Paglia am&aa launchpad keynote final 6.09.2011

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LaunchPad brings together all of the players in the Southern California middle market sector of the private capital markets. Sponsored by the Alliance of Mergers & Acquisitions, Dr. John Paglia shares findings from the Summer 2011

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Paglia am&aa launchpad keynote final 6.09.2011

  1. 1. The State of the Private Capital Markets Private Capital Markets LaunchPad June 10, 2011 John K. Paglia, Ph.D., CFA, CPA Associate Professor of Finance Senior Researcher, Pepperdine Private Capital Markets Project
  2. 5. <ul><li>What is cost of capital for privately-held businesses? </li></ul><ul><li>The project launched in 2007; first report in July 2009 </li></ul><ul><li>We now survey 12 segments semi-annually </li></ul><ul><li>Survey asks about firm profile, behavior, returns, view of next 12 months </li></ul><ul><li>Certificate in Private Capital Markets offered again in Malibu November 14-16 </li></ul>Pepperdine Private Capital Markets Project
  3. 7. <ul><li>What is the Status of Privately-Held Businesses as of Spring 2011? </li></ul>
  4. 8. Prob. of failure finally declines Net income expectations positive
  5. 9. Confidence rebounds sharply Optimistic about growth
  6. 10. What are Owners Focusing on Today?
  7. 11. Finally ended layoffs and CAPEX reductions
  8. 12. Still increasing collection times Pricing power or inflationary response? More competitive than ever
  9. 13. Business Owner Access to Capital (Net Increases) Finally reversed deteriorating capital access
  10. 14. <ul><li>Nearly 95% of business owners report having the enthusiasm to execute growth strategies </li></ul><ul><li>Yet just 53% report having the necessary financial resources to successfully execute growth strategies </li></ul>What is the State of Financing?
  11. 15. <ul><li>How much senior leverage is available for transactions? </li></ul><ul><li>How much junior leverage is available and what are the total debt thresholds? </li></ul><ul><li>How much equity is available for growth capital and transactions? </li></ul>Capital Access Drives Valuations and Deal Flow in the Middle Markets
  12. 17. <ul><li>What’s Happening with Capital Providers? </li></ul>
  13. 18. <ul><li>37% of activity from refinancing; 17% acquisitions; 12% growth financing </li></ul><ul><li>60% of applications declined, 36% lack high-quality earnings/cash flow </li></ul><ul><li>Demand for loans up, due diligence efforts increased significantly </li></ul><ul><li>Leverage increased slightly </li></ul>What’s Happening in Banks?
  14. 19. <ul><li>Personal guarantees mandatory under $15 million EBITDA </li></ul><ul><li>Regulatory pressure to avoid risky loans increased, 76% report feeling increased pressure </li></ul><ul><li>60% indicate that increased pressure led to declining loans that otherwise would have been made </li></ul>What’s Happening in Banks? (Cont’d)
  15. 20. <ul><li>26% of investments next year in business services, 25% manufacturing, 14% wholesale and distribution </li></ul><ul><li>Demand for investment up considerably along with leverage and deal multiples </li></ul><ul><li>Confidence and conditions improving </li></ul><ul><li>Warrant coverage and expected returns down slightly </li></ul>What’s Happening in Mezz?
  16. 21. Tightness of Financial Covenants, Warrant Coverage and PIK Features Warrant coverage declines Covenants less restrictive
  17. 22. <ul><li>25% of investments in next 12 months in manufacturing, 14% in business services, 14% healthcare </li></ul><ul><li>Demand for investment up considerably along with leverage and deal multiples </li></ul><ul><li>Confidence and conditions improving </li></ul>What’s Happening in PE?
  18. 23. <ul><li>Power of LPs increasing! 30% say beneficial; 38% say detrimental </li></ul><ul><li>56% now looking at larger/smaller investments to deploy capital </li></ul><ul><li>Making more minority investments; 60% indicate no change in expected returns </li></ul>What’s Happening in PE? (cont’d)
  19. 24. <ul><li>What are Investment Bankers Experiencing? </li></ul>
  20. 25. <ul><li>Deal flow has increased slightly </li></ul><ul><li>Leverage multiples have improved slightly, as have deal multiples, particularly for later-stage companies </li></ul><ul><li>Due diligence efforts by banks and buyers have increased </li></ul>Compared to Six Months Ago
  21. 26. 40% of Business Sale Engagements Expired Without a Transaction
  22. 27. Valuation Gaps for Non-Transacted Engagements
  23. 28. Difficulty Securing Senior Debt?
  24. 29. Balance of Capital with Businesses Worthy of Financing: Surplus or Shortage?
  25. 30. Top Issues Facing Privately Held Businesses (Today versus Emerging) Today Emerging
  26. 32. <ul><li>John K. Paglia, Ph.D., CFA, CPA </li></ul><ul><li>Associate Professor of Finance </li></ul><ul><li>Senior Researcher, Pepperdine Private Capital Markets Project </li></ul><ul><li>bschool.pepperdine.edu/privatecapital </li></ul><ul><li>[email_address] </li></ul>Thank You!

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