2015 CAPITAL MARKETS REPORT

Transcription

2015 CAPITAL MARKETS REPORT
B Y DR. CRA IG R. E V E R E T T
Assistant Professor of Finance
Director, Pepperdine Private Capital Markets Project
PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 TABLE OF CONTENTS INVESTMENT BANKER SURVEY INFORMATION ................................................................................................... 6 Operational and Assessment Characteristics ................................................................................................................ 6 PRIVATE EQUITY SURVEY INFORMATION ........................................................................................................... 14 Operational and Assessment Characteristics .............................................................................................................. 14 BANK AND ASSET‐BASED LENDING SURVEY INFORMATION ............................................................................... 22 Operational and Assessment Characteristics .............................................................................................................. 22 Asset‐Based Lending Specific Characteristics .............................................................................................................. 29 MEZZANINE SURVEY INFORMATION .................................................................................................................. 31 Operational and Assessment Characteristics .............................................................................................................. 31 LIMITED PARTNER SURVEY INFORMATION ........................................................................................................ 39 Operational and Assessment Characteristics .............................................................................................................. 39 VENTURE CAPITAL SURVEY INFORMATION ........................................................................................................ 45 Operational and Assessment Characteristics .............................................................................................................. 45 ANGEL INVESTOR SURVEY INFORMATION ......................................................................................................... 51 Operational and Assessment Characteristics .............................................................................................................. 51 BUSINESS APPRAISER SURVEY INFORMATION ................................................................................................... 57 Operational and Assessment Characteristics .............................................................................................................. 57 BROKER SURVEY INFORMATION ....................................................................................................................... 61 Operational and Assessment Characteristics .............................................................................................................. 61 BUSINESS OWNER SURVEY INFORMATION ........................................................................................................ 67 Operational and Assessment Characteristics .............................................................................................................. 67 ABOUT THE AUTHOR ......................................................................................................................................... 82 INDEX OF TABLES .............................................................................................................................................. 84 INDEX OF FIGURES ............................................................................................................................................ 86 © 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 1 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT Director CRAIG EVERETT, PhD Research Support IRINA SHAYKHUTDINOVA, MBA Advisor to Project JOHN PAGLIA Marketing Communications KIMBERLY SHEDIAK CYNTHIA CHILTON Public Relations KP PUBLIC AFFAIRS PATRICK GEORGE PEPPERDINE UNIVERSITY Interim Dean David M. Smith, PhD Interim Associate Dean John Mooney, PhD Mark W. S. Chun, PhD, Director, Center for Applied Research Willis Clow Doris Jones Michael Lucarelli Alin Shah Michael Stamper © 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 2 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 ORGANIZATIONAL SUPPORT Howard J. Lothrop, CFA International Business Broker Association (IBBA) International Business Valuation Assoc. (LinkedIn Group) International Factoring Association (IFA) The Mankoff Company Mezzanine & Junior Capital Deal Flow (LinkedIn Group) National Association for Small Business Investment Companies (NASBIC) Pepperdine Private Capital Markets Project (LinkedIn Group) Risk Management Association (RMA) Valuation (LinkedIn Group) Venture Capital (LinkedIn Group) Alliance for Mergers and Acquisitions Advisors Association for Corporate Growth (ACG) Best Community Banks Association Business Valuation Resources (BVR) California Bankers Association (CBA) Commercial Finance Association (CFA) Community Bank (LinkedIn Group) Corporate Banking (LinkedIn Group) Deal Flow Source (LinkedIn Group) Exit Planning Institute Finance Club (LinkedIn Group) Graziadio Alumni Network (GAN) SURVEY DESIGN, DISTRIBUTION, AND OTHER SUPPORT Robert T. Slee Leonard Lanzi Gray DeFevere Jan Hanssen Robert Zielinski Kevin D. Cantrell Eric Nath Jeri Harmon Letitia Green Nevena Orbach Brad Triebsch Gary W. Clark M. Todd Stemler Patrick George Brian Cove Rob Brougham Brett Palmer Gary LaBranche Dennis Gano Linh Xavier Vuong Michael Nall Simon James, PhD © 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 3 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 PEPPERDINE PRIVATE CAPITAL MARKETS SURVEY The Pepperdine private cost of capital survey (PCOC) was originally launched in 2007 and is the first comprehensive and simultaneous investigation of the major private capital market segments. This year’s survey deployed in October 2014, specifically examined the behavior of senior lenders, asset‐based lenders, mezzanine funds, private equity groups, venture capital firms, angel investors, privately‐held businesses, investment bankers, business brokers, limited partners, and business appraisers. The Pepperdine PCOC survey investigated, for each private capital market segment, the important benchmarks that must be met in order to qualify for capital, how much capital is typically accessible, what the required returns are for extending capital in today’s economic environment, and outlooks on demand for various capital types, interest rates, and the economy in general. Our findings indicate that the cost of capital for privately‐held businesses varies significantly by capital type, size, and risk assumed. This relationship is depicted in the Pepperdine Private Capital Market Line, which appears below. Figure 1. Private Capital Market Required Rates of Return 50.0%
VC (25% ‐ 33%)
45.0%
Angel (25% ‐ 30%)
PEG (25% ‐ 30%)
40.0%
35.0%
Mezz (8% ‐ 16%)
30.0%
25.0%
ABL (4% ‐ 9.8%)
20.0%
15.0% Banks (3.5% ‐ 5.5%)
10.0%
5.0%
0.0%
1 quartile
Median
3 quartile
Median 2014
© 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 4 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 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 Bank ($1M CF loan) 1st quartile Median 3rd quartile 5.0% 5.5% 6.0% Bank ($5M CF loan) 4.5% 5.0% 5.5% Bank ($10M CF loan) 3.8% 5.0% 5.5% Bank ($25M CF loan) 3.0% 4.0% 5.0% Bank ($50M CF loan) 3.0% 3.5% 3.5% ABL ($1M loan) 6.4% 9.8% 12.3% ABL ($5M loan) 6.1% 7.8% 9.1% ABL ($10M loan) 4.5% 5.0% 9.0% ABL ($25M loan) 3.6% 4.3% 4.9% ABL ($50M loan) 3.5% 4.0% 4.5% Mezz ($1M loan) 13.0% 16.0% 21.0% Mezz ($5M loan) 13.0% 16.0% 21.0% Mezz ($10M loan) 11.0% 14.0% 15.0% Mezz ($25M loan) 11.0% 13.0% 14.0% Mezz ($50M loan) 11.0% 12.0% 14.0% PEG ($25M EBITDA) 24.3% 25.0% 28.8% PEG ($50M EBITDA) 22.3% 25.0% 26.3% VC (Seed) 23.0% 33.0% 48.0% VC (Startup) 23.0% 33.0% 38.0% VC (Early Stage) 23.0% 28.0% 38.0% VC (Expansion) 19.0% 25.0% 33.0% VC (Later Stage) 18.0% 25.0% 33.0% Angel (Seed) 15.0% 30.0% 35.0% Angel (Early Stage) 21.3% 25.0% 35.0% Angel (Expansion) 21.0% 25.0% 35.0% Angel (Later Stage) 17.5% 25.0% 30.0% © 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 5 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 INVESTMENT BANKER SURVEY INFORMATION The majority of the 104 respondents to the investment banker survey indicated increasing margin pressure on companies over the last twelve months. They also reported increases in deal flow, increased presence of strategic buyers, leverage and deal multiples, and improved business conditions. Domestic economic uncertainty was identified as the most important current and emerging issue facing privately‐held businesses, following by government regulations and taxes, and access to capital. Other key findings include:  Approximately 41% of respondents expect to close six or more deals in the next 12 months.  The top three reasons for deals not closing were valuation gap (29%), insufficient cash flow (22%), and lack of capital to finance (12%).  Respondents indicated a general imbalance between companies worthy of financing and capital available for the same. There is a reported shortage of capital for those companies with less than $11 million in EBITDA, but a general surplus for companies with $1 million in EBITDA or more.  The most popular valuation methods used by respondents when valuing privately‐held businesses were discounted future earnings, guideline company transactions, and capitalization of earnings approaches.  When using multiples to determine the value of a business, the most popular methods used by respondents when valuing privately‐held businesses were recast (adjusted) EBITDA multiple (58%), revenue multiple (12%) and EBITDA (unadjusted) multiple (11%) approaches. Operational and Assessment Characteristics Approximately 11% of the respondents didn’t close any deals in the last twelve months; 67% closed between one and five deals, while 22% closed six transactions or more. Figure 2. Private Business Sales Transactions Closed in the Last 12 Months 20%
18%
18%
18%
16%
16%
14%
12%
11%
10%
10%
8%
8%
6%
5%
6%
4%
4%
3%
2%
1%
1%
9
10
0%
0
1
2
3
4
5
6
7
8
More than 10
© 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 6 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 I‐BANKER cont. Approximately 18% of all transactions closed in the last twelve months involved manufacturing, followed by 14% that involved business services, and 11% that involved consumer goods and services. Figure 3. Business Types That Were Involved in the Transactions Closed in the Last 12 Months 7%
6% 6% 5%
Manufacturing
Business services
Consumer goods & services
Health care & biotech
Wholesale & distribution
Information technology
Financial services & real estate
Construction & engineering
Basic materials & energy
Media & entertainment
Other
18%
14%
7%
9%
11%
9%
9%
The majority of deals (61%) took 6 to 12 months to close. 9% of closed deals take more than one year to close. Figure 4. Average Number of Months to Close One Deal 30%
25%
20%
15%
10%
5%
0%
24%
24%
19%
18%
5%
2 ‐ 4 months 4 ‐ 6 months 6 ‐ 8 months
8 ‐ 10 months
10 ‐ 12 months
4%
4%
12 ‐ 18 months
18 ‐ 24 months
1%
more than 24 months
Nearly 59% of respondents expect to close between one and five deals, while 41% expect to close 6 deals or more. Figure 5. Private Business Transactions Expected to Close in the Next 12 Months 18%
20%
13%
15%
13%
13%
10%
10%
5%
9%
9%
7%
4%
3%
2%
0%
1
2
3
4
5
6
7
8
9
10
More than 10
© 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 7 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 I‐BANKER cont. Approximately 36% of deals terminated without transacting over the past year.
Figure 6. Percentage of Business Sales Engagements Terminated Without Transacting 36%
Transacted
Not transacted
64%
Top three reasons for deals not closing: valuation gap in pricing (29%), insufficient cash flow (22%) and lack of capital to finance (12%). Figure 7. Reasons for Business Sales Engagements Not Transacting Valuation gap in pricing
8%
8%
6%
7%
Insufficient cash flow
29%
Lack of capital to finance
Unreasonable seller or buyer demand
8%
22%
12%
Economic uncertainty
Seller misrepresentations
No market for business
Other
Of those transactions that didn’t close due to a valuation gap in pricing, approximately 35% had a valuation gap in pricing between 21% and 30%. Figure 8. Valuation Gap in Pricing for Transactions That Didn’t Close 3%
17%
8%
0 ‐ 10%
4%
33%
11 ‐ 20%
21 ‐ 30%
31 ‐ 40%
35%
41 ‐ 50%
Greater than 50%
© 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 8 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 I‐BANKER cont. The weights of the various valuation methods used by respondents when valuing privately‐held businesses included 25% for discounted future earnings method. Figure 9. Usage of Valuation Methods 30%
25%
20%
15%
10%
5%
0%
25%
23%
21%
11%
Discounted future earnings method
Guideline Capitalization company of earnings transactions method
method
8%
Guideline public company method
Gut feel
7%
4%
Adjusted net asset method
Other
The weights of the various multiple methods used by respondents when valuing privately‐held businesses included 58% for recast (adjusted) EBITDA multiple. Figure 10. Usage of Multiple Methods 70%
60%
50%
40%
30%
20%
10%
0%
58%
12%
Recast (Adjusted) EBITDA multiple
Revenue multiple
11%
9%
EBITDA (unadjusted) multiple
4%
Cash flow multiple
3%
2%
EBIT multiple Net income multiple
Other
Average deal multiples on transactions from the prior twelve months as observed by respondents varied from 4.2 to 8.6. Table 2. Median Deal Multiples by EBITDA Size of Company Manufacturing Construction & engineering Cons. goods & services Wholesale & distribution Business services Basic materials & energy Health care & biotech IT Financial services Media & entertain. Avg. $0M ‐ $1M 4.0 3.5 4 4.5 4 3.3 5.5 6.5 5.5 n/a 4.5 $2M ‐ $5M 5.0 4.5 5.5 6 5.3 4 6 8 6.5 5.0 5.6 $6M ‐ $10M 6.0 5.5 5.8 6.0 7 5 7 8 7 7.5 6.5 $11M ‐ $25M 7.5 6 6 6.3 8 5.5 8 9.5 9 8.3 7.4 $26M ‐ $50M 7.5 6.5 7.0 n/a 9 n/a 8 10 10 n/a 8.3 8 6.8 9 8 10 7.3 8 10 10 n/a 8.6 EBITDA >$50M © 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 9 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 I‐BANKER cont. Average total leverage multiples observed by respondents varied from 2.9 to 5.2. Table 3. Median Total Leverage Multiples by Size of Company Manufacturing Construction & engineering Cons. goods & services Wholesale & distribution Business services Basic materials & energy Health care & biotech IT $0M ‐ $1M 3 3 3 n/a 3 2.5 n/a $2M ‐ $5M 3.5 3 3 2.5 4 2.5 2 $6M ‐ $10M 4 4 3.3 3.5 4.0 3.3 $11M ‐ $25M 4.5 4 3.5 3.8 4.3 4 $26M ‐ $50M 4.8 n/a 4 n/a 4.8 >$50M 6.3 6 4 4 4.8 EBITDA Financial services Media & entertain. Avg. 2.5 3 n/a 2.9 4.0 4.3 3.3 3.2 3 5 4.5 4.0 3.8 4 5 4.8 4.3 4.2 n/a 5.5 5.5 5 n/a 4.9 4.5 n/a 7 5 n/a 5.2 Average senior leverage multiples observed by respondents varied from 2.5 to 4.5.
