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Trends in Finance | Jon Weiss Summit 2016 Presentation

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Trends in Finance | Jon Weiss Summit 2016 Presentation

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Trends in Finance | Jon Weiss Summit 2016 Presentation

  1. 1. Summit 2016 1 Jonathan Weiss, President, Wells Fargo Securities, LLC December 9, 2016 Trends in Finance: Implications for Boards and Businesses © 2016 Wells Fargo Securities, LLC. All rights reserved. Internal use.
  2. 2. Summit 2016 2 Shareholder Activism Changing Capital Flows Early Expectations from a Trump Presidency Three Topics of Interest
  3. 3. Shareholder Activism
  4. 4. Summit 2016 4 Number of U.S. Public Companies Has Declined Source: World Bank, Capital IQ, ThomsonOne, as of 12/31/2015 U.S. Public Companies 8,025 4,381 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 1995 2000 2005 2010 2015 #ofPublicCompanies Initial Public Offerings Public M&A 141 0 100 200 300 400 500 600 700 800 900 1995 2000 2005 2010 2015 #IPOs 218 0 100 200 300 400 500 600 1995 2000 2005 2010 2015 #PublicM&ATransactions
  5. 5. Summit 2016 5 Asset Flows to Passive Strategies Have Outpaced Flows to Active Strategies Net Flows of U.S. Stock Mutual Funds and ETFs ($200.0) ($150.0) ($100.0) ($50.0) $0.0 $50.0 $100.0 $150.0 $200.0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Actively Managed Passively Managed $ in Billions Source: Morningstar as of 10/17/2016 and Wharton Research Data Services, CRSP Survivor-Bias-Free U.S. Mutual Fund Database as of 6/30/2016.
  6. 6. Summit 2016 6 3.6% 9.6% 37.0% 0% 10% 20% 30% 40% 50% 60% 70% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 YTD S&P 500 Poison Pill Classified Board No Shareholder Right to Call Special Meetings Sarbanes- Oxley Act enacted on July 30, 2002 Various Forms of Activism  Corporate Governance Activism – Corporate governance activists call on the company to conform to so- called “best practices” related to corporate governance  Shareholder Activism – Shareholder activists attempt to enact change at a public company, with the primary goal of unlocking shareholder value Structural defense of corporations diminished since the passing of Sarbanes-Oxley Act in 2002 Note: Data as of 6/30/16 Source: SharkRepellent
  7. 7. Summit 2016 7 309% 115% 0% 50% 100% 150% 200% 250% 300% 350% 400% 450% 500% 2009 2010 2011 2012 2013 2014 2015 2Q 2016 PerformanceReturn S&P Activist Interest Index S&P 500 31 23 24 18 14 14 17 18 0 5 10 15 20 25 30 35 2009 2010 2011 2012 2013 2014 2015 2Q 2016 AverageVIX Average VIX Activists Have Raised Ample Capital ¹ VIX is a measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices ² YTD represents latest available data as of 3/31/16 Note: Data as of 6/30/16, unless otherwise noted; S&P Activist Interest Index measures the performance of companies that have been targeted by an activist investor within the last 24 months Source: FactSet, S&P, Hedge Fund Research Active Managers Seeking Alpha Led to Rise in Activist AuM Decrease in Volatility1 Activists Have Generated Alpha $36 $47 $51 $66 $93 $119 $123 $113 $0 $25 $50 $75 $100 $125 $150 2009 2010 2011 2012 2013 2014 2015 YTD ² ActivistHedgeFunds$(bn)
  8. 8. Summit 2016 8 # of Activist Campaigns Diminished Corporate Defenses & Rise in AuM Led to Increase in Shareholder Activism 63 68 75 42 56 100 109 126 133 100 93 77 90 92 105 101 114 73 73 85 53 97 143 210 206 223 185 200 204 219 178 266 259 237 0 50 100 150 200 250 300 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 LTM 3Q'15 LTM 3Q'16 #ProxyFights/Campaigns # Shareholder Activist Proxy Fights # Shareholder Activist Campaigns Note: Data as of 6/30/16; Proxy success rate represents the percentage of outright or partial victories or settlements by dissidents of total nominations of opposing slates Source: SharkRepellent
