ppcmp capital markets 2012 fin

SURVEY REPORT I 2011-2012

By Dr. John K. Paglia Denney Academic Chair and Associate Professor of Finance

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PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2011 ‐ 2012

© 2011 | PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 1

PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT

Senior Researcher

JOHN PAGLIA, PhD, MBA, CPA, CFA

Research Support IRINA SHAYKHUTDINOVA, MBA

Executive Officer MICHAEL SIMS

Advisor to Project RACHEL WILLIAMS

Public Relations F. DOUGLASS GORE KP PUBLIC AFFAIRS

Design

R&R PARTNERS

ACKNOWLEDGEMENTS

This research was made possible by the generous funding from the Denney Endowed Professorship.

PEPPERDINE UNIVERSITY

Dean Linda A. Livingstone, PhD Associate Dean David M. Smith, PhD

Mark W. S. Chun, PhD, Director, Center for Applied Research Dianne King

Michael Stamper Darlene Kiloglu Roger Lotho

Juan Mena Jing Zhang Doris Jones

DUN & BRADSTREET CREDIBILITY CORP.

Jeffrey Stibel, Chair and Chief Executive Officer Aaron Stibel, Senior Vice President, Technology

Judy Hackett, Chief Marketing Officer Erik Simon Brenda Gary



ORGANIZATIONAL SUPPORT

Alliance for Mergers and Acquisitions Advisors (AM&AA)

Association for Corporate Growth (ACG)

Business Valuation Resources (BVR)

California Bankers Association (CBA)

California Mortgage Bankers Association (CMBA)

California Small Business Association (CSBA)

Commerical Finance Association (CFA)

Deal Flow Source Linkedin Group

Exit Planning Institute

Finance Club Linkedin Group

Graziadio Alumni Network (GAN)

Harvard/USC Business Growth Conference

International Business Broker Association (IBBA)

International Business Valuation Association Linkedin Group

International Factoring Association (IFA)

Linked Business Linkedin Group

Los Angeles Venture Association (LAVA)

National Association for Small Business Investment

Companies (NASBIC)

National Association of Women Business Owners

PE/VC Roundtable

Pepperdine Private Capital Markets Project Linkedin Group

Risk Management Association (RMA)

Valuation Linkedin Group

Venture Capital Linkedin Group

Virginia Active Angel Network (VAAN)

SURVEY DESIGN, DISTRIBUTION, AND OTHER SUPPORT

Robert T. Slee Michael McGregor

Tim Rhine Barry D. Yelton Everett Walker Samir Desai

Richard J. Crosby

Leonard Lanzi

Gray DeFevere Jan Hanssen

Robert Zielinski Kevin D. Cantrell

Scott Jones Deidre A. Brennan

Eric Nath Gunther Hofmann Michael Painter

James A. Nelson, MD John Davis Larry Gilson

Andrew Springer Jeri Harmon

Letitia Green Gloria Guenther Steven Brandt Dat T. Do

Andy Wilson Yingping Huang Jason Baum Jason Kumpf Hal Spice Jane Pak

Ralph Adams Eric Williams Dan Deeney John Graham Jeff Nagle

Greg Howath

Nevena Orbach

John Dmohowski Brad Triebsch Gary W. Clark

M. Todd Stemler Patrick George

Sean Samet Mark Walker Kelly Szejko Kevin Halpin

Andre Suskavcevic Chris M. Miller Brian Cove

Jeff Thomas

John Lonergan

Rob Brougham

Brett Palmer

Gary LaBranche

Jamie Schneier

Troy Fukumoto

Dennis Gano

Linh Xavier Vuong

Chris de Vries

Tucker Herring

Michael Nall

Simon James, PhD



TABLE OF CONTENTS

BUSINESS APPRAISER SURVEY INFORMATION ................................................................................................... 10

Operational and Assessment Characteristics ..................................................................................................... 10

INVESTMENT BANKER SURVEY INFORMATION .................................................................................................. 14


BROKER SURVEY INFORMATION ....................................................................................................................... 24


LIMITED PARTNER SURVEY INFORMATION ........................................................................................................ 32


ANGEL INVESTOR SURVEY INFORMATION ......................................................................................................... 39


VENTURE CAPITAL SURVEY INFORMATION ........................................................................................................ 46


PRIVATE EQUITY SURVEY INFORMATION ........................................................................................................... 54


MEZZANINE SURVEY INFORMATION .................................................................................................................. 63


BANK AND ASSET‐BASED LENDING SURVEY INFORMATION ............................................................................... 70


Asset‐Based Lending Specific Characteristics ..................................................................................................... 79

ABOUT THE AUTHOR ......................................................................................................................................... 81

INDEX OF TABLES .............................................................................................................................................. 82

INDEX OF FIGURES ............................................................................................................................................ 84

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FOREWORD

Growth Capital Fixated on Large Companies

By JOHN PAGLIA

Since it’s onset in late 2007, the Great Recession has created never‐before‐seen economic conditions for

economies around the world. Private capital markets have endured significant turbulence during the economic

downturn. From business closures to bank failures to financial service bailouts, we have seen some survivors and

many, many losers.

Since the 2008 passage of the Troubled Asset Relief Program (TARP), we have seen rapid evolution of the capital

providers industry. At the same time, capital seekers have struggled to secure funding. The era of effortless credit

lines and bank loans for small businesses is little more than a fond memory. Venture capitalists have become more

focused on investments in safer, more established companies. Angel Investors are increasingly taking up

opportunities vacated by VCs. Private equity and investment bankers are enduring longer periods to profitably exit

deals.

These rapid changes have left policy makers fumbling for hastily formed government based solutions to correct the

markets. At the same time, overstretched business owners and capital providers are struggling to create workable

market based solutions.

One thing is clear; businesses, capital providers, policy makers and economists would benefit from more up‐to‐

date, precise information to aid the private capital markets. Improved understanding of the entire market, not just

individual segments, from capital providers to individual businesses would improve operations and market

efficiency. It also would save business owners incalculable hours spent chasing capital and capital providers’ time

reviewing only those companies that are deserving of investment.

The Pepperdine Private Capital Markets Project is the first comprehensive set of data to look at the market from

businesses to capital provider’s perspective. The Capital Markets 2011‐2012 Report allows capital providers to

better understand the issues as determined by peer lenders across the major capital segments. The report also

shares behind‐the‐scenes insights into the minds of capital providers.

The Capital Markets 2011‐2012 Report has uncovered data that highlights the state of the overall market. For

example, Private equity firms and Investment bankers have closely matching points of view regarding accessibility

of capital. According to the most recent data, 76% of the 253 investment bankers surveyed said that the number of

companies with $1 million EBITDA (a company's earnings before the deduction of interest, tax and amortization

expenses) who are worthy of investment exceeds the amount of capital available. Whereas, 58% of the investment

banker respondents said the capital available exceeds the number of companies with $100 million EBITDA that

meet investment criteria. In terms of private equity respondents, 63% of the 288 surveyed say that the number of

companies with $5 million EBITDA that are investment worthy exceeds the capital available. On the other hand,

58% of private equity respondents said that the capital available exceeds the number of companies with over $100

million EBITDA who are worthy of investment.



Historically, agreement among investment bankers and private equity firms is uncommon but their agreement is

corroborated by the fact that larger “safer” companies enjoy access to growth capital. However, smaller

companies seeking capital greatly outweigh the available capital.

Other revealing findings include:

Deals are taking longer. Respondents in private equity survey said only 12% planned IPOs. Respondents

exit strategies include selling to a private company at 28%, another 26% of respondents plan to sell to

another private equity group and 22% say they would sell to a public company. PE funders also said they

are waiting 4 years or more to exit regardless of investment size.

Refinancing comprises almost half of bank loans. Respondents to the banks survey said refinancing

accounted for nearly 49% of all lending activity followed by expansion (22%) and working capital (11%).

The largest concentration (58%) of loan sizes was between $1 million and $25 million.

Private equity fears future regulation. While 11% said they feared government regulation and taxes

today, 28% said it was an emerging issue. This could be in response to a recently approved rule from the

Commodity Futures Trading Commission (CFTC) (October 31st) requiring the largest U.S. hedge funds and

private equity funds to report financial information to the government starting next year. The CFTC rule

was also passed by the Securities and Exchange Commission. The reporting requirements were mandated

under the 2010 financial overhaul law.

In 2004, Robert T. Slee wrote "Private Capital Markets: Valuation, Capitalization, and Transfer of Private Business

Interests,” in which he discussed the importance of the private capital markets but relatively little market wide

understanding or research. The Private Capital Markets Project’s Capital Markets 2011‐2012 Report seeks to

improve the inner‐workings of the private capital markets based on real world responses and reactions from

professionals. Through improved understanding of market wide conditions and interconnectedness based on

responses from business owners and capital providers, public and policy makers will be better able to encourage

market‐driven solutions.

The Peppethe major behavior oangel inveappraisersbenchmarkrequired recapital typ Our findingand risk abelow.

0%

10%

20%

30%

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60%

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The cost of capital data presented below identifies medians, 25th percentiles (1st quartile), and 75th percentiles (3rd quartile) of annualized gross financing costs for each major capital type and its segments. The data reveal that loans have the lowest average rates while capital obtained from angels has the highest average rates. As the size of loan or investment increases, the cost of borrowing or financing from any of the following sources decreases.

Table 1. Private Capital Market Required Rates of Return

1st quartile Median 3rd quartile

Bank ($1M CF loan) 6% 6% 7%

Bank ($5M CF loan) 6% 6% 7%

Bank ($10M CF loan) 5% 6% 7%

Bank ($25M CF loan) 5% 6% 6%

Bank ($50M CF loan) 5% 5% 6%

Bank ($100M CF loan) 4% 5% 5%

ABL ($1M loan) 4% 7% 9%

ABL ($5M loan) 4% 7% 9%

ABL ($10M loan) 4% 7% 9%

ABL ($25M loan) 3% 5% 5%

ABL ($50M loan) 3% 4% 4%

ABL ($100M loan) 3% 4% 4%

Mezz ($1M EBITDA) 21% 23% 25%

Mezz ($5M EBITDA) 21% 21% 24%

Mezz ($10M EBITDA) 18% 19% 21%

Mezz ($25M EBITDA) 18% 18% 19%

Mezz ($50M EBITDA) 16% 18% 18%

Mezz ($100M EBITDA) 15% 18% 18%

PEG ($1M EBITDA) 25% 30% 34%

PEG ($5M EBITDA) 24% 26% 30%

PEG ($10M EBITDA) 24% 25% 30%

PEG ($25M EBITDA) 23% 25% 30%

PEG ($50M EBITDA) 23% 25% 30%

PEG ($100M EBITDA) 21% 23% 30%

VC (seed) 28% 38% 46%

VC (startup) 23% 30% 46%

VC (early stage) 23% 28% 51%

VC (expansion) 18% 28% 38%

VC (later stage) 18% 28% 38%

Angel (seed) 30% 45% 95%

Angel (startup) 28% 45% 83%

Angel (early stage) 28% 40% 70%

Angel (expansion) 18% 38% 47%

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CM&AA sElF stUDY MAtERiAls

S p o n S o r e d b y

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REPORT – 2011 ‐

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3.9

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REPORT – 2011 ‐

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multiple

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9%

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2012

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APPRAISER

TDA multiples (

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A multiple

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6.3%

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1% 5%

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PROJECT | CAPIT

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49%

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24%

25%

14%

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23%

REPORT – 2011 ‐

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by Revenue S

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17% 51%

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1% 10%

1% 30%

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1% 25%

1% 26%

1% 16%

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2012

erved. | 12

APPRAISER

Sizes (years)

al business cond

onths Ago

ase %

decreaseincde

% 22%

% 13%

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% 3%

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% 11%

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ss conditions ov

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29%

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51%

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RespondenGovernmen

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15%

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-Held Busine

6

% 60%

ing issue

REPORT – 2011 ‐

ENT. All Rights Res

ly‐held businesmerging issue.

esses

65%

80%

2012

erved. | 13

APPRAISER

sses today.

100%

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7

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© 2011 | PEPPER

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Figure 9. P

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e:

4% of respondey 72% of respon

asons for deals ller or buyer de

dicated a generais a reported shs for companies

ar valuation appsaction approa

sessment Ch

e respondents dore than six.

Private Busin

9%

PITAL MARKETS

Y GRAZIADIO SCHO

NT BANKE

he investment y also reported c buyers, and wue facing privatmerging issue.

ents expect to cndents in Spring

not closing weemand (17%).

al imbalance behortage of capits with $25 millio

proaches used bches.

haracteristics

didn’t close any

ness Sales T

25%

24%

PROJECT | CAPIT

OOL OF BUSINESS

ER SURVE

banker survey slight increases

worsened businely‐held busine

close between og 2011.

re valuation ga

etween compantal for those coon in EBITDA or

by respondents

s

deals in the las

Transactions

%

TAL MARKETS R

AND MANAGEME

EY INFOR

indicated incres in deal flow, ress conditions.esses today. Go

one and five de

p (29%), econo

nies worthy of fompanies with lr more.

s when valuing p

st six months; 5

Closed in th

0

1

2

3

4

5

6

Gr

REPORT – 2011 ‐

ENT. All Rights Res

RMATION

asing margin prrelatively flat le Domestic econvernment regu

eals in the next

omic uncertaint

financing and caess than $10 m

privately‐held b

57% closed betw

he Last Six M

eater than 6

2012

erved. | 14

N

ressure on verage and deanomic uncertainlations and tax

12 months. Thi

y (18%), and

apital available million in EBITDA

businesses were

ween one and f

Months

al nty es

is is up

for A, but

e

five

Approximainvolved bu

Figure 1

The majorit

Nearly 7% oand five de

F

PEPPERDIN

© 2011 | PEPPER

tely 20% of all tusiness services

10. Business

ty of deals (58%

of the respondeals, while only

Figure 12. Pri

11%

9%

8%

7%

13%

16%9

16%

12%

NE PRIVATE CAP

RDINE UNIVERSITY

transactions clos, and 12% that

Types That

%) took six to 12

Figure 11. A

ents don’t expe2% expect to cl

rivate Busine

2

11%

8%

7%

2

29%

%4%

7%

20%

%7%

2%

PITAL MARKETS

Y GRAZIADIO SCHO

osed in the last involved whole

Were Involve

2 months to clo

verage Num

ect to close any ose more than

ess Transacti

0%

15%

12%

22%

%13%

PROJECT | CAPIT

OOL OF BUSINESS

six months invoesale and manu

ed in the Tra

ose. Rarely did a

ber of Month

deals in the ne6 deals.

ions Expecte

%

2 ‐ 4 m

6 ‐ 8 m

10 ‐ 12

Greate

23%

TAL MARKETS R

AND MANAGEME

olved manufactufacturing.

ansactions C

any deal take m

hs to Close O

ext 12 months; 8

ed to Close i

months

months

2 months

er than 18 mon

0

2

4

6

REPORT – 2011 ‐

ENT. All Rights Res

turing, followed

Closed in the

more than one y

One Deal

84% expect to c

in the Next 1

Manufactur

Business ser

Wholesale &

Health care

Information

Retail & con

Financial ser

Basic mater

Other

4 ‐ 6 m

8 ‐ 10

12 ‐ 18

nths

2012

erved. | 15

I‐BANKE

d by 15% that

Last Six Mo

year to close (4%

close between

12 Months

ing

rvices

& distribution

technology

nsumer service

rvices

ials & energy

months

months

8 months

1

3

5

Greater than

ER cont.

onths

%).

one

s

6

Approxima

Figu

Top three rSeller/buye

Of those trabetween 21

1

PEPPERDIN

© 2011 | PEPPER

tely 42.7% of d

ure 13. Perce

reasons for deaer demands (17

Figure

ansactions that1% and 30%.

Figure

42.7%

17

14%

8%

6%2%

39%

9%

7%

NE PRIVATE CAP

RDINE UNIVERSITY

eals terminated

entage of Bu

ls not closing: v%).

14. Reasons

t didn’t close du

15. Valuatio

%

6%

8%

%

7%

PITAL MARKETS

Y GRAZIADIO SCHO

d without trans

usiness Sales

valuation gap in

s for Busines

ue to a valuatio

on Gap in Pric

57.3

29%

18%

29%

PROJECT | CAPIT

OOL OF BUSINESS

sacting over the

s Engageme

n pricing (29%),

ss Sales Eng

n gap in pricing

cing for Tran

3%

TAL MARKETS R

AND MANAGEME

e past year.

ents Termina

economic unce

gagements N

g, approximatel

nsactions Th

Tr

%

Valuation g

Economic u

Unreasonab

Lack of capi

No market f

Insufficient

Seller misre

Other

0‐10%

11‐20%

21‐30%

31‐40%

41‐50%

Greater tha

REPORT – 2011 ‐

ENT. All Rights Res

ted Without

ertainty (18%),

Not Transacti

ly 39% had a va

hat Didn’t Clo

ransacted

Not transacte

gap in pricing

uncertainty

ble seller or bu

ital to finance

for business

cash flow

epresentations

an 50%

2012

erved. | 16

I‐BANKE

Transacting

and unreasona

ting

aluation gap in p

ose

d

uyer demand

s

ER cont.

g

able

pricing

The weight34% for bot

Recast EBITvaluations.

Average de

EBITDA

$1M

$5M

$10M

$25M

$50M

$100M

5%

PEPPERDIN

© 2011 | PEPPER

ts of the variousth income and

TDA multiples (3

eal multiples on

Ta

Manufacturing

4

4.5

5.25

6

6.5

6.5

15%

11%

21%

12%

NE PRIVATE CAP

RDINE UNIVERSITY

s valuation apptransaction app

Figur

39%) and EBITD

transactions fr

Table 4. Media

g Retail and consumer services

3.5

4

7

6.5

4.5

7.25

34%

% 6%

13%7%

3%

PITAL MARKETS

Y GRAZIADIO SCHO

roaches used bproaches.

re 16. Usage

DA multiples (21

Figure 17.

rom the prior si

an Deal Mult

Wholesale &

distribution

B

3.5

4.5

5.5

6

6.25

6

34%

%

39%

PROJECT | CAPIT

OOL OF BUSINESS

by respondents

of Valuation

1%) carried the

Usage of Mu

x months as ob

tiples by EBI

Business services

Bamat

en

4 3

5

6

6

6 7

7.5

Rev

Re

EB

EB

Cas

Ne

Ot

TAL MARKETS R

AND MANAGEME

when valuing p

n Approache

most weight w

ultiples

bserved by resp

ITDA Size of

asic terials & ergy

Health care

3.5 4

4 5

5 6

5 5.75

7.5 7

8 6.5

Income appr

Transaction a

Public compa

Asset based

Other

venue multiple

cast EBITDA m

ITDA multiple

IT multiple

sh flow multip

et income mult

her

REPORT – 2011 ‐

ENT. All Rights Res

privately‐held b

es

when using mult

pondents varied

f Company

Information technology

4.25

5.5

6

7.5

7.75

8.75

roach (DCF, NP

approach

any approach

approach

e

multiple

ple (excluding E

tiple

2012

erved. | 17

I‐BANKE

businesses inclu

tiples to determ

d from 2 to 9.

