State of Middle Markets

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For the Risk Management Association, Pepperdine University researcher John Paglia offers a perspective on data and current trends on capital markets across major segments. Sourcing the most results from the on-going Pepperdine Private Capital Markets Project, Dr. Paglia share how these markets work in relation to the publicly traded markets .

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State of Middle Markets

  1. 1. The State of the Middle MarketsRisk Management AssociationMay 18, 2011<br />John K. Paglia, Ph.D., CFA, CPA <br />Associate Professor of Finance<br />Senior Researcher, Pepperdine Private Capital Markets Project<br />
  2. 2. Pepperdine Private Capital Markets Project<br />What is cost of capital for privately-held businesses?<br />The project launched in 2007<br />We survey 12 segments<br />Survey asks about firm profile, behavior, returns, view of next 12 months<br />Capital providers surveyed semi-annually<br />Last report published in December<br />Next report to be released in May 2011<br />
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  4. 4. Business Owners<br />
  5. 5.
  6. 6. What are Owners Focusing on Today?<br />
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  8. 8.
  9. 9. Motivation for CAPEX Planned Over Next 12 Months<br />
  10. 10.
  11. 11. What Motivates Business Owners to Open Businesses?<br />
  12. 12. Capital Access Drives Valuations <br />in the Middle Markets<br />How much senior leverage is available and how does one qualify?<br />How much junior leverage is available and how does one qualify?<br />How much equity capital is available and how does one qualify?<br />What happens if one doesn’t qualify?<br />
  13. 13.
  14. 14. State of Financing<br />Approximately 54% of those businesses attempting to raise capital in the last six months were unsuccessful<br />Of those that were successful, approximately 59% of them secured bank loans followed by 20% who secured friends and family financing<br />Just 13% raised funding from angels, venture capital and private equity combined<br />
  15. 15. How Competitive is Access to Capital?<br />Banks denied approximately 60% of loan applications over last six months<br />Angel investors funded just one business plan of 25 reviewed<br />Venture capitalists funded just one business plan of 80 reviewed<br />Private equity funds invested in just one business plan out of approximately 150 reviewed<br />
  16. 16. Businesses Need Capital <br />to Grow and Build Value<br />Expected increase in organic revenues over the next year is approximately 20%<br />Nearly 95% of business owners report having the enthusiasm to execute growth strategies<br />Yet just 53% report having the necessary financial resources to successfully execute growth strategies<br />
  17. 17. What are Top Issues Facing Privately-Held Businesses Today According to I-Bankers?<br />
  18. 18.
  19. 19. Most Important Emerging Issues According to Business Owners<br />
  20. 20. Overall Impressions of Capital Sources<br />
  21. 21. Impressions of Costs of Capital Sources<br />
  22. 22. Ranking of Capital Sources<br />
  23. 23. Business Transfer Intentions (Spring 2011)<br />
  24. 24. Business Transfer Timing (Spring 2011)<br />
  25. 25. Capital Providers<br />
  26. 26. What’s Happening in Banks<br />37% of activity from refinancing; 17% acquisitions; 12% growth financing<br />60% of applications declined, 36% lack high-quality earnings/cash flow<br />Demand for loans up, due diligence efforts increased significantly<br />Leverage increased slightly<br />
  27. 27. What’s Happening in Banks (Cont’d)<br />Personal guarantees and collateral requirements mandatory under $15 million<br />Regulatory pressure to avoid risky loans increased, 76% report feeling increased pressure<br />60% indicate that increased pressure led to declining loans that otherwise would have been made<br />60% of applications declined, 36% lack high-quality earnings/cash flow<br />Demand for loans up, due diligence efforts increased significantly<br />considerably along with leverage and deal multiples<br />Confidence and conditions improving<br />
  28. 28. What’s Happening in Mezz<br />26% of investments in next 12 months in business services, 25% in manufacturing, 14% in wholesale and distribution<br />Demand for investment up considerably along with leverage and deal multiples<br />Confidence and conditions improving<br />Warrant coverage and expected returns down slightly<br />
  29. 29. What’s Happening in PE<br />25% of investments in next 12 months in manufacturing, 14% in business services, 14% healthcare<br />Demand for investment up considerably along with leverage and deal multiples<br />Confidence and conditions improving<br />
  30. 30. What’s Happening in PE (cont’d)<br />Power of LPs increasing! 30% say beneficial; 38% say detrimental<br />56% now looking at larger/smaller investments to deploy capital<br />Making more minority investments; 60% indicate no change in expected returns<br />
  31. 31. Investment Bankers<br />
  32. 32. Private Business Sales Transactions Closed in Last 6 Months<br />
  33. 33. Average Number of Months <br />to Close a Deal<br />
  34. 34. Components of Closed Deals<br />
  35. 35. Equity Invested to Close Deals (Financial Buyers)<br />
  36. 36. Reasons for 40% of Business Sale Engagements not Transacting<br />
  37. 37. Valuation Gaps for Non-Transacted Engagements<br />
  38. 38. Deal Multiples by Financial Buyers<br />
  39. 39. Premiums by Strategics?<br />
  40. 40. Difficulty Securing Senior Debt<br />
  41. 41. Balance of Capital with Opportunities<br />
  42. 42. Top Issues Facing Privately Held Businesses (Today versus Emerging)<br />Today<br />Emerging<br />
  43. 43. The Road Ahead<br />Continued economic uncertainty<br />Inflation and competitive pressures<br />Increasing confidence in growth prospects<br />Increasing demand for capital and capital availability<br />Increasing deal multiples<br />
  44. 44. Thank You!<br />John K. Paglia, Ph.D., CFA, CPA<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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