Table 4. Median Senior Leverage Multiples by Size of Company Manuf. Construction & engineering Cons. goods & services Wholesale & distribution Business services Basic materials & energy Health care & biotech IT Financial services Media & entertain. Median, all industries $0M ‐ $1M 2.5 2.0 2.8 2.0 3.0 2.0 2.5 2.5 3.0 3.5 2.5 $2M ‐ $5M 3.0 2.0 3.0 2.3 3.0 2.0 2.5 3.0 3.0 3.5 3.0 $6M ‐ $10M 3.0 3.5 3.0 2.3 3.3 2.8 3.5 3.5 3.5 4.0 3.4 $11M ‐ $25M 3.5 4.0 3.0 3.0 4.0 4.0 3.5 4.5 3.5 4.0 3.8 $26M ‐ $50M 4.5 4.0 3.5 3.3 6.0 4.0 4.0 5 4.0 5.3 4.0 >$50M 4.5 4.0 3.5 3.3 6.0 4.0 6.0 6.5 4.5 6.5 4.5 EBITDA Approximately 31% of business sales transactions closed in the last 12 months involved contingent earnouts. Figure 11. Components of Closed Deals 35%
31%
30%
29%
25%
25%
22%
20%
15%
15%
10%
6%
5%
0%
Contingent earnout
Rollover
Seller Financing / Seller Note
Lowered multiple of EBITDA
Adjusted amount of equity sold
Other
© 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 10 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 I‐BANKER cont. Approximately 52% of closed business sales transactions over the past 12 months involved strategic buyers. Figure 12. Percent of Transactions Involved Strategic and Financial Buyers 48%
Strategic buyers
52%
Financial buyers
Approximately 26% of respondents didn’t witness any premium paid by strategic buyers, while 49% saw premiums between 1% and 20%. Figure 13. Premium Paid by Strategic Buyers Relative to Financial Buyers 35%
30%
29%
26%
25%
21%
20%
14%
15%
10%
5%
4%
3%
4%
Yes, 31‐40% more
Yes, 41‐50% more
Yes, >50% more
0%
No premium
Yes, 0‐10% more
Yes, 11‐20% more
Yes, 21‐30% more
Approximately 61% of closed business sales transactions that involved financial buyers over the past 12 months were platform investments. Figure 14. Percent of Transactions Involved Strategic and Financial Buyers 39%
Platform investments
61%
Follow‐on investments
© 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 11 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 I‐BANKER cont. Respondents indicated a general imbalance between companies worthy of financing and capital available for the same. There is a reported shortage of capital for those companies with less than $1 million in EBITDA but a general surplus for companies with $1 million in EBITDA or more. Table 5. Balance of Available Capital with Quality Companies Companies worthy of financing GREATLY exceed capital available Companies worthy of financing exceed capital available General balance Capital available exceeds companies worthy of financing $1M 24% 34% 10% 24% 8% ‐0.4 $5M 12% 25% 20% 31% 12% 0.1 $10M 8% 8% 32% 33% 20% 0.5 $15M 3% 14% 38% 28% 17% 0.4 $25M 6% 7% 37% 26% 24% 0.6 $50M 6% 4% 33% 27% 31% 0.7 $100M 10% 6% 25% 33% 25% 0.6 >$100M 12% 6% 22% 26% 34% 0.6 EBITDA Capital available GREATLY exceeds companies worthy of financing Score (‐2 to 2) Respondents indicated a general difficulty with arranging senior debt for businesses with less than or equal to $1 million in EBITDA. Table 6. How Difficult to Arrange Senior Debt for Transactions over the Past 12 Months $1M Extremely difficult 28% 25% Somewhat difficult 17% 15% Somewhat easy 6% $5M 9% 12% 13% 15% 24% 25% 3% 0.2 $10M 4% 6% 8% 20% 16% 27% 20% 1.0 $15M 3% 6% 6% 22% 19% 25% 19% 1.0 $25M 3% 3% 6% 23% 26% 16% 23% 1.0 $50M 0% 4% 11% 11% 22% 37% 15% 1.2 $100M+ 4% 4% 7% 7% 25% 29% 25% 1.3 EBITDA Difficult Neutral Easy 9% Extremely easy 0% Score (‐3 to 3) ‐1.3 Respondents indicated slightly increased deal flow, increased leverage and deal multiples, percentage of strategic buyers making deals, margin pressure on companies, and improved business conditions in the last twelve months. Table 7. General Business and Industry Assessment: Today versus 12 Months Ago Stayed Decreased Decreased Increased about the significantly slightly slightly same 6% 4% 27% 38% Deal flow Increased significantly 24% Net % % increase/ increase decrease
decrease
63% 11% 52% Leverage multiples 1% 6% 30% 57% 5% 62% 8% 55% Deal multiples 0% 3% 26% 57% 14% 71% 3% 68% Amount of time to sell business 0% 13% 55% 29% 3% 32% 13% 19% Difficulty financing/selling business 2% 27% 40% 26% 4% 31% 29% 1% General business conditions 3% 11% 36% 47% 3% 51% 14% 37% Strategic buyers making deals 1% 5% 33% 54% 7% 61% 6% 55% Margin pressure on companies 0% 11% 45% 38% 6% 44% 11% 34% Buyer interest in minority transactions 8% 18% 43% 23% 8% 30% 26% 4% © 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 12 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 I‐BANKER cont. During the next twelve months, respondents expect further increases in deal flow, margin pressure on companies, strategic buyers making deals, leverage and deal multiples and general business conditions. Table 8. General Business and Industry Assessment Expectations over the Next 12 Months Decrease significantly Decrease Stay about Increase slightly the same slightly Net Increase % % increase
increase/ significantly decrease
decrease
Deal flow 1% 4% 25% 57% 13% 70% 5% 64% Leverage multiples 0% 10% 64% 26% 0% 26% 10% 16% Deal multiples 0% 16% 53% 30% 1% 31% 16% 14% Amount of time to sell business 0% 21% 52% 24% 3% 27% 21% 7% Difficulty financing/selling business 0% 23% 49% 25% 3% 28% 23% 5% General business conditions 1% 18% 45% 35% 1% 36% 20% 16% Strategic buyers making deals 0% 4% 46% 43% 7% 50% 4% 46% Margin pressure on companies 0% 11% 55% 27% 7% 34% 11% 23% Buyer interest in minority transactions 2% 17% 56% 24% 1% 26% 19% 7% Respondents believe domestic economic uncertainty is the most important current and emerging issue facing privately‐
held businesses. Figure 15. Issues Facing Privately‐Held Businesses 0%
5%
10%
15%
Economic uncertainty (Domestic)
30%
35%
40%
34%
24%
13%
20%
18%
Government regulations and taxes
9%
Political uncertainty / elections
6%
Economic uncertainty (International)
3%
Inflation
Other
25%
22%
Access to capital
Competition from foreign trade partners
20%
1%
11%
11%
9%
10%
3%
5%
Today's issue
Emerging issue
© 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 13 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 PRIVATE EQUITY SURVEY INFORMATION Approximately 42% of the 64 participants who responded to the private equity group survey indicated that they make investments in the $10 million to $25 million range. Nearly 63% of respondents said that demand for private equity is up from twelve months ago, this is up from 43% of respondents indicating increased demand in 2013. Other key findings include:  Respondents indicated increases in the quality of companies seeking investment. They also reported a slight decrease in expected returns on new investments, improved general business conditions and increase in expected investment holding period. 
Respondents expect further increases in demand for private equity, deal multiples, value of portfolio companies and improving business conditions. 
The types of businesses respondents plan to invest in over next 12 months are very diverse with over 24% targeting manufacturing and another 15% planning to invest in basic materials & energy. 
Respondents believe government regulations and taxes is the most important issue facing privately‐held businesses today. 
The most popular valuation methods used by respondents when valuing privately‐held businesses were discounted future earnings, capitalization of earnings, and guideline company transactions approaches. 
When using multiples to determine the value of a business, the most popular methods used by respondents when valuing privately‐held businesses were recast EBITDA multiple (30%) and EBITDA multiple (30%). Operational and Assessment Characteristics The largest concentration of checks written was in the $1 ‐ $5 million range (32%), followed by $5 ‐ $10 million (30%), and $10 ‐ $25 million (30%). Figure 16. Typical Investment Size 40%
32%
30%
30%
30%
25%
18%
20%
10%
14%
7%
5%
0%
Less than $1 $1‐5 million
million
$5‐$10 million
$10‐25 million
$25‐$50 million
$50‐$100 $100‐$500 Greater than million
million $500 million
Respondents reported on business practices and the results are reflected below.
Table 9. PEG Fund Data 1st Quartile 2009 Median 2012 3rd Quartile 2014 Size of fund ($ millions) 20 150 425 Targeted number of total investments 3 7.5 13 Target fund return (gross pretax cash on cash annual IRR %) 20% 25% 30% Expected fund return (gross pretax cash on cash annual IRR%) 18% 23% 25% Vintage year (year in which first investment made) © 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 14 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 PRIVATE EQUITY cont. The types of businesses respondents plan to invest in over next 12 months are very diverse with over 24% targeting manufacturing and another 15% planning to invest in basic materials and energy. Figure 17. Type of Business for Investments Planned over Next 12 Months Manufacturing
6%
3% 4% 4%
24%
9%
10%
15%
12%
13%
Business services
Other
Approximately 49% of respondents made between one and three investments over the last twelve months. Figure 18. Total Number of Investments Made in the Last 12 Months 25%
22%
20%
20%
22%
15%
10%
7%
7%
7%
5%
5%
2%
5%
2%
0%
0
1
2
3
4
5
6
7
9
10
Figure 19. Number of Follow‐on Investments Made in the Last 12 Months 35%
30%
25%
20%
15%
10%
5%
0%
33%
23%
13%
0
1
2
10%
3
8%
4
5%
5%
5
6
3%
3%
8
More than 10
© 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 15 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 PRIVATE EQUITY cont. The majority (70%) of respondents plan to make one to four investments over the next 12 months. Figure 20. Number of Total Investments Planned over Next 12 Months 40%
35%
30%
25%
20%
15%
10%
5%
0%
35%
13%
10%
0
13%
10%
1
2
3
10%
4
3%
3%
6
7
5
5%
9
Figure 21. Number of Follow‐on Investments Planned over Next 12 Months 30%
26%
23%
25%
20%
18%
15%
10%
10%
8%
10%
5%
3%
3%
6
8
0%
0
1
2
3
4
5
Approximately 46% of buyout investments were in the range between $1 million and $10 million of EBITDA. Figure 22. Size of Buyout Investments in the Last 12 Months 23%
25%
20%
23%
18%
15%
15%
10%
10%
5%
5%
$50M ‐
$100M EBITDA
> $100M EBITDA
5%
0%
$0M ‐ $1M EBITDA
$1M ‐ $5M EBITDA
$5M ‐ $10M $10M ‐ $25M $25M ‐ $50M EBITDA
EBITDA
EBITDA
© 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 16 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 PRIVATE EQUITY cont. Average deal multiples for buyout deals for the prior twelve months vary from 5.5 to 7.5 times EBITDA depending on the size of the company. Expected returns vary from 20% to 25%. Table 10. General Characteristics – Buyout Transactions (medians) Number of investments Average size of investment in million USD (medians) $1M EBITDA $5M EBITDA $10M EBITDA $25M EBITDA $50M EBITDA $100M EBITDA $100M + EBITDA 1 1 2 1 1 2 2 1.5 3.5 7.5 45 90 100 100 Expected time to exit (years) (medians) 4.5 5 4 5 4 5 5 Equity as % of new capital structure 40% 35% 30% 30% 25% 25% 25% % of total equity purchased 90% 85% 75% 85% 90% 95% 95% Average deal multiple (multiple of EBITDA) 4.5 5.0 5.5 6.0 6.5 7.0 7.0 Total expected returns (gross cash on cash pre‐tax IRR) 30% 30% 25% 25% 25% 25% 25% 1
Approximately 39% of non‐buyout investments were in the range between $0 million and $1 million of EBITDA. Figure 23. Size of Non‐Buyout Investments in the Last 12 Months 50%
40%
30%
20%
10%
0%
39%
26%
13%
13%
4%
$0M ‐ $1M EBITDA
$1M ‐ $5M EBITDA
$5M ‐ $10M EBITDA
$10M ‐ $25M EBITDA
4%
$25M ‐ $50M > $100M EBITDA
EBITDA
Average expected returns on non‐buyout deals vary from 20% to 30%. Table 11. General Characteristics – Non‐Buyout Transactions (medians) Number of investments Average size of investment in million USD Expected time to exit (years) (medians) $1M EBITDA $5M EBITDA $10M EBITDA $25M EBITDA $50M EBITDA 3 1 1 2 1 1 7.5 7.5 45 100 3.3 3.5 4.5 5 5 Equity as % of new capital structure 25% 35% 45% 45% 55% % of total equity purchased 25% 25% 35% 35% 45% Average deal multiple (multiple of EBITDA) 5.0 6 6.5 7 9 Total expected returns (gross cash on cash pre‐tax IRR) 30% 25% 25% 20% 20% 1
The private equity deal multiples reported by this year’s survey respondents are somewhat suspect. They are down from last year, but later in the survey when PEGs are asked generically about multiples, they unanimously indicate that multiples have increased since last year (which is consistent with anecdotal reports that we have heard from private equity professionals. © 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 17 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 PRIVATE EQUITY cont. When valuing a business, approximately 36% of the weight is placed on discounted future earnings method. Figure 24. Usage of Valuation Approaches 36%
40%
35%
30%
25%
20%
15%
10%
5%
0%
18%
18%
Discounted future Capitalization of earnings method earnings method
Guideline company transactions method
8%
6%
Gut feel
8%
4%
Other
The weights of the various multiple methods used by respondents when valuing privately‐held businesses included 30% for recast (adjusted) EBITDA multiple and 30% for EBITDA multiple. Figure 25. Usage of Multiple Methods 35%
30%
25%
20%
15%
10%
5%
0%
30%
30%
13%
Recast EBITDA multiple
EBITDA multiple
11%
Cash flow multiple
Revenue multiple
4%
2%
3%
EBIT multiple
Net income multiple
Other
Deal multiples vary from 2 to 8, the highest multiples are indicated in consumer goods and services. Table 12. Deal Multiples Among Industries (medians) $1M EBITDA Manufacturing $5M EBITDA $10M EBITDA $15M EBITDA $25M EBITDA Average 3.3 5 5.3 6.0 7 5.3 2 4.5 4.5 6.5 6.5 4.8 Consumer goods & services 5.8 5.5 7.3 5.5 7 6.2 Wholesale & distribution n/a 5 5 5.5 n/a 5.2 Business services 3.25 5.3 6 6.0 8 6.1 Basic materials & energy 4.5 4.5 5 n/a n/a 4.7 3 3.8 4.0 7.3 7.5 5.5 3.5 n/a n/a 4.0 n/a 3.8 4 4 4 4 7 4.6 3.7 4.8 5.3 5.9 7.1 5.4 Construction & engineering Health care & biotech Information technology Financial services & real estate Average © 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 18 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 PRIVATE EQUITY cont. Respondents reported on items required to close one deal. Figure 26. Items Required to Close One Deal 120
98
100
80
53
60
40
28
25
20
6
20
10
4
7
2
2
4
0
Business plans or Meetings with principals Proposal letters or term Letters of intent signed
memorandums reviewed
conducted
sheets issued
1st Quartile
Median
3rd Quartile
Respondents reported exit strategies that include selling to a private company (30%), selling to a public company (25%), and selling to another private equity group (23%).