Financial services

A

3.5

4

5

5.25

5

6.75

PV, IRR)

EBITDA or EBIT

ER cont.

ded

mine

Average

4

5

6

6

6

7

T)

Average tot

$1M

$5M

$10M

$25M

$50M

$100M

Average tot

$1M

$5M

$10M

$25M

$50M

$100M

Approxima

0%

10%

20%

30%

40%

PEPPERDIN

© 2011 | PEPPER

tal leverage mu

Ta

Manufacturing

3

3

3

3.25

4.5

5.75

tal leverage mu

Tab

Manufacturing

2

2.5

2

3.25

3

3.75

tely 37% of bus

37%

Contingent ea

NE PRIVATE CAP

RDINE UNIVERSITY

ultiples observe

ble 5. Media

Retail &

consumer services

W

2.75

3.5

4

2.75

3

5

ultiples observe

ble 6. Median

Retail &

consumer services

W

2

3

3

3

3

3.25

siness sales tran

Figu

arnout Sel

PITAL MARKETS

Y GRAZIADIO SCHO

ed by responden

n Total Leve

Wholesale & distribution

Bs

2.5

3

3

2.5

3

3.5

ed by responden

n Senior Leve

Wholesale & distribution

Buse

1.75

2

2

2

2.25

3

nsactions closed

ure 18. Comp

32%

ller financing /note

PROJECT | CAPIT

OOL OF BUSINESS

nts varied from

erage Multipl

usiness ervices

Basmateria

ener

3 2.5

2.5 2.7

3 2.5

4 2.5

4.75 5

5.5 6

nts varied from

erage Multip

usiness ervices

Basmateria

ener

1.75 n/a

2.5 2.5

2.75 2

4 2

4.5 5

4 n/a

d in the last 12

ponents of C

/ seller Low

TAL MARKETS R

AND MANAGEME

m 1.5 to 6.

les by Size o

sic als & rgy

Health care

5 2

75 3

5 3

5 3.5

3.75

5

m 1.5 to 6.

ples by Size o

sic als & rgy

Health care

a 1.5

5 2.75

2.5

2.75

2.5

a n/a

months involve

Closed Deals

28%

wered multipleEBITDA

REPORT – 2011 ‐

ENT. All Rights Res

of Company


3

2.5

3.75

3

5

5

of Company

reInformation technology

2.5

2

2.5

1.5

n/a

n/a

ed contingent e

s

e of Adjuse

2012

erved. | 18

I‐BANKE

Financial services

Av

3

3

3.5

3.25

3.5

3.5

Financial services

Av

2

3.5

3.5

3.5

5

4

earnouts.

27%

sted amount oequity sold

ER cont.

verage

3

3

3

3

4

5

verage

2

3

3

3

4

4

of

Approximabetween 1%

RespondenThere is a rcompanies

EBITDA

$1M

$5M

$10M

$25M

$50M

$100M

RespondenEBITDA.

Tab

EBITDA

$1M

$5M

$10M

$15M

$25M

$50M

$100M

PEPPERDIN

© 2011 | PEPPER

tely 19% of res% and 20%.

Figure 19

nts indicated a greported shortawith $25 millio

Ta

Compworthfinan

GREAexceed

avail

45

20

6%

6%

5%

2%

nts indicated a g

ble 8. How Di

Extremely difficult

38%

11%

1%

2%

3%

4%

7%

13%

3%2%

NE PRIVATE CAP

RDINE UNIVERSITY

pondents didn’

9. Premium P

general imbalange of capital foon in EBITDA or

able 7. Balan

panies hy of ncing ATLY

d capital lable

Cowfi

exca

5%

0%

%

%

%

%

general difficult

ifficult to Arr

Difficult

34%

19%

19%

15%

12%

12%

7%

19

28%

13%

PITAL MARKETS

Y GRAZIADIO SCHO

t witness any p

Paid by Stra

nce between coor those companmore.

ce of Availab

ompanies worthy of inancing eed capital

available

31%

39%

31%

25%

19%

11%

ty with arrangin

range Senior

Somewhat difficult

14%

23%

22%

20%

14%

10%

16%

9%

23%

PROJECT | CAPIT

OOL OF BUSINESS

premium paid b

tegic Buyers

ompanies worthnies with less th

ble Capital w

General balance

12%

22%

34%

36%

32%

29%

ng senior debt f

r Debt for Tra

Neutral S

8%

22%

20%

15%

21%

18%

7%

TAL MARKETS R

AND MANAGEME

by strategic buy

s Relative to

hy of financing ahan $10 million

with Quality C

Capital available exceeds

companies worthy of financing

8%

13%

22%

25%

26%

35%

for businesses w

ansactions o

Somewhat easy

6%

15%

15%

23%

14%

10%

13%

REPORT – 2011 ‐

ENT. All Rights Res

ers, while 51%

Financial Bu

and capital avan in EBITDA but

Companies

Capitalavailable

GREATLexceeds

companieworthy ofinancing

4%

6%

7%

8%

18%

23%

with less than $

over the Past

Easy Ext

e

0%

8%

15%

12% 1

14% 2

14% 3

18% 3

No

Yes, 1 ‐10%

Yes, 11‐20%

Yes, 21‐30%

Yes, 31‐40%

Yes, 41‐50%

Yes, >50% m

2012

erved. | 19

I‐BANKE

saw premiums

uyers

ilable for the saa general surpl

e

LY s es of g

Scor(-2 to

-1.04

-0.5

-0.0

0.06

0.33

0.66

$5 million in

t Six Months

remely easy

Sc(-3 t

1% -1

2% -0

9% 0

13% 0

22% 0

33% 0

33% 1

I‐BANKE

more

more

more

more

more

more

ER cont.

ame. lus for

re 2)

4

5

7

6

3

6

ore to 3)

1.9

0.6

.1

.3

.6

.9

.0

ER cont.

Approximachief execu

Figure 2

According t

Understa

Knowled

PEPPERDIN

© 2011 | PEPPER

tely 79% of resutives, would be

20. Would Se

to respondents

Figure

anding compet

Sa

dge of busines

In

Legal and reg

Manag

Quantitative

Global bus

NE PRIVATE CAP

RDINE UNIVERSITY

pondents agreeenefit from add

enior Manage

leadership skil

e 21. Skills T

49%

17%

4% 1%

Leader

titive environm

Strategic plan

ales and marke

s and world ev

Corporate fin

nspiring innova

gulatory knowle

gement accoun

e analysis/rese

iness managem

Human resou

PITAL MARKETS

Y GRAZIADIO SCHO

e that among coitional leadersh

ers and ChieSkil

ls are the most

That Are Impo

30%

0% 10%

rship

ments

nning

eting

vents

ance

ation

edge

nting

earch

ment

urces

Today

PROJECT | CAPIT

OOL OF BUSINESS

ompanies that thip and skills tra

ef Executiveslls Training?

important for s

ortant for Se

% 20% 30%

y In the fut

TAL MARKETS R

AND MANAGEME

they have workaining.

s Benefit from?

senior managem

enior Manage

Stron

Agre

Neut

Disag

Stron

38%

37%

36%32%

30%

% 40% 50%

ture

REPORT – 2011 ‐

ENT. All Rights Res

ked with, senior

m Additional

ment to have.

ement to Hav

ngly agree

e

tral

gree

ngly disagree

69%

67%

60%58%

60% 70%

2012

erved. | 20

r managers, suc

l Leadership

ve

I‐BANKE

94

88%

86%

%

80% 90% 10

ch as

and

ER cont.

4%

00%



Respondents indicated increases in deal flow, margin pressure on companies, strategic buyers making deals, and worsened general business conditions relative to six months ago.

Table 9. General Business and Industry Assessment: Today versus Six Months Ago

Decreased significantly

Decreased slightly

Stayed about the

same

Increased slightly

Increased significantly

% increase

% decrease

Net increase/ decrease

Deal flow 9% 21% 23% 32% 14% 46% 30% 16%

Leverage multiples 8% 15% 47% 29% 0% 29% 23% 6%

Deal multiples 5% 19% 42% 31% 2% 34% 24% 9%

Amount of time to sell business 2% 12% 47% 25% 14% 39% 13% 26%

Difficulty financing/selling business 2% 13% 50% 23% 11% 35% 15% 20%

General business conditions 10% 42% 29% 17% 2% 19% 52% -33%

Strategic buyers making deals 3% 14% 35% 40% 7% 48% 17% 31%

Margin pressure on companies 2% 7% 34% 41% 16% 58% 9% 49%

Buyer interest in minority transactions 13% 20% 49% 16% 1% 17% 34% -16%

During the next twelve months, respondents expect further increases in deal flow, margin pressure on companies, strategic buyers making deals, and worsening general business conditions.

Table 10. General Business and Industry Assessment Expectations over the Next 12 Months

Decrease significantly

Decrease slightly

Stay about the same

Increase slightly

Increase significantly

% increase

% decrease

Net increase/decrease

Deal flow 2% 15% 27% 46% 9% 55% 17% 38%


Deal multiples 3% 24% 34% 39% 1% 39% 27% 13%


Difficulty financing/selling business 0% 24% 42% 26% 9% 35% 24% 11%


Strategic buyers making deals 2% 10% 40% 40% 8% 48% 12% 36%


Buyer interest in minority transactions 8% 16% 55% 19% 3% 22% 23% -1%

I‐BANKER cont.

RespondenGovernmen

Econo

Govern

Economic

Compet

PEPPERDIN

© 2011 | PEPPER


omic uncertaint

Acc

ment regulatio

uncertainty (i

tition from fore

NE PRIVATE CAP

RDINE UNIVERSITY

nomic uncertainand taxes are in

Figure 22

ty (domestic)

ess to capital

ons and taxes

nternational)

eign partners

Other

Inflation

0

PITAL MARKETS

Y GRAZIADIO SCHO

nty is the most idicated as the

. Issues Faci

2%

2%

0%

2%

4%

0% 5% 1

Current iss

PROJECT | CAPIT

OOL OF BUSINESS

important issuemost important

ing Privately

11%

10%

1

15%

9%

10% 15% 2

sue Emerg

TAL MARKETS R

AND MANAGEME

e facing privatet emerging issu

y-Held Busin

17%

24%

%

20% 25%

ging issue

REPORT – 2011 ‐

ENT. All Rights Res

ly‐held businesue.

nesses

32%

29%

30% 35%

2012

erved. | 22

sses today.

43%

40% 45%

50%

Approxima12 monthsuncertaintydomestic e Other key f

Theiha

Apal

Toec

Operatio

Approximadeals, while

Approximainvolved bu

Figure

PEPPERDIN

© 2011 | PEPPER

tely 39% of the. This is up froy is the most imconomic uncert

findings include

he majority of dght‐month catealf years to clos

pproximately 4so further incre

op three reasonconomic uncert

onal and Ass

tely 25% of thee 9% closed mo

Figure 23.

tely 20% of all tusiness services

24. Private B

16%

8%6

6%

11%

16%

NE PRIVATE CAP

RDINE UNIVERSITY

BRO

e 99 participantom 25% of resmportant issue tainty are indic

e:

deals (87%) tooegory. Another se.

5% of respondeeases in deal flo

ns for deals nottainty (19%).

sessment Ch

e respondents dore than six.

Private Busi

transactions clos and 12% that i

Business Sal

19

24%

6%2%

5%

3%

8%

14%

%6%

PITAL MARKETS

Y GRAZIADIO SCHO

KER SURV

ts in the brokerpondents in thfacing privatelated as the mo

k less than 1 ye9% took about

ents expect woow, margin pres

closing: valuat

haracteristics

didn’t close any

iness Sales T

osed in the last involved whole

les Transact

9%

20%

0%

20%

16%

PROJECT | CAPIT

OOL OF BUSINESS

VEY INFO

r survey said thhe Spring 2011ly‐held businesost important em

ear to close with a year and a ha

rsening businesssure on compa

ion gap in pricin

s

deal in the last

Transactions

six months invosale and manuf

tions Expecte

TAL MARKETS R

AND MANAGEME

ORMATIO

ey expect to clo1 report. Resposses today. Govmerging issues.

h the largest coalf and rarely d

ss conditions inanies, and strat

ng (24%); lack o

t six months; 57

s Closed in th

olved manufactfacturing.

ed to bClose

0

2

4

6

0

2

4

6

Greate

REPORT – 2011 ‐

ENT. All Rights Res

ON

ose more than ondents believevernment regul.

oncentration bedid a deal take m

n the next 12 motegic buyers ma

of capital to fina

7% closed betw

the Last Six M

turing followed

e in the Next

r than 10

2012

erved. | 24

five deals in the domestic ecoations and tax

eing the in six tomore than one a

onths. Respondaking deals.

ance (23%);

ween one and fiv

Months

d by 15% that

Twelve Mon

1

3

5

Greater than

1

3

5

7 ‐ 10

he next onomic es and

o and a

dents

ve

nths

n 6

Approximamonths.

Fig

The majorit

Approxima

Figu

1

5%

PEPPERDIN

© 2011 | PEPPER

tely 58% of res

gure 25. Priva

ty of deals (51%

tely 46% of dea

ure 27. Perce

6%

11%

%

4%3% 4%

13%

16%

54%

NE PRIVATE CAP

RDINE UNIVERSITY

pondents are p

ate Business

%) took four to e

Figure 26. A

als terminated w

entage of Bu

3%

8

14%

6%

7%9%

4%

PITAL MARKETS

Y GRAZIADIO SCHO

planning to close

s Sales Trans

eight months to

verage Num

without transac

usiness Sales

%

20%

16%

22%

29%

46%

PROJECT | CAPIT

OOL OF BUSINESS

e between one

sactions Exp

o close.

ber of Month

cting over the p

s Engageme

%

TAL MARKETS R

AND MANAGEME

and five busine

pect to Close

hs to Close O

past year.

ents Termina

0

2

4

6

8

10

2 ‐ 4 mo

4 ‐ 6 mo

6 ‐ 8 mo

8 ‐ 10 m

10 ‐ 12

12 ‐ 18

Greater

REPORT – 2011 ‐

ENT. All Rights Res

ess sales transa

e in the Next

One Deal

ted Without

1

3

5

7

9

Great

onths

onths

onths

months

months

months

r than 18 mont

Transacted

Not transact

2012

erved. | 25

BROKE

actions in the ne

t 12 Months

Transacting

er than 10

ths

ed

ER cont.

ext 12

g

Top three runcertainty

Of those debetween 21

The most pincome and

13

PEPPERDIN

© 2011 | PEPPER

reasons for deay (19%).

Figure

eals that didn’t 1% and 30%.

Figure

popular valuatiod transaction ap

19%

3%

7%7%

2%

5

23%

2%

5%

13%

5%

NE PRIVATE CAP

RDINE UNIVERSITY

ls not closing: v

28. Reasons

close due to a v

29. Valuatio

on approaches upproaches.

Figur

24%5%

6%

42%

5%

13%

PITAL MARKETS

Y GRAZIADIO SCHO

valuation gap in

s for Busines

valuation gap in

on Gap in Pric

used (by weight

re 30. Usage

23%

23%

30%

34%

PROJECT | CAPIT

OOL OF BUSINESS

n pricing (24%),

ss Sales Eng

n pricing, appro

cing for Tran

t) by responden

of Valuation

0‐

21

41

TAL MARKETS R

AND MANAGEME

lack of capital t

gagements N

oximately 42% h

nsactions Th

nts when valuin

n Approache

Valuation gap

Lack of capital

Economic unce

Unreasonable

Insufficient ca

No market for

Seller misrepre

Other

‐10%

1‐30%

1‐50%

Incom

Tran

Publi

Asse

Costs

Othe

REPORT – 2011 ‐

ENT. All Rights Res

to finance (23%

Not Transacti

had a valuation

hat Didn’t Clo

ng privately‐hel

es

in pricing

l to finance

ertainty

seller or buye

sh flow

r business

esentations

11

31

Gr

me approach (

saction approa

ic company ap

t based approa

s to create app

er

2012

erved. | 26

BROKE

%), and econom

ting

n gap in pricing

ose

d businesses w

r demand (non

1‐20%

1‐40%

reater than 50%

(DCF, NPV, IRR

ach

pproach

ach

proach

ER cont.

mic

were

n‐price)

%

)

Most of res

Average rev

Revenue

$100,000

$500,000

$1M

$5M

$10M

Greater than

Average EB

Revenue

$100,000

$500,000

$1M

$5M

$10M

PEPPERDIN

© 2011 | PEPPER

spondents use r

venue multiple

Table 1

Manuf

1

1

1

n $10M 2

BITDA multiples

Table 1

Manufacturing

3

3.25

3.5

4.5

4.75

15%

12%

7%

5%

NE PRIVATE CAP

RDINE UNIVERSITY

recast EBITDA m

s on deals obse

11. Median Re

acturing Reta

consuservic

1.9 1.4

1 1.7

2 1.6

1.4 1.5

1.6 2

2.3 2

on deals obser

12. Median E

Retail & consumer services

Wd

2

3

3

4

5

%4%

PITAL MARKETS

Y GRAZIADIO SCHO

multiples (34%)

Figure 31.

erved by respon

evenue Deal

il & umer ces

Wholesaledistributio

4 1.3

7 1.4

6 0.8

5 1

3

3

rved by respond

EBITDA Deal

holesale & istribution

Busser

3.5

3.25

3 3

4

4 4

34%

23%

PROJECT | CAPIT

OOL OF BUSINESS

and cash flow

Usage of Mu

ndents varied fr

l Multiples by

&n

Business services

Bmat

en

1.5

1.1

1.4

1

1

2

dents varied fro

Multiples by

siness rvices

Basicmaterials

energy

3 2.75

3 4

3.5 3.5

4 4.5

4.75 7

TAL MARKETS R

AND MANAGEME

multiples (23%

ultiples

rom 1 to 3.

y Revenue S

Basic terials &nergy

Health care

2 2

2 2.1

2.1 0.8

2 1.2

2.4 3

3 2.1

om 2 to 7.

y Revenue Si

c s & y

Health care

5.5

4

4

7

6

Reca

Cash

EBIT

Reve

Othe

Net

EBIT

REPORT – 2011 ‐

ENT. All Rights Res

%).

Size of Comp


2

2.1

2.4

3

2.8

3

ize of Compa


5

3

4.75

5.5

7

ast EBITDA mu

h flow multiple

TDA multiple

enue multiple

er

income multip

T multiple

2012

erved. | 27

BROKE

pany

Financial services

Ave

1

1.2

1.8

1.4

2.7

2.8

any

Financial services

Ave

3.25 3

3.75 3

5 3

2.5 4

5 5

BROKE

ltiple

e

ple

ER cont.

erage

2

2

2

2

2

3

erage

3.5

3.4

3.8

4.5

5.4

ER cont.

Approxima

Respondenrevenues.

