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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 …

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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  • 1. The State of the Middle MarketsRisk Management AssociationMay 18, 2011
    John K. Paglia, Ph.D., CFA, CPA
    Associate Professor of Finance
    Senior Researcher, Pepperdine Private Capital Markets Project
  • 2. Pepperdine Private Capital Markets Project
    What is cost of capital for privately-held businesses?
    The project launched in 2007
    We survey 12 segments
    Survey asks about firm profile, behavior, returns, view of next 12 months
    Capital providers surveyed semi-annually
    Last report published in December
    Next report to be released in May 2011
  • 3.
  • 4. Business Owners
  • 5.
  • 6. What are Owners Focusing on Today?
  • 7.
  • 8.
  • 9. Motivation for CAPEX Planned Over Next 12 Months
  • 10.
  • 11. What Motivates Business Owners to Open Businesses?
  • 12. Capital Access Drives Valuations
    in the Middle Markets
    How much senior leverage is available and how does one qualify?
    How much junior leverage is available and how does one qualify?
    How much equity capital is available and how does one qualify?
    What happens if one doesn’t qualify?
  • 13.
  • 14. State of Financing
    Approximately 54% of those businesses attempting to raise capital in the last six months were unsuccessful
    Of those that were successful, approximately 59% of them secured bank loans followed by 20% who secured friends and family financing
    Just 13% raised funding from angels, venture capital and private equity combined
  • 15. How Competitive is Access to Capital?
    Banks denied approximately 60% of loan applications over last six months
    Angel investors funded just one business plan of 25 reviewed
    Venture capitalists funded just one business plan of 80 reviewed
    Private equity funds invested in just one business plan out of approximately 150 reviewed
  • 16. Businesses Need Capital
    to Grow and Build Value
    Expected increase in organic revenues over the next year is approximately 20%
    Nearly 95% of business owners report having the enthusiasm to execute growth strategies
    Yet just 53% report having the necessary financial resources to successfully execute growth strategies
  • 17. What are Top Issues Facing Privately-Held Businesses Today According to I-Bankers?
  • 18.
  • 19. Most Important Emerging Issues According to Business Owners
  • 20. Overall Impressions of Capital Sources
  • 21. Impressions of Costs of Capital Sources
  • 22. Ranking of Capital Sources
  • 23. Business Transfer Intentions (Spring 2011)
  • 24. Business Transfer Timing (Spring 2011)
  • 25. Capital Providers
  • 26. What’s Happening in Banks
    37% of activity from refinancing; 17% acquisitions; 12% growth financing
    60% of applications declined, 36% lack high-quality earnings/cash flow
    Demand for loans up, due diligence efforts increased significantly
    Leverage increased slightly
  • 27. What’s Happening in Banks (Cont’d)
    Personal guarantees and collateral requirements mandatory under $15 million
    Regulatory pressure to avoid risky loans increased, 76% report feeling increased pressure
    60% indicate that increased pressure led to declining loans that otherwise would have been made
    60% of applications declined, 36% lack high-quality earnings/cash flow
    Demand for loans up, due diligence efforts increased significantly
    considerably along with leverage and deal multiples
    Confidence and conditions improving
  • 28. What’s Happening in Mezz
    26% of investments in next 12 months in business services, 25% in manufacturing, 14% in wholesale and distribution
    Demand for investment up considerably along with leverage and deal multiples
    Confidence and conditions improving
    Warrant coverage and expected returns down slightly
  • 29. What’s Happening in PE
    25% of investments in next 12 months in manufacturing, 14% in business services, 14% healthcare
    Demand for investment up considerably along with leverage and deal multiples
    Confidence and conditions improving
  • 30. What’s Happening in PE (cont’d)
    Power of LPs increasing! 30% say beneficial; 38% say detrimental
    56% now looking at larger/smaller investments to deploy capital
    Making more minority investments; 60% indicate no change in expected returns
  • 31. Investment Bankers
  • 32. Private Business Sales Transactions Closed in Last 6 Months
  • 33. Average Number of Months
    to Close a Deal
  • 34. Components of Closed Deals
  • 35. Equity Invested to Close Deals (Financial Buyers)
  • 36. Reasons for 40% of Business Sale Engagements not Transacting
  • 37. Valuation Gaps for Non-Transacted Engagements
  • 38. Deal Multiples by Financial Buyers
  • 39. Premiums by Strategics?
  • 40. Difficulty Securing Senior Debt
  • 41. Balance of Capital with Opportunities
  • 42. Top Issues Facing Privately Held Businesses (Today versus Emerging)
    Today
    Emerging
  • 43. The Road Ahead
    Continued economic uncertainty
    Inflation and competitive pressures
    Increasing confidence in growth prospects
    Increasing demand for capital and capital availability
    Increasing deal multiples
  • 44. Thank You!
    John K. Paglia, Ph.D., CFA, CPA
    Associate Professor of Finance
    Senior Researcher, Pepperdine Private Capital Markets Project
    bschool.pepperdine.edu/privatecapital
    john.paglia@pepperdine.edu

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