Figure 27. Exit Plans for Portfolio Companies Sell to a private company
6%
8%
8%
30%
Sell to a public company
Sell to another PEG
23%
25%
Management buyout
IPO
Other
© 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 19 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 PRIVATE EQUITY cont. Most of the respondents believe the number of companies “worthy of financing” exceeds “capital available” for the companies with less than $1M in EBITDA. Whereas for the larger companies, “capital available” exceeds the number of companies “worthy of financing.” Table 13. The Balance of Available Capital with Quality Companies for the Following Size Companies worthy of financing GREATLY exceed capital available Companies worthy of financing exceed capital available $1M EBITDA 16% $5M EBITDA 11% $10M EBITDA General balance Capital available exceeds companies worthy of financing Capital available GREATLY exceeds companies worthy of financing Score (‐2 to 2) 16% 40% 12% 16% 0.0 11% 39% 25% 14% 0.2 13% 13% 17% 33% 25% 0.5 $15M EBITDA 4% 8% 13% 46% 29% 0.9 $25M EBITDA 8% 0% 20% 36% 36% 0.9 $50M EBITDA 5% 0% 5% 33% 57% 1.4 $100M EBITDA 0% 4% 13% 26% 57% 1.3 > $100M EBITDA 9% 0% 13% 17% 61% 1.1 Relative to twelve months ago, respondents indicated increases in demand for private equity, quality of companies seeking investment, amount of non‐control investments and deal multiples. They also reported a decrease in expected returns on new investments, increase in expected investment holding period and improved general business conditions. Table 14. General Business and Industry Assessment: Today versus 12 Months Ago Decreased significantly Stayed Net Decreased Increased Increased % % about the increase/ slightly slightly significantly increase decrease same decrease Demand for private equity 5% 8% 24% 39% 24% 63% 13% 50% Quality of companies seeking investment 3% 21% 34% 32% 11% 42% 24% 18% Average investment size 3% 5% 57% 30% 5% 35% 8% 27% Non‐control investments 3% 10% 50% 23% 13% 37% 13% 23% Expected investment holding period 0% 6% 67% 25% 3% 28% 6% 22% Deal multiples 0% 6% 31% 31% 31% 63% 6% 57% Exit opportunities 0% 12% 38% 21% 29% 50% 12% 38% Expected returns on new investments 0% 32% 49% 11% 8% 19% 32% ‐14% Value of portfolio companies 0% 3% 46% 37% 14% 51% 3% 49% General business conditions 0% 11% 43% 41% 5% 46% 11% 35% Size of private equity industry 0% 11% 29% 31% 29% 60% 11% 49% © 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 20 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 PRIVATE EQUITY cont. Respondents expect further increases in demand for private equity, deal multiples, value of portfolio companies and improving general business conditions. Table 15. General Business and Industry Assessment Expectations over the Next 12 Months Net Increase % % increase/ significantly increase decrease decrease Decrease significantly Decrease slightly Demand for private equity 3% 6% 41% 41% 9% 50% 9% 41% Quality of companies seeking investment 3% 3% 74% 18% 3% 21% 6% 15% Average investment size 0% 3% 56% 38% 3% 41% 3% 38% Non‐control investments 0% 0% 77% 20% 3% 23% 0% 23% Expected investment holding period 0% 3% 65% 24% 9% 32% 3% 29% Deal multiples 0% 18% 44% 32% 6% 38% 18% 21% Exit opportunities 3% 12% 53% 29% 3% 32% 15% 18% Expected returns on new investments 0% 21% 62% 18% 0% 18% 21% ‐3% Value of portfolio companies 0% 9% 26% 59% 6% 65% 9% 56% General business conditions 0% 21% 41% 38% 0% 38% 21% 18% Size of private equity industry 0% 15% 39% 42% 3% 45% 15% 30% Stay about Increase the same slightly Respondents believe government regulations and taxes is the most important issue facing privately‐held businesses today. Figure 28. Issues Facing Privately‐Held Businesses 0%
5%
10%
15%
20%
25%
17%
7%
9%
Political uncertainty / elections 6%
Economic uncertainty (international)
2%
Inflation
0%
40%
30%
18%
Access to capital
35%
36%
25%
Economic uncertainty (domestic)
30%
21%
18%
5%
5%
Current issue
Emerging issue
© 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 21 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 BANK AND ASSET‐BASED LENDING SURVEY INFORMATION There were 57 responses to the banks and asset‐based lenders surveys with community banks making up 65% in terms of individual lending function. Over 63% of respondents believe that general business conditions will improve over the next 12 months and over 52% said demand for loans will increase. Other key findings include:  Over the last twelve months respondents were seeing decreased credit quality of borrowers applying for credit, with increase in demand for business loans and improved general business conditions  Respondents also expect increases in demand for business loans, lending capacity of banks, improving general business conditions, average loan size and loan maturity, and further pricing compression.  Currently, 29% lenders see domestic economic uncertainty as the top issue facing privately‐held businesses, followed by government regulations and taxes (26%) and access to capital (23%). Operational and Assessment Characteristics Respondents reported on the type of entity that best describes their lending function. Figure 29. Description of Lending Entity 8%
3%
5%
Community bank
Commercial bank 19%
65%
Commercial finance company
Corporate bank
Private banker
The majority (86%) report participating in government loan programs. Figure 30. Participation in Government Loan Programs 14%
Yes
86%
No
© 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 22 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 BANKS cont. The largest concentration of loan sizes was between $1 million and $5 million (44%). Figure 31. Typical Investment Size 50%
44%
45%
40%
35%
30%
25%
20%
20%
13%
15%
10%
6%
6%
4%
5%
3%
4%
0%
Less than $1 $1‐$5 million
million
$6‐$10 million
$11‐$25 million
$25‐$50 million
$50‐$100 million
$100‐$500 Greater than million
$500 million
Respondents reported on all‐in rates for various industries. Table 16. All‐in Rates by Loan Size and Industry $1M $5M $10M $500M Manufacturing 5.3% 5.0% 4.5% 3.3% Consumer goods and services 6.0% 5.5% 4.3% 3.5% Wholesale & distribution 5.8% 5.0% 4.3% 3.3% Business services 5.5% 5.0% 4.3% 3.3% Basic materials & energy 5.5% 5.0% 4.3% 3.0% Health care & biotech 5.3% 5.0% 4.8% 3.5% Information technology 5.5% 5.3% 4.3% 4.0% Financial services 5.3% 5.0% 4.3% 3.5% Table 17. All‐in Rates by Loan Type $1M $5M $10M $100M $500M Cash flow loan 5.5% 5.0% 5.0% 4.5% 4.5% Working capital loan 6.0% 5.0% 5.0% 4.5% 4.0% Equipment loan 5.5% 5.0% 4.0% 4.0% 4.0% Real estate loan 5.5% 5.0% 4.0% 4.0% 4.0% 60 60 60 60 48 Typical Fixed‐Rate Loan Term (months) © 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 23 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 BANKS cont. Senior leverage multiples are reported below for the various industries and EBITDA sizes. Table 18. Senior Leverage Multiple by EBITDA Size 1.3 $10M EBITDA 1.5 $25M EBITDA 2.0 $50M EBITDA 2.5 $50M+ EBITDA 2.5 1.3 1.5 1.9 2.0 2.3 1.3 1.3 1.5 2.2 2.5 2.5 1.3 1.3 1.5 2.2 2.4 2.6 1.4 1.4 1.5 2.0 2.5 2.5 $1M EBITDA $5M EBITDA Manufacturing 1.3 Construction & engineering 1.3 Consumer goods & services Wholesale & distribution Business services Basic materials & energy 1.4 1.4 1.5 2.0 2.8 2.8 Healthcare & biotech 1.4 1.4 1.7 2.0 2.5 2.5 Information technology 1.3 1.3 1.5 2.0 2.5 2.5 Financial services 1.3 1.4 1.6 2.0 2.5 2.8 Media & entertainment 1.3 1.4 1.5 2.0 2.5 2.5 Total median 1.3 1.3 1.5 2.0 2.5 2.5 Various fees as reported by lenders are as follows. Table 19. Fees Charged 1st Quartile Median 3rd Quartile % Reporting Closing fee 0% 1% 1% 16% Modification fee 0% 0% 1% 13% Commitment fee 0% 1% 1% 14% Underwriting fee 0% 0% 1% 11% Arrangement fee 0% 0% 0% 7% Prepayment penalty (yr 1) 1% 3% 3% 14% Prepayment penalty (yr 2) 1% 2% 3% 13% Unused line fee 0% 0% 1% 12% Refinancing was the most commonly described financing by buyers at 41%, followed by expansion at 20%. Figure 32. Borrower Motivation to Secure Financing (past 12 months) 45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
39%
20%
Refinancing existing loans or equity
Expansion
17%
Working capital fluctuations
7%
6%
Finance worsening operating conditions
Management buyout
10%
Other
© 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 24 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 BANKS cont. Total debt‐service coverage ratio was the most important factor when deciding whether to invest or not. Table 20. Importance of Financial Evaluation Metrics Unimportant Of little importance Moderately important Important Very important Score (1 to 5) Current ratio 16% 16% 21% 33% 14% 3.1 Senior DSCR or FCC ratio 10% 12% 15% 22% 41% 3.7 Total DSCR or FCC ratio 7% 9% 7% 25% 52% 4.1 Senior debt‐to‐cash flow 15% 10% 10% 41% 24% 3.5 Total debt‐to‐cash flow 13% 4% 16% 31% 36% 3.7 Debt‐to‐net worth 9% 7% 20% 43% 20% 3.6 Table 21. Financial Evaluation Metrics Average Data Average borrower data Limit not to be exceeded Current ratio 1.2 1.2 Senior DSCR or FCC ratio 1.3 1.2 Total DSCR or FCC ratio 1.3 1.2 Senior debt‐to‐cash flow 1.5 2.4 Debt‐to‐net worth 2.8 3.0 Respondents reported on the percentage of loans (by size) that require personal guarantee and collateral. Table 22. Personal Guarantee and Collateral Percentage of Occurrence by Size of Loan (%) Personal guarantee Collateral $1M loan 100% $5M loan 100% $10M loan 98% $25M loan 50% $50M loan 25% $100M loan 25% 100% 95% 95% 50% 25% 25% Approximately 40% of cash flow applications were declined. Table 23. Applications Data Reviewed Offered Booked Declined Cash flow based 970 60% 33% 40% Collateral based 435 66% 8% 45% Real estate 435 66% 11% 51% Other 70 93% 1% 86% 1910 64% 26% 45% Average © 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 25 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 BANKS cont. Approximately 36% of applications were declined due to poor quality of earnings and/or cash flow followed by 25% that were declined due to insufficient collateral. Figure 33. Reason for Declined Loans Quality of earnings and/or cash flow
36%
Insufficient collateral
25%
Debt load
15%
Size or availability of personal guarantees
3%
Size of company
3%
Customer concentrations
3%
Insufficient credit
3%
Insufficient operating history
2%
Economic concerns
1%
Weakening industry
1%
Insufficient management team
1%
Other
4%
Respondents believe domestic economic uncertainty is the most important issue facing privately‐held businesses today. Figure 34. Issues Facing Privately‐Held Businesses Economic uncertainty (domestic)
25%
22%
Access to capital
7%
6%
Economic uncertainty (international)
4%
Inflation
4%
Other ‐ please specify
26%
23%
10%
29%
19%
10%
6%
8%
1%
0%
Current issue
Emerging issue
© 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 26 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 BANKS cont. Respondents indicated increases in demand for business loans, percent of loans with personal guarantees, improved general business conditions, decreased credit quality of borrowers applying for credit, loan fees, and number/ tightness of financial covenants. Table 24. General Business and Industry Assessment: Today versus 12 Months Ago Decreased significantly Stayed Net Decreased Increased Increased % about the % increase
increase/ slightly slightly significantly
decrease
same decrease