Figu

Revenusize

$100K

$500K

$1M

$5M

$10M

$15M

$25M+


Figure 3

0%10%20%30%40%50%60%70%

S

PEPPERDIN

© 2011 | PEPPER

tely 61% of bus

nts indicated a g

re 33. How D

ue Extremdifficu

71%

41%

31%

14%

12%

13%

12%


34. Would Se

61%

Seller FinancingNote

23%

NE PRIVATE CAP

RDINE UNIVERSITY

siness sales tran

Figu

general difficult

Difficult to Ar

mely ult

Difficult

% 8%

% 23%

% 27%

% 22%

% 19%

% 9%

% 12%


enior Manage

g / Seller C

36%

5%

PITAL MARKETS

Y GRAZIADIO SCHO

nsactions closed

ure 32. Comp

ty with arrangin

rrange Senio

Somewhat difficult

3%

9%

10%

19%

27%

22%

18%


ers and ChieSkil

36%

ontingent earn

36%

PROJECT | CAPIT

OOL OF BUSINESS

d in the last 12

ponents of C

ng senior debt f

or Debt for Tr

Neutral S

16%

11%

16%

17%

12%

9%

12%



nout Low

TAL MARKETS R

AND MANAGEME

months involve

Closed Deals

for businesses w

ransactions

Somewhat easy

E

0%

7%

10%

14%

15%

26%

29%


s Benefit from?

49%

wered deal pric

REPORT – 2011 ‐

ENT. All Rights Res

ed seller financ

s

with less than $

over the Pas

Easy Extre

eas

3% 0%

9% 0%

6% 0%

14% 0%

8% 8%

9% 13

0% 18

ked with, senior

m Additional

ce Lowereq

Strongly agre

Agree

Neutral

Disagree

2012

erved. | 28

ing or seller no

$1 million in

st Six Months

mely sy

Score(-2 to 2

% -1.26

% -0.52

% -0.33

% 0.36

% 0.54

% 1.04

% 1.06

r managers, suc

l Leadership

BROKE

15%

red amount ofquity sold

ee

te.

s

e 2)

ch as

and

ER cont.

f

According tmost impor

RespondenGovernmen

Underst

Knowle

Ec

Econo

Gov

Competiti

PEPPERDIN

© 2011 | PEPPER

to respondents,rtant for senior

Figure


tanding compe

edge of busine

Mana

Legal and re

Quantitativ

Global bu

conomic uncert

omic uncertaint

vernment regu

ion from foreig

NE PRIVATE CAP

RDINE UNIVERSITY

, leadership skir management t

e 35. Skills T

nomic uncertainand taxes and e

Figure 36

Leade

Strategic pla

etitive environm

Sales and mar

ess and world e

Corporate fi

Inspiring innov

agement accou

Human reso

egulatory know

ve analysis/res

usiness manage

tainty (domest

Access to capi

ty (internation

lations and tax

gn trade partne

Oth

PITAL MARKETS

Y GRAZIADIO SCHO

lls, strategic plato have.

That Are Impo

nty is the most iconomic uncert

. Issues Faci

4%6

0% 10

ership

anning

ments

keting

events

nance

vation

unting

ources

wledge

search

ement

Other

Today

0%

5%

tic)

tal

nal)

xes

ers

her

0%

Current iss

PROJECT | CAPIT

OOL OF BUSINESS

anning, and und

ortant for Se

important issuetainty are indic

ing Privately

2726

%6%

0% 20% 30%

y In the fut

10%

8%

7%

16%

16%

7%

%

10% 20

sue Emerg

TAL MARKETS R

AND MANAGEME

derstanding com

enior Manage

e facing privatecated as the mo

y-Held Busin

47

42%40%

7%6%

48

41%

41%

41%

% 40% 50%

ture

27%

27%

%

%

27%

% 30%

ging issue

REPORT – 2011 ‐

ENT. All Rights Res

mpetitive envir

ement to Hav

ly‐held businesost important em

nesses

62%

56%53%

%

58%

59%8%

64%

52%

55%

% 60% 70%

40%

2012

erved. | 29

onments are th

ve

sses today. merging issues.

BROKE

86%

86%

86%

73%

75%

77%73%

80% 90% 1

48%

50%

he

.

ER cont.

100%

60%



Compared to six months ago, respondents indicated increases in deal flow and difficulty financing or selling business, increase in margin pressure on companies and deteriorated general business conditions. Respondents also indicated decreased deal multiples.

Table 13. General Business and Industry Assessment: Today Versus Six Months Ago


Decreased slightly

Stayed about the

same

Increased slightly


% increase

% decrease


Deal flow 11% 10% 32% 36% 11% 47% 21% 26%

Ratio of businesses sold/total listings 13% 4% 49% 28% 6% 33% 17% 16%

Deal multiples 3% 23% 59% 13% 3% 16% 26% -10%

Business exit opportunities 6% 26% 30% 33% 6% 39% 31% 7%


Difficulty selling business 4% 16% 36% 24% 20% 44% 20% 24%

Business opportunities for growth 4% 20% 42% 28% 6% 33% 25% 9%



During the next twelve months, respondents expect further increases in deal flow, margin pressure on companies, and worsening general business conditions.



Decrease slightly

Stay about the same

Increase slightly


% increase

% decrease


Deal flow 10% 14% 34% 32% 10% 42% 24% 19%

Ratio of businesses sold/total listings 12% 12% 47% 27% 2% 29% 24% 5%

Deal multiples 7% 24% 59% 9% 2% 10% 31% -21%

Business exit opportunities 8% 28% 30% 30% 3% 33% 37% -3%


Difficulty selling business 2% 15% 37% 25% 20% 46% 17% 29%

Business opportunities for growth 5% 24% 37% 29% 5% 34% 29% 5%



Approximarisk/return currently oinformationfindings inc

Apbe

Oanca

Retoin

Reinan

Operatio

Approxima$50 million

Responden

Figure

0%

50%

100%

PEPPERDIN

© 2011 | PEPPER

L

tely 20% of thetrade‐off inve

offers the best n technology. Cclude:

pproximately 2etween $50 mil

n average respond 15% to direcapital, buyout p

espondents indo all other alternncreased expect

espondents seencreasing allocand further incre

onal and Ass

tely 26% of res and $500 milli

F

nts reported on

e 38. Current

18%

9%

NE PRIVATE CAP

RDINE UNIVERSITY

LIMITED P

e 71 respondentestment class, risk/return tra

Confidence in th

6% of respondellion and $500 m

ondents target ct investments. private equity a

dicated increasenative assets inted returns on n

e best domestiction to alternatease in expected

sessment Ch

pondents reporon.

Figure 37. As

their % of tota

t and Target A

8%

15%

52%

Current alloc

PITAL MARKETS

Y GRAZIADIO SCHO

PARTNER

ts in the limitedfollowed by d

ade‐off, 48% ofhe energy indus

ents reported tmillion.

to allocate 20%Respondents end direct invest

ed allocation to n the last six monew investmen

c opportunities tive assets, slighd returns.

haracteristics

rted their asset

ssets under M

l asset allocatio

Asset Alloca

26%

23%

cation

PROJECT | CAPIT

OOL OF BUSINESS

R SURVEY

d partner survedirect investmef respondents stry is down to 3

heir asset categ

% of their assetsexpect the highetments.

direct investmonths. They alsots.

in California, Tehtly improving b

s

t category being

Managemen

ons for “Alterna

ations for "A

TAL MARKETS R

AND MANAGEME

Y INFORM

ey reported buyents at 19%. Wreported healt30% from 44%

gory being less

s to venture capest returns of 2

ents and privato reported wors

exas and New Ebusiness condit

g less than $50

t or Investab

ative Assets”.

Alternative As

Le

$5

$5

$1

$5

Gr

Targ

REPORT – 2011 ‐

ENT. All Rights Res

MATION

yout private eqWhen asked ath care, followin the Spring 20

than $50 millio

pital, 19% to bu20% from invest

te equity and desened business

England states. tions, increase

million, while 2

ble Funds

ssets" (% of

ess than $50 m

50 million ‐ $50

500 million ‐ $1

1 billion ‐ $5 bi

5 billion ‐ $10 b

reater than $10

55%

get allocation

2012

erved. | 32

uity as being thabout which ined by 36% rep011 report. Oth

on, while 23% w

uyout private eqtments in ventu

ecreased alloca conditions but

They also expein direct investm

23% were betw

total portfol

illion

00 million

1 billion

llion

billion

0 billion

he best ndustry porting her key

were

quity ure

ation t

ect ments

ween

lio)

On averageto direct inv

On averageinvestment

Privat

Di

Privat

Private e

0%

5%

10%

15%

20%

25%

PEPPERDIN

© 2011 | PEPPER

e, respondents tvestments.

e respondents ets.

Fi

Venture cap

e equity ‐ buyo

irect investme

e equity ‐ grow

Real estate fu

Hedge fu

Secondary fun

quity ‐ distress

Mezzan

Fund of fun

20% 20%

NE PRIVATE CAP

RDINE UNIVERSITY

target to alloca

Figur

expect the highe

igure 40. Ann

2

ital

out

nts

wth

und

und

nds

sed

ine

nds

% 20%

PITAL MARKETS

Y GRAZIADIO SCHO

te 20% of their

re39.Curren

est returns from

nual Return E

5%

4%

3%

2%

18% 18%

PROJECT | CAPIT

OOL OF BUSINESS

r assets to ventu

nt Target Ass

m investments

Expectations

9%

8%

%15%

TAL MARKETS R

AND MANAGEME

ure capital, 19%

set Allocation

in venture capi

s for New Inv

15

11%

15% 15%

REPORT – 2011 ‐

ENT. All Rights Res

% to buyout priv

n

tal, buyout priv

vestments

19%

5%

%14%

2012

erved. | 33

vate equity, and

vate equity and

20%

%

13% 12%

LP cont.

d 15%

direct

%

Approximaclass, follow

When askecare, follow

7%

0%

10%

20%

30%

40%

50%

60%

PEPPERDIN

© 2011 | PEPPER

tely 20% of reswed by direct in

Fig

d about which wed by 36% rep

11%

7%

%

7%6%

48%

3

NE PRIVATE CAP

RDINE UNIVERSITY

pondents repornvestments at 1

ure 41. Asse

industries curreorting informat

Figure

1%

6% 4%

6% 34%

PITAL MARKETS

Y GRAZIADIO SCHO

rted buyout pri19%.

ets with the B

ently offer the btion technology

e 42. Industry

20%

3%

%30%

PROJECT | CAPIT

OOL OF BUSINESS

vate equity as b

Best Risk/Re

best risk/returny.

y with the Be

19%

24%

TAL MARKETS R

AND MANAGEME

being the best

eturn Trade-o

n trade offs, 48%

est Risk/Retu

Private

Direct

Ventu

Private

Private

Secon

Hedge

Mezza

Real e

Fund o

12%

REPORT – 2011 ‐

ENT. All Rights Res

risk/return trad

off Currently

% of responden

urn

e equity ‐ buyo

investments

re capital

e equity ‐ grow

e equity ‐ distr

dary funds

e fund

anine investme

state funds

of funds

10% 10

2012

erved. | 34

de‐off investme

nts reported he

outs

wth

ressed

ent

0% 8%

LP cont.

ent

ealth

In regard tofollowed by

Figure

According tselecting Ba

0%

10%

20%

30%

40%

50%

60%

0%

5%

10%

15%

20%

25%

30%

35%

40%

Si

PEPPERDIN

© 2011 | PEPPER

o the geography the Latin Ame

e 43. Geograp

to 38% of respoay Area, follow

Figure 44. G

57%

NorthAmerica A

38%

ilicon Valley

NE PRIVATE CAP

RDINE UNIVERSITY

ic regions with erica (41%), and

phic Regions

ondents the geoed by Texas (35

Geographic R

41%

LatinAmerica

Em

35%

Texas

PITAL MARKETS

Y GRAZIADIO SCHO

the best risk/red emerging Asia

s of the Worl

ographic region5%), and New E

Regions of t

35%

2

mergingAsia

DeveA

27%

New England

PROJECT | CAPIT

OOL OF BUSINESS

eturn trade‐offsa (35%) areas.

ld Offering th

with best risk/ngland (27%).

the USA with

20%16

elopedAsia

WesEuro

24%

Bay Area

TAL MARKETS R

AND MANAGEME

s, 57% of respo

he Best Risk

/return trade of

h the Best Ris

6%

10%

sternope

Othemergmark

22%

New YorkMetro

REPORT – 2011 ‐

ENT. All Rights Res

ndents reporte

k/Return Trad

ffs is Silicon Val

sk/Return Cu

%

4%

ergingkets

Central EasterEurop

19%

SouthernCalifornia

2012

erved. | 35

ed North Americ

deoff Curren

ley with anothe

urrently

2%

andrnpe

Other

11%

WashingtoDC

LP cont.

ca,

ntly

er 24%

LP cont.

r

on

According tspecific stra

Characteris

General pa

Specific st

Historical funds Returned fund (distri

Residual v(residual va

Gut feel/ins

Specific loc

Other - ple


Figure 4

PEPPERDIN

© 2011 | PEPPER

to respondents,ategy and histo

stics

artner

rategy

fund performa

capital from mbution to paid-in

value of most alue to paid-in or

stinct

cation

ease specify


45. Would Se

36%

NE PRIVATE CAP

RDINE UNIVERSITY

, the general paorical fund perfo

Table 15

Un

nce on all

most recent or DPI)

recent fund r RVPI)


enior Manage

84%

PITAL MARKETS

Y GRAZIADIO SCHO

artner is the moormance.

5. Importance

nimportant O

im

2%

0%

2%

22%

4%

6%

6%

4%


ers and ChieSkil

%

5

PROJECT | CAPIT

OOL OF BUSINESS

ost important fa

e of Factors

Of little portance

ModIm

2%

0%

2% 2

0%

10% 3

8% 2

12% 3

27% 2



52%

TAL MARKETS R

AND MANAGEME

actor when eva

When Evalua

derately mportant

Imp

2% 3

8% 4

21% 4

0% 2

31% 4

29% 5

38% 3

29% 2


s Benefit from?

REPORT – 2011 ‐

ENT. All Rights Res

aluating investm

ating

portant Ve

impo

37% 58

40% 52

42% 33

2% 56

40% 15

50% 8%

35% 10

9% 12

ked with, senior

m Additional

Strongly agree

Agree

Neural

Disagree

2012

erved. | 36

ment followed b

ery ortant

Sco(1 to

8% 4.4

2% 4.4

3% 4.0

6% 3.5

5% 3.4

% 3.3

0% 3.1

2% 3.8

r managers, suc

l Leadership

e

by

ore o 5)

46

44

02

54

46

31

7

89

ch as

and

LP cont.

According tunderstand

Respondenother alterndeployed b

Ta

Characteris

Allocation to

Allocation to

Allocation to

Allocation to

Allocation to

Allocation to

Direct invest

General bus

Expected redeployed

Understa

Knowled

PEPPERDIN

© 2011 | PEPPER

to respondents,ding competitiv

Figure

nts indicated incnative assets inbut worsened ge

able 16. Gene

stics

o venture capital

o private equity

o mezzanine

o hedge funds

o secondary fund

o real estate fund

tments

siness conditions

turns on new ca

anding compet

Sa

dge of busines

Global bus

In

Legal and reg

Quantitative

Manag

NE PRIVATE CAP

RDINE UNIVERSITY

, important skile environments

e 46. Skills T

creased allocatin the last six moeneral business

eral Busines

Desig

ds

ds

s

pital

Leader

Strategic plan

titive environm

ales and marke

s and world ev

Human resou

iness managem

nspiring innova

gulatory knowle

Corporate fin

e analysis/rese

gement accoun

PITAL MARKETS

Y GRAZIADIO SCHO

ls to have in ses.

That Are Impo

ons to direct inonths. Respondes conditions.

s and Indust

ecreased nificantly

Decresligh

6% 15%

0% 11%

4% 22%

11% 16%

8% 8%

8% 10%

4% 6%

4% 43%

2% 19%

0%

rship

nning

ments

eting

vents

urces

ment

ation

edge

ance

earch

nting

Today

PROJECT | CAPIT

OOL OF BUSINESS

nior manageme

ortant for Se

nvestments andents also indica

try Assessm

eased htly

Stayed about the

same

% 69%

% 70%

% 67%

% 68%

% 77%

% 74%

% 47%

% 35%

% 38%

3230%

20% 40

y In the fut

TAL MARKETS R

AND MANAGEME

ent are leaders

enior Manage

d private equity ated increased e

ment: Today v

e Increased

slightly In

sig

10%

15%

7%

5%

5%

5%

23%

17%

38%

6

61%

57%

54%43%

39%

%

57%

49%

45%

42%

0% 60%

ture

REPORT – 2011 ‐

ENT. All Rights Res

ship, strategic p

ement to Hav

and decreasedexpected return

versus Six M

creased gnificantly

% increa

0% 10%

4% 19%

0% 7%

0% 5%

3% 8%

3% 8%

19% 43%

0% 17%

4% 42%

86

71%

68%1%

%

%

79%

83%

64%

%

72%

79%

80%

2012

erved. | 37

planning, and

ve

d allocations to ns on new capit

Months Ago

ase %

decreaseind

% 21%

% 11%

% 27%

% 27%

% 15%

% 18%

% 11%

% 48%

% 21%

100%

89%

6%

91%

%

100% 12

all tal

Net ncrease/ ecrease

-10%

9%

-20%

-22%

-8%

-10%

32%

-30%

21%

LP cont.

