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Fall 2009 Private Capital Survey Findings
Fall 2009 Private Capital Survey Findings
Fall 2009 Private Capital Survey Findings
Fall 2009 Private Capital Survey Findings
Fall 2009 Private Capital Survey Findings
Fall 2009 Private Capital Survey Findings
Fall 2009 Private Capital Survey Findings
Fall 2009 Private Capital Survey Findings
Fall 2009 Private Capital Survey Findings
Fall 2009 Private Capital Survey Findings
Fall 2009 Private Capital Survey Findings
Fall 2009 Private Capital Survey Findings
Fall 2009 Private Capital Survey Findings
Fall 2009 Private Capital Survey Findings
Fall 2009 Private Capital Survey Findings
Fall 2009 Private Capital Survey Findings
Fall 2009 Private Capital Survey Findings
Fall 2009 Private Capital Survey Findings
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Fall 2009 Private Capital Survey Findings

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The Pepperdine Private Capital Markets Project previews key finding from its forthcoming 126-page report detailing the 2010 outlook for private capital providers and privately-held businesses.

The Pepperdine Private Capital Markets Project previews key finding from its forthcoming 126-page report detailing the 2010 outlook for private capital providers and privately-held businesses.

Published in: Economy & Finance, Business
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  • 1. Fall 2009 Survey FindingsJanuary 27, 2010<br />John K. Paglia, Senior Researcher,<br />Denney Academic Chair, <br />and Associate Professor of Finance<br />
  • 2. Private Capital Markets Survey <br />Web-based survey that included banks, asset based lenders, mezzanine funds, private equity, venture capital, and privately-held companies<br />Typical survey asked about firm profile, credit box, historical returns, expected returns, view of next 12 months<br />Capital providers were surveyed in October and November 2009<br />Over 700 responses<br />
  • 3.
  • 4. Banks (Senior Lenders) <br />Tough Credit Environment<br />Despite fewer applications, the time to process loans has increased<br />82% report reductions in credit quality of borrowers<br />45% report smaller loan sizes<br />64% report reductions in cash flow multiples<br />45% report declines in standard advance rates on collateral<br />Industry Challenges Continue<br />Increases in delinquency rates (nearly half report an increase)<br />Increases in charge-off rates (nearly half report an increase)<br />80% report the number of loans being made by competitor banks declined<br />
  • 5. Banks (Continued)<br />Motivations for Loans<br />Refinancing at 40.2% (44% previously)<br />Acquisitions at 17.1% (7% previously)<br />Growth at 9.8% (12% previously)<br />Important Factors when Lending<br />Collateral at 14.8% (7% previously)<br />Liquidity (14.1%)<br />Debt to cash flow (12.2%)<br />Fixed charge coverage (12.1%)<br />
  • 6. Asset Based Lenders <br />Restrictive Credit Environment<br />82% report increases in loan applications<br />73% report lower percentage of borrowers approved for credit<br />Industry Concerns Linger<br />Increases in delinquency rates<br />Increases in charge-off rates<br />Declines in the number of loans being made by competitor banks<br />
  • 7. ABLs (Continued)<br />Motivations for Loans<br />Refinancing at 44.1% (53% previously)<br />Growth at 20.2% (12% previously)<br />Acquisitions at 10.4% (22% previously)<br />Advance Rates <br />Vary by collateral type and quality<br />Highest for marketable securities and receivables<br />All-in Rates Decline Significantly for Larger Loans: Working Capital<br />
  • 8. Mezzanine Funds<br />Signs of Growth<br />Nearly 78% report increases in business plans received<br />Slight net increase in number of investments being made<br />54% of respondents report growth in the size of industry<br />48% report increases in warrant coverage<br />Risk Aversion<br />Nearly 52% report a decrease in cash flow multiples<br />56% indicate a decreased appetite for risk<br />48% report an increase in interest rate spreads<br />Net increase in tightness of financial covenants<br />Motivations for Loans<br />Refinancing at 31.6% (33% previously)<br />MBOs at 24.6% (21% previously)<br />Growth at 20.6% (22% previously)<br />