  9. 9. Summit 2016 9 Top Activist Investors Notable Shareholder Activists Note: Data as of 6/30/16; Success rate denotes percentage of outright or partial victories or settlements by dissidents of total opposing slate nominations. Outlined in red are shareholder activists most likely to engage with small and mid-size companies Source: SharkRepellent, 13DMonitor, Activist Insight, SEC filings, Pensions & Investments Activist Investor Proxy Campaigns AuM ($BN) Years Active Key Personnel 13D Filer Median Stake Size ($MM) Equity Capital Deployed ($MM) Proxy Campaign Success Rate 62 $5 17 Jeffrey Smith 116 $141.3 $2,826 44/62 (71%) 38 $32 29 Carl Icahn 115 $965.5 $20,276 21/38 (55%) 14 $46 39 Paul Elliott Singer 74 $157.2 $11,629 8/14 (57%) 7 $16 21 Daniel Loeb 48 $269.0 $10,492 6/7 (86%) 7 $7 15 Barry Rosenstein 37 $172.1 $5,850 5/7 (71%) 5 $12 21 William Ackman 51 $834.8 $7,513 3/5 (60%) 5 $13 5 Keith Meister 15 $265.6 $7,438 2/5 (40%) 3 $14 11 Nelson Peltz 10 $1,499.6 $10,497 2/3 (67%) 1 $17 16 Jeff Ubben 86 $787.0 $11,018 1/1 (100%) 1 $3 5 Mick McGuire 12 $77.1 $1,234 1/1 (100%)
  10. 10. Summit 2016 10 Advanced Preparation is Key Form Multi- Disciplinary Team Assess Shareholder Base Look at Your Company like an Activist Would Review Board Composition Review Investor Relations & Communications  Designate key officers, banker, counsel, PR firm and proxy solicitor  Team updates Management and Board periodically on activist activity  Track changes in shareholder register based on regulatory filings  Hire a stock watch service to monitor trading in stock  Watch out for critical shareholder letters or activist attendance on earnings calls  Conduct financial and operational self-evaluation; compare company’s performance to peers  Prepare a white paper attack and response  Periodically evaluate Board size and composition (tenure, relevant experience, age, independence)  Identify at least two potential independent directors  Occasionally allow key major shareholders unsupervised access to key independent directors  Review the company’s communications and investor relations plan  Evaluate relationships with large shareholders and listen to value creation ideas Analyze Structural Defenses  Ask specialized counsel to review the Company’s bylaws for suitability in a proxy contest  Update poison pill “on the shelf”
  11. 11. Changing Capital Flows
  12. 12. Summit 2016 12  Public Equity  Investors have heavily favored passively managed investment funds  Private Equity  The emergence of direct investment by pensions and sovereign wealth funds (SWF)  Lending  Alternative debt capital (i.e. the shadow banking system) Capital Flows Have Been Shifting
  13. 13. Summit 2016 13 ($200.0) ($150.0) ($100.0) ($50.0) $0.0 $50.0 $100.0 $150.0 $200.0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Actively Managed Passively Managed $ in Billions Public Equity: Investors Have Heavily Favored Passively Managed Investment Funds Net Flows of U.S. Stock Mutual Funds and ETFs Source: Morningstar as of 10/17/2016 and Wharton Research Data Services, CRSP Survivor-Bias-Free U.S. Mutual Fund Database as of 6/30/2016. Actively managed funds used to represent the market norm as investors sought outperformance in the 1990’s bull market Investors piled into U.S. equities through the 1990’s and early 2000’s, as both active and passive funds saw net inflows Concerns about relative underperformance and opaque fee structures have led to sizeable outflows from active into passive strategies The current investor preference for low-fee, passively-managed U.S. equity funds represents a challenge for potential IPOs; where past investors would clamor for a “hot” stock to seek outperformance, today’s passive investing climate appears less inclined to participate.