20%

Responden

Table

Characterist

Allocation to

Allocation to

Allocation to

Allocation to

Allocation to

Allocation to

Direct invest

General bus

Expected redeployed

Respondenbusinesses emerging is

Ec

Gov

Econo

Competiti

PEPPERDIN

© 2011 | PEPPER

nts expect furth

17. General

tics

o venture capital

o private equity

o mezzanine

o hedge funds

o secondary fund

o real estate fund

tments

siness conditions

turns on new ca

nts believe accetoday. Governmssues.

conomic uncert

vernment regu

omic uncertaint

ion from foreig

NE PRIVATE CAP

RDINE UNIVERSITY

er increases in

Business an

Decsignif

0

0

2

5

ds 5

ds 5

2

s 2

pital 2

ss to capital anment regulation

Figure 47

Access to capi

tainty (domest

lations and tax

ty (internation

gn trade partne

Inflati

Oth

PITAL MARKETS

Y GRAZIADIO SCHO

allocation to di

nd Industry A

rease ficantly

Decreaslight

0% 13%

0% 6%

2% 14%

5% 5%

5% 13%

5% 13%

2% 4%

2% 22%

2% 13%

d economic uncns and taxes an

7. Issues Faci

2%

2%

2%

tal

tic)

xes

nal)

ers

on

her

0% 5

Current iss

PROJECT | CAPIT

OOL OF BUSINESS

rect investmen

Assessment

ase ly

Stay about the same

% 79%

81%

% 74%

78%

% 68%

% 56%

57%

% 40%

% 54%

certainty are thnd economic un

ing Privately

4%

8%

4%

5% 10%

sue Emerg

TAL MARKETS R

AND MANAGEME

nts and private e

Expectation

Increase slightly

Incsign

8%

11%

7%

8%

8%

23%

26% 1

30%

26%

he most importncertainty are in

y-Held Busin

17

17

13%

12%

15% 2

ging Issue

REPORT – 2011 ‐

ENT. All Rights Res

equity, as well

ns over the N

crease ificantly

% increas

0% 8%

2% 13%

2% 9%

3% 11%

5% 13%

3% 26%

11% 37%

6% 36%

4% 30%

ant issues facinndicated as the

nesses

%

%

20% 25%

2012

erved. | 38

as real estate fu

Next 12 Month

se %

decreaseind

13%

6%

16%

11%

18%

18%

7%

24%

15%

ng privately‐helmost importan

30%

28%

29%

30%

unds.

hs

Net ncrease/

decrease

-4%

6%

-7%

0%

-5%

8%

30%

12%

15%

d nt

33%

35%

Approximamonths, th

Aphe

Thta

Refocobu

Rere

Operatio

Approxima

PEPPERDIN

© 2011 | PEPPER

A

tely 14% of thee majority (56%

pproximately 3eld businesses.

he types of busargeting inform

espondents indollow‐on investmompanies seekiusiness conditio

espondents’ exespondents plan

onal and Ass

tely 47% of res

Figure

Figure 49

15%

8%

2% 12%

25

18%

4%4% 1

NE PRIVATE CAP

RDINE UNIVERSITY

ANGEL IN

e 93 respondent%) of responden

0% of responde

inesses respondation technolog

dicated a sharp ments, and expng investmentsons and appetit

it strategies than to sell to a pu

sessment Ch

pondents made

e 48. Total Nu

9. Number o

12%

19%

%7%

23%

5%

% 5%

PITAL MARKETS

Y GRAZIADIO SCHO

NVESTOR

ts to the angel ints plan to mak

ents base valua

dents plan to ingy and another

increase in dempected returns os and time to exte for risk.

at include sellinublic company.

haracteristics

e either one or

umber of Inv

f Follow-on I

%

25%

%

20%

PROJECT | CAPIT

OOL OF BUSINESS

SURVEY

investor surveye between one

tions on a basic

nvest in over ne22% planning t

mand for angel con new investmxit deals, decrea

ng to a private c

s

two investmen

vestments Ma

Investments

TAL MARKETS R

AND MANAGEME

INFORM

y plan to investe and five invest

c method (quic

ext 12 months ato invest in hea

capital, and incments. They alsoased opportuni

company total 3

nts over the last

ade in the La

Made in the

0

2

4

6 ‐ 10

0

2

4

6 ‐ 10

REPORT – 2011 ‐

ENT. All Rights Res

ATION

outside of the tments. Other k

k estimate) wh

are very diversealth care.

creases in size oo reported increities to exit, wo

34%, while anot

t six months.

ast Six Mont

e Last Six Mo

1

3

5

M

1

3

5

M

2012

erved. | 39

U.S. over the nekey findings inc

en valuing priva

e with over 34%

of angel industryeased quality oforsened general

ther 34% of

ths

onths

More than 10

ore than 10

ext 12 clude:

ately‐

%

y, f l

The majorit

The types oinformation

9

PEPPERDIN

© 2011 | PEPPER

ty (56%) of resp

Figure

Figure 51

of businesses ren technology an

Figure 52

7%

18%

7%1%

10%

10%

9%

9%

7%

1%

NE PRIVATE CAP

RDINE UNIVERSITY

pondents plan t

50. Number

1. Number of

espondents plannd another 22%

2. Type of Bu

8%15

26%5%

18%

21%

21%

14%6%

3%

5%

PITAL MARKETS

Y GRAZIADIO SCHO

to make betwee

r of Total Inve

f Follow-on In

n to invest in ov% planning to in

usiness for In

%

23%

%

20%

34%

22%

PROJECT | CAPIT

OOL OF BUSINESS

en one and five

estments Pla

nvestments

ver next 12 monvest in health c

nvestments P

TAL MARKETS R

AND MANAGEME

e investments o

anned over N

Planned ove

nths are very dcare.

Planned ove

0

2

4

6 ‐ 10

0

2

4

6 ‐ 10

Inform

Healt

Basic

Retai

Busin

Manu

Finan

Whol

Other

REPORT – 2011 ‐

ENT. All Rights Res

over the next 12

Next 12 Mont

er Next 12 Mo

iverse with ove

er Next 12 Mo

1

3

5

Mo

1

3

5

M

mation techno

th care

materials & en

l & consumer s

ness services

ufacturing

ncial services

lesale & distrib

r

2012

erved. | 40

ANG

2 months.

ths

onths

er 34% targeting

onths

ore than 10

1

3

5

More than 10

ology

nergy

services

bution

EL cont.

g



ANGEL cont.

Respondents reported on a variety of stats pertaining to their investments.

Table 18. General Information on Investments by Company Stages

Seed Startup Early stage Expansion

Number of investments made in last six months

1st quartile 1 1 1 1

Median 1 2 1 2

3rd Quartile 4 2 2 3

Average size of investment ($ thousands)

1st quartile $25 $75 $75 $75

Median $150 $150 $150 $150

3rd quartile $250 $150 $250 $250

Average % of total equity purchased (fully diluted basis)

1st quartile 5% 4% 3% 1%

Median 15% 6% 6% 2%

3rd quartile 25% 20% 10% 9%

Total EXPECTED returns (gross cash on cash pretax IRR) on new investments (%)

1st quartile 30% 28% 28% 18%

Median 45% 45% 40% 38%

3rd quartile 95% 83% 70% 58%

Expected time to exit (years)

1st quartile 4 4 3 3

Median 5 5 4 4

3rd quartile 5 5 5 4

Average company “pre-money” value ($ millions)

1st quartile 0.45 0.65 1.5 0.95

Median 1.5 1.5 2.5 2.5

3rd quartile 1.5 2.5 4.5 10

Average company value at time of investment (post-money $ millions)

1st quartile 0.750 1 2 1.5

Median 1.5 2 3 3.5

3rd quartile 3.5 4.5 7 8

Respondenthe U.S., 14

Approxima

Approximabusinesses.

PEPPERDIN

© 2011 | PEPPER

nts reported on 4% of responde

Figure 53.

tely 35% of res

tely 30% of res. Only 14% of re

39%

35

9%7%

NE PRIVATE CAP

RDINE UNIVERSITY

where they plants are plannin

. Geographic

pondents don’t

Figure

pondents base espondents use

Figur

17

2%

14%

21%

%

14%

%%5% 14%

PITAL MARKETS

Y GRAZIADIO SCHO

an to invest oveg to invest outs

c Location of

t have geograph

e 54. Geograp

valuations on ae an income app

re 55. Usage

7%8%

7%

6%4%

3%%

15%

12%

18%

30%

21%

PROJECT | CAPIT

OOL OF BUSINESS

er the next 12 mside of the U.S.

f Planned Inv

hical restriction

phical Limit

a basic method proach.

of Valuation

%

%

TAL MARKETS R

AND MANAGEME

months. The res

vestment ov

ns for their futu

for Investme

(quick estimate

n Approache

South

Texas

New E

Silicon

New Y

Wash

Bay A

All oth

Outsid

2‐hou

4‐hou

State/

Regio

No re

Basic

Transa

Incom

Public

Costs

Asset

Other

REPORT – 2011 ‐

ENT. All Rights Res

sults reflect inve

ver Next 12 M

re investments

ent

e) when valuing

es

hern California

s

England

n Valley

York Metro

hington DC

Area

her US

de of US

ur drive

ur drive

/ province

on

estrictions

method (quick

action approac

me approach (D

c company app

to create appr

based approac

r

2012

erved. | 42

ANG

estment throug

Months

s.

g privately‐held

ANG

k estimate)

ch

DCF, NPV, IRR)

proach

roach

ch

EL cont.

ghout

d

EL cont.

Responden

Respondento sell to a


Figure 5

0

10

20

30

40

50

mem

PEPPERDIN

© 2011 | PEPPER

nts reported on

nts’ exit strategipublic company


58. Would Se

8

20

4

Business plansmorandums re

7%

7%

5%5%

50%

NE PRIVATE CAP

RDINE UNIVERSITY

items required

Figure

ies that includey.

Figure


enior Manage

40

s oreviewed

Meet

34%

5% 3%

5% 5%

PITAL MARKETS

Y GRAZIADIO SCHO

d to close one d

e 56. Items R

selling to a priv

e 57. Exit Plan


ers and ChieSkil

56.5 10

tings with princonducted

1st Quartile

34%

41%

PROJECT | CAPIT

OOL OF BUSINESS

eal.

Required to C

vate company t

ns for Portfo



1

0

cipals Proposs

Median

TAL MARKETS R

AND MANAGEME

Close One De

total 34%, while

olio Compani


s Benefit from?

1 2 3

sal letters or teheets issued

3rd Quartile

Sell t

Sell t

Sell t

Liqui

IPO

Sell t

Mana

Othe

Str

Ag

Ne

Dis

REPORT – 2011 ‐

ENT. All Rights Res

eal

e another 34%

ies

ked with, senior

m Additional

1

erm Letters o

to a private com

to a public com

to private equit

date or bankru

to a VC

agement buyo

er

rongly agree

gree

eutral

sagree

2012

erved. | 43

of respondents

r managers, suc

l Leadership

ANG

1 2

of intent signe

mpany

mpany

ty group

upt

out

s plan

ch as

and

EL cont.

ed


Respondeninvestmentinvestmentfor risk.

Ta

Demand for

Size of ange

Quality of coinvestment

Follow-on in

Average inv

Exit opportu

Time to exit

Expected re

Value of por

General bus

Appetite for

Understa

Knowled

PEPPERDIN

© 2011 | PEPPER


Figure

nts indicated a sts and expectedts and time to e

able 19. Gene

angel capital

el finance industr

ompanies seekin

nvestments

estment size

nities

deals

turns on new inv

rtfolio companies

siness conditions

risk

anding compet

Sa

In

dge of busines

Quantitative

Legal and reg

Manag

Global bus

NE PRIVATE CAP

RDINE UNIVERSITY


e 59. Skills T

sharp increase id returns on newexit deals, decre

eral Busines

Decrsignif

2

ry 3

g 0

0

3

6

3

vestments 2

s 2

s 20

15

Leader

titive environm

ales and marke

Strategic plan

nspiring innova

s and world ev

Corporate fin

e analysis/rese

gulatory knowle

Human resou

gement accoun

iness managem

O

PITAL MARKETS

Y GRAZIADIO SCHO

lls, understandto have.

That Are Impo

n demand for aw investments.eased opportun

s and Indust

reased ficantly

Decreasslight

2% 2%

3% 25%

0% 14%

0% 17%

3% 23%

6% 33%

3% 14%

2% 9%

2% 28%

0% 31%

5% 38%

8%6%

rship

ments

eting

nning

ation

vents

ance

earch

edge

urces

nting

ment

Other

Today

PROJECT | CAPIT

OOL OF BUSINESS

ing competitive

ortant for Se

angel capital, in They also reponities to exit, wo

try Assessm

sed ly

Stayed about the

same

32%

% 25%

% 43%

% 43%

% 45%

% 43%

% 34%

60%

% 34%

% 25%

% 31%

3

33

30%

27%

24%

17%

%

3

3

30%

%

y In the fut

TAL MARKETS R

AND MANAGEME

e environments

enior Manage

ncreases in size orted increasedorsened genera

ment: Today v

Increased slightly

Incrsign

28% 3

25% 2

34%

28% 1

26%

13%

27% 2

25%

34%

20%

11%

58

36%

3%

%

54%

39%

3%

3%

36%

%

41%

ture

REPORT – 2011 ‐

ENT. All Rights Res

s and strategic p

ement to Hav

of angel industd quality of comal business cond

versus Six M

reased ificantly

% increas

37% 65%

22% 47%

9% 43%

12% 40%

3% 29%

5% 17%

22% 48%

5% 29%

3% 37%

5% 25%

5% 15%

8

82

77%

64%

8%

8

74%

74%

71%

63%

2012

erved. | 44

planning are th

ve

try, follow‐on mpanies seekingditions, and app

Months Ago

se %

decreaseincde

3%

28%

14%

17%

26%

40% -

17%

11%

29%

51% -

54% -ANG

98%

3%

2%

3%

e

g petite

Net crease/ crease

62%

19%

29%

23%

3%

-22%

31%

18%

8%

-26%

-38% EL cont.

Responden

Table

Demand for

Size of ange


Follow-on in

Average inv

Exit opportu

Time to exit

Expected re

Value of por

General bus

Appetite for

Respondenregulations

Ec

Econo

Gov

Competiti

PEPPERDIN

© 2011 | PEPPER

nts expect furth

20. General

angel capital

el finance industr

ompanies seekin

nvestments

estment size

nities

deals

turns on new inv

rtfolio companies

siness conditions

risk

nts believe acces and taxes are

conomic uncert

omic uncertaint

vernment regu

ion from foreig

NE PRIVATE CAP

RDINE UNIVERSITY

er increases in

Business an

Decsignif

0

ry 5

g 5

0

0

6

3

vestments 3

s 2

s 1

1

ss to capital is tindicated as the

Figure 60

Access to capi

tainty (domest

ty (internation

lations and tax

gn trade partne

Inflati

Oth

PITAL MARKETS

Y GRAZIADIO SCHO

business chara

nd Industry A

rease ficantly

Decreaslight

0% 0%

5% 8%

5% 9%

0% 14%

0% 17%

6% 14%

3% 9%

3% 16%

2% 14%

6% 23%

3% 28%

the most impore most importa

. Issues Faci

0%

0%3%

tal

tic)

nal)

xes

ers

on

her

0% 5%

Current iss

PROJECT | CAPIT

OOL OF BUSINESS

cteristics excep

Assessment

ase ly

Stay about the

same

20%

35%

48%

% 38%

% 48%

% 47%

47%

% 52%

% 36%

% 28%

% 39%

rtant issue facinant emerging iss

ing Privately

8%

5%

11%

11%

6%

8%

10% 15

sue Emerg

TAL MARKETS R

AND MANAGEME

pt general busin

Expectation

Increase slightly

Incsign

56% 2

41% 1

34%

41%

32%

27%

31%

25%

44%

25%

17%

ng privately‐helsue.

y-Held Busin

22

% 20% 2

ging issue

REPORT – 2011 ‐

ENT. All Rights Res

ness conditions

ns over the N

crease ificantly

% increas

23% 80%

11% 52%

3% 38%

6% 48%

3% 35%

6% 33%

9% 41%

5% 30%

5% 48%

8% 33%

3% 20%

d businesses to

nesses

2%

25%

26%

5% 30% 3

2012

erved. | 45

.

Next 12 Month

se %

decreaseincdec

0%

13%

14%

14%

17%

20%

13%

19%

16%

39%

41% -

oday. Governme

41

36%

35% 40%

hs

Net crease/ crease

80%

40%

23%

33%

17%

13%

28%

11%

33%

-6%

-20%

ent

1%

45%

Of the 139 general busindustry. Th Other key f

Thtare

Rere

ReDo

Operatio

Approxima

PEPPERDIN

© 2011 | PEPPER

V

participants whsiness conditionhe majority (52

findings include

he types of busargeting informespondents plan

espondents’ exespondents plan

espondents belomestic econom

onal and Ass

tely 47% of res

Figure

Figure 62

5%5%

18%

6%

10%

19%

NE PRIVATE CAP

RDINE UNIVERSITY

VENTURE

ho responded tns over the nex%) of responde

e:

inesses respondation technologn to make new

it strategies than to sell to a pu

ieve access to cmic uncertainty

sessment Ch

pondents made

e 61. Total Nu

2. Number o

14%

15%

11%

16%

17%%

8%

PITAL MARKETS

Y GRAZIADIO SCHO

CAPITAL

o the venture ct 12 months, 48ents plans to ma

dents plan to ingy and another investments ou

at include sellinublic company.

capital is the my is indicated as

haracteristics

e between one

umber of Inv

f Follow-on I

13%

19%

%

12%

12%

PROJECT | CAPIT

OOL OF BUSINESS

L SURVEY

capital survey, a8% of respondeake between tw

nvest in the nex19% planning tutside of the U.

ng to a public co

ost important is the most impo

s

and three inve

vestments Ma

Investments

TAL MARKETS R

AND MANAGEME

Y INFORM

approximately 3ents also expectwo and five inve

xt 12 months arto invest in heaS.

ompany total 41

ssue facing privortant emerging

stments over th

ade in the La

Made in the

0

2

4

6 ‐ 10

0

2

4

6 ‐ 10

REPORT – 2011 ‐

ENT. All Rights Res

MATION

32% say that tht a shrinking of estments over t

re very diverse walth care. Appro

1%, while anoth

vately‐held busg issue.

he last six mont

ast Six Mont

e Last Six Mo

1

3

5

M

1

3

5

M

2012

erved. | 46

hey expect worsthe venture cathe next 12 mo

with over 43% oximately 39% o

her 27% of

inesses today.

ths.

ths

onths

1

3

5

More than 10

1

3

5

More than 10

sening apital nths.

of

The majorit

Responden

Vintage ye

Size of fun

Targeted n

Target fund

Expected f

The types oInformation

PEPPERDIN

© 2011 | PEPPER

ty (52%) of resp

Figure

Figure 64

nts reported on

ear (year in which

nd ($ millions)

number of total in

d return (gross p

fund return (gros

of businesses ren technology an

Figure 65

18%

8

17%

6%5%5%4%4%

1%

NE PRIVATE CAP

RDINE UNIVERSITY

pondents plans

63. Number

4. Number of

business practi

h first investment

nvestments

pretax cash on ca

s pretax cash on

espondents plannd another 19%

5. Type of Bu

7%

7%12%

19%

1

6%8%

18%

19%

13%

PITAL MARKETS

Y GRAZIADIO SCHO

to make betwe

r of Total Inve

f Follow-on In

ices and the res

Table 2

t made)

ash annual IRR %

n cash annual IR

n to invest in ov% planning to in

usiness for In

4%12%

21%

%

11%9%

1

13%

43%

PROJECT | CAPIT

OOL OF BUSINESS

een two and fiv

estments Pla

nvestments

sults are reflect

1. VC Fund D

%)

R %)

ver next 12 monvest in health c

nvestments P

18%

TAL MARKETS R

AND MANAGEME

ve investments

anned over N

Planned ove

ted below.

Data

1st quarti

2004

20

11

20

15

nths are very dcare.

Planned ove

0

2

4

6 ‐ 10

0

2

4

6 ‐ 10

InformHealtBasic ManuBusin

RetailFinanWholOther

REPORT – 2011 ‐

ENT. All Rights Res

over the next 1

Next 12 Mont

er Next 12 Mo

ile Median

2007

58

16

25

21

iverse with ove

er Next 12 Mo

1

3

5

Mo

1

3

5

More

mation technoh carematerials & enufacturingness services

l & consumer sncial servicesesale & distribr

2012

erved. | 47

VENTURA CAPITA

12 months.

ths

onths

n 3rd qua

2009

131

25

30

30

er 43% targeting

onths

ore than 10

e than 10

ology

nergy

services

bution

AL cont.

artile

9

g



VENTURA CAPITAL cont.

Respondents reported on a variety of stats pertaining to their investments.