Demand for business loans (applications) 7% 11% 33% 29% 20% 49% 18% 31% Credit quality of borrowers applying for credit 2% 28% 51% 17% 2% 19% 30% ‐11% Due diligence efforts 2% 11% 53% 30% 4% 34% 13% 21% Average loan size 0% 2% 57% 30% 11% 41% 2% 39% Average loan maturity (months) 0% 7% 44% 40% 9% 49% 7% 42% Percent of loans with personal guarantees 0% 7% 63% 30% 0% 30% 7% 24% Percent of loans requiring collateral 0% 7% 93% 0% 0% 0% 7% ‐7% Size of interest rate spreads (pricing) 0% 7% 85% 7% 0% 7% 7% 0% Loan fees 0% 52% 43% 2% 2% 4% 52% ‐48% Senior leverage multiples 7% 30% 59% 4% 0% 4% 37% ‐33% Total leverage multiples 0% 8% 68% 24% 0% 24% 8% 16% Focus on collateral as backup means of payment 0% 8% 73% 19% 0% 19% 8% 12% SBA lending 0% 7% 81% 12% 0% 12% 7% 5% Lending capacity of bank 0% 13% 48% 30% 9% 39% 13% 26% General business conditions 0% 4% 27% 54% 15% 69% 4% 65% Appetite for risk 0% 15% 50% 35% 0% 35% 15% 20% Loans outstanding 0% 13% 54% 33% 0% 33% 13% 20% Nonaccrual loans 5% 11% 32% 37% 16% 53% 16% 37% Number/ tightness of financial covenants 0% 27% 73% 0% 0% 0% 27% ‐27% Standard advance rates 0% 11% 84% 5% 0% 5% 11% ‐5% © 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 27 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 BANKS cont. Respondents expect further increases in demand for business loans, percent of loans with personal guarantees, lending capacity of bank, improving general business conditions, as well as decreasing leverage multiples, focus on collateral as backup means of payment and number/ tightness of financial covenants. Table 25. General Business and Industry Assessment Expectations over the Next 12 Months Decrease slightly Demand for business loans (applications) 4% 11% 33% 35% 17% 52% 15% 37% Credit quality of borrowers applying for credit 2% 21% 60% 15% 2% 17% 23% ‐6% Due diligence efforts 2% 15% 53% 28% 2% 30% 17% 13% Average loan size 0% 2% 70% 24% 4% 28% 2% 26% Average loan maturity (months) 0% 9% 43% 41% 7% 48% 9% 39% Percent of loans with personal guarantees 0% 4% 70% 26% 0% 26% 4% 22% Percent of loans requiring collateral 0% 7% 91% 2% 0% 2% 7% ‐5% Size of interest rate spreads (pricing) 0% 4% 96% 0% 0% 0% 4% ‐4% Loan fees 0% 37% 48% 13% 2% 15% 37% ‐22% Senior leverage multiples 4% 28% 61% 7% 0% 7% 33% ‐26% Total leverage multiples 0% 16% 80% 4% 0% 4% 16% ‐12% Focus on collateral as backup means of payment 0% 15% 85% 0% 0% 0% 15% ‐15% SBA lending 0% 7% 86% 7% 0% 7% 7% 0% Lending capacity of bank 0% 0% 52% 35% 13% 48% 0% 48% General business conditions 0% 0% 37% 56% 7% 63% 0% 63% Appetite for risk 0% 13% 50% 37% 0% 37% 13% 24% Loans outstanding 2% 11% 59% 28% 0% 28% 13% 15% Nonaccrual loans 5% 11% 32% 37% 16% 53% 16% 37% Number/ tightness of financial covenants 0% 27% 73% 0% 0% 0% 27% ‐27% Standard advance rates 0% 11% 84% 5% 0% 5% 11% ‐5% Stay about Increase the same slightly Net Increase % % increase/ significantly increase decrease
decrease
Decrease significantly © 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 28 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 BANKS cont. Asset‐Based Lending Specific Characteristics According to respondents approximately 32% of asset‐based loans were issued for financial services and real estate companies. Figure 35. Industries Served by Asset‐Based Lenders 3% 3% 1% 1%
5%
3%
Manufacturing
32%
9%
Business services
10%
14%
19%
Other
Approximately 83% of the companies that booked asset‐based loans in the last twelve months had EBITDA size less than $5 million. Figure 36. Typical EBITDA Sizes for Companies Booked 70%
80%
60%
40%
13%
20%
8%
6%
3%
$6‐10 million in EBITDA
$51+ million in EBITDA
0%
Negative EBITDA
Respondents reported on all‐in rates by type and size of current booked loans and the results are reported below. Table 26. All‐in Rates on Current Asset‐Based Loans (medians) Real estate Working capital Typical Fixed‐
Rate Loan Term (months) 20.0% 9.8% 19.0% 48 15.0% 13.5% 9.8% 10.0% 48 10.0% 12.0% 11.5% 7.8% 7.8% 48 3.0% 4.0% 4.5% 4.3% 4.0% 4.3% 42 $25‐50 million 3.0% 3.5% 4.0% 4.0% 4.3% 3.0% 36 $50‐100 million 3.0% 2.8% 3.5% 4.0% 3.5% 3.0% 24 Marketable Securities Accounts Receivable Inventory Equipment Less than $1 million 5.0% 17.0% 21.5% $1‐5 million 5.0% 13.0% $5‐$10 million 4.5% $10‐25 million © 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 29 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 BANKS cont. Respondents reported on standard advance rates and the results are reflected below. Table 27. Standard Advance Rate (or LTV ratio) for Assets (%) Typical Loan Upper Limit 1st quartile Median 3rd quartile 1st quartile Median 3rd quartile Marketable securities 58% 80% 95% 83% 90% 98% Accounts receivable 80% 80% 85% 83% 85% 88% Inventory ‐ low quality 15% 20% 35% 15% 25% 35% Inventory ‐ intermediate quality 33% 40% 48% 35% 40% 50% Inventory ‐ high quality 50% 50% 63% 60% 60% 64% Equipment 35% 70% 73% 50% 70% 80% Real estate 60% 65% 65% 60% 65% 70% Land 18% 28% 34% 24% 38% 46% Respondents reported on valuation standards used to estimate LTV ratios. Figure 37. Valuation Standards Used to Estimate LTV Ratio 80%
70%
60%
50%
40%
30%
20%
10%
0%
Purchase price
Depreciate
d Value Face value (Book)
Fair Market Value
Forced Orderly liquidation liquidation
Other
Equipment
8%
0%
8%
8%
50%
17%
0%
Real estate
13%
0%
0%
67%
7%
0%
0%
Accounts Receivable
8%
8%
62%
8%
0%
8%
8%
Inventory
8%
15%
8%
15%
8%
38%
8%
According to respondents working capital based loans had the smallest decline rate (20%) over the last twelve months. Figure 38. Asset‐Based Loans Decline Rate 60%
50%
40%
30%
20%
10%
0%
50%
40%
40%
30%
20%
Receivables based
Inventory based
Equipment based
Real estate based (only)
A/R + Inventory + Term Financing Combined
© 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 30 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 MEZZANINE SURVEY INFORMATION The majority of the 21 participants that responded to the mezzanine survey typically book deals in the $1 million to $25 million range. Over 26% plan on investing in manufacturing companies over the next 12 months, followed by 17% in consumer goods and services. Other key findings include:  Relative to 12 months ago, respondents indicated increases in demand for mezzanine capital, leverage multiples, appetite for risk and improved general business conditions. They also reported decreases in general underwriting standards, warrant coverage, loan fees and expected returns on new investments.  Respondents expect further increase in demand for mezzanine capital, leverage multiples and appetite for risk; improving general business conditions; and decrease in general underwriting standards, warrant coverage, PIK features, and loan fees.  Approximately 38% of respondents believe domestic economic uncertainty is the most important issue facing privately‐held businesses today. Operational and Assessment Characteristics Approximately 38% of respondents are SBIC Firms. Figure 39. SBIC (small business investment) Firms 38%
Yes
62%
No
The largest concentration of typical loan sizes is between $11 million and $25 million. Figure 40. Typical Investment Size 60%
52%
50%
52%
48%
40%
30%
20%
19%
14%
5%
10%
0%
Less than $1 million
$1‐$5 million
$5‐$10 million $10‐$25 million $25‐$50 million $50‐$100 million
© 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 31 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 MEZZANINE cont. Respondents reported on business practices and the results are reflected below. Table 28. Mezzanine Fund Data Vintage year (year in which first investment made) Size of fund ($ millions) Targeted number of total investments 1st quartile Median 3rd quartile 2010 2012 2013 75 175 250 18 25 39 Target fund return (gross pretax cash on cash annual IRR %) 12.3% 18% 20% Expected fund return (gross pretax cash on cash annual IRR %) 12.5% 19% 23% The types of businesses respondents plan to invest in over next 12 months are very diverse with over 21% targeting manufacturing, followed by 18% who plan to invest in business services. Figure 41. Type of Business for Investments Planned over Next 12 Months 2% 2% 2%
Manufacturing
4%
8%
26%
Business services
12%
17%
14%
14%
Approximately 56% of respondents made 6 investments or more over the last 12 months. Figure 42. Total Number of Investments Made in the Last 12 Months 35%
29%
30%
25%
20%
15%
10%
10%
10%
5%
5%
10%
5%
5%
3
4
10%
10%
5%
5%
9
10
0%
0
1
2
5
6
7
More than 10
© 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 32 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 MEZZANINE cont. Figure 43. Number of Follow‐on Investments Made in the Last 12 Months 30%
25%
24%
19%
20%
14%
15%
10%
10%
10%
10%
5%
5%
5%
5%
7
More than 10
0%
0
1
2
3
4
5
6
Approximately 59% of respondents plan to make 6 investments or more over the next 12 months. Figure 44. Number of Total Investments Planned over Next 12 Months 35%
30%
30%
25%
25%
20%
15%
15%
10%
10%
5%
5%
5%
0
3
4
5%
5%
0%
5
6
8
10
More than 10
25%
25%
20%
20%
15%
15%
15%
15%
10%
5%
5%
5%
0%
0
1
2
3
4
5
6
© 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 33 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 MEZZANINE cont. Approximately 57% of sponsored deals were in the range between $1 million and $10 million of EBITDA. Figure 46. Size of Sponsored Deals in the Last 12 Months 35%
30%
25%
20%
15%
10%
5%
0%
30%
27%
13%
13%
13%
3%
$0M ‐ $1M EBITDA
$1M ‐ $5M EBITDA
$5M ‐ $10M EBITDA
$50M+ EBITDA
Results of responses to sponsored deals based on size of investee EBITDA are reported below. Table 29. Sponsored Deals by EBITDA Size (medians) $0M ‐ $1M EBITDA $1M ‐ $5M EBITDA $5M ‐ $10M EBITDA $10M ‐ $25M EBITDA $25M ‐ $50M EBITDA $50M+ EBITDA 35% 67% 67% 0% 0% 0% 5 5 5 6 6.5 7 0.5 3 3.3 3.5 4 4.5 0.5 3.8 4.3 4.5 5.5 6 Average loan size ($ millions) 0.5 7.5 7.5 25 45 100 Cash interest rate 12% 12% 11% 11% 11% 8% PIK 2% 2% 1% 1% 1.5% 1% 14% 10.5% n/a n/a n/a n/a 16% 16% 14% 13% 12% 8% % of deals with warrants Average loan terms (years) Senior leverage ratio (multiple of EBITDA) Total leverage ratio (multiple of EBITDA) Warrants expected return (IRR contribution) Total expected returns (gross cash on pre‐tax IRR) Table 30. Investment Type by Size of Investee Company, Sponsored Deals Sub debt only Blended Sr. / Jr. Other $1M ‐ $5M EBITDA 43% 57% 0% $5M ‐ $10M EBITDA 50% 25% 25% $10M ‐ $25M EBITDA 50% 25% 25% $25M ‐ $50M EBITDA 67% 0% 33% $50M+ EBITDA 100% 0% 0% © 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 34 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 MEZZANINE cont. Approximately 62% of sponsored deals were in the range between $1 million and $10 million of EBITDA. Figure 47. Size of Non‐Sponsored Deals in the Last 12 Months 40%
35%
30%
27%
23%
20%
12%
10%
4%
0%
$0M ‐ $1M EBITDA $1M ‐ $5M EBITDA $5M ‐ $10M EBITDA
Results of responses to non‐sponsored deals based on size of investee EBITDA are reported below. Table 31. Non‐Sponsored Deals by EBITDA Size (medians) $1M ‐ $5M EBITDA $5M ‐ $10M EBITDA $10M ‐ $25M EBITDA $25M ‐ $50M EBITDA $50M+ EBITDA % of deals with warrants 46% 100% 50% 80% n/a Average loan terms (years) 3.5 5 5 5 6 Senior leverage ratio (multiple of EBITDA) 0.8 1.8 2.5 3 4 Total leverage ratio (multiple of EBITDA) 1 3 3.3 4 5.5 Average loan size ($ millions) 0.5 4 7.5 9 100 Cash interest rate 11% 11% 11% 9.5% 8% PIK 1% 2% 2% 2% n/a Warrants expected return (IRR contribution) 12% 10% 5.5% n/a n/a Total expected returns (gross cash on pre‐tax IRR) 20% 20% 16% 14.5% 9% Table 32. Investment Type by Size of Investee Company, Sponsored Deals Senior debt only Sub debt only Blended Sr. / Jr. Other $0M ‐ $1M EBITDA 0% 17% 83% 0% $1M ‐ $5M EBITDA 13% 38% 38% 13% $5M ‐ $10M EBITDA 17% 33% 33% 17% $10M ‐ $25M EBITDA 0% 50% 50% 0% $25M ‐ $50M EBITDA 0% 100% 0% 0% © 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 35 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 MEZZANINE cont. Financing growth was reported by 26% of respondents as a motivation to secure mezzanine funding, followed by acquisition loan at 25%. Figure 2848. Borrower Motivation to Secure Mezzanine Funding (past 12 months) 3% 1%
4%
6%
Financing growth or construction
5%
Acquisition loan
26%
Refinancing
9%
Finance worsening operations conditions or distress
10%
Management or owner buyout
25%
11%
LBO or PEG buyout
Dividend
Working capital fluctuations
Owner liquidity or equity recapitalization
Other
Figure 49. Items Required to Close One Deal 120
98
100
80
60
40
20
25
12
5
16
10
3
8
5
1
2
3
0
conducted
sheets issued
1st Quartile
Median
3rd Quartile