  14. 14. Summit 2016 14 Public Equity: Depressed IPO Activity in 2015 and 2016 YTD Summary of Yearly IPO Activity Since 2006 (1) Source: Dealogic as of 12/2/2016. (1) IPO activity excludes ADRs and deals less than $20 million in proceeds. $36.9 $41.4 $24.3 $15.7 $35.3 $34.6 $39.6 $52.0 $57.9 $28.1 $13.2 186 183 27 50 118 114 126 205 248 141 76 0 50 100 150 200 250 300 $0.0 $10.0 $20.0 $30.0 $40.0 $50.0 $60.0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 YTD #ofIPOs IPOVolume ($Billions)
  15. 15. Summit 2016 15 Public Equity: Small-Cap and Mid-Cap Healthcare Offerings Leading IPO Activity IPO Breakout By Market Cap Size (% of Total Number of Deals) Source: Dealogic as of 12/2/2016. 63% 60% 48% 52% 59% 42% 51% 51% 56% 52% 49% 17% 22% 26% 20% 18% 25% 20% 18% 18% 20% 28% 20% 19% 26% 28% 23% 32% 29% 31% 26% 28% 23% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 YTD Small Cap (<$500MM) Mid-Cap ($500MM - $1BN) Large-Cap (>$1BN) Small-Cap and Mid-Cap IPOs By Sector (% of Total Number of Deals) 21% 25% 15% 14% 15% 16% 12% 33% 48% 51% 50% 29% 36% 15% 31% 32% 27% 34% 19% 17% 16% 19% 50% 39% 70% 56% 53% 57% 54% 48% 35% 33% 31% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 YTD Healthcare Tech & Svcs. Other Sectors
  16. 16. Summit 2016 16 Public Equity: Keys to a Successful IPO Characteristics of Successful IPOs Differentiated Business Model Unique, clear, and distinguished strategy from existing public peers with streamlined business plan that is easy to understand  Conservative Capital Structure Utilize less leverage compared to immediate peer group, preserving balance sheet flexibility and liquidity for growth  Management Team Strong management team with track record of mitigating operational and investment risks through superior capital allocation and executing business plans  Sustainable & Predictable Growth Consistent and recurring cash flows with manageable growth that drives EBITDA / earnings higher  Adequate Scale & Operational Efficiency Sufficient asset base (sector dependent) to compete in marketplace with sufficient operational competence  Superior Asset Quality Investors generally favor premium brands / assets with superior cash flow generation and prestige value  Since investors are becoming more selective in their investment choices, it is imperative that potential public market entrants evaluate their respective competitive strengths and meet multiple criteria listed above to achieve optimal IPO execution. All sector offerings can work with the right story and market timing.
  17. 17. Summit 2016 17 Private Equity Continues to Grow and Remain at Record Levels Private Equity Dry Powder ($ Trillions)Private Equity Fund AUM ($ Billions) 0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 $0.40 $0.56 $0.80 $1.00 $1.07$1.06 $0.95 $1.00 $0.94 $1.08 $1.19 $1.26 $1.45 Source for both charts: Federal Reserve Board, Bloomberg LP and Wells Fargo Securities, LLC
  18. 18. Summit 2016 18 Private Equity: Evolution of the LBO and the Emergence of Pensions and SWF As Active Participants Source: Capital IQ, press releases and company news. 1 Now known as iHeart Media. 2 Excludes fees and expenses. 3 Blackstone to acquire $14.1 bn and Wells Fargo Co. to acquire $8.9 bn. Mar-00 Mar-05 Sep-05 Jan-06 May-06 Jun-06 Jul-06 Sep-06 Nov-06 Nov-06 Dec-06 Apr-07 May-07 May-07 Jul-07 Jan-09 Feb-13 Feb-13 Target: Acquirer: ($ in Billions) Dec-14Apr-07Feb-07Oct-06Aug-05Nov-85 Jun-86 Oct-88 1 Traditional LBOs Club Deal Era Co-Investors/ Partnerships Great Recession Selected U.S. Leveraged Buyout Transactions (1985 - Today) Mar-15 Jun-15 Jul-15 Jul-15 Direct Investments Jun-15 ~ Apr-15 3 $6.1 $4.2 $31.1 $20.0 $11.5 $16.8 $12.8 $19.1 $30.3 $13.7 $33.8 $18.4 $27.4 $23.8 $36.9 $11.5 $44.4 $28.7 $25.0 $27.5 $20.8 $26.0 $13.9 $28.1 $28.7 $8.9 $4.1 $23.0 $12.0 $2.0 $9.0 $4.0
  19. 19. Summit 2016 19 Private Equity: The Emergence of Direct Investment by Pensions and Sovereign Wealth Funds SWFs completed 254 cross-border direct investments in 2015, for total spend of $72 billion, an 80% increase in total spend since 2013 (Sovereign Wealth Center 2015 Annual Report) Over the last 18 months, emerging investors (SWFs, pensions, family offices) bought ~17% of assets sold by private equity firms, up from 2% in 2007 (Goldman Sachs study, 2015) 77% of ultra-wealthy families (median net worth of $1B) preferred direct investments in private companies as opposed to investing in private-equity funds (up from 59% in 2010) (Barron’s 2015 survey) While banks still control most corporate lending, the ascendance of direct lenders reflects the power shift transforming Wall Street as investment firms increasingly take on roles previously occupied by banks (Wall Street Journal)
  20. 20. Summit 2016 20 All-Stock Merger of Equals $7,800 Million July 2016 Financial Advisor Different Flavors of Private Equity Capital Global Capital Players Sources:: Towers Watson Global Pension Asset Study, Sovereign Wealth Center , Family Office Exchange, Preqin Pension Funds Sovereign Wealth Funds Private Equity  $551 billion capital raised by 1,062 PE funds in 2015  $411 billion in buyout deals in 2015  Seek stable businesses with strong cash flows  Typical investment horizon is 3-6 years  Average U.S. family office AUM of $926MM  Nearly one-third of family office assets are in private investments ($1.7 trillion in total assets)  Share owner-operator mentality and establish strong rapport with companies Family Offices AUM: $6.7 trillionAUM: $4.2 trillionAUM: $6.5 trillionAUM: $35.3 trillion  Pension assets represent 80% of GDP in the top 19 markets  62% of pension assets are deployed in the U.S.  Patient Capital: Favor long-term value over short-term results  Assets have doubled in the last five-years  71% of SWFs have increased AUM since 2013  Partnership-driven: Co- invest with strategic, like- minded investors has acquired $2,500 Million November 2016 Sellside Advisor has acquired a stake in $75 Million October 2016 has acquired $1,000 Million September 2016 Buyside Advisor JAB Beech Inc.
  21. 21. Summit 2016 21 How to Fund Your Business with Private Equity? Buyout Control Investment Minority Investment Pre-IPO Financing Vestar Capital Partners $188 Million M&A Advisor September 2013 Buyside Advisor Roark Capital Group $825 Million Pro Rata Credit Facility October 2016 Left Lead Arranger Goldman Sachs $5.2 billion Senior Sec. Credit Facility October 2016 ABL Administrative Agent & Joint Lead Arranger Is acquiring Roark Capital Group $180 Million Senior Sec. Credit Facility June 2016 Left Lead Arranger & Joint Bookrunner
  22. 22. Summit 2016 22 Lending: Unprecedented Market Conditions have Fueled Opportunities for Alternative Debt Capital Regulatory PressureSearch for Investment Opportunities Traditional High Yield and TLB Markets Not Receptive to <$250mm Deals  Regulators limiting what banks can (i) hold on balance sheet and (ii) arrange for other investors  Issuers forced to seek non-bank sources of financing  Historically low rates  Strong investor liquidity positions  Investors forced to find alternative ways to generate satisfactory returns  CLO's and other traditional low cost investment funds requiring minimum deal size of ~$250mm  Private institutional investors have stepped in to fill the void 1 3 2 Alternative Debt Capital Serving the Needs of Issuers
  23. 23. Summit 2016 23 Lending: Alternative Debt Capital Investors and Characteristics  BDCs  Private equity  Insurance companies  Pension funds  Hedge funds  Family offices  Other institutional  Unitranche  Mezzanine  2nd Lien  Club Term Loan  Preferred  Other / Customizable  Illiquid: <$300mm tranches  Junior: Often behind bank debt  Discretely placed: 1-4 investors Representative Investors  Angelo Gordon  Apollo  Ares  Benefit Street  Blackstone  Brookfield  Cerberus  CPP  GIC  Golub  GSO  Guggenheim  Highbridge  Koch  KKR  MSD  New Mountain  Oaktree  PSP  Tennenbaum  TPG Benefits Considerations Benefits and Considerations of Alternative Debt Capital  Flexible and customizable  Effective cost of capital  Limited dissemination of information  Not relationship oriented  Likely requires maintenance covenants  Illiquidity premium Characteristics / Structures Types of Investors
  24. 24. Summit 2016 24 Lending: Accessing Alternative Debt Capital  Alternative Debt Capital solutions can take various forms including:  2nd lien Term Loan / Mezzanine / Preferred  Pairing low cost bank debt with a tranche of junior capital  Attractive on a WACD basis  Private Institutional Term Loan or Note / Unitranche  Placed with one or a “club” of institutional lenders  Results in operating flexibility  Simple execution and clean capital structure for the client  Best to hire an advisor to counsel you on terms and provide an access to the right investors  Goal should be a tailored approach to the financing coupled with a highly competitive execution, maintaining confidentiality of the process Wells Fargo is well positioned to help our clients capitalize on this growing trend
  25. 25. Early Expectations from a Trump Presidency
  26. 26. Summit 2016 26 Comprehensive tax reform is gathering momentum as a core 2017 legislative priority for both the Trump administration and Republican leadership in Congress Transformative Tax Legislation Could Be a Reality in 2017  Important details are still TBD, but key concepts common to Trump and House proposals include:  Substantially lower corporate and individual tax rates  Accelerated ability to deduct capital expenditures  Reduced ability to deduct interest expense  Much greater access to global cash flows  Elimination of carried interest tax benefit  Strategic and financial impact could be profound and vary substantially from company to company
  27. 27. Summit 2016 27 Tax Rates Are Going Down Source: Organisation for Economic Co-Operation and Development; Tax Foundation Note: Capital gains taxes assume holding period of >1 year  U.S corporate tax rates could go from among the highest in the OECD to 15-20%  Could radically change financial considerations for companies making investment decisions, considering asset dispositions, expanding internationally, etc.  Potential changes to partnership/passthrough rates remain vague, but could be highly impactful to many family businesses  Change in carried interest tax treatment could catalyze substantial private equity monetization in 2017 Status Quo Trump Tax Plan House Tax Plan Corporate 35% 15% 20% Individual 10% to 39.6%; Capital gains and dividends rate at 15% to 23.8% 12%, 25%, and 33%; Capital gains and dividends at maximum rate of 20% 12.5%, 25%, and 33%; Capital gains and dividends taxes halved from ordinary rates Passthrough Individual ordinary income tax rates Between individual rates and 15% (to be determined) Maximum rate of 25%
  28. 28. Summit 2016 28 Tax Incentives May Favor Capital Investment Over Financial Leverage  Both Trump and House plans propose some form of the following:  Ability to immediately expense certain capital expenditures  Elimination of current deduction for net interest expense  This would likely drive a net tax benefit in the near-term for companies with substantial capital expenditures For every $1 of net interest expense deduction lost… …$3.43 of potential CAPEX deduction accelerated Source: Bloomberg Note: Net interest expense and CAPEX figures based on Russell 2000 from 2010-2015; CAPEX includes land that is not depreciable Illustrative Tax Economics Based on Russell 2000 Averages Companies should consider reevaluating capital plan and financing strategy
  29. 29. Summit 2016 29 Offshore Cash Is Likely to Become Accessible  Current U.S. tax regime has driven multinationals to accumulate massive amounts of cash offshore  Both plans would eliminate incentive to keep foreign earnings outside the U.S., either by removing deferral or with a territorial system  Sudden access to global liquidity could change the strategic dynamics in many industries  Would also force companies to reevaluate capital structure and capital allocation strategies Source: FactSet; Equity research via ThomsonOne 1 Free Cash Flow, Share Buybacks, and Dividends are aggregate numbers for 2015 based on current S&P 500 constituents; U.S. M&A is overall total $1,000bn $718bn $2,264bn $569bn $718bn Offshore cash FCF U.S. M&A Share Repo Total Dividends Putting Offshore Cash in Context1 > A sudden cash windfall may spur M&A activity
  30. 30. Summit 2016 30 Disclaimer This document and any other materials accompanying this document (collectively, the “Materials”) are provided for general informational purposes. By accepting any Materials, the recipient thereof acknowledges and agrees to the matters set forth below in this notice. Wells Fargo Securities makes no representation or warranty (express or implied) regarding the adequacy, accuracy or completeness of any information in the Materials. Information in the Materials is preliminary and is not intended to be complete, and such information is qualified in its entirety. Any opinions or estimates contained in the Materials represent the judgment of Wells Fargo Securities at this time, and are subject to change without notice. Interested parties are advised to contact Wells Fargo Securities for more information. The Materials are not an offer to sell, or a solicitation of an offer to buy, the securities or instruments named or described herein. The Materials are not intended to provide, and must not be relied on for, accounting, legal, regulatory, tax, business, financial or related advice or investment recommendations. No person providing any Materials is acting as fiduciary or advisor with respect to the Materials. You must consult with your own advisors as to the legal, regulatory, tax, business, financial, investment and other aspects of the Materials. Wells Fargo Securities is the trade name for certain capital markets and investment banking services of Wells Fargo & Company and its subsidiaries, including Wells Fargo Securities, LLC, member FINRA and SIPC, and Wells Fargo Bank, NA. Notwithstanding anything to the contrary contained in the Materials, all persons may disclose to any and all persons, without limitations of any kind, the U.S. federal, state or local tax treatment or tax structure of any transaction, any fact that may be relevant to understanding the U.S. federal, state or local tax treatment or tax structure of any transaction, and all materials of any kind (including opinions or other tax analyses) relating to such U.S. federal, state or local tax treatment or tax structure, other than the name of the parties or any other person named herein, or information that would permit identification of the parties or such other persons, and any pricing terms or nonpublic business or financial information that is unrelated to the U.S. federal, state or local tax treatment or tax structure of the transaction to the taxpayer and is not relevant to understanding the U.S. federal, state or local tax treatment or tax structure of the transaction to the taxpayer. IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in the Materials is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax penalties or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

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