Table 22. General Information on Investments by Company Stages

Seed Startup Early stage Expansion Later stage

Number of investments made in last six months

1st quartile 2 1 1 2 1

Median 2 2 2 2 1

3rd quartile 3 3 3 4 4

Average size of investment ($ millions)

1st quartile < 1 < 1 < 1 < 1 $3

Median < 1 $2 $2 $3 $3

3rd quartile < 1 $3 $3 $4 $8

Average % of total equity purchased (fully diluted basis)

1st quartile 15% 15% 5% 5% 5%

Median 25% 15% 15% 15% 5%

3rd quartile 25% 25% 20% 15% 15%

Total expected returns (gross cash on cash pretax IRR) on new investments

1st quartile 28% 23% 23% 18% 25%

Median 38% 30% 28% 28% 28%

3rd quartile 78% 45% 50% 38% 55%

Expected time to exit

1st quartile 5 4 3 3 2

Median 5 5 4 3 2

3rd quartile 7 6 5 5 2

Average company “pre-money” value

1st quartile 1.5 2.5 3.5 8.0 25.0

Median 1.5 2.5 8.0 15.0 35.0

3rd quartile 2.5 8.0 15.0 35.0 80.0

Average company value at time of investment (post-money $ millions)

1st quartile 1.0 3.5 3.5 15.0 25.0

Median 2.5 8.0 8.0 25.0 45.0

3rd quartile 3.5 10.0 15.0 35.0 90.0

Respondenthe U.S., 39

When valuivaluing priv

Responden

0

20

40

60

80

100

120

me

PEPPERDIN

© 2011 | PEPPER

nts reported on 9% of responde

Figure 66.

ing the companvately‐held bus

nts reported on

3

1

11

30

60

Business planemorandums r

NE PRIVATE CAP

RDINE UNIVERSITY

where they plants are plannin

. Geographic

ny, approximateinesses.

Figur

items required

Figure

11%

26%

9%

17%15%

1%5%

12%

100

ns orreviewed

Meet

1

PITAL MARKETS

Y GRAZIADIO SCHO

an to invest oveg to invest outs

c Location of

ely 40% of the w

re 67. Usage

d to close one d

e 68. Items R

%11%

5%5%3%

40%

%

1020

30


1st Quartile

PROJECT | CAPIT

OOL OF BUSINESS

er the next 12 mside of the U.S.

f Planned Inv

weight of the va

of Valuation

eal.

Required to C

2

0

ncipals Propossh

Median 3

TAL MARKETS R

AND MANAGEME

months. The res

vestment ov

aluation is put o

n Approache

Close One De

Sili

Ba

Ne

Ne

So

All

Ou

Tr

Pu

In

Co

As

Ot

2 3 5


3rd Quartile

REPORT – 2011 ‐

ENT. All Rights Res

sults reflect inve

ver Next 12 M

on a transaction

es

eal

icon Valley

y Area

ew England

ew York Metro

uthern Californ

Other US

utside of US

ransaction app

ublic company

come approac

osts to create a

sset based app

ther

1

erm Letters o

2012

erved. | 49

VENTURA CAPITA

estment throug

Months

n approach whe

nia

proach

approach

ch (DCF, NPV, I

approach

proach

1 2

of intent signed

AL cont.

ghout

en

RR)

d

Respondento sell to a


Figure 7


Understa

Knowled

PEPPERDIN

© 2011 | PEPPER

nts’ exit strategiprivate compan


70. Would Se


Figure

12%

5%4%

16%

anding compet

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ies that includeny.

Figure


enior Manage


e 71. Skills T

27%

% 4% 4%3%

54%

%7%

Leader

Strategic plan

titive environm

ales and marke

nspiring innova

s and world ev

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gulatory knowle

gement accoun

iness managem

e analysis/rese

O

PITAL MARKETS

Y GRAZIADIO SCHO

selling to a pub

e 69. Exit Plan


ers and ChieSkil

lls, strategic plato have.

That Are Impo

41%

22%

2.9%5%

rship

nning

ments

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earch

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PROJECT | CAPIT

OOL OF BUSINESS

blic company to

ns for Portfo



anning, and und

ortant for Se

%

y In the fut

TAL MARKETS R

AND MANAGEME

otal 41%, while

olio Compani


s Benefit from?

derstanding com

enior Manage

Se

Se

IPO

Se

Se

Ma

Liq

Ot

Stro

Agr

Neu

Disa

49

44%

39%

37%31%

30%

46%

40%

37%

ture

REPORT – 2011 ‐

ENT. All Rights Res

another 27% o

ies

ked with, senior

m Additional

mpetitive envir

ement to Hav

ll to a public co

ll to a private c

O

ll to private eq

ll to another V

anagement bu

quidate or ban

her

ongly agree

ree

utral

agree

60%

51%9%

7

7

65%

%

57%

51%

54%

2012

erved. | 50

VENTURA CAPITA

of respondents

r managers, suc

l Leadership

onments are th

ve

ompany

company

quity group

VC

yout

krupt

9

89

83%

79%

81%

72%

70%

70%

%

AL cont.

plan

ch as

and

he

91%

%



VENTURA CAPITAL cont.

Respondents indicated increases in demand for venture capital, quality of companies seeking investment, follow‐on investments, and presence of super angels in space formerly occupied by VCs. They also reported decreased size of venture capital industry and worsened general business conditions.



Decreased slightly

Stayed about the

same

Increased slightly


% increase

% decrease


Demand for venture capital 1% 10% 40% 30% 18% 48% 12% 36%

Quality of companies seeking investment

1% 7% 46% 34% 12% 46% 9% 37%

Follow-on investments 0% 5% 41% 33% 22% 55% 5% 50%

Average investment size 2% 9% 56% 26% 8% 33% 11% 23%

Exit opportunities 4% 34% 26% 25% 10% 35% 38% -3%

Time to exit deals 0% 12% 32% 44% 12% 56% 12% 44%

Expected returns on new investments

0% 33% 43% 16% 7% 24% 33% -9%

Value of portfolio companies 1% 28% 33% 30% 7% 37% 30% 7%


Presence of super angels in space formerly occupied by VCs

0% 11% 26% 43% 20% 62% 11% 51%

Size of venture capital industry 14% 47% 29% 8% 3% 11% 61% -50%

Respondents expect further increases in all business characteristics except general business conditions and size of venture capital industry.



Decrease slightly

Stay about the same

Increase slightly


% increase

% decrease


Demand for venture capital 3% 3% 27% 52% 15% 67% 6% 61%

Quality of companies seeking Investment

0% 5% 39% 48% 8% 56% 5% 52%

Follow-on investments 0% 5% 27% 48% 20% 69% 5% 64%


Exit opportunities 3% 21% 32% 35% 9% 44% 24% 20%

Time to exit deals 2% 3% 44% 41% 11% 52% 5% 47%


2% 25% 40% 29% 5% 34% 26% 8%

Value of portfolio companies 3% 14% 32% 40% 11% 51% 17% 34%


Presence of super angels in space formerly occupied by VCs

3% 12% 55% 23% 7% 30% 15% 15%

Size of venture capital industry 8% 41% 38% 11% 3% 14% 48% -34%

Respondeneconomic u

Ec

Econo

Gov

Competiti

PEPPERDIN

© 2011 | PEPPER

nts believe acceuncertainty is in

conomic uncert

omic uncertaint

vernment regu

ion from foreig

NE PRIVATE CAP

RDINE UNIVERSITY

ss to capital is tndicated as the

Figure 72

Access to capi

tainty (domest

ty (internation

lations and tax

Oth

gn trade partne

Inflati

PITAL MARKETS

Y GRAZIADIO SCHO

the most impormost importan

. Issues Faci

4

1%

0%

3%

3%

tal

tic)

nal)

xes

her

ers

on

0% 5%

Current iss

PROJECT | CAPIT

OOL OF BUSINESS

rtant issue facinnt emerging issu

ing Privately

10%

4%%

5%

%

% 10%

sue Emerg

TAL MARKETS R

AND MANAGEME

ng privately‐helue.

y-Held Busin

18%

20

20

15% 20%

ging issue

REPORT – 2011 ‐

ENT. All Rights Res

d businesses to

nesses

28

0%

26%

0%

23%

25% 30

2012

erved. | 52

VENTURA CAPITA

oday. Domestic

3

8%

0% 35%

AL cont.

37%

40%

Consistent groups survsaid that deincreased d

Recore

Reco

Thta

Rebuem

Operatio

The largestand $5 ‐ $1

Responden

Vintage ye

Size of fun

Targeted n

Target fund

Expected f

0%

10%

20%

30%

40%

Le

PEPPERDIN

© 2011 | PEPPER

with previous vey indicated themand for privdemand in sprin

espondents indontrol investmeeturns on new i

espondents exponditions, and a

he types of busargeting manufa

espondents belusinesses todaymerging issue.

onal and Ass

concentration 10 million (33%)

nts reported on

ear (year in which

nd ($ millions)

number of total in

d return (gross p

fund return (gros

8%

ess than $1million

$1‐

NE PRIVATE CAP

RDINE UNIVERSITY

PRIVATE

iterations of that they make ate equity is upng 2011. Other

dicated increaseents, as well as nvestments and

pect further inca lower appetite

inesses respondacturing and an

ieve domestic ey. Nearly 28% o

sessment Ch

of checks writt)

F

business practi

h first investment

nvestments

pretax cash on ca

s pretax cash on

30%

‐5 million $m

PITAL MARKETS

Y GRAZIADIO SCHO

EQUITY S

the report, 43%investments inp from six monkey findings inc

es in the qualitya slight increased worsened gen

reasing demane for risk.

dents plan to innother 16% plan

economic uncef respondents i

haracteristics

ten was in the $

Figure 73. Ty

ices and the res

Table 25

t made)

ash annual IRR %

n cash annual IR

33% 3

5‐$10million

$1mi

PROJECT | CAPIT

OOL OF BUSINESS

SURVEY I

% of the 288 p the $10 millioths ago, this is clude:

y of companies e in deal multipneral business c

d for private eq

nvest in over nenning to invest

rtainty is the mndicated gover

s

$10 ‐ $25 millio

ypical Investm

sults are reflect

5. PEG Fund

%)

R %)

35% 33

10‐25illion

$25‐mil

TAL MARKETS R

AND MANAGEME

INFORMA

participants whn to $25 millio slightly down

seeking investmples. They also rconditions.

quity and deal m

ext 12 months ain business serv

most important rnment regulati

n range (35%),

ment Size

ted below.

Data

1st quarti

2007

50

7

20

20

3%

18%

‐$50lion

$50‐$milli

REPORT – 2011 ‐

ENT. All Rights Res

ATION

ho responded tn range. Nearlyfrom 57% of re

ment and the areported a decr

multiples, worse

are very diversevices.

issue facing priions and taxes a

followed by $2

ile Median

2008

178

10

25

25

% 16%

$100ion

$100‐$millio

2012

erved. | 54

to the private y 52% of responespondents ind

mount of non‐rease in expect

ening business

e with over 19%

vately‐held as the number

25 ‐ $50 million

n 3rd qua

2010

428

13

30

30

RIVATE EQUIT

%

3%

500on

Greater t$500 mil

equity ndents icating

ed

%

one

(33%),

artile

0

TY cont.

thanlion

The types omanufactu

Approxima

The majorit

PEPPERDIN

© 2011 | PEPPER

of businesses rering and anothe

Figure 74

tely 58% of res

Figure

Figure 7

ty (61%) of resp

Figure

97%

6

17%

11%

17%

9%6

NE PRIVATE CAP

RDINE UNIVERSITY

espondents planer 16% planning

4. Type of Bu

pondents made

e 75. Total Nu

6. Number o

pondents plans

77. Number

19

12%9%

6%6% 13%

2

%

%7%4%

2% 3%

29%

%

8%

3%2%1%1%

2%

30%

6%12%

1%

PITAL MARKETS

Y GRAZIADIO SCHO

n to invest in ovg to invest in bu

usiness for In

e between one

umber of Inv

f Follow-on I

to make two o

r of Total Inve

9%

16%

12%

6%

30%

39%

%

9%

31%

PROJECT | CAPIT

OOL OF BUSINESS

ver next 12 monusiness services

nvestments P

and three inve

vestments Ma

Investments

r three investm

estments Pla

TAL MARKETS R

AND MANAGEME

nths are very ds.

Planned ove

stments over th

ade in the La

Made in the

ments over the n

anned over N

Ma

BuHeReBa

WhFinInfOt

0

2

4

6 ‐ 10

0

2

4

6 ‐ 10

0

2

4

6 ‐ 10

REPORT – 2011 ‐

ENT. All Rights Res

iverse with ove

er Next 12 Mo

he last six mont

ast Six Mont

e Last Six Mo

next 12 months

Next 12 Mont

anufacturing

usiness servicesealth careetail & consumasic materials &

holesale & distnancial serviceformation techther

1

3

5

M

1

3

5

M

1

3

5

Mor

2012

erved. | 55

er 19% targeting

onths

ths.

ths

onths

s.

ths

PRIVATE EQUIT

s

er services& energy

tributionshnology

More than 10

More than 10

e than 10

g

TY cont.

Average desize of the c

Average si

Expected t

Equity as %

% of total e

Average de

Total expepre-tax IRR

Average ex

Average si

Expected t

Equity as %

% of total e

Average de

Total expepre-tax IRR

When valui

PEPPERDIN

© 2011 | PEPPER

Figure 78

eal multiples forcompany. Expe

Table

ize of investment

time to exit (year

% of new capital

equity purchased

eal multiple (mul

cted returns (groR)

xpected returns

Table 27

ize of investment

time to exit (year

% of new capital

equity purchased

eal multiple (mul

cted returns (groR)

ing a business,

14%

3%

NE PRIVATE CAP

RDINE UNIVERSITY

8. Number of

r buyout deals fcted returns va

e 26. General

t ($ millions)

rs, median)

structure

d

tiple of EBITDA)

oss cash on cash

s on non‐buyou

7. General Ch

t ($ millions)

rs, median)

structure

d

tiple of EBITDA)

oss cash on cash

approximately

16%

24%

6% 5%1%

PITAL MARKETS

Y GRAZIADIO SCHO

f Follow-on In

for the prior sixary from 23% to

l Characteris

$1M EBITDA

1

4

45%

95%

4

h 30%

ut deals vary fro

haracteristic

$1M EBITDA

1.5

3.5

55%

25%

4

h 25%

35% of the wei

%

31%

PROJECT | CAPIT

OOL OF BUSINESS

nvestments

x months vary fro 30%.

stics – Buyou

$5M EBITDA

$EB

4

5

55%

85%

5

26%

om 20% to 25%

cs – Non-Buy

$5M EBITDA

$EB

4

5

35% 4

20%

5

25%

ght is placed on

TAL MARKETS R

AND MANAGEME

Planned ove

rom four to sev

ut Transactio

$10M BITDA

$25MEBITD

15 25

5 4

50% 45%

75% 65%

6 6

25% 25%

.

yout Transac

$10M BITDA

$25MEBITD

15 25

4 4

45% 35%

15% 15%

5 5.5

25% 22%

n an income ap

0

2

4

6 ‐ 10

REPORT – 2011 ‐

ENT. All Rights Res

er Next 12 Mo

ven times EBITD

ons (medians

M DA

$50M EBITDA

50

4

% 35%

% 75%

7

% 25%

ctions (media

M DA

$50M EBITDA

45

3

% 55%

% 45%

7.5

% 22%

pproach.

1

3

5

Mo

2012

erved. | 56

onths

DA depending o

s)

$100M EBITDA

> $EB

100+ 1

4

45% 3

85% 8

7

25% 2

ans)

$100M EBITDA

> $EB

75

3

45%

25%

8

22% 2

PRIVATE EQUIT

ore than 10

on the

$100M BITDA

100+

4

35%

85%

7

23%

$100M BITDA

60

3.5

5%

15%

8

20%

TY cont.

When resprecast (adju

Deal multip

Manufactu

Retail & co

Wholesale

Business s

Basic mate

Health care

Information

Financial s

Average

PEPPERDIN

© 2011 | PEPPER

ondents use a musted) EBITDA m

ples vary from 3

ring

onsumer services

& distribution

services

erials & energy

e

n technology

services

17

12%

7%

18%

NE PRIVATE CAP

RDINE UNIVERSITY

Figur

multiple‐based multiples (26%)

3.5 to 9, the hig

Table 28. D

$1M EBITDA

4

s 4.5

4.5

4.5

4

5

7

4.5

4.8

27

7%

% 9%

10%

30%

%

6% 3%

PITAL MARKETS

Y GRAZIADIO SCHO

re 79. Usage

approach, the .

Figure 80.

ghest multiples

Deal Multiple

$5M

EBITDA

5

5.5

5

4.5

5

7

7

n/a

5.6

35%

7%

%

26%

PROJECT | CAPIT

OOL OF BUSINESS

of Valuation

multiple with t

Usage of Mu

are in health ca

es Among Ind

$10M EBITDA

5

6

5.5

5

6

7.5

n/a

6.5

5.9

TAL MARKETS R

AND MANAGEME

n Approache

he largest weig

ultiples

are industry wit

dustries (me

$25M EBITDA

5

6

n/a

6.5

6

7.5

7

n/a

6.3

Income ap

Transactio

Public com

Asset base

Other

Revenu

Recast

EBITDA

EBIT m

Cash flo

Net inc

Other

REPORT – 2011 ‐

ENT. All Rights Res

es

ght is the EBITD

th average at 7.

edians)

$50M EBITDA

$EB

5.5

7

n/a

7

6

n/a

n/a

n/a

6.4

pproach (DCF,

on approach

mpany approac

ed approach

ue multiple

EBITDA multip

A multiple

ultiple

ow multiple

come multiple

2012

erved. | 57

A multiple (30%

.2.

$100M BITDA

Ave

6.5 5

8 6

5.5 5

7 5

6 5

9 7

7.5 7

8.5 6

7.3 6

PRIVATE EQUIT

NPV, IRR)

ch

ple

%) or

rage

.2

.2

.1

.8

.5

.2

.1

.5

.0

TY cont.

Responden

Respondento sell to an

Responden$5 million i

Ta

$1M EBITD

$5M EBITD

$10M EBIT

$15M EBIT

$25M EBIT

$50M EBIT

$100M+ EB

0

20

40

60

80

100

120

me

PEPPERDIN

© 2011 | PEPPER

nts reported on

nts’ exit strateginother private e

nts reported on n EBITDA and m

able 29. The E

Extremdiffic

DA 31%

DA 13%

TDA 5%

TDA 3%

TDA 3%

TDA 3%

BITDA 4%

20

50


22%

12%

NE PRIVATE CAP

RDINE UNIVERSITY

items required

Figure

ies that includeequity group.

Figure

average it is eamore.

Ease to Arra

mely ult

Difficult

% 26%

% 21%

% 7%

% 8%

% 3%

% 7%

% 0%

100

ns orreviewed

Mee

1

%5%1%

6%

PITAL MARKETS

Y GRAZIADIO SCHO

d to close one d

e 81. Items R

selling to a priv

e 82. Exit Plan

asier for them to

nge Senior D

Somewhat Difficult

17%

28%

25%

23%

28%

21%

15%

815

25

etings with princonducted

1st Quartile

28%

26%

PROJECT | CAPIT

OOL OF BUSINESS

eal.