  • 9. Mezzanine (Continued)<br />Financial Ratios<br />A typical firm will invest up to 4X EBITDA (3.75X previously)<br />Up to 2.5X can be senior debt (unchanged)<br />Minimum fixed charge ratios are 1.1X (1.2X previously)<br />Pricing<br />Median coupon rate of 14% (previously 13%)<br />Nearly 58% with PIK provision<br />65% of deals with warrants (4-8% of diluted ownership)<br />Expect 8% return on warrants<br />Targeting Service and Manufacturing Over Next 12 Months<br />
  • 10. Private Equity<br />Challenging Investing Environment<br />53% report a decline in leverage multiples<br />62% report a decline in deal multiples<br />68% report a longer time to exit deals<br />70% report a decline in the size of industry<br />Interesting Minority Interests<br />Nearly 70% of respondents report willingness to invest in minority interests with investor protections<br />Median discount from pro rata is 20%<br />Deal Flow Funnel<br />100 plans reviewed (up from 80)<br />15 meetings<br />5 term sheets<br />2 letters of intent<br />
  • 11. Private Equity (Continued)<br />Exit Plans for Portfolio Companies<br />43% report plans to sell to a public company (up from 35%)<br />30% plan to sell to another PEG (34% previously)<br />7% IPO (previously 9%)<br />Service and Manufacturing Industries Targeted Over Next 12 Months<br />Service at 30.7% (up from 27.3%)<br />Manufacturing at 23.8% (up from 21.3%)<br />Retail down to 0.8% from 4.1%<br />
  • 12. Venture Capital<br />Contraction Continues...<br />59% report a decline in percent of plans funded while 66% report decreasing percentages of “up” rounds<br />61% report an increase in time to exit<br />73% report a decrease in appetite for risk<br />61% believe fundraising prospects have declined<br />91% report a contraction in size of industry<br />Yet Hope Remains<br />Nearly 48% report increases in number of business plans received<br />Approximately 46% report an increase in number of high-quality investment prospects<br />45.5% report increases in quality of portfolio<br />Review 100 Business Plans to Close a Deal<br />
  • 13. Venture Capital (Continued)<br />Higher Expected Sales to TVI Ratios for New Investments Made in Last 6 Months<br />Stage 1 increased from 8.2X to 9.5X<br />Stage 3 from 6.4X to 8.5X<br />Stage 6 rose from 3.9X to 5.5X<br />Longer Expected Time to Exit for New Investments Made in Last 6 Months<br />Stage 1 from 6.2 years to 7.5 years<br />Stage 3 from 5.1 years to 6.5 years<br />Stage 6 from 3.8 years to 3.5 years (shorter)<br />Implied Returns on Investment Lower<br />Stage 1 from 40.5% to 35.8%<br />Stage 3 from 43.5% to 41.4%<br />Stage 6 from 43.3% to 43.0%<br />Exit Plans<br />Sell to public company is 58.9% (previously 50%)<br />Sell to private company is 21.6% (previously 24%)<br />IPO is 12.4% (down from 17%)<br />
  • 14. Venture Capital (Continued)<br />California is Target for Nearly 36% of Investments over Next 12 Months<br />Nearly 10.7% outside of U.S.<br />5.7% in Texas<br />Massachusetts decline from 6.9% to 3.6%<br />Clean Technology is Industry Targeted for Largest Concentration of New Investment over Next 12 Months<br />Increase from 12.3% to 14.5%<br />Software from 15.8% to 13.5%<br />Hardware from 6.7% to 3.2%<br />Biotech from 11.6% to 9.8%<br />
  • 15. Privately-Held Businesses<br />Glass Half Empty or Half Full?<br />Despite nearly 50% indicating increased competitive pressures, approximately 64% report that growth opportunities increased relative to 6 months ago<br />However, nearly 46% report decreased access to capital<br />Businesses Report Varied Costs of Capital, Paybacks, and Expected Returns<br />Realistic, Optimistic, or Delusional?<br />Approximately 57% believe they qualify for a bank loan<br />Nearly 47% believe they qualify for a private equity investment<br />Almost 41% believe they qualify for venture capital<br />
  • 16. Investment Analysis Techniques <br />Frequency of Use in the Private Markets<br />
  • 17. 12 Month Outlook<br />
  • 18. Thank You!<br />John K. Paglia<br />Associate Professor of Finance<br />Senior Researcher, Pepperdine Private Capital Markets Project<br />Bschool.pepperdine.edu/privatecapital<br />John.paglia@pepperdine.edu<br />

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