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 33. Importance of Financial Evaluation Metrics 12% Of little importance 29% 12% Very important 24% Total DSCR or FCC ratio 6% 12% 0% 24% 59% 4.18 Senior debt‐to‐cash flow ratio 12% 12% 24% 24% 29% 3.47 Total debt‐to‐cash flow ratio 6% 0% 12% 18% 65% 4.35 Senior DSCR or FCC ratio Unimportant Moderately important 24% Important Score (1 to 5) 3.06 © 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 36 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 MEZZANINE cont. Table 34. Financial Evaluation Metrics Average Data Average borrower data Limit not to be exceeded 1.5 1.1 Senior DSCR or FCC ratio Total DSCR or FCC ratio 1.3 1.1 Senior debt to cash flow ratio 2.5 3.3 Total debt to cash flow ratio 3.7 4.2 Respondents believe domestic economic uncertainty is the most important issue facing privately‐held businesses today. Figure 50. Issues Facing Privately‐Held Businesses 0%
5%
10%
15%
20%
16%
Access to capital
12%
14%
12%
14%
16%
0%
0%
Inflation
0%
Other
0%
25%
30%
35%
40%
45%
50%
45%
27%
8%
8%
Current issue
16%
12%
Emerging issue
© 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 37 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 MEZZANINE cont. Relative to 12 months ago, respondents indicated increases in demand for mezzanine capital, leverage multiples and appetite for risk. They also reported decreases in general underwriting standards, warrant coverage, loan fees, and expected returns on new investments. Table 35. General Business and Industry Assessment: Today versus 12 Months Ago Decreased significantly Stayed Net Decreased Increased Increased % about the % increase
increase/ slightly slightly significantly
decrease
same decrease
Demand for mezzanine capital 5% 21% 16% 21% 37% 58% 26% 32% Credit quality of borrowers seeking investment 0% 26% 42% 32% 0% 32% 26% 5% Average investment size 0% 5% 58% 32% 5% 37% 5% 32% Average investment maturity (months) 0% 0% 84% 16% 0% 16% 0% 16% General underwriting standards 0% 26% 63% 11% 0% 11% 26% ‐16% Warrant coverage 25% 13% 56% 6% 0% 6% 38% ‐31% PIK features 0% 7% 73% 20% 0% 20% 7% 13% Loan fees 0% 11% 89% 0% 0% 0% 11% ‐11% Leverage multiples 0% 0% 33% 44% 22% 67% 0% 67% Expected returns on new investments 5% 32% 47% 16% 0% 16% 37% ‐21% General business conditions 0% 16% 37% 42% 5% 47% 16% 32% Appetite for risk 0% 5% 42% 37% 16% 53% 5% 47% Respondents expect further increases in all business characteristics except general underwriting standards, warrant coverage, loan fees and expected returns on new investments. Table 36. General Business and Industry Assessment Expectations over the Next 12 Months Decrease slightly Demand for mezzanine capital 5% 5% 37% 42% 11% 53% 11% 42% Credit quality of borrowers seeking investment 0% 21% 53% 26% 0% 26% 21% 5% Average investment size 0% 0% 63% 32% 5% 37% 0% 37% Average investment maturity (months) 0% 0% 95% 5% 0% 5% 0% 5% General underwriting standards 0% 16% 79% 0% 5% 5% 16% ‐11% Warrant coverage 6% 6% 82% 6% 0% 6% 12% ‐6% PIK features 0% 0% 94% 6% 0% 6% 0% 6% Loan fees 0% 11% 89% 0% 0% 0% 11% ‐11% Leverage multiples 0% 0% 44% 50% 6% 56% 0% 56% Expected returns on new investments 0% 37% 53% 11% 0% 11% 37% ‐26% General business conditions 0% 16% 47% 32% 5% 37% 16% 21% Appetite for risk 0% 21% 32% 32% 16% 47% 21% 26% Stay about Increase the same slightly Net Increase % % increase
increase/d
significantly
decrease
ecrease Decrease significantly © 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 38 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 LIMITED PARTNER SURVEY INFORMATION Approximately 43% of the 23 respondents in the limited partner survey reported real estate funds as being the best risk/return trade‐off investment class and another 13% reported direct investments as being the best risk/return trade‐
off investment class. When asked about which industry currently offers the best risk/return trade‐off, 20% of respondents reported healthcare and biotech, followed by 15% reporting basic materials and energy, and another 15% reporting information technology. Other key findings include:  On average respondents target to allocate 32% of their assets to real estate funds, 14% to hedge funds and 11% to venture capital. Respondents expect the highest returns of 13% from direct investments, 11% from real estate funds, 10% from investments in venture capital, and 10% from growth private equity.  Respondents indicated increased allocation to private equity, real estate funds, and direct investments, and decreased allocation to all other alternative assets in the last twelve months. They also reported relatively flat business conditions and expected returns on new investments.  Respondents also expect further increases in allocation to direct investments, private equity, and real estate funds, improving business conditions and increasing expected returns. Operational and Assessment Characteristics Approximately 35% of respondents indicated being private investor followed by family office (22%). Figure 51. Entity Type Private investor
4% 4%
4%
4%
9%
Family office
35%
Fund of funds
Public pension fund
17%
Insurance company
22%
Endowment
Investment company
Other
Approximately 48% of respondents reported their asset category being less than $50 million, while 17% were between $50 million and $500 million. Figure 52. Assets under Management or Investable Funds 100%
80%
60%
40%
20%
0%
48%
17%
9%
9%
4%
13%
© 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 39 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 LP cont. Respondents reported on their % of total asset allocations for “Alternative Assets”. Figure 53. Current Asset Allocation for "Alternative Assets" (% of total portfolio) 100%
80%
60%
40%
20%
0%
27%
9%
0%
1% ‐ 10% 11%‐ 20%
23%
5%
5%
5%
9%
9%
5%
21% ‐
30%
31% ‐
40%
41% ‐
50%
51% ‐
60%
61% ‐
70%
81% ‐
90%
5%
91% ‐
100%
Figure 54. Target Asset Allocation for "Alternative Assets" (% of total portfolio) 100%
50%
19%
29%
10%
14%
11%‐ 20%
31% ‐ 40%
5%
10%
5%
41% ‐ 50%
51% ‐ 60%
81% ‐ 90%
0%
1% ‐ 10%
91% ‐ 100%
On average, respondents target to allocate 32% of their assets to real estate funds, 14% to hedge funds, and 11% to venture capital. Figure 55. Target Asset Allocation by Assets 0%
5%
10%
15%
Real estate fund
25%
30%
35%
32%
Hedge fund
14%
Venture capital
11%
Direct investments
10%
Private equity ‐ growth
7%
Private equity ‐ distressed
4%
Private equity ‐ buyout
4%
Fund of funds
4%
Mezzanine
Secondary funds
20%
2%
1%
© 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 40 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 LP cont. On average, respondents expect the highest returns from investments in direct investments, real estate funds, venture capital and growth private equity. Figure 56. Annual Return Expectations for New Investments 14%
12%
10%
8%
6%
4%
2%
0%
13%
11%
10%
10%
6%
6%
5%
5%
4%
4%
4%
Approximately 43% of the 23 respondents in the limited partner survey reported real estate funds as being the best risk/return trade‐off investment class, another 13% reported direct investments as being the best risk/return trade‐off investment class. Figure 57. Assets with the Best Risk/Return Trade‐off Currently Real estate funds
4%
4% 4% 4%
Direct investments
43%
9%
Venture capital
Private equity ‐ distressed
9%
Fund of funds
9%
13%
Mezzanine investment
Private equity ‐ buyouts Private equity ‐ growth
Hedge fund
© 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 41 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 LP cont. When asked about which industries currently offer the best risk/return trade offs, 20% of respondents reported health care & biotech, followed by 15% reporting basic material & energy, and another 15% reporting information technology. Figure 58. Industry with the Best Risk/Return Health care & biotech
5%
10%
5%
10%
20%
15%
10%
Business services
15%
10%
Financial services
Manufacturing
Other
In regard to the geographic regions with the best risk/return trade‐offs, 96% of respondents reported North America and 4% reported Western Europe. Figure 59. Geographic Regions of the World Offering the Best Risk/Return Tradeoff Currently 4%
North America
96%
Western Europe
In regard to the geographic regions with the best risk/return trade‐offs in the US, 18% of respondents reported Texas, and 12% reported Southern California. Figure 60. Geographic Regions in the US Offering the Best Risk/Return Tradeoff Currently Texas
18%
12%
53%
Southern California
Bay Area
6%
6%
6%
New England
Sillicon Valley
Other
© 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 42 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 LP cont. According to respondents, general partner and specific strategy are the most important factors when evaluating investment followed by residual value of most recent fund. Table 37. Importance of Factors When Evaluating Unimportant Of little importance Moderately important Important Very important Score (1 to 5) 0% 0% 35% 43% 22% 3.9 0% 13% 35% 39% 13% 3.5 0% 9% 32% 45% 14% 3.6 General partner 0% 0% 22% 26% 52% 4.3 Specific strategy 0% 9% 13% 22% 57% 4.3 Specific location 4% 26% 30% 35% 4% 3.1 Gut feel/instinct 9% 9% 32% 41% 9% 3.3 Historical fund performance on all funds Returned capital from most recent fund (Distribution to Paid‐in or DPI) Residual value of most recent fund (Residual Value to Paid‐in or RVPI) Respondents believe access to capital is the most important issue facing privately‐held businesses today, while domestic economic uncertainty is indicated as the most important emerging issue. Figure 61. Issues Facing Privately‐Held Businesses 0%
5%
10%
Access to capital
15%
30%
35%
30%
27%
11%
15%
29%
9%
11%
9%
6%
Other
25%
8%
Inflation
20%
13%
11%
0%
16%
3%
3%
Current issue
Emerging Issue
© 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 43 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 LP cont. Respondents indicated increased allocation to private equity, direct investments and real estate funds, and decreased allocation to all other alternative assets in the last twelve months. They also reported relatively flat general business conditions and expected returns on new investments. Table 38. General Business and Industry Assessment: Today versus 12 Months Ago Stayed Net Increased Increased % % about the increase/ slightly significantly increase decrease same decrease
Decreased significantly
Decreased slightly Allocation to venture capital 10% 15% 65% 10% 0% 10% 25% ‐15% Allocation to private equity 0% 10% 55% 20% 15% 35% 10% 25% Allocation to mezzanine 5% 11% 74% 11% 0% 11% 16% ‐5% Allocation to hedge funds 10% 14% 62% 10% 5% 14% 24% ‐10% Allocation to secondary funds 11% 11% 58% 16% 5% 21% 21% 0% Allocation to real estate funds 0% 9% 50% 36% 5% 41% 9% 32% Direct investments 5% 5% 24% 43% 24% 67% 10% 57% General business conditions 0% 10% 76% 14% 0% 14% 10% 5% Expected returns on new capital deployed 0% 9% 73% 18% 0% 18% 9% 9% Characteristics Respondents also expect further increases in allocation to direct investments, private equity and real estate funds, improving business conditions and expected returns. Table 39. General Business and Industry Assessment Expectations over the Next 12 Months Net Increase % increase % decrease increase/ significantly decrease