Required to C

vate company t

ns for Portfo

o arrange senio

Debt for Tran

Neutral S

12%

11%

16%

13%

19%

17%

15%

3

5

ncipals Propos

Median

TAL MARKETS R

AND MANAGEME

Close One De

total 28%, while

olio Compani

or debt for inve

nsactions ov

Somewhat Easy

3%

12%

18%

15%

19%

21%

19%

3 5 10

osal letters or tsheets issued

3rd Quartile

Sell to

Sell to

Sell to

IPO

Mana

Liquid

Other

REPORT – 2011 ‐

ENT. All Rights Res

eal

e another 26%

ies

estments into co

ver the Past S

Easy Extr

E

5% 5

12% 4

25% 5

23% 1

14% 1

17% 1

23% 2

1

erm Letters

o a private com

o another PEG

o a public com

agement buyou

date or Bankru

r

2012

erved. | 58

of respondents

ompanies with

Six Months

remely Easy

Sco(-3 to

5% -1.5

4% -0.6

5% 0.3

5% 0.5

4% 0.5

4% 0.5

23% 1.3

PRIVATE EQUIT

2 3

of intent signe

mpany

pany

ut

upt

s plan

re o 3)

5

6

3

5

5

5

3

TY cont.

ed

Most of the$10M in EB

Tabl

$5M EBITD

$10M EBIT

$15M EBIT

$25M EBIT

$50M EBIT

$100M EB

> $100M E

Average vatypical privfrom 25% t

Table 31.

10% equity

20% equity

30% equity

40% equity

50% equity


Figure 8

PEPPERDIN

© 2011 | PEPPER

e respondents bBITDA. Whereas

le 30. The Ba

Compwortfina

GREexcca

ava

DA 39

TDA 17

TDA 6

TDA 4

TDA 4

ITDA 3

EBITDA 4

luation discounately‐held como 45% for unpr

. Valuation D

y interest

y interest

y interest

y interest

y interest


83. Would Se

NE PRIVATE CAP

RDINE UNIVERSITY

believe “worthys for the larger

alance of Ava

panies thy of ncing

EATLY ceed pital ilable

Cowofin

exceav

9%

7%

6%

4%

4%

3%

4%

nts for lack of copany with a totrofitable busine

Discount for Ma

1st quarti

15%

15%

11%

10%

2%


enior Manage

44%

17%4%

PITAL MARKETS

Y GRAZIADIO SCHO

y of financing” ecompanies, “ca

ailable Capit

mpanies orthy of nancing eed capital vailable

24%

35%

24%

20%

12%

14%

7%

ontrol implied ttal equity valueess depending o

Minority Stoa Total Equity

Profitable bus

le Median

25%

20%

18%

15%

10%


ers and ChieSkil

35%

PROJECT | CAPIT

OOL OF BUSINESS

exceeds “capitaapital available”

tal with Quali

General balance

13%

22%

32%

33%

41%

30%

32%

to pro rata valu of $10 millionon percentage o

ck Interests y Value of $1

siness

n 3rd quarti

35%

25%

24%

20%

19%



TAL MARKETS R

AND MANAGEME

al available” for” exceeds “wort

ity Compani

Capital available exceeds

companies worthy of financing

17%

21%

29%

26%

28%

39%

38%

ues for various svary from 10% of equity intere

in a Typical 10 Million

ile 1st quarti

25%

24%

24%

20%

19%


s Benefit from?

REPORT – 2011 ‐

ENT. All Rights Res

r the companiesthy of financing

ies for the Fo

Capital available

GREATLYexceeds

companiesworthy of financing

8%

4%

10%

17%

16%

14%

20%

sized minority sto 25% for prost.

Privately-He

Unprofitable b

ile Median

45%

35%

25%

30%

25%

ked with, senior

m Additional

Strongly agre

Agree

Neutral

Disagree

2012

erved. | 59

s with less thang.”

ollowing Size

Y

s

Score(-2 to 2

-0.7

-0.4

0.1

0.3

0.4

0.5

0.6

stock interests ifitable business

eld Company

usiness

n 3rd quart

65%

50%

50%

55%

45%

r managers, suc

l Leadership

PRIVATE EQUIT

e

n

e

e 2)

n a s, and

y with

tile

ch as

and

TY cont.


Relative to investmentexpected re

Ta

Demand fo

Quality of cinvestment

Average in

Non-contro

Expected iperiod

Deal multip

Exit opport

Expected rinvestment

Value of po

General bu

Size of priv

Understa

Knowled

PEPPERDIN

© 2011 | PEPPER

to respondents rtant for senior

Figure

six months agot, amount of noeturns on new i

able 32. Gene

or private equity

companies seekit

nvestment size

ol investments

nvestment holdin

ples

tunities

returns on new ts

ortfolio companie

usiness condition

vate equity indus

anding compet

Sa

dge of busines

In

Legal and reg

Manag

Global bus

Quantitative

NE PRIVATE CAP

RDINE UNIVERSITY

leadership skilr management t

e 84. Skills T

o, respondents on‐control invesinvestments an

eral Busines

Decrsignif

1

ing 1

1

0

ng 0

3

9

2

es 2

ns 1

stry 2

Leader

titive environm

Strategic plan

ales and marke

s and world ev

nspiring innova

Human resou

Corporate fin

gulatory knowle

gement accoun

iness managem

e analysis/rese

PITAL MARKETS

Y GRAZIADIO SCHO

ls, strategic plato have.

That Are Impo

indicated increastments and slignd worsened ge

s and Indust

reased ficantly

Decreaslight

1% 7%

1% 25%

1% 14%

0% 9%

0% 7%

3% 25%

9% 34%

2% 31%

2% 32%

2% 47%

2% 27%

0% 10

rship

ments

nning

eting

vents

ation

urces

ance

edge

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ment

earch

Today

PROJECT | CAPIT

OOL OF BUSINESS

nning, and und

ortant for Se

ases in demandght increases inneral business

try Assessm

sed ly

Stayed about the

same

41%

% 29%

% 52%

55%

40%

% 32%

% 27%

% 45%

% 23%

% 22%

% 43%

0% 20% 30

y In the fut

TAL MARKETS R

AND MANAGEME

derstanding com

enior Manage

d for private eqn deal multiplesconditions.

ment: Today v

Increased slightly

Incsign

35%

38%

30%

28%

35%

31%

25%

21%

38%

17%

22%

441%

41%

36%

34%33%

30%

41%

40%

40%

31%

36%

0% 40% 5

ture

REPORT – 2011 ‐

ENT. All Rights Res

mpetitive enviro

ement to Hav

uity, quality of s. They also rep

versus Six M

reased nificantly

% increas

17% 52%

7% 45%

3% 33%

8% 36%

18% 53%

9% 40%

5% 30%

1% 21%

5% 43%

2% 19%

5% 28%

61%

52%

46%

51%

56%

48%

%

52%

0% 60% 7

2012

erved. | 60

onments are th

ve

companies seeorted a decreas

Months Ago

se %

decreaseincde

8%

26%

15%

9%

7%

28%

43%

34%

35%

59%

29%

PRIVATE EQUIT

8

77%

75%

%

74%

68%

70%

70% 80% 9

e

eking se in

Net crease/

ecrease

44%

19%

18%

27%

46%

11%

-13%

-12%

8%

-40%

-2%

TY cont.

84%

90%

Respondenprivate equ

Table

Demand for


Average inv

Non-control

Expected inv

Deal multiple

Exit opportu

Expected reinvestments

Value of por

General bus

Size of priva

Responden

Ec

Econo

Gov

Competiti

PEPPERDIN

© 2011 | PEPPER

nts expect furthuity industry.

33. General

private equity

ompanies seekin

estment size

investments

vestment holding

es

nities

turns on new s

rtfolio companies

siness conditions

ate equity industr

nts believe dom

conomic uncert

omic uncertaint

vernment regu

ion from foreig

NE PRIVATE CAP

RDINE UNIVERSITY

er increases in

Business an

Decrsignif

0

g 1

0

1

g period 0

3

6

2

s 4

s 11

ry 4

estic economic

Figure 85

Access to capi

tainty (domest

ty (internation

lations and tax

Oth

gn trade partne

Inflati

PITAL MARKETS

Y GRAZIADIO SCHO

all business cha

nd Industry A

rease ficantly

Decreaslightl

0% 5%

% 16%

0% 14%

% 12%

0% 6%

3% 25%

6% 27%

2% 26%

4% 22%

1% 33%

4% 23%

c uncertainty is

. Issues Faci

4

1%

0%

3%

tal

tic)

nal)

xes

her

ers

on

0% 5%

Current iss

PROJECT | CAPIT

OOL OF BUSINESS

aracteristics exc

Assessment

ase y

Stay about the

same

32%

32%

46%

49%

48%

38%

39%

47%

36%

28%

47%

the most impor

ing Privately

10%

4%%

5%

% 10%

sue Emerg

TAL MARKETS R

AND MANAGEME

cept general bu

Expectation

Increase slightly

Incrsignif

50% 1

43% 9

36% 5

32% 6

37% 9

31% 2

25% 3

25% 1

32% 6

25% 3

20% 6

rtant issue facin

y-Held Busin

18%

20

20

15% 20%

ging issue

REPORT – 2011 ‐

ENT. All Rights Res

usiness conditio

ns over the N

rease ficantly

% increase

3% 63%

9% 51%

5% 41%

6% 39%

9% 45%

2% 34%

3% 29%

1% 26%

6% 38%

3% 28%

6% 26%

ng privately‐he

nesses

280%

26%

0%

23%

25% 30

2012

erved. | 61

ons and size of

Next 12 Month

e %

decrease

Nincrdec

5% 5

17% 3

14% 2

13% 2

6% 3

28% 6

33% -

27% -

26% 1

44% -1

27% -

ld businesses to

3

8%

0% 35%

hs

Net rease/

crease

58%

35%

27%

26%

39%

6%

-4%

-2%

12%

17%

-1%

oday.

37%

40%

Of the 75 pthe $5 milliinvesting in

Reav(p

Reingebu

Thpr

Operatio

Approxima

The largest

0%10%20%30%40%50%60%70%

PEPPERDIN

© 2011 | PEPPER

participants thation to $10 million business servi

espondents indverage investmpayment in kind

espondents expncrease in undeeneral businessusiness develop

he majority of rrivately‐held bu

onal and Ass

tely 42% of res

concentration

58%

6%

Less than $1million

NE PRIVATE CAP

RDINE UNIVERSITY

MEZZA

t responded to on range and 39ces over the ne

dicated increaseent size, and led) features, exp

pect further incrwriting standas conditions; anpment compani

respondents (62usinesses today

sessment Ch

pondents are S

Figure 86

of loan sizes w

F

39%

$1‐5 million

PITAL MARKETS

Y GRAZIADIO SCHO

ANINE SU

the mezzanine9% made invesext 12 months, f

es in demand foverage multiplepected returns

rease in demanards; relatively fd Increasing sizies (BDCs) and S

2%) believe domy.

haracteristics

BIC Firms.

6. SBIC (sma

as between $5

Figure 87. Ty

42%

58%

$5‐$10million

PROJECT | CAPIT

OOL OF BUSINESS

URVEY INF

survey, 58% retments in the $followed by 21%

or mezzanine caes. They also reon new investm

nd for mezzaninflat loan fees, Pze of mezzanineSBIC (small bus

mestic econom

s

ll business i

million and $10

ypical Investm

37%

$10‐25million

TAL MARKETS R

AND MANAGEME

FORMAT

eported making$1 million to $5 % in manufactu

apital, quality oeported decreasments, and wor

ne capital, but fPIK, and warrante industry with iness investme

ic uncertainty i

investment) F

0 million (58%)

ment Size

18%

$25‐$50million

REPORT – 2011 ‐

ENT. All Rights Res

ION

g deals over the million range. uring. Other key

f borrowers seeses in warrant crsened general

flat leverage mut coverage; a siadditional comnt) funds.

s the most imp

Firms

.

Yes

No

10%

$50‐$100million

2012

erved. | 63

e past six montOver 22% plan y findings includ

eking investmecoverage, PIK business condi

ultiples; a slightgnificant decre

mpetition from

ortant issue fac

5%

$100‐$500million

hs in on de:

nt,

tions.

t ease in

cing

Responden

Vintage ye

Size of fun

Targeted n

Target fund

Expected f

The types obusiness se

Approxima

PEPPERDIN

© 2011 | PEPPER

nts reported on

ear (year in which

nd ($ millions)

number of total in

d return (gross p

fund return (gros

of businesses reervices, followe

Figure 88

tely 57% of res

Figure

12%

10%

8%

3%11%

20%

NE PRIVATE CAP

RDINE UNIVERSITY

business practi

h first investment

nvestments

pretax cash on ca

s pretax cash on

espondents pland by 21% who p

8. Type of Bu

pondents made

e 89. Total Nu

2

14%

8%

2%3%

14%

14%

9%

PITAL MARKETS

Y GRAZIADIO SCHO

ices and the res

Table 34. M

t made)

ash annual IRR %

n cash annual IR

n to invest in ovplan to invest in

usiness for In

e between one

umber of Inv

22%

21%

%

11%

18%

PROJECT | CAPIT

OOL OF BUSINESS

sults are reflect

Mezzanine Fu

%)

R %)

ver next 12 monn manufacturin

nvestments P

and five loans o

vestments Ma

TAL MARKETS R

AND MANAGEME

ted below.

und Data

1st quarti

2006

100

15

16

15

nths are very dg.

Planned ove

over the last six

ade in the La

0

2

4

6 ‐ 10

REPORT – 2011 ‐

ENT. All Rights Res

ile Median

2007

200

20

19

18

iverse with ove

er Next 12 Mo

x months.

ast Six Mont

Business servi

Manufacturing

Health care

Retail and con

Wholesale & d

Information te

Basic material

Financial servi

Other

1

3

5

Mor

2012

erved. | 64

MEZZANIN

n 3rd qua

2008

488

25

20

20

er 22% targeting

onths

ths

MEZZANIN

ces

g

nsumer service

distribution

echnology

s & energy

ices

re than 10

NE cont.

artile

8

g

NE cont.

es

Approxima

PEPPERDIN

© 2011 | PEPPER

Figure 90

tely 32% of res

Figure

Figure 92

17%

15%

5

32%

2

13%

8%

13%

NE PRIVATE CAP

RDINE UNIVERSITY

0. Number o

pondents plan

91. Number

2. Number of

%

% 6%

2% 2%

2% 2%

%

23%

12%

17%

10%

2%

PITAL MARKETS

Y GRAZIADIO SCHO

f Follow-on I

to make betwe

r of Total Inve

f Follow-on In

34%

19%

%4%

14%

9%

14%

%

25%

7%

PROJECT | CAPIT

OOL OF BUSINESS

Investments

een six and 10 in

estments Pla

nvestments

TAL MARKETS R

AND MANAGEME

Made in the

nvestments ove

anned over N

Planned ove

0

2

4

6 ‐ 10

0

2

4

6 ‐ 10

0

2

4

6 ‐ 10

REPORT – 2011 ‐

ENT. All Rights Res

e Last Six Mo

er the next 12 m

Next 12 Mont

er Next 12 Mo

1

3

5

M

1

3

5

M

1

3

5

Mo

2012

erved. | 65

onths

months.

ths

onths

MEZZANIN

ore than 10

More than 10

ore than 10

NE cont.



Results of responses to sponsored deals based on size of investee EBITDA are reported below.

Table 35. Sponsored Deals by Size of Investee Company EBITDA (medians)

$1M

EBITDA $5M

EBITDA $10M

EBITDA $25M

EBITDA $50M

EBITDA $100M

EBITDA

% of deals with warrants 100% 100% 46% 30% 26% 7%

Average loan terms (years) 5 5 5 5 6 6.5

Senior leverage ratio (multiple of EBITDA) 2 2.25 2.5 3.25 3.25 4

Total leverage ratio (multiple of EBITDA) 3 3.25 3.5 4.25 4.75 5.25

Average loan size 4 4 7.5 15 25 90

Cash interest rate 12% 12% 12% 11% 11% 9.5%

PIK 0% 2% 3% 3% 3% n/a

Warrants expected return (IRR contribution) 2% 7% 4% 2% n/a n/a

Total expected returns (gross cash on pre-tax IRR) 23% 21% 18.5% 18% 18% 17.5%

Table 36. Investment Type by Size of Investee Company, Sponsored Deals

Senior debt only Sub debt only Blended Sr./Jr. Other

$0M - $1M EBITDA 0% 67% 33% 0%

$1M - $5M EBITDA 0% 40% 60% 0%

$5M - $10M EBITDA 8% 33% 50% 8%

$10M - $25M EBITDA 10% 20% 60% 10%

$25M - $50M EBITDA 17% 17% 67% 0%

$50M+ EBITDA 25% 25% 50% 0%

Results of responses to non‐sponsored deals based on size of investee EBITDA are reported below.

Table 37. Non-Sponsored Deals by Size of Investee Company EBITDA (medians)

$1M

EBITDA $5M

EBITDA $10M

EBITDA $25M

EBITDA $50M

EBITDA $100M

EBITDA

% of deals with warrants 88% 83% 60% 75% 100% 100%

Average loan terms (years) 4 5 5 5 7 3

Senior leverage ratio (multiple of EBITDA) 2 2.5 3 3 n/a n/a

Total leverage ratio (multiple of EBITDA) 4 3.5 3.5 4.25 n/a n/a

Average loan size 4 4 7.5 15 100 n/a

Cash interest rate 11% 11% 11% 9% 9% n/a

PIK 2% 2% 2% 3% 2% 0%

Warrants expected return (IRR contribution) 8% 10% 5% 8% 6% 6%

Total expected returns (gross cash on pre-tax IRR) 17.5% 18% 18% 18.5% 21% 23%

MEZZANINE cont.

$0M - $1M

$1M - $5M

$5M - $10M

$10M - $25

$25M - $50

$50M+ EB

Acquisition22.6%.

Responden

0

10

20

30

40

50

60

70

80

90

100

me

PEPPERDIN

© 2011 | PEPPER

Table 38.

EBITDA

EBITDA

M EBITDA

5M EBITDA

0M EBITDA

ITDA

loan was repo

Figure 93. B

nts reported on

16%

16%

35

50


NE PRIVATE CAP

RDINE UNIVERSITY

. Investment

Senior d

rted by 31% of

Borrower Mo

items required

Figure

29%

%6% 2%

5

90

ns orreviewed

Meet

1

PITAL MARKETS

Y GRAZIADIO SCHO

Type by Siz

debt only

0%

0%

20%

20%

0%

100%

respondents as

otivation to S

d to close one d

e 94. Items R

31%

5.7510

18.


1st Quartile

PROJECT | CAPIT

OOL OF BUSINESS

ze of Investee

Sub debt only

5

4

2

s borrower mot

Secure Mezza

eal.

Required to C

4

5

cipals Propossh

Median 3

TAL MARKETS R

AND MANAGEME

e Company,

y Blende

0%

53%

40%

20%

0%

0%

tivation, follow

anine Fundin

Close One De

Acquisition

Managemen

Refinancing

Financing gr

Working cap

Finance wor

4 5.510


3rd Quartile

REPORT – 2011 ‐

ENT. All Rights Res

Sponsored D

ed Sr./Jr.

