State of Private Capital Markets 2011: Update

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Prepared for the AM&AA Private Capital Markets LaunchPad, June 10, 2011

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State of Private Capital Markets 2011: Update

  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. 2. <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>Next report to be released Monday </li></ul><ul><li>Certificate in Private Capital Markets </li></ul>Pepperdine Private Capital Markets Project
  3. 4. <ul><li>What is the Status of Privately-Held Businesses as of Spring 2011? </li></ul>
  4. 7. What are Owners Focusing on Today?
  5. 11. <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>State of Financing
  6. 12. <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
  7. 13. Median Deal Multiples by Financial Buyers Investment Banker Survey (Spring 2011) Industry $1M EBITDA $5M EBITDA $10M EBITDA $15M EBITDA $25M EBITDA $50M EBITDA $100M EBITDA Service 4.0 5.0 6.0 7.0 7.0 8.0 12.0 Mfg. 4.0 5.0 6.0 5.3 6.0 7.0 10.0 Retail 3.5 5.0 6.0 7.0 6.0 7.5 8.5 Wholesale 4.8 5.3 3.3 4.0 6.5 7.0 8.0 Distribution 4.3 5.3 5.0 4.5 5.3 6.5 6.0 Oil and Gas 4.5 4.0 4.0 5.0 6.0 7.0 NA Restaurant 3.0 3.0 3.5 4.0 6.0 6.0 NA Healthcare 5.0 6.5 6.8 6.0 6.0 7.0 7.0 Technology 5.0 7.0 8.0 9.0 8.0 10.5 9.0 Media / Ent. 5.5 5.5 4.0 7.0 7.0 8.0 7.5 Average 4.4 5.2 5.3 5.9 6.4 7.5 8.5
  8. 15. Business Transfer Intentions (Spring 2011)
  9. 16. Business Transfer Timing (Spring 2011)
  10. 17. Overall Impressions of Capital Sources Capital Source Very unfavorable Unfavorable Slightly Unfavorable Neutral Slightly Favorable Favorable Very favorable Score (-3 to 3) Bank loan 6% 5% 6% 11% 15% 34% 22% 1.48 Asset based lender 4% 6% 9% 21% 20% 29% 11% 1.08 Private equity fund 6% 12% 11% 24% 20% 20% 7% 0.51 Angel investor 9% 13% 14% 23% 21% 14% 5% 0.12 Venture capital fund 10% 17% 14% 22% 19% 15% 2% -0.07 Mezz Fund 9% 14% 14% 35% 16% 11% 2% -0.12 Friends and family 19% 18% 11% 18% 10% 15% 9% -0.22 Factor 15% 19% 13% 29% 11% 9% 4% -0.48
  11. 18. <ul><li>Capital Providers </li></ul>
  12. 19. <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
  13. 20. <ul><li>Personal guarantees and collateral requirements mandatory under $15 million </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)
  14. 23. <ul><li>26% of investments in next 12 months in business services, 25% in manufacturing, 14% in 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
  15. 26. <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
  16. 27. <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)
  17. 32. <ul><li>Insights from Investment Bankers </li></ul>
  18. 33. <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
  19. 34. 40% of Business Sale Engagements Expired Without a Transaction
  20. 35. Valuation Gaps for Non-Transacted Engagements
  21. 36. Difficulty Securing Senior Debt?   Very difficult Difficult Somewhat Difficult Neutral Somewhat Easy Easy Very Easy % Difficult $1M EBITDA 41.3% 27.3% 19.8% 8.3% 2.5% 0.0% 0.8% 88.4% $5M EBITDA 12.7% 14.4% 33.9% 23.7% 10.2% 1.7% 3.4% 61.0% $10M EBITDA 6.6% 10.5% 15.8% 25.0% 27.6% 11.8% 2.6% 32.9% $15M EBITDA 5.8% 5.8% 19.2% 19.2% 28.8% 19.2% 1.9% 30.8% $25M EBITDA 6.5% 4.3% 17.4% 21.7% 19.6% 21.7% 8.7% 28.2% $50M EBITDA 11.4% 5.7% 5.7% 20.0% 28.6% 14.3% 14.3% 22.8% $100M+ EBITDA 12.9% 6.5% 3.2% 25.8% 22.6% 12.9% 16.1% 22.6%
  22. 37. Balance of Capital with Opportunities   Companies worthy of financing GREATLY exceed capital available Companies worthy of financing exceed capital available General balance between companies worthy of financing and capital available Capital available exceeds companies worthy of financing Capital available GREATLY exceeds companies worthy of financing Score $1M EBITDA 28.6% 37.1% 20.0% 11.4% 2.9% -0.8 $5M EBITDA 13.2% 30.9% 32.4% 17.6% 5.9% -0.3 $10M EBITDA 5.7% 17.0% 39.6% 24.5% 13.2% 0.2 $15M EBITDA 4.9% 22.0% 29.3% 31.7% 12.2% 0.2 $25M EBITDA 6.3% 15.6% 31.3% 18.8% 28.1% 0.5 $50M EBITDA 13.8% 10.3% 13.8% 31.0% 31.0% 0.6 $100M EBITDA 18.5% 11.1% 14.8% 22.2% 33.3% 0.4 > $100M EBITDA 14.8% 11.1% 14.8% 11.1% 48.1% 0.7
  23. 39. Top Issues Facing Privately Held Businesses (Today versus Emerging) Today Emerging
  24. 40. <ul><li>Business owners are more optimistic, back to focusing on expansion, and looking for exit opportunities </li></ul><ul><li>Capital availability is robust for larger companies, still a concern for smaller ones </li></ul><ul><li>Deal market active for larger companies, improving for smaller ones </li></ul>M&A Outlook The Road Ahead
  25. 41. <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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