Decrease significantly Decrease slightly Stay about the same Increase slightly Allocation to venture capital 10% 15% 60% 15% 0% 15% 25% ‐10% Allocation to private equity 5% 11% 53% 26% 5% 32% 16% 16% Allocation to mezzanine 6% 28% 67% 0% 0% 0% 33% ‐33% Allocation to hedge funds 0% 20% 60% 10% 10% 20% 20% 0% Allocation to secondary funds 6% 11% 67% 17% 0% 17% 17% 0% Allocation to real estate funds 0% 5% 60% 30% 5% 35% 5% 30% Direct investments 0% 5% 50% 40% 5% 45% 5% 40% General business conditions 0% 10% 62% 29% 0% 29% 10% 19% Expected returns on new capital deployed 0% 14% 52% 33% 0% 33% 14% 19% Characteristics © 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 44 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 VENTURE CAPITAL SURVEY INFORMATION Of the 28 participants who responded to the venture capital survey, approximately 54% of respondents expect an increasing size of the venture capital industry. The majority (85%) of respondents plan to make four investments or more over the next 12 months. Other key findings include:  The types of businesses respondents plan to invest in the next 12 months are very diverse with over 39% targeting information technology and another 19% planning to invest in health care and biotech.  Respondents’ exit strategies include selling to a public company (37%) followed by selling to a private company (23%).  Respondents believe access to capital is the most important issue facing privately‐held businesses today. Operational and Assessment Characteristics Approximately 48% of respondents made five investments or more over the last twelve months. Figure 62. Total Number of Investments Made in the Last 12 Months 25%
22%
19%
20%
15%
15%
11%
11%
10%
5%
7%
4%
4%
0
1
4%
4%
0%
2
3
4
5
6
7
8
More than 10
22%
19%
20%
15%
11%
10%
7%
7%
7%
4%
5%
7%
4%
7%
4%
0%
0
1
2
3
4
5
6
7
8
10
More than 10
© 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 45 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 VENTURE CAPITAL cont. The majority (85%) of respondents plan to make four investments or more over the next 12 months. Figure 64. Number of Total Investments Planned over Next 12 Months 40%
30%
30%
19%
20%
10%
11%
4%
15%
7%
7%
6
7
4%
4%
8
10
0%
0
3
4
5
More than 10
30%
19%
20%
10%
11%
7%
15%
11%
4%
4%
4%
0%
0
1
2
3
4
5
6
8
More than 10
Respondents reported on business practices and the results are reflected below. Table 40. VC Fund Data 1st quartile Median 3rd quartile Vintage year (year in which first investment made) 2008 2011 2013 Size of fund ($ millions) $18 $38 $175 Targeted number of total investments 13 18 23 Target fund return (gross pretax cash on cash annual IRR %) 25% 25% 35% Expected fund return (gross pretax cash on cash annual IRR %) 25% 25% 35% The types of businesses respondents plan to invest in over next 12 months are very diverse with over 39% targeting Information technology, and another 19% planning to invest in health care and biotech. Figure 66. Type of Business for Investments Planned over Next 12 Months 50%
40%
30%
20%
10%
0%
39%
19%
8%
Information Health care & Basic materials technology
biotech
& energy
6%
5%
5%
4%
Business services
Manufacturing
Financial services
4%
2%
1%
Media & Construction & Wholesale & entertainment engineering
distribution
8%
Other
© 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 46 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 VENTURE CAPITAL cont. Respondents reported on a variety of stats pertaining to their investments. Table 41. General Information on Investments by Company Stages Seed Startup Early Stage Expansion Later Stage Number of Investments Made in Last six months 1st Quartile 2 1.75 1 2 2 Median 3 3 3 2.5 3 3rd Quartile 5 3.5 4 4 5 Average Size of Investment ($ million) 1st Quartile 0.5 0.5 0.5 0.5 0.5 Median 0.5 1 1.5 2.5 2.5 3rd Quartile 0.5 2.5 2.5 4.25 4.25 Average % of Total Equity Purchased (fully diluted basis) 1st Quartile 8% 5% 5% 5% 5% Median 20% 15% 20% 5% 5% 3rd Quartile 25% 25% 15% 10% 10% Total expected Returns (gross cash on cash pretax IRR) on new investments 1st Quartile 23% 23% 23% 19% 18% Median 33% 33% 28% 25% 25% 3rd Quartile 48% 38% 38% 33% 33% Expected Time to Exit (years) 1st Quartile 5 3 3 3 2 Median 5 5 4.5 4 2.5 3rd Quartile 7.25 7 6 5 3 Average company 'pre‐money' value ($ million) 1st Quartile 1.5 2.5 4.5 15.0 31.0 Median 2.5 4.5 8.0 25.0 70.0 3rd Quartile 4.5 8.0 15.0 30.0 100.0 Average Company Value at Time of Investment (post‐money $ millions) 1st Quartile 1.0 1.3 7.0 20.0 25.0 Median 3.0 8.0 15.0 40.0 70.0 3rd Quartile 8.0 10.0 15.0 72.5 100.0 © 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 47 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 VENTURE CAPITAL cont. Respondents reported on where they plan to invest over the next 12 months. The results reflect investment throughout the U.S. Figure 67. Geographic Location of Planned Investment over Next 12 Months 25%
24%
18%
20%
14%
15%
12%
8%
10%
7%
6%
2%
2%
New York
Great Plains
5%
0%
California
Southwest
Southeast
Great Lakes Mid‐Atlantic New England
Northwest
When valuing the company, approximately 27% of respondents use gut feel when valuing privately‐held businesses. Figure 68. Usage of Valuation Methods 30%
25%
20%
15%
10%
5%
0%
27%
18%
Gut feel
15%
13%
Guideline Discounted company future transactions earnings method
method
10%
8%
Capitalization Adjusted net of earnings asset method
method
9%
Other
The weights of the various multiple methods used by respondents when valuing privately‐held businesses included 47% for revenue multiple and 15% for recast (adjusted) EBITDA multiple methods. Figure 69. Usage of Multiple Methods 50%
47%
40%
30%
20%
15%
14%
10%
10%
8%
Cash flow multiple
EBIT multiple
5%
0%
Revenue multiple Recast (Adjusted) EBITDA EBITDA multiple (unadjusted) multiple
Net income multiple
© 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 48 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 VENTURE CAPITAL cont. Respondents reported on items required to close one deal. Figure 70. Items Required to Close One Deal 50
40
30
20
10
0
40
26
12.5
5
10
15
1.5
4
2
1
3
2
conducted
sheets issued
1st Quartile
Median
3rd Quartile
Respondents’ exit strategies include selling to a public company (37%) followed by selling to a private company (23%). Figure 71. Exit Plans for Portfolio Companies 40%
30%
37%
23%
17%
20%
8%
10%
0%
5%
IPO
4%
Other
4%
3%
Sell to another VC
Respondents believe access to capital is the most important issue facing privately‐held businesses today. Figure 72. Current Issues Facing Privately‐Held Businesses 0%
5%
10%
15%
20%
Access to capital
35%
32%
18%
17%
9%
27%
6%
7%
Inflation
30%
20%
21%
20%
25%
0%
3%
3%
3%
Other
7%
Today issue
9%
Emerging issue
© 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 49 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 VENTURE CAPITAL cont. Respondents indicated increases in demand for venture capital, follow‐on investments, value of portfolio companies, presence of super angels in space formerly occupied by VCs, and improved general business conditions. Table 42. General Business and Industry Assessment: Today versus 12 Months Ago Decreased significantly Stayed Net Decreased Increased Increased % % about the increase/ slightly slightly significantly increase decrease same decrease Demand for venture capital 0% 0% 19% 54% 27% 81% 0% 81% Quality of companies seeking investment 4% 16% 40% 28% 12% 40% 20% 20% Follow‐on investments 0% 4% 29% 54% 13% 67% 4% 63% Average investment size 0% 0% 52% 28% 20% 48% 0% 48% Exit opportunities 0% 17% 42% 17% 25% 42% 17% 25% Time to exit deals 0% 16% 60% 20% 4% 24% 16% 8% Expected returns on new investments 4% 8% 65% 19% 4% 23% 12% 12% Value of portfolio companies 0% 4% 19% 38% 38% 77% 4% 73% General business conditions 4% 4% 23% 62% 8% 69% 8% 62% Presence of super angels in space formerly occupied by VCs 0% 12% 24% 40% 24% 64% 12% 52% Size of venture capital industry 8% 15% 35% 35% 8% 42% 23% 19% Appetite for risk 12% 15% 35% 35% 4% 38% 27% 12% Respondents expect further increases in all business characteristics. Table 43. General Business and Industry Assessment Expectations over the Next 12 Months Decrease significantly Net Decrease Stay about Increase Increase % % increase/ slightly the same slightly significantly increase decrease decrease Demand for venture capital 0% 8% 38% 33% 21% 54% 8% 46% Quality of companies seeking investment 4% 4% 67% 13% 13% 25% 8% 17% Follow‐on investments 0% 8% 38% 42% 13% 54% 8% 46% Average investment size 0% 4% 46% 38% 13% 50% 4% 46% Exit opportunities 4% 4% 50% 33% 8% 42% 8% 33% Time to exit deals 0% 13% 54% 29% 4% 33% 13% 21% Expected returns on new investments 0% 8% 46% 25% 21% 46% 8% 38% Value of portfolio companies 0% 8% 21% 54% 17% 71% 8% 63% General business conditions 4% 13% 25% 50% 8% 58% 17% 42% Presence of super angels in space formerly occupied by VCs 4% 13% 35% 30% 17% 48% 17% 30% Size of venture capital industry 8% 21% 25% 42% 4% 46% 29% 17% Appetite for risk 8% 17% 46% 25% 4% 29% 25% 4% © 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 50 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 ANGEL INVESTOR SURVEY INFORMATION Of the 20 participants who responded to the angel investor survey, the majority (55%) of respondents plan to make between two and four investments. Other key findings include:  Approximately 24% of respondents base valuations on gut feel when valuing privately‐held businesses.  When using multiples to determine the value of a business, the most popular methods used by respondents were revenue multiple (37%), EBITDA multiple (21%) and cash flow multiple (14%).  The types of businesses respondents plan to invest in over next 12 months are very diverse with 26% targeting information technology and another 17% planning to invest in health care or biotech.  Respondents indicated a sharp increase in demand for angel capital, increases in size of angel industry, follow‐
on investments, quality of companies seeking investment and improved general business conditions. They also reported decreased expected returns on new investments.  Respondents’ exit strategies include selling to a private company (30%) and selling to a public company (29%). Operational and Assessment Characteristics Approximately 25% of respondents made either five investments or more over the last twelve months. Figure 73. Total Number of Investments Made in the Last 12 Months 30%
25%
25%
20%
20%
15%
15%
10%
10%
10%
5%
5%
5%
5%
9
10
More than 10
5%
0%
0
1
2
3
4
5
37%
26%
30%
21%
20%
10%
5%
5%
5%
3
4
9
0%
0
1
2
© 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 51 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 ANGEL cont. The majority (55%) of respondents plan to make between two and four investments over the next 12 months. Figure 75. Number of Total Investments Planned over Next 12 Months 40%
35%
30%
20%
10%
10%
10%
10%
10%
5%
10%
5%
5%
0%
0
1
2
3
4
5
6
7
More than 10
40%
35%
30%
25%
20%
15%
10%
5%
0%
32%
11%
11%
0
1
2
3
5%
5%
4
More than 10
The types of businesses respondents plan to invest in over next 12 months are very diverse with over 27% targeting information technology and another 17% planning to invest in health care & biotech. Figure 77. Type of Business for Investments Planned over Next 12 Months Information technology
5%
5%
7%
27%
8%
Business services
8%
17%
10%
13%
Other
© 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 52 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 ANGEL cont. Respondents reported on a variety of stats pertaining to their investments. Table 44. General Information on Investments by Company Stages Seed Startup Early Stage Expansion Later Stage Number of Investments Made in Last six months 1st Quartile 1.0 1.0 1.0 1.0 3.0 Median 1.0 1.5 1.0 2.0 5.0 3rd Quartile 2.0 2.0 2.3 2.0 5.0 1st Quartile $25 $25 $25 $50 $500 Median $25 $75 $75 $100 $950 3rd Quartile $150 $150 $250 $650 $2,500 4% 3.5% 1.3% 5% 11% Median 5% 5% 3% 7.5% 12% 3rd Quartile Total EXPECTED Returns (gross cash on cash pretax IRR) on New Investments (%) 10% 5% 5% 17.5% 14% Average Size of Investment (in thousands) Average % of Total Equity Purchased (fully diluted basis) 1st Quartile 1st Quartile 15% 17.5% 21.3% 21% 17.5% Median 30% 25% 25% 25% 25% 3rd Quartile 35% 25% 35% 35% 30% 1st Quartile 4 3.5 3.8 4 4 Median 5 5 5 5 5 7.5 5 5 7.5 6.5 $0.23 $0.43 $0.7 $0.7 $1.5 $1 $1.5 $1.5 $2.5 $3.5 $1.8 $2.5 $3.5 $4.0 $7.5 Expected Time to Exit (years) 3rd Quartile Average company 'pre‐money' value (in millions) 1st Quartile Median 3rd Quartile Average Company Value at Time of Investment (post‐money $ millions) 1st Quartile $0.4 $0.83 $1.3 $3.0 $3.3 Median $1.5 $1.8 $3.5 $3.8 $4.5 3rd Quartile $2.3 $3.5 $4.8 $8.5 $13.0 Respondents reported on where they plan to invest over the next 12 months. The results reflect investment throughout the U.S. Figure 78. Geographic Location of Planned Investment over Next 12 Months 5%