100%

47%

40%

60%

100%

0%

ed by managem

ng (past six m

eal

loan

nt buyout

g

rowth

pital fluctuatio

rsening operat

1

erm Letters o

2012

erved. | 67

Deals

Other

ment buyouts a

months)

MEZZANIN

ons

tions condition

2 3

f intent signed

0%

0%

0%

0%

0%

0%

t

NE cont.

ns

d


Figure 9


Understa

Knowled

PEPPERDIN

© 2011 | PEPPER


95. Would Se


Figure

18

anding compet

Sa

dge of busines

In

Manag

Legal and reg

Quantitative

Global bus

NE PRIVATE CAP

RDINE UNIVERSITY


enior Manage


e 96. Skills T

51%

%

2%

Leader

titive environm

Strategic plan

ales and marke

s and world ev

Corporate fin

nspiring innova

gement accoun

gulatory knowle

e analysis/rese

Human resou

iness managem

PITAL MARKETS

Y GRAZIADIO SCHO


ers and ChieSkil

lls, understandto have.

That Are Impo

29%

0% 10%

rship

ments

nning

eting

vents

ance

ation

nting

edge

earch

urces

ment

Today

PROJECT | CAPIT

OOL OF BUSINESS



ing competitive

ortant for Se

20%3

% 20% 30%

y In the fut

TAL MARKETS R

AND MANAGEME


s Benefit from?

e environments

enior Manage

49

42%

42%

40%

38%

33%

5

35%

5

35%

30%

35%

% 40% 50%

ture

REPORT – 2011 ‐

ENT. All Rights Res

ked with, senior

m Additional

s and strategic p

ement to Hav

Strongly agree

Agree

Neutral

Disagree

7

53%

9%

65%

51%

58%

51%

60% 70%

2012

erved. | 68

r managers, suc

l Leadership

planning are th

ve

MEZZANIN

e

93

89%

82%

73%

84%

84%

79%

80% 90% 10

ch as

and

e

NE cont.

3%

00%



Total debt‐to‐cash flow ratio was the most important factor when deciding whether to invest or not, followed by total debt service coverage ratio.

Table 39. Importance of Financial Evaluation Metrics

Unimportant

Of little importance

Moderately important

Important Very

important Score

(1 to 5)

Senior DSCR or FCC ratio 17% 6% 17% 37% 23% 3.43

Total DSCR or FCC ratio 3% 3% 6% 34% 54% 4.34

Senior debt-to-cash flow ratio 6% 0% 18% 47% 29% 3.94

Total debt-to-cash flow ratio 0% 0% 6% 24% 70% 4.64

Table 40. Financial Evaluation Metrics Average Data

Average borrower data Limit not to be exceeded

Financial ratio covenant after booking

Senior DSCR or FCC ratio 1.4 1.4 1.4

Total DSCR or FCC ratio 1.4 1.2 1.2

Senior debt to cash flow ratio 2.5 3 3

Total debt to cash flow ratio 4 4 4

Relative to six months ago, respondents indicated increases in demand for mezzanine capital, quality of borrowers seeking investment, average investment size, and leverage multiples. They also reported decreases in warrant coverage, PIK features, and expected returns on new investments, as well as worsened general business conditions.



Decreased slightly

Stayed about the

same

Increased slightly


% increase

% decrease


Demand for mezzanine capital 0% 12% 33% 47% 9% 56% 12% 44%

Credit quality of borrowers seeking investment

0% 19% 49% 28% 5% 33% 19% 14%


Average investment maturity 0% 0% 93% 7% 0% 7% 0% 7%

General underwriting standards 5% 19% 57% 17% 2% 19% 24% -5%

Warrant coverage 8% 31% 46% 13% 3% 15% 38% -23%

PIK features 0% 24% 63% 10% 2% 12% 24% -12%

Loan fees 0% 12% 81% 7% 0% 7% 12% -5%



2% 45% 26% 21% 5% 26% 48% -21%


MEZZANINE cont.

Respondenof borrowe

Table

Demand fo

Credit quainvestment

Average in

Average in

General un

Warrant co

PIK feature

Loan fees

Leverage m

Expected rinvestment

General bu

Size of me

Responden

B

Ec

Econo

Gov

Competiti

PEPPERDIN

© 2011 | PEPPER

nts expect furthers seeking inve

42. General

or mezzanine cap

lity of borrowers t

nvestment size

nvestment maturi

nderwriting stand

overage

es

multiples

returns on new ts

usiness condition

ezzanine industry

nts believe dom

BANK AN

conomic uncert

omic uncertaint

vernment regu

ion from foreig

NE PRIVATE CAP

RDINE UNIVERSITY

er increases in stment.

Business an

Decsigni

pital 0

seeking 2

0

ity 0

dards 0

0

0

0

2

0

ns 5

y 0

estic economic

Figure 97

ND ASSET‐

tainty (domest

ty (internation

Access to capi

lations and tax

Inflati

gn trade partne

Oth

PITAL MARKETS

Y GRAZIADIO SCHO

all business cha

nd Industry A

crease ficantly

Decreaslight

0% 2%

2% 29%

0% 3%

0% 3%

0% 13%

0% 13%

0% 10%

0% 5%

2% 27%

0% 20%

5% 51%

0% 10%

c uncertainty is

7. Issues Faci

‐BASED L

2%

1%

5

4%

tic)

nal)

tal

xes

on

ers

her

0% 5%

Current iss

PROJECT | CAPIT

OOL OF BUSINESS

aracteristics exc

Assessment

ase tly

Stay aboutthe same

% 41%

% 44%

% 80%

% 93%

% 65%

% 68%

% 80%

% 83%

% 41%

% 44%

% 27%

% 49%

the most impor

ing Privately

LENDING

11%

9%

5%

%

10% 15%

sue Emerg

TAL MARKETS R

AND MANAGEME

cept general bu

Expectation

t Increase slightly

Insign

37%

22%

15%

3%

20%

15%

5%

10%

29%

29%

17%

34%

rtant issue facin

y-Held Busin

SURVEY

21%

17%

20% 25%

ging issue

REPORT – 2011 ‐

ENT. All Rights Res

usiness conditio

ns over the N

crease nificantly

% increas

20% 56%

2% 24%

3% 18%

3% 5%

3% 23%

5% 20%

5% 10%

2% 12%

0% 29%

7% 37%

0% 17%

7% 41%

ng privately‐he

nesses

INFORMA

29%

28%

30% 35%

2012

erved. | 70

ons and credit q

Next 12 Month

se %

decreaseinde

% 2%

% 32%

% 3%

3%

% 13%

% 13%

% 10%

% 5%

% 29%

% 20%

% 56%

% 10%

ld businesses to

ATION

44%

40% 45%

quality

hs

Net ncrease/ ecrease

54%

-7%

15%

3%

10%

8%

0%

7%

0%

17%

-39%

32%

oday.

%

50%

There werefunction. Oover 51% sa

Odeco

Recref

Cuhe

Operatio

Respondenfollowed by

The majorit

The largest

PEPPERDIN

© 2011 | PEPPER

e 103 responsesOver 32% of respaid demand for

ver the last six emand for loanollateral as a ba

espondents alsoredit quality of fforts, and furth

urrently, the meld businesses.

onal and Ass

nts reported on y 15% as a corp

ty (78%) report

concentration

8%

8%

8%

NE PRIVATE CAP

RDINE UNIVERSITY

s to the banks spondents believr loans will incre

months respons and underwriackup means of

o expect increaborrowers, sligher pricing com

ajority of lende

sessment Ch

the type of entporate bank.

Figu

participating in

Figure 99. P

of loan sizes w

31%

5%

2% 2% 1%

22%

PITAL MARKETS

Y GRAZIADIO SCHO

survey with comve that general ease. Other key

ndents were seeiting standards payment.

ase in lending caht increases in pression.

ers (56%) see do

haracteristics

tity that best de

ure 98. Descr

n government l

Participation

as between $1

35%

78%

PROJECT | CAPIT

OOL OF BUSINESS

mmercial banks business condiy findings includ

eing worsened with slight incr

apacity of banksenior and tota

omestic econom

s

escribes them a

ription of Le

oan programs.

n in Governm

million and $25

TAL MARKETS R

AND MANAGEME

making up 35%itions will improde:

business conditrease in credit q

s and SBA lendal leverage mult

mic uncertainty

and 55% report

nding Entity

ment Loan Pr

5 million (58%)

C

A

C

C

C

O

P

R

C

REPORT – 2011 ‐

ENT. All Rights Res

% in terms of inove over the ne

tions and appetquality of borro

ing, flat underwtiples, increasin

y as the top issu

as being a com

y

rograms

.

ommercial ban

Asset‐based len

orporate bank

ommunity ban

ommercial fina

Other

rivate banker

esidential mor

redit union

Yes

2012

erved. | 71

dividual lendingext 12 months a

tite for risk, flatowers, and focu

writing standardng due diligence

ue facing private

mmercial bank,

BANK

nk

nder

k

nk

ance company

rtgage lender

No

g and

t s on

ds and e

ely‐

KS cont.

y

Responden

Manufactu

Retail and

Wholesale

Business s

Basic mate

Health care

Information

Financial s

Cash flow

Working ca

Equipment

Real estate

Typical fixe

Senior leve

0%

5%

10%

15%

20%

25%

30%

PEPPERDIN

© 2011 | PEPPER

nts reported on

ring

consumer servic

& distribution

services

erials & energy

e

n technology

services

loan

apital loan

t loan

e loan

ed-rate loan term

rage multiples

11%

Less than $1million

NE PRIVATE CAP

RDINE UNIVERSITY

Fi

all‐in rates for

T

ces

Ta

m (years)

are reported be

25%

$1 ‐ 5 millio

PITAL MARKETS

Y GRAZIADIO SCHO

igure 100. Ty

various industr

Table 43. All

$1M

5.5% 5

6.3%

6%

6.3% 5

5.5% 5

6%

6.3%

7% 6

Table 44. All-i

$1M

6% 5

6%

6%

6%

5.5

elow for the va

17%

on $6 ‐ $10 m

PROJECT | CAPIT

OOL OF BUSINESS

ypical Invest

ries.

l-in Rates by

$5M $1

5.8% 5.

6% 5.

6% 5.

5.5% 5.

5.3% 5

6% 5.

6% 6

6.3% 6

in Rates by L

$5M $

5.50% 5.

5.5% 5

5% 4

6% 5

6

rious industries

% 1

million $11 ‐ 2

TAL MARKETS R

AND MANAGEME

tment Size

y Industry

10M $25

.0% 4%

.8% 5.3

.3% 5.0

.3% 5.0

5% 5%

.5% 5%

6% 5.8

6% 5%

Loan Type

10M $2

.50% 5.5

5.8% 5.

4.8% 5.

5% 5

5

s and EBITDA si

18%

25 million $

REPORT – 2011 ‐

ENT. All Rights Res

5M $50

% 3.5%

3% 5.0%

0% 3.8%

0% 3.5%

% 4.5%

% 5%

8% 4.5%

% 4.8%

25M $50

50% 5.25

5% 5.5

3% 3.5

5% 4.5

5 5

zes.

14%

$25 ‐ $50million

G

2012

erved. | 72

M $100

% 3.3%

% 3.8%

% 3%

% 3.5%

% 3.8%

% 5%

% 4.3%

% 4.0%

0M $100

5% 5%

5% 5%

5% 4.5%

5% 5%

5 7

BANK

15%

Greater than $million

M

%

%

%

%

%

%

0M

%

%

%

%

KS cont.

50

Manufactu

Retail and

Wholesale

Business s

Basic mate

Health care

Information

Financial s

Average

Various fee

Closing fee

Modificatio

Commitme

Underwritin

Arrangeme

Prepaymen

Prepaymen

Unused lin

Refinancing

PEPPERDIN

© 2011 | PEPPER

ring

consumer servic

& distribution

services

erials & energy

e

n technology

services

es as reported b

e

on fee

ent fee

ng fee

ent fee

nt penalty (yr 1)

nt penalty (yr 2)

e fee

g was the most

Figure

17%

12%

11%

5%

NE PRIVATE CAP

RDINE UNIVERSITY

Table 45.

$1EBIT

1.2

ces 1.2

1.2

1.2

1.

1.2

1.

1.2

1.

by lenders are a

commonly des

101. Borrowe

%

%3%

PITAL MARKETS

Y GRAZIADIO SCHO

Senior Leve

M TDA

$5MEBIT

25 1.2

25 1.2

25 1.2

25 1.2

.5 1.2

25 1.5

.5 1.5

25 1.2

.3 1.3

as follows.

Table 46

1st quart

0.5%

0.2%

0.5%

0.0%

0.0%

1.0%

0.5%

0.3%

scribed financin

er Motivation

52%

PROJECT | CAPIT

OOL OF BUSINESS

erage Multipl

M TDA

$10MEBITD

25 1.25

25 1.25

25 1.25

25 1.25

25 1.25

5 1.75

5 1.5

25 1.5

3 1.4

6. Fees Char

tile Me

1

0

0

0

0

2

1

0

g by buyers at 5

n to Secure F

%

TAL MARKETS R

AND MANAGEME

le by EBITDA

M DA

$25MEBITD

5 1.25

5 1.25

5 1.25

5 1.25

5 1.25

5 2

5 2

5 1.75

4 1.5

rged

edian

.0%

.3%

.5%

.5%

.5%

.0%

.0%

.4%

52%, followed

Financing (p

Refinancing

Expansion

Working ca

Finance wo

Manageme

Other

REPORT – 2011 ‐

ENT. All Rights Res

A Size

M DA

$50MEBITD

5 1.75

5 1.25

5 1.25

5 1.75

5 1.25

1.75

1.5

5 1.75

1.5

3rd quartile

1.5%

0.5%

1.0%

1.0%

1.0%

3.0%

2.0%

0.5%

by expansion at

past six mont

g existing loans

apital fluctuatio

orsening opera

ent buy‐out

2012

erved. | 73

M DA

$100MEBITD

5 1.75

5 1.25

5 1.5

5 1.75

5 1.75

5 1.75

1.75

5 1.75

1.7

% reportin

15%

12%

14%

11%

11%

13%

13%

11%

t 17%.

ths)

BANK

s or equity

ons

ting condition

M DA

5

5

5

5

5

5

5

ng

KS cont.

s



Total debt service coverage ratio was the most important factor when deciding whether to invest or not, followed by total debt‐to‐cash flow.

Table 47. Importance of Financial Evaluation Metrics

Unimportant

Of little importance

Moderately important

Important Very

important Score (0 to 4)

Current ratio 29% 24% 29% 13% 4% 1.4

Senior DSCR or FCC ratio 9% 15% 9% 15% 52% 2.9

Total DSCR or FCC ratio 9% 9% 2% 28% 52% 3.1

Senior debt-to-cash flow 7% 14% 16% 34% 30% 2.7

Total debt-to-cash flow 7% 11% 13% 42% 27% 2.7

Debt-to-net worth 16% 18% 29% 20% 18% 2.1

Revenue growth rate 6% 29% 29% 29% 6% 2.0

Table 48. Financial Evaluation Metrics Average Data

Average borrower data Limit not to be exceeded

Financial ratio covenant after booking

Current ratio 1.5 1.3 1.2

Senior DSCR or FCC ratio 1.3 1.3 1.2

Total DSCR or FCC ratio 1.2 1.25 1.1

Senior debt-to-cash flow 2.0 2.3 3

Total debt-to-cash flow 2.5 2.5 4

Debt-to-net worth 2 1.5 3

Revenue growth rate 5% 5% n/a

Respondents reported on the percentage of loans (by size) that require personal guarantees..

Table 49. Personal Guarantee Percentage of Occurrence by Size of Loan (%)

$1M loan $5M loan $10M loan $25M loan $50M loan $100M loan

Personal guarantee 100% 100% 75% 25% 25% 25%

Approximately 63% of cash flow applications were declined.

Table 50. Applications Data

Declined

Cash flow-based 63%

BANKS cont.

Approximawere declin

Responden

Fig


Figure 10

Qua

Size or av

PEPPERDIN

© 2011 | PEPPER

tely 36% of appned due to insu

nts agree they a

gure 103. Fee


04. Would Se

ality of earning

Ins

Custom

E

vailability of pe

W

Insufficient m

Insufficien

Lack of ba

13%

31

NE PRIVATE CAP

RDINE UNIVERSITY

plications were fficient collater

Fig

re feeling incre

eling Increas


enior Manag

gs and/or cash

sufficient collat

Debt

mer concentrat

Size of comp

Economic conc

ersonal guaran

Weakening indu

management t

t operating his

Insufficient cr

anking relation

O

17%

%

13% 4%

12%

1%

12%

PITAL MARKETS

Y GRAZIADIO SCHO

declined due toral.

ure 102. Rea

eased pressure f

sed Pressure


gers and ChieSkil

2%

2%

2%

2%

1%

1%

flow

teral

load

tions

pany

cerns

ntees

stry

eam

story

redit

nship

Other

52%

%

46%

PROJECT | CAPIT

OOL OF BUSINESS

o poor quality o

ason for Decl

from regulators

e from Regul



10%

6%

6%

4%

%

%

%

%

5%

TAL MARKETS R

AND MANAGEME

of earnings and

lined Loans

s (72%) to avoid

lators to Avo


s Benefit fro?

%

St

Ag

Ag

Ne

Di

A

REPORT – 2011 ‐

ENT. All Rights Res

/or cash flow fo

d making risky l

oid Making R

ked with, senior

om Additiona

22%

rongly agree

gree

gree somewha

either agree no

sagree somew

Strongly agree

Agree

Neutral

Disagree

2012

erved. | 75

ollowed by 22%

loans.

Risky Loans

r managers, suc

al Leadership

BANK

3

t

or disagree

what

e

% that

ch as

p and

KS cont.

36%

According tsenior man

Responden

Understa

Knowled

G

Eco

Compe

PEPPERDIN

© 2011 | PEPPER

to respondents,nagement to ha

Figure

nts believe dom

Sa

anding compet

Legal and reg

In

dge of busines

Manag

Quantitative

Global bus

Economic unc

Government re

onomic uncerta

etition from for

NE PRIVATE CAP

RDINE UNIVERSITY

, leadership skive.

e 105. Skills T

estic economic

Figure 106

Leader

ales and marke

Strategic plan

titive environm

gulatory knowle

nspiring innova

s and world ev

Corporate fin

gement accoun

e analysis/rese

iness managem

Human resou

certainty (dom

Access to c

egulations and

ainty (internat

reign trade par

Inf

O

PITAL MARKETS

Y GRAZIADIO SCHO

lls, sales, marke

That Are Imp

c uncertainty is

6. Issues Fac

0%

rship

eting

nning

ments

edge

ation

vents

ance

nting

earch

ment

urces

Today

2%

2%

mestic)

apital

taxes

ional)

rtners

lation

Other

Current iss

PROJECT | CAPIT

OOL OF BUSINESS

eting skills, and

portant for Se

the most impor

cing Privately

10% 20%

y In the fut

1

%

5%

9%

9%

5%

7%

%

sue Emerg

TAL MARKETS R

AND MANAGEME

strategic plann

enior Manag

rtant issue facin

y-Held Busin

3

33%

30%

30%

24%

28%

25%

28%

28%

30% 4

ture

21%

16%2

ging issue

REPORT – 2011 ‐

ENT. All Rights Res

ning are the mo

gement to Ha

ng privately‐he

nesses

42%

39%

39%

36%

%

46%

39%

42%

39%

40% 50%

40

28%

2012

erved. | 76

ost important fo

ave

ld businesses to

BANK

6

64%

61%

61%

63%

63%

63%

63%

60% 7

0%

or

oday.

KS cont.

67%

%%

%

%

%

70%

56%



Respondents indicated increases in almost all general business characteristics except general underwriting standards, amount of nonaccrual loans, size of interest rate spreads, business conditions and appetite for risk.



Decreased slightly

Stayed about the

same

Increased slightly


% increase

% decrease


Demand for business loans (applications)

12% 12% 30% 35% 12% 47% 23% 23%

General underwriting standards 0% 20% 64% 12% 4% 16% 20% -4%

Credit quality of borrowers applying for credit

7% 16% 37% 35% 5% 40% 23% 16%

Loans outstanding 0% 11% 17% 56% 17% 72% 11% 61%

Nonaccrual loans 25% 38% 38% 0% 0% 0% 63% -63%

Number/ tightness of financial covenants

6% 11% 61% 17% 6% 22% 17% 6%

Due diligence efforts 0% 0% 48% 40% 12% 52% 0% 52%

Average loan size 0% 14% 49% 35% 2% 37% 14% 23%

Average loan maturity (months) 0% 7% 60% 28% 5% 33% 7% 26%

Percent of loans with personal guarantees

0% 10% 80% 5% 5% 10% 10% 0%

Percent of loans requiring collateral 0% 4% 76% 16% 4% 20% 4% 16%

Size of interest rate spreads (pricing) 0% 48% 24% 20% 8% 28% 48% -20%

Loan fees 0% 42% 42% 14% 2% 16% 42% -26%

Standard advance rates 0% 6% 61% 28% 6% 33% 6% 28%

Interest rate spread (pricing) 6% 56% 17% 17% 6% 22% 61% -39%

Senior leverage multiples 0% 4% 58% 29% 8% 38% 4% 33%

Total leverage multiples 0% 8% 54% 29% 8% 38% 8% 29%

Focus on collateral as backup means of payment

0% 8% 58% 29% 4% 33% 8% 25%

SBA lending 10% 20% 35% 25% 10% 35% 30% 5%

Lending capacity of bank 8% 8% 17% 38% 29% 67% 17% 50%


Appetite for risk 8% 36% 28% 20% 8% 28% 44% -16%

BANKS cont.



Respondents expect further increases in all business characteristics except average loan size, loan fees, total leverage multiples, focus on collateral, and lending capacity of bank.



Decrease slightly

Stay about the same

Increase slightly


% increase

% decrease


Demand for business loans (applications) 0% 5% 44% 37% 14% 51% 5% 47%

General underwriting standards 0% 8% 72% 16% 4% 20% 8% 12%

Credit quality of borrowers applying for credit 0% 16% 56% 26% 2% 28% 16% 12%

Due diligence efforts 0% 0% 22% 61% 17% 78% 0% 78%

Average loan size 0% 31% 56% 6% 6% 13% 31% -19%

Average loan maturity (months) 0% 17% 61% 17% 6% 22% 17% 6%

Percent of loans with personal guarantees 0% 0% 68% 28% 4% 32% 0% 32%

Percent of loans requiring collateral 0% 0% 56% 42% 2% 44% 0% 44%

Size of interest rate spreads (pricing) 0% 5% 70% 21% 5% 26% 5% 21%

Loan fees 0% 14% 82% 0% 5% 5% 14% -9%

Senior leverage multiples 0% 8% 80% 4% 8% 12% 8% 4%

Total leverage multiples 0% 38% 42% 17% 4% 21% 38% -17%

Focus on collateral as backup means of payment 0% 23% 63% 12% 2% 14% 23% -9%

SBA lending 0% 0% 89% 11% 0% 11% 0% 11%

Lending capacity of bank 0% 28% 50% 22% 0% 22% 28% -6%

General business conditions 0% 4% 64% 28% 4% 32% 4% 28%

Appetite for risk 0% 4% 60% 32% 4% 36% 4% 32%

BANKS cont.

Asset‐Ba

According t

Approxima$5 million.

Responden

$5 million l

$25 million

$50 million

$100 millio

Average lo

Responden

0%

10%

20%

30%

40%

N

PEPPERDIN

© 2011 | PEPPER

ased Lending

to respondents

tely 38% of the

F

nts reported on

Tab

oan

loan

loan

on loan

oan length (month

nts reported on

12

8%

7%5%

3%

13%

Negative EBITD

NE PRIVATE CAP

RDINE UNIVERSITY

g Specific Ch

approximately

Figure 107.

e companies tha

Figure 108. T

all‐in rates by t

ble 53. All-in

Accountreceivabl

11

4

3

2.4

hs) 42

standard advan

12%2%

12%

38

DA $0 ‐ 5 mEBIT

PITAL MARKETS

Y GRAZIADIO SCHO

haracteristics

y 25% of asset‐b

Industries S

at booked asset

Typical EBIT

type and size of

Rates on Cu

s le

Inventory

12

4

3

2.4

42

nce rates and th

25%

16%

8%

millionTDA

$

PROJECT | CAPIT

OOL OF BUSINESS

s

based loans wer

Served by As

t‐based loans in

TDA Sizes for

f current booke

urrent Asset-

Equipment

6

4

3

2.5

42

he results are r

16%

$5 ‐ 10 millionEBITDA

TAL MARKETS R

AND MANAGEME

re issued for ma

sset-Based L

n the last six mo

r Companies

ed loans and the

-Based Loan

Real estate

Woca

7

4

3.5

2.8 2

39

eflected below

Man

Who

Heal

Busi

Basic

Infor

Reta

Fina

Othe

18%

$10 ‐ 50 mEBITD

REPORT – 2011 ‐

ENT. All Rights Res

anufacturing co

Lenders

onths had EBITD

s Booked

e results are re

ns (medians)

orking apital

10

4

3

2.8

48

.

nufacturing

olesale & distri

lth care

ness services

c materials & e

rmation techn

ail & consumer

ncial services

er

%

millionDA

$50+

2012

erved. | 79

ompanies.

DA size less tha

ported below.

BANK

bution

energy

ology

r services

15%

million EBITDA

n

KS cont.

A

Marketable

Accounts r

Inventory -

Inventory -

Inventory -

Equipment

Real estate

Land

Responden

According t

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0%

20%

40%

60%

80%

100%

W

PEPPERDIN

© 2011 | PEPPER

Tab

e securities

receivable

low quality

intermediate qu

high quality

t

e

nts reported on

Fi

to respondents

10%6%

Purchaseprice

59%

Working capita

NE PRIVATE CAP

RDINE UNIVERSITY

ble 54. Stand

1st qu

9

8

2

ality 4

5

5

6

3

valuation stand

igure 109. Va

working capita

Figure

6% 5%

Depreciatedvalue (book)

Equipment

72%

al Receivablebased

PITAL MARKETS

Y GRAZIADIO SCHO

dard Advanc

Typical

uartile Media

90 90

80 85

25 30

40 45

55 60

59 75

60 65

35 40

dards used to e

aluation Stan

al‐based loans h

e 110. Asset-

35%

11%

Face value

Real estate

73%

es Equipmbase

PROJECT | CAPIT

OOL OF BUSINESS

ce Rate (or L

Loan

an 3rd quart

90

85

31

50

65

80

70

45

estimate LTV rat

ndards Used

had the smalles

-Based Loan

6%

87%

5%

Fair marketvalue

Accounts

% 7

mented

Invent

TAL MARKETS R

AND MANAGEME

TV ratio) for

tile 1st quar

90

85

21

40

50

75

55

37

tios.

d to Estimate

st decline rate (5

ns Decline Ra

25% 25%33%

Forcedliquidation

receivable

74%

ory based R

REPORT – 2011 ‐

ENT. All Rights Res

Assets (%)

Upper Lim

rtile Median

90

85

30

50

60

75

70

42

LTV Ratio

59%) over the l

ate

63%

7%10%

%

44%

Orderlyliquidation

Inventory

79%

Real estatebased

O

2012

erved. | 80

mit

3rd quartile

90

90

46

60

65

78

75

44

ast six months.

7%10%

%

6%

nOther

79%

Other operatinasset‐based

.

%

ng



ABOUT THE AUTHOR

John Paglia, PhD, MBA, CPA, CFA

Associate Professor of Finance and Senior Researcher

Pepperdine Private Capital Markets

Dr. Paglia, a former Julian Virtue and Denney Professorship recipient, is an associate professor of finance at

Pepperdine University and directs the Pepperdine Private Capital Markets Project. He has over 10 years of

university teaching experience in finance, performs business valuations for privately‐held companies, and has

testified as an expert on economic damage and valuation matters.

His work on the Pepperdine Private Capital Markets Project—the first simultaneous, comprehensive, and on‐

going investigation of the major private capital market segments—has resulted in over 20,000 report

downloads in more than 70 countries and has earned him the 2011 George Award, which is given to the one

faculty member annually who best leverages the business community to make a difference in the classroom.

His research has appeared in the Wall Street Journal, CNBC, USA Today, and the New York Times, been

published in a number of journals and been presented at domestic and international conferences. Dr. Paglia

holds a PhD in finance, an MBA, a BS in finance, and is a Certified Public Accountant (CPA) and Chartered

Financial Analyst (CFA) charterholder.

Contact: [email protected]

ABOUT PEPPERDINE UNIVERSITY’S

GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT

Founded on the core values of integrity, stewardship, courage, and compassion, Pepperdine University’s

Graziadio School of Business and Management has been developing values‐centered leaders and advancing

responsible business practice since 1969. Student‐focused, experience‐driven, and globally‐oriented, the

Graziadio School offers fully accredited MBA, master of science, and bachelor’s completion business programs.

More information found at: bschool.pepperdine.edu/newsroom



INDEX OF TABLES

Table 1. Private Capital Market Required Rates of Return ................................................................................... 8

Table 2. General Business and Industry Assessment: Today versus Six Months Ago ............................................ 12

Table 3. General Business and Industry Assessment Expectations over the Next 12 Months ............................... 12

Table 4. Median Deal Multiples by EBITDA Size of Company .............................................................................. 17

Table 5. Median Total Leverage Multiples by Size of Company ........................................................................... 18

Table 6. Median Senior Leverage Multiples by Size of Company ......................................................................... 18

Table 7. Balance of Available Capital with Quality Companies ............................................................................ 19

Table 8. How Difficult to Arrange Senior Debt for Transactions over the Past Six Months ................................... 19

Table 9. General Business and Industry Assessment: Today versus Six Months Ago ............................................ 21

Table 10. General Business and Industry Assessment Expectations over the Next 12 Months ............................. 21

Table 11. Median Revenue Deal Multiples by Revenue Size of Company ............................................................ 27

Table 12. Median EBITDA Deal Multiples by Revenue Size of Company .............................................................. 27

Table 13. General Business and Industry Assessment: Today Versus Six Months Ago ......................................... 30


Table 15. Importance of Factors When Evaluating ............................................................................................. 36

Table 16. General Business and Industry Assessment: Today versus Six Months Ago .......................................... 37


Table 18. General Information on Investments by Company Stages ................................................................... 41



Table 21. VC Fund Data ..................................................................................................................................... 47

Table 22. General Information on Investments by Company Stages ................................................................... 48



Table 25. PEG Fund Data ................................................................................................................................... 54



Table 26. General Characteristics – Buyout Transactions (medians) ................................................................... 56

Table 27. General Characteristics – Non‐Buyout Transactions (medians) ............................................................ 56

Table 28. Deal Multiples Among Industries (medians)........................................................................................ 57

Table 29. The Ease to Arrange Senior Debt for Transactions over the Past Six Months........................................ 58

Table 30. The Balance of Available Capital with Quality Companies for the Following Size ................................. 59

Table 31. Valuation Discount for Minority Stock Interests in a Typical Privately‐Held Company with a Total Equity

Value of $10 Million ................................................................................................................................. 59



Table 34. Mezzanine Fund Data ......................................................................................................................... 64

Table 35. Sponsored Deals by Size of Investee Company EBITDA (medians) ....................................................... 66

Table 36. Investment Type by Size of Investee Company, Sponsored Deals ........................................................ 66

Table 37. Non‐Sponsored Deals by Size of Investee Company EBITDA (medians) ................................................ 66

Table 38. Investment Type by Size of Investee Company, Sponsored Deals ........................................................ 67

Table 39. Importance of Financial Evaluation Metrics ........................................................................................ 69

Table 40. Financial Evaluation Metrics Average Data ......................................................................................... 69



Table 44. All‐in Rates by Industry ...................................................................................................................... 72

Table 45. All‐in Rates by Loan Type ................................................................................................................... 72

Table 46. Senior Leverage Multiple by EBITDA Size ............................................................................................ 73

Table 47. Fees Charged ...................................................................................................................................... 73

Table 48. Importance of Financial Evaluation Metrics ........................................................................................ 74

Table 49. Financial Evaluation Metrics Average Data ......................................................................................... 74

Table 50. Personal Guarantee Percentage of Occurrence by Size of Loan (%) ...................................................... 74

Table 51. Applications Data ............................................................................................................................... 74





Table 54. All‐in Rates on Current Asset‐Based Loans (medians) .......................................................................... 79

Table 55. Standard Advance Rate (or LTV ratio) for Assets (%) ........................................................................... 80

INDEX OF FIGURES

Figure 1. Private Capital Market Required Rates of Return .................................................................................. 7

Figure 2. Annual Revenues of Companies Valued ............................................................................................... 10

Figure 3. Usage of Valuation Approaches ........................................................................................................... 10

Figure 4. Usage of Multiples .............................................................................................................................. 11

Figure 5. Average Risk‐Free Rate, Market (equity) Risk Premium and Long‐Term Growth Rate ........................... 11

Figure 6. Discount for Lack of Marketability (DLOM) by Revenue Sizes ............................................................... 11

Figure 7. Explicit Forecast Period for High‐Growth Companies by Revenue Sizes (years) ..................................... 12

Figure 8. Issues Facing Privately‐Held Businesses ............................................................................................... 13

Figure 9. Private Business Sales Transactions Closed in the Last Six Months ....................................................... 14

Figure 10. Business Types That Were Involved in the Transactions Closed in the Last Six Months ....................... 15

Figure 11. Average Number of Months to Close One Deal .................................................................................. 15

Figure 12. Private Business Transactions Expected to Close in the Next 12 Months ............................................ 15

Figure 13. Percentage of Business Sales Engagements Terminated Without Transacting .................................... 16

Figure 14. Reasons for Business Sales Engagements Not Transacting ................................................................. 16

Figure 15. Valuation Gap in Pricing for Transactions That Didn’t Close ............................................................... 16

Figure 16. Usage of Valuation Approaches ......................................................................................................... 17

Figure 17. Usage of Multiples ............................................................................................................................ 17

Figure 18. Components of Closed Deals ............................................................................................................. 18

Figure 19. Premium Paid by Strategic Buyers Relative to Financial Buyers ......................................................... 19

Figure 20. Would Senior Managers and Chief Executives Benefit from Additional Leadership and Skills Training?

................................................................................................................................................................ 20



Figure 21. Skills That Are Important for Senior Management to Have ................................................................ 20

Figure 22. Issues Facing Privately‐Held Businesses ............................................................................................. 22

Figure 23. Private Business Sales Transactions Closed in the Last Six Months ..................................................... 24

Figure 24. Private Business Sales Transactions Expected to bClose in the Next Twelve Months .......................... 24

Figure 25. Private Business Sales Transactions Expect to Close in the Next 12 Months ....................................... 25

Figure 26. Average Number of Months to Close One Deal .................................................................................. 25

Figure 27. Percentage of Business Sales Engagements Terminated Without Transacting .................................... 25

Figure 28. Reasons for Business Sales Engagements Not Transacting ................................................................. 26

Figure 29. Valuation Gap in Pricing for Transactions That Didn’t Close ............................................................... 26



Figure 32. Components of Closed Deals ............................................................................................................. 28

Figure 33. How Difficult to Arrange Senior Debt for Transactions over the Past Six Months ................................ 28


................................................................................................................................................................ 28



Figure 37. Assets under Management or Investable Funds ................................................................................. 32

Figure 38. Current and Target Asset Allocations for "Alternative Assets" (% of total portfolio) ........................... 32

Figure 39. Current Target Asset Allocation ......................................................................................................... 33

Figure 40. Annual Return Expectations for New Investments ............................................................................. 33

Figure 41. Assets with the Best Risk/Return Trade‐off Currently ........................................................................ 34

Figure 42. Industry with the Best Risk/Return .................................................................................................... 34

Figure 43. Geographic Regions of the World Offering the Best Risk/Return Tradeoff Currently ........................... 35

Figure 44. Geographic Regions of the USA with the Best Risk/Return Currently ................................................. 35


................................................................................................................................................................ 36





Figure 48. Total Number of Investments Made in the Last Six Months ............................................................... 39

Figure 49. Number of Follow‐on Investments Made in the Last Six Months ........................................................ 39

Figure 50. Number of Total Investments Planned over Next 12 Months ............................................................. 40

Figure 51. Number of Follow‐on Investments Planned over Next 12 Months ...................................................... 40

Figure 52. Type of Business for Investments Planned over Next 12 Months ........................................................ 40

Figure 53. Geographic Location of Planned Investment over Next 12 Months .................................................... 42

Figure 54. Geographical Limit for Investment .................................................................................................... 42


Figure 56. Items Required to Close One Deal ..................................................................................................... 43

Figure 57. Exit Plans for Portfolio Companies ..................................................................................................... 43


................................................................................................................................................................ 43








Figure 66. Geographic Location of Planned Investment over Next 12 Months .................................................... 49





................................................................................................................................................................ 50





Figure 73. Typical Investment Size ..................................................................................................................... 54











................................................................................................................................................................ 59



Figure 86. SBIC (small business investment) Firms ............................................................................................. 63

Figure 87. Typical Investment Size ..................................................................................................................... 63






Figure 93. Borrower Motivation to Secure Mezzanine Funding (past six months) ............................................... 67



................................................................................................................................................................ 68





Figure 98. Description of Lending Entity............................................................................................................. 71

Figure 99. Participation in Government Loan Programs ..................................................................................... 71

Figure 100. Typical Investment Size ................................................................................................................... 72

Figure 101. Borrower Motivation to Secure Financing (past six months) ............................................................ 73

Figure 102. Reason for Declined Loans ............................................................................................................... 75

Figure 105. Feeling Increased Pressure from Regulators to Avoid Making Risky Loans ........................................ 75


................................................................................................................................................................ 75

Figure 104. Skills That Are Important for Senior Management to Have ............................................................... 76

Figure 106. Issues Facing Privately‐Held Businesses ........................................................................................... 76

Figure 107. Industries Served by Asset‐Based Lenders ....................................................................................... 79

Figure 108. Typical EBITDA Sizes for Companies Booked .................................................................................... 79

Figure 109. Valuation Standards Used to Estimate LTV Ratio ............................................................................. 80

Figure 110. Asset‐Based Loans Decline Rate ...................................................................................................... 80

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