-recourse to Sherritt, it looked
financially leveraged when in actuality it had little net debt. Sherritt reported improving results
through the year, as rising commodity prices lifted the cyclical segments of its business from
trough earnings. The company also helped clarify its balance sheet to investors. Sherritt has a
book value per share of C$11.82, and closed the year at C$6.57.

Maiden Holdings (“MHLD”), a specialty reinsurance company that we have described in the
past, more than doubled during the year as it recovered from its depressed late 2008 valuation.
The company’s book value per share also grew from $7 to almost $9.50, although slow
deployment of the company’s excess cash and falling interest rates are limiting earnings growth.
The company is well positioned to take advantage opportunities in its industry, although the
recovery in financial markets has taken the pressure off of weak players. We estimate 2010 EPS
of approximately $1.30, and the stock ended the year at $7.32.

Schweitzer-Mauduit (“SWM”) was up substantially during the year. SWM is a producer of


specialty papers for the tobacco industry, with an 80% market share in the U.S. and
approximately 30% share in Europe. The investment is interesting because the company is in the
process of completing a major cost restructuring, as well as beginning a new multi-year product
cycle. The company’s proprietary low ignition paper (“LIP”) technology will reduce the fire
hazard of cigarettes, and is being gradually mandated in the developed world over the next
several years. The company is also growing in emerging markets with its reconstituted tobacco
leaf (“RTL”) tolling business. The combination of these factors is causing a dramatic increase in
earnings. We currently estimate 2009 EPS of $4/share growing to $10-15/share by 2013. The
stock ended the year at $70.35.

Lyondell is a global chemicals company that is in bankruptcy. Corsair acquired the senior debt
in the low 40s with the view that there was limited downside and attractive upside to “own the
equity” of a restructured company. The company has reported improving earnings results, made
good progress on its reorganization plan to emerge from bankruptcy, and has at least one
interested bidder waiting in the wings. The debt ended the year at 74.

Kapstone Paper & Packaging (“KS”) approximately doubled during our holding period. KS was
put together in 2006 when a special purpose acquisition corp. (“SPAC”) acquired certain assets
of International Paper. We have followed the company for several years and became interested
when two catalysts converged this summer. First, the company was benefiting from “black
liquor” tax credits of over $150 million in 2009, which fixed the company’s overleveraged
balance sheet. Second, in August, 37 million warrants dating from the original IPO expired. The
expiration (and partial conversion) of these warrants removed a significant overhang in our view.

This letter is not a research report or recommendation to buy or sell the securities mentioned herein. Corsair Capital Management and its affiliates
may, at any time, buy or sell any of the securities mentioned in this letter and may change its long or short position at any time without providing any
notification of such changes.
We have estimated mid-cycle EPS at a little over $1/share, but believe this may be conservative
as high cost capacity continues to leave the industry. The stock ended the year at $9.83.

MDS Inc. (“MDZ”), a life sciences conglomerate, traded up after the company made significant
progress in its review of strategic alternatives. The company agreed to sell its Analytical
Technologies division for $650 million, announced the intention to sell its CRO business, and
said it would return approximately 2/3 of the proceeds to shareholders via an extraordinary share
repurchase. Assuming that the tender and sale of the CRO business go as planned, investors will
own a pure play investment in the remaining division, Nordion. At current prices, investors will
own the visible part of Nordion at a “fair price” and have significant upside optionality
depending on how the company’s medical isotopes business turns out. We think the range of
reasonable outcomes is between $7-13/share. The stock closed the year at $7.65.

We continue to be optimistic about the opportunity set in front of us, and look forward to
markets that are neither going straight up nor straight down. As we have described in recent
letters, the tumultuous activity of the last couple years is resulting in an increase in interesting
corporate strategic activity – particularly in post reorganization equities.

Our Annual Presentation is on March 2nd, and we hope to see many of you. You should have
received a save the date with the details, but feel free to reach out if you did not or if you have
any questions. We hope you have a healthy, happy and prosperous 2010.

The five largest positions in Corsair Select are Globe Specialty Metals, Lyondell bank debt,
Maiden Holdings, MDS Inc., and Schweitzer Mauduit.

Thank you for your continued support and confidence. The attached Appendix is a write-up of a
recent investment. Please feel free to call us with any questions you may have at (212)389-8240.

Sincerely,

Jay Petschek Steven Major

* The funds’ returns are based on a typical investor in Corsair Capital or Corsair Select since inception. For Corsair Capital
100, Corsair Investors, or Corsair Select 100 returns, please refer to your capital statement.

This letter is not a research report or recommendation to buy or sell the securities mentioned herein. Corsair Capital Management and its affiliates
may, at any time, buy or sell any of the securities mentioned in this letter and may change its long or short position at any time without providing any
notification of such changes.
Appendix – KAR Auction Services (“KAR” – $14)

KAR is one of the largest auto auction companies in the world. Its ADESA segment is the #2
player in the North American “whole car” auction market, where it serves as an intermediary to
match used car supply and demand between auto dealers and fleet managers. Its Insurance Auto
Auctions (“IAAI”) segment is the #2 player in the North American salvage auto auction market.
IAAI matches sellers of heavily damaged cars (often insurance companies) with buyers who
typically use the parts for scrap. Both ADESA and IAAI conduct auctions simultaneously at
physical locations and over the internet.

The investment is interesting because KAR has an attractive business model and over the next
couple of years will expand margins and further de-lever its balance sheet. We think high single
digit EBITDA growth will grow EPS by 15-20% a year while reducing debt/EBITDA from 4.5x
to near 2.5x by year end 2011. This will be achieved through the impact of an improving
economy, moderate price increases and services up-sell, and cost cutting. Because we made the
investment at a 20-50% discount to similar businesses, we should also benefit from potential
multiple expansion.

Corsair was involved with ADESA in its previous life as a spin-off from ALLETE (“ALE”). In
late 2006, ADESA was acquired in a leveraged buy-out and subsequently merged with IAAI to
form KAR. After integrating the companies, the sponsors took it public to de-leverage the
balance sheet. SEC delays pushed the IPO to December, and the company ended up going on
the road at an inopportune time. While the initial price range was indicated at $15-17/share, the
deal priced at $12 and Corsair acquired its position at a discount to this on the open market. An
attractive dynamic of the IPO is that the financial sponsors didn’t sell stock, as all proceeds went
to de-lever the balance sheet. Interestingly, one of the sponsors added to its position on the open
market in the first several days of trading.

The largest component of earnings for ADESA and IAAI comes from transaction fees charged to
buyers and sellers. Because this fee is a low percentage of the total transaction value, KAR adds
substantial economic value relative to its “cut”. Additionally, both the whole car and salvage
segments operate in consolidated markets with rational competitors. This should enable KAR to
have strong pricing power over time. Barriers to enter this industry are high as buyers and sellers
are sticky and both tend to gravitate to where the volume is. In addition, auction demand has
proven to be quite stable and has shown only limited correlation to new car sales. When
considering the quality of the business, it is notable that EBITDA will actually be up in 2009 vs.
2008. KAR will also benefit from the completion of its cost cutting and integration programs
over the next couple of years. Consolidation of vendors, technology upgrades, and process
standardization should yield total margin improvement of 200-300 basis points.

By 2012, KAR should be earning more than $1.60 of adjusted EPS and almost $2/share of free
cash flow. We believe that as the public market begins to understand the stability and the
favorable competitive dynamics of this business, KAR’s earnings multiple can expand. Auto
auction businesses tend to trade at around 10x EBITDA in private market transactions, and there
are similar public analogs that trade at or above 10x. If KAR gets a similar multiple over the
next couple of years, we would have a stock in the high $20s.

This letter is not a research report or recommendation to buy or sell the securities mentioned herein. Corsair Capital Management and its affiliates
may, at any time, buy or sell any of the securities mentioned in this letter and may change its long or short position at any time without providing any
notification of such changes.