2% 1%
5%
11%
46%
12%
18%
California
Southwest
Mid‐Atlantic
Northwest
New York
Southeast
Great Plains
Great Lakes
© 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 53 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 ANGEL cont. Respondents reported on their geographical limits for investments. Figure 79. Geographical Limit for Investment 10%
2‐hour drive
15%
4‐hour drive
15%
60%
State/province
Region
Approximately 24% of respondents base valuations on gut feel when valuing privately‐held businesses followed by discounted future earnings method (20%). Figure 80. Usage of Valuation Methods Gut feel
5%
16%
24%
Capitalization of earnings method
8%
10%
20%
17%
Other
The weights of the various multiple methods used by respondents when valuing privately‐held businesses included 37% for revenue multiple and 21% for EBITDA multiple methods. Figure 81. Usage of Multiple Methods 2%
9%
Revenue multiple
5%
37%
13%
EBITDA multiple
Cash flow multiple
14%
21%
Recast EBITDA multiple
Net income multiple
EBIT multiple
Other
© 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 54 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 ANGEL cont. Respondents reported on items required to close one deal. Figure 82. Items Required to Close One Deal 55
60
40
20
10
14
7
5
4
2
3
4.5
1
2
1
0
conducted
sheets issued
1st Quartile
Median
3rd Quartile
Respondents’ exit strategies include selling to a private company (30%) and selling to a public company (29%). Figure 83. Exit Plans for Portfolio Companies 8%
7%
Sell to a private company
3%
30%
11%
Liquidate or bankrupt
12%
Sell to a venture capital fund
29%
Sell to private equity group
IPO
Management buyout
Respondents believe access to capital is the most important current and emerging issue facing privately‐held businesses. Figure 84. Issues Facing Privately‐Held Businesses 0%
10%
20%
30%
40%
Access to capital
60%
18%
70%
65%
13%
15%
9%
8%
4%
Inflation
4%
0%
0%
Other
50%
10%
15%
15%
15%
4%
3%
Current issue
Emerging issue
© 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 55 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 ANGEL cont. Respondents indicated a sharp increase in demand for angel capital, increases in size of angel industry, follow‐on investments, time to exit deals and improved general business conditions. They also reported decreased expected returns on new investments. Table 45. General Business and Industry Assessment: Today versus 12 Months Ago Stayed Net Increased Increased % % about the increase/ slightly significantly increase decrease same decrease Decreased significantly Decreased slightly Demand for angel capital 5% 11% 21% 26% 37% 63% 16% 47% Size of angel finance industry 0% 5% 11% 47% 37% 84% 5% 79% Quality of companies seeking investment 5% 21% 16% 47% 11% 58% 26% 32% Follow‐on investments 0% 6% 24% 53% 18% 71% 6% 65% Average investment size 0% 16% 42% 21% 21% 42% 16% 26% Exit opportunities 5% 11% 37% 42% 5% 47% 16% 32% Time to exit deals 0% 21% 47% 16% 16% 32% 21% 11% Expected returns on new investments 5% 16% 68% 5% 5% 11% 21% ‐11% Value of portfolio companies 0% 0% 44% 44% 11% 56% 0% 56% General business conditions 0% 5% 37% 42% 16% 58% 5% 53% Appetite for risk 0% 11% 47% 26% 16% 42% 11% 32% Respondents expect further increases in business characteristics except appetite for risk. Table 46. General Business and Industry Assessment Expectations over the Next 12 Months Net Increase % % increase/ significantly increase decrease decrease Decrease significantly Decrease slightly Stay about the same Increase slightly Demand for angel capital 5% 16% 21% 42% 16% 58% 21% 37% Size of angel finance industry 5% 16% 21% 53% 5% 58% 21% 37% Quality of companies seeking investment 5% 26% 26% 42% 0% 42% 32% 11% Follow‐on investments 6% 0% 24% 65% 6% 71% 6% 65% Average investment size 5% 0% 53% 42% 0% 42% 5% 37% Exit opportunities 11% 11% 50% 22% 6% 28% 22% 6% Time to exit deals 0% 0% 56% 28% 17% 44% 0% 44% Expected returns on new investments 6% 6% 67% 22% 0% 22% 11% 11% Value of portfolio companies 0% 24% 47% 29% 0% 29% 24% 6% General business conditions 0% 22% 50% 22% 6% 28% 22% 6% Appetite for risk 6% 17% 61% 17% 0% 17% 22% ‐6% © 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 56 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 BUSINESS APPRAISER SURVEY INFORMATION According to the 166 business appraiser survey respondents domestic economic uncertainty is the most important issue facing privately‐held business today. Respondents indicated increases in number of engagements, fees for services, competition, and improved general business conditions over the last twelve months. They also expect decreases in all general business characteristics over the next year. Other key findings include:  When using valuation methods to determine the value of a business, the most popular methods used by respondents were discounted future earnings method (37%), capitalization of earnings method (24%) and guideline company transactions method (17%).  Recast (adjusted) EBITDA multiple is the most popular when using multiple valuation method  Respondents use an average risk‐free rate of 3.4% and a market (equity) risk premium of 6.1%  Average long‐term terminal growth is estimated at 3.3% Operational and Assessment Characteristics Most of the companies valued by respondents have annual revenues from $2 million to $50 million. Figure 85. Annual Revenues of Companies Valued 80%
60%
40%
66%
62%
32%
68%
46%
39%
31%
14%
20%
0%
Less than $500K ‐ $1M $2M ‐ $5M $5M ‐ $10M $11M ‐
$500K in in revenues in revenues in revenues $50M in revenues
revenues
$51M ‐
$100M in revenues
$100M ‐ > $500M in $500M in revenues
revenues
Appraisers, on average, apply a 37% weight to discounted future earnings method when valuing a privately‐held business. Figure 86. Usage of Valuation Methods 4%
11%
7%
37%
Capitalization of earnings method
17%
24%
Other
© 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 57 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 APPRAISERS cont. Respondents using multiples‐based approaches indicate a preference for using recast (adjusted) EBITDA multiples (40%), followed by revenue multiples (20%). Figure 87. Usage of Multiple Methods Recast (Adjusted) EBITDA multiple
4%
8%
5%
7%
Revenue multiple
40%
Cash flow multiple
16%
EBITDA (unadjusted) multiple
20%
EBIT multiple
Net income multiple
Other
Respondents indicated using an average risk‐free rate of 3.4%, average market (equity) risk premium of 6.1% and average long‐term growth rate of 3.3%. Figure 88. Average Risk‐Free Rat and Market (equity) Risk Premium and Long‐Term Growth Rate 0%
1%
2%
3%
4%
Risk‐free rate
5%
6%
7%
3.4%
Market (equity) risk premium
6.1%
Average Long‐term terminal growth rate (%)
3.3%
Figure 81 indicates considerable differences in DLOMs across sizes of companies and subject interests. Figure 89. Discount for Lack of Marketability (DLOM) by Revenue Sizes 0%
$250M in revenues
5%
10%
15%
20%
25%
30%
8.0%
33.0%
10.5%
$25M in revenues
28.6%
13.5%
$1M in revenues
25.3%
16.9%
$100,000 in revenues
Control interest
35%
21.3%
Minority interest
© 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 58 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 APPRAISERS cont. Figure 90. Explicit Forecast Period for High‐Growth Companies by Revenue Sizes (years) 0
1
2
3
4
5
6
Private operating company with $1M in EBITDA
7
8
6.0
5.8
6.0
Respondents indicated increases in number of engagements, fees for services, competition, and improved general business conditions over the last twelve months. Table 47. General Business and Industry Assessment: Today versus 12 Months Ago Characteristics Decreased significantly Stayed Net Decreased Increased Increased % % about the increase/
slightly slightly significantly increase decrease
same decrease
Number of engagements 5% 22% 32% 25% 16% 41% 27% 14% Time to complete a typical appraisal 0% 14% 68% 15% 3% 18% 14% 4% Fees for services 2% 8% 55% 31% 3% 34% 11% 23% Competition 0% 2% 59% 28% 12% 39% 2% 37% Cost of capital 0% 20% 62% 15% 2% 17% 20% ‐3% Market (equity) risk premiums 0% 13% 74% 11% 2% 13% 13% 0% DLOM 0% 8% 85% 6% 1% 7% 8% ‐1% Company specific risk premiums 0% 15% 71% 13% 1% 14% 15% ‐1% General business conditions 1% 9% 47% 40% 3% 43% 10% 33% Respondents expect decreases in all general business characteristics except DLOMs over the next year. Table 48. General Business and Industry Assessment Expectations over the Next 12 Months Characteristics Decrease significantly Net Decrease Stay about Increase Increase % % increase/
slightly the same slightly significantly increase decrease
decrease
Number of engagements 2% 8% 34% 45% 12% 0% 10% ‐10% Time to complete a typical appraisal 0% 9% 80% 10% 2% 0% 9% ‐9% Fees for services 0% 5% 54% 39% 2% 0% 5% ‐5% Competition 0% 2% 62% 30% 5% 1% 2% ‐1% Cost of capital 0% 4% 62% 32% 1% 2% 4% ‐2% Market (equity) risk premiums 0% 4% 71% 21% 2% 2% 4% ‐2% DLOM 0% 2% 85% 5% 1% 6% 2% 4% Company‐specific risk premiums 0% 5% 78% 12% 2% 4% 5% ‐1% General business conditions 1% 9% 52% 35% 1% 2% 10% ‐8% © 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 59 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 APPRAISERS cont. Respondents believe domestic economic uncertainty is the most important issue facing privately‐held businesses today. Figure 91. Issues Facing Privately‐Held Businesses 0%
5%
10%
15%
20%
30%
35%
40%
35%
23%
25%
26%
Access to capital
10%
10%
25%
4%
3%
3%
Inflation
3%
Other
3%
3%
Today's issue
16%
17%
7%
11%
Emerging issue
© 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 60 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 BROKER SURVEY INFORMATION Approximately 39% of the 41 participants in the broker survey said they expect to close six deals or more in the next 12 months. Respondents believe access to capital is the most important issue facing privately‐held businesses today. Domestic economic uncertainty is indicated as the most important emerging issue. Other key findings include:  The majority of deals (85%) took less than 1 year to close with the largest concentration being the nine to ten month category. Another 11% took about a year and a half.  Respondents indicated increases in deal flow, ratio of businesses sold to total listings, business exit opportunities and difficulty selling business.  Top three reasons for deals not closing: unreasonable non‐price seller or buyer demand (29%), valuation gap in pricing (23%), and no market for business (11%). Operational and Assessment Characteristics Approximately 19% of the respondents didn’t close any deal in the last twelve months; 63% closed between one to five deals, while 19% closed six or more transactions. Figure 92. Private Business Sales Transactions Closed in the Last Twelve Months 20%
19%
17%
16%
15%
13%
12%
10%
8%
5%
5%
4%
3%
1%
1%
1%
8
9
10
0%
0
1
2
3
4
5
6
7
More than 10
Approximately 60% of respondents are planning to close between one and five business sales transactions in the next 12 months. Figure 93. Private Business Sales Transactions Expected to Close in the Next Twelve Months 20%
15%
11%
10%
5%
13%
15%
13%
14%
12%
7%
6%
5%
8
10
2%
1%
0%
0
1
2
3
4
5
6
7
More than 10
© 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 61 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 BROKER cont. The majority of business transactions (38%) took 7 to 10 months to close. Figure 94. Average Number of Months to Close One Business Transaction 19%
19%
16%
14%
14%
20%
15%
10%
8%
5%
5%
3%
3%
0%
2 months or less
3 ‐ 4 months
5 ‐ 6 months
7 ‐ 8 months
9 ‐ 10 months
11 ‐ 12 months
13 ‐ 18 months
19 ‐ 24 months
more than 24 months
Approximately 33% of deals terminated without transacting over the past year. Figure 95. Percentage of Business Sales Engagements Terminated Without Transacting 33%
Transacted
67%
Not transacted
Approximately 46% of deals that were not transacted had a valuation gap in pricing between 11% and 20%. Figure 96. Valuation Gap in Pricing for Transactions That Didn’t Close 50%
46%
40%
34%
30%
20%
11%
10%
3%
6%
0%
11‐20%
21‐30%
31‐40%
41‐50%
Greater than 50%
© 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 62 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 BROKER cont. Top reasons for deals not closing: unreasonable seller/buyer demand (29%) and valuation gap in pricing (23%). Figure 97. Reasons for Business Sales Engagements Not Transacting Unreasonable seller or buyer demand (non‐price)
5%
7%
8%
8%
Valuation gap in pricing
29%
No market for business
Insufficient cash flow
9%
Economic uncertainty
23%
11%
Lack of capital to finance
Seller misrepresentations
Other
The most popular valuation method used by respondents when valuing privately‐held businesses was capitalization of earnings method. Figure 98. Usage of Valuation Methods 35%
30%
25%
20%
15%
10%
5%
0%
32%
22%
16%
13%
10%
4%
Capitalization Guideline of earnings company method
transactions method
Discounted Adjusted net future asset method
earnings method
Gut feel
1%
Other
1%
2%
Net income multiple
Other
Figure 99. Usage of Multiples 50%
40%
30%
40%
25%
20%
12%
10%
10%
10%
0%
Recast EBITDA SDE Multiple
multiple
EBITDA multiple
Revenue multiple
Cash flow multiple
© 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 63 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 BROKER cont. Approximately 57% of business sales transactions closed in the last 12 months involved seller financing or seller note. Figure 100. Components of Closed Deals 57%
60%
50%
37%
40%
28%
30%
20%
20%
10%
10%
Lowered amount of equity sold
Rollover
10%
0%
Seller financing / Lowered deal seller note
price
Contingent earnout
Other
Table 49. How Difficult to Arrange Senior Debt for Transactions over the Past 12 Months Extremely difficult Difficult Somewhat difficult Neutral Somewhat easy Easy Extremely easy $100K 37% 16% 11% 15% 10% 7% 4% ‐1.3 $500K 9% 23% 23% 21% 13% 9% 3% ‐0.7 $1M 6% 13% 16% 25% 19% 15% 6% ‐0.2 $5M 10% 6% 16% 23% 23% 15% 7% 0.0 $10M 11% 9% 11% 23% 20% 15% 12% 0.0 $15M 14% 6% 8% 24% 16% 16% 16% 0.1 $25M+ 14% 2% 10% 26% 19% 10% 19% 0.2 Revenue size Score (‐2 to 2) Average seller’s discretionary earnings (SDE) deal multiples on transactions by revenue size from the prior twelve months as observed by respondents varied from 1.3 to 4.1. Table 50. Median Seller’s Discretionary Earnings (SDE) Deal Multiples by Revenue Size < 500K revenue $500K ‐ $1M revenue $1M ‐ $2M revenue $2M ‐ $5M revenue $5M ‐ $50M revenue Basic materials & energy 2.5 n/a n/a n/a n/a Business services 1.4 2.6 3 3.2 3.4 Construction & engineering 1.8 2 2.1 2.8 n/a Consumer goods & retail 1.8 2 2.3 2.5 n/a Information technology 1.3 2 2.6 4 n/a Health care & biotech 1.5 2.5 2.8 n/a 4.1 Manufacturing 1.3 2.5 2.8 3.5 4 Restaurants Revenue 1.5 2.8 3 n/a n/a Financial services 2 2 n/a n/a n/a Personal services 1.5 1.8 2.3 3.8 n/a Wholesale & distribution 1.9 2 2.4 3.2 n/a © 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 64 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 BROKER cont. Average deal multiples on transactions by EBITDA size from the prior twelve months as observed by respondents varied from 1.5 to 5.1. Table 51. Median EBITDA Deal Multiples by Revenue Size of Company Revenue n/a $500K ‐ $1M revenue n/a 2 2.6 3 4.5 5.1 2.5 2.8 3.6 n/a < 500K revenue Basic materials & energy Business services $1M ‐ $2M revenue n/a $2M ‐ $5M revenue n/a $5M ‐ $50M revenue 3.9 Construction & engineering n/a Consumer goods & retail 2.3 2 2.4 2.5 3.1 Information technology 1.5 2.3 2.6 4 5 2 2.5 2.8 2.8 4.1 Manufacturing n/a 2.5 3.5 Restaurants 1.5 2.8 3 n/a 3 4 n/a Financial services 2 n/a n/a n/a n/a Personal services 2.5 4 2.3 n/a n/a Wholesale & distribution 2.5 3.8 3.8 4 4.6 Health care & biotech Approximately 55% of closed business sales transactions over the past 12 months involved strategic buyers. Figure 101. Percent of Transactions Involved Strategic and Financial Buyers 45%
Strategic buyers
55%
Financial buyers
Approximately 46% of closed business sales transactions over the past 12 months involved strategic follow‐on investments. Figure 102. Percent of Transactions Involved Platform and Follow‐on Investments 46%
Platform investments
54%
Follow‐on investments
© 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 65 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 BROKER cont. Compared to twelve months ago, respondents indicated increases in deal flow, ratio of businesses sold to total listings, business exit opportunities and improved general business conditions. During the next twelve months, respondents expect further increases in deal flow, margin pressure on companies, and improving general business conditions. Table 52. General Business and Industry Assessment: Today versus 12 Months Ago Decreased significantly Deal flow 4% Stayed Decreased Increased about the slightly slightly same 13% 31% 40% Increased significantly % % Net increase decrease increase
11% 51% 18% 33% Ratio of businesses sold / total listings 4% 13% 47% 29% 7% 37% 16% 21% Deal multiples 0% 8% 67% 22% 2% 24% 9% 15% Business exit opportunities 2% 11% 52% 30% 5% 35% 13% 22% Amount of time to sell business 0% 11% 57% 23% 8% 31% 12% 19% Difficulty selling business 1% 13% 55% 22% 9% 31% 14% 17% Business opportunities for growth 1% 10% 46% 40% 4% 44% 11% 33% General business conditions 2% 13% 38% 44% 4% 47% 15% 33% Margin pressure on companies 0% 12% 60% 23% 5% 28% 12% 16% Table 53. General Business and Industry Assessment: Expectations over the Next 12 Months Decrease
significantly 2% Deal flow Decrease
slightly 5% Stay about Increase
the same slightly 30% 53% Increase
% Net % increase significantly decrease increase
11% 64% 6% 58% Ratio of businesses sold / total listings 2% 4% 36% 50% 9% 59% 5% 54% Deal multiples 0% 6% 64% 29% 1% 29% 7% 23% Business exit opportunities 0% 6% 50% 38% 6% 44% 7% 37% Amount of time to sell business 0% 18% 58% 21% 4% 25% 18% 7% Difficulty selling business 0% 20% 57% 19% 4% 23% 20% 3% Business opportunities for growth 1% 6% 52% 39% 2% 41% 7% 35% General business conditions 1% 11% 44% 41% 4% 45% 12% 33% Margin pressure on companies 0% 6% 67% 24% 4% 27% 6% 22% Respondents believe domestic access to capital is the most important issue facing privately‐held businesses today. Government regulations and taxes are indicated as the most important emerging issues. Figure 103. Issues Facing Privately‐Held Businesses 0%
5% 10% 15% 20% 25% 30%
Access to capital
Inflation
Other
16%
6%
16%
5%
2%
40%
45%
50%
45%
27%
28%
14%
10%
10%
0%
0%
0%
35%
5%
Current issue
16%
Emerging issue
© 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 66 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 BUSINESS OWNER SURVEY INFORMATION Of the 681 privately‐held businesses that responded to the survey, 15% had businesses that involved manufacturing, 12% were in professional, scientific or technical services, another 12% were in business service, followed by construction and engineering (9%). Approximately 50% of businesses have annual revenues less than $1 million. Nearly 89% of business owners report having the enthusiasm to execute growth strategies, yet just 52% report having the necessary financial resources to successfully execute growth strategies. Other findings include: Of the respondents who were seeking financing in the last 12 months, approximately 49% anticipated to raise less than $100,000 in capital. Approximately 47% of respondents reported that they were seeking bank business loans or business credit card financing as a source of funding, followed by friends and family (13%). Of all financing options, bank loans emerged as the financing source with highest “willingness” for small business to use, followed by grants and credit unions. Results also showed that 77% of privately‐held businesses that sought bank loans over the past 12 months were successful. Survey results indicated that business owners who raised capital on average contacted 1.9 banks. Nearly half of small businesses (57%) are planning to hire additional workers. Nearly 22% of respondents believe domestic economic uncertainty is the number one issue small businesses face today, another 21% believe government regulations and taxes is the most important current issue, followed by access to capital (18%). According to small businesses, of those policies most likely to lead to job creation in 2014, increased access to capital emerged as number one (31%) followed by “repeal or modify Affordable Care Act” (21%), and regulatory reform (19%). The study showed that of those that do plan to hire, skilled labor is in greatest demand (47%) followed by sales and marketing skills (44%) and service/customer service (37%). Also, 87% of companies planning to hire indicate they’d need to train those they hire. 37% of respondents believe that general business conditions improved in the twelve months compared to 33% surveyed year ago. Operational and Assessment Characteristics The privately‐held business survey results were generated from 681 participants. The locations of businesses are distributed over all regions of the United States. Figure 104. Respondents Distribution by State 0-2
3-5
6 - 10
11 - 15
16 - 25
26 - 50
51 - 100
more than 100
ME
WA
ND
MT
OR
ID
WY
UT
CO
CA
AZ
MI
IL
KS
OK
NM
TX
IN
OH
RI
NJ
MD
WV
MO
VA
KY
NC
TN
SC
AR
MS
AK
CT
PA
IA
NE
MA
NY
WI
SD
NV
HI
VT NH
MN
AL
GA
LA
FL
© 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 67 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 BUSINESS OWNER cont. Businesses involved in manufacturing accounted for 15% of respondents followed by professional, scientific or technical services (12%) and business services (12%). Figure 105. Description of Entity 3%
Manufacturing
Business services
Professional, scientific or technical services
Finance & real estate
Retail trade
Information technology or services
Educational services
Arts, entertainment or recreation
Forestry, fishing, hunting or agriculture
Transportation and warehousing
Other services
Other
1%
3% 2% 2%
7%
2%
15%
3%
5%
12%
5%
5%
12%
8%
7%
9%
Approximately 49% of businesses have less than or equal to five employees.
Figure 106. Number of Employees 7% 8% 3% 4%
12%
24%
10%
12%
21%
0
1 ‐ 2
3 ‐ 5
6 ‐ 10
11 ‐ 20
21 ‐ 50
51 ‐ 100
101 ‐ 500
more than 500
Approximately 64% of the respondents are active control owners of their businesses.
Figure 107. Ownership Role 1%
Control owner (>50%) who actively operates the business
2%
Control owner (>50%) who passively manages the business
10%
14%
1%
8%
64%
Shared‐control owner (exactly 50%) who actively operates the business
Shared‐control owner (exactly 50%) who passively manages the business)
Non‐control owner (<50%) who actively operates the business
Non‐control owner (< 50%) who passively manages the business
1%
Manager or executive with no ownership interest in the business
Other
© 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 68 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 BUSINESS OWNER cont. Approximately 50% of respondents have less than or equal to $1M in annual revenues, followed by 22% reporting between $1M and $5M. Figure 108. Annual Revenues $0 $1 ‐ $100,000
2%
7%
7%
5% 8%
$100,001 ‐ $500,000
16%
$500,001 ‐ $1,000,000
$1,000,001 ‐ $5,000,000
21%
22%
$5,000,001 ‐ $10,000,000
12%
$10,000,001 ‐ $25,000,000
$25,000,001 ‐ $50,000,000
Greater than $50 million
Average change in annual revenues in the last 12 months was 1.3%. 26%
21%
16%
11%
6%
1%
‐4%
Figure 109. Annual Revenues Change in the Last 12 Months 23%
10%
4%
2% 2% 3%
5% 3% 4%
2% 2%
12%
8%
5% 6% 4%
Decline
2% 2% 3% 1.3%
Increase
On average respondents expect their annual revenues to grow by 7.7% in the next 12 months. Figure 110. Annual Revenues Change Expectations in the Next 12 Months 26%
21%
16%
11%
6%
1%
‐4%
22%
14%
11%
15%
8%
2% 2% 2%
0% 0% 1% 1% 1%
Decline
5% 4%
3% 1%
6% 7.7%
Increase
© 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 69 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 BUSINESS OWNER cont. