The document outlines the state of private capital markets as of Spring 2011, highlighting a rebound in business owner confidence and a decrease in the probability of business failure. Despite 95% of owners being enthusiastic about growth strategies, only 53% possess the financial means to execute them. The report details trends in financing, including increased demand for loans, tighter lending standards, and varying investment focuses among financial institutions.

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

5. What is cost of capital for privately-held businesses? The project launched in 2007; first report in July 2009 We now survey 12 segments semi-annually Survey asks about firm profile, behavior, returns, view of next 12 months Certificate in Private Capital Markets offered again in Malibu November 14-16 Pepperdine Private Capital Markets Project

7. What is the Status of Privately-Held Businesses as of Spring 2011?

8. Prob. of failure finally declines Net income expectations positive

9. Confidence rebounds sharply Optimistic about growth

10. What are Owners Focusing on Today?

11. Finally ended layoffs and CAPEX reductions

12. Still increasing collection times Pricing power or inflationary response? More competitive than ever

13. Business Owner Access to Capital (Net Increases) Finally reversed deteriorating capital access

14. 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 What is the State of Financing?

15. How much senior leverage is available for transactions? How much junior leverage is available and what are the total debt thresholds? How much equity is available for growth capital and transactions? Capital Access Drives Valuations and Deal Flow in the Middle Markets

17. What’s Happening with Capital Providers?

18. 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 What’s Happening in Banks?

19. Personal guarantees mandatory under $15 million EBITDA 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 What’s Happening in Banks? (Cont’d)

20. 26% of investments next year in business services, 25% manufacturing, 14% 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 What’s Happening in Mezz?

21. Tightness of Financial Covenants, Warrant Coverage and PIK Features Warrant coverage declines Covenants less restrictive

22. 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 What’s Happening in PE?

23. 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 What’s Happening in PE? (cont’d)

24. What are Investment Bankers Experiencing?

25. Deal flow has increased slightly Leverage multiples have improved slightly, as have deal multiples, particularly for later-stage companies Due diligence efforts by banks and buyers have increased Compared to Six Months Ago

26. 40% of Business Sale Engagements Expired Without a Transaction

27. Valuation Gaps for Non-Transacted Engagements

28. Difficulty Securing Senior Debt?

29. Balance of Capital with Businesses Worthy of Financing: Surplus or Shortage?

30. Top Issues Facing Privately Held Businesses (Today versus Emerging) Today Emerging

32. John K. Paglia, Ph.D., CFA, CPA Associate Professor of Finance Senior Researcher, Pepperdine Private Capital Markets Project bschool.pepperdine.edu/privatecapital [email_address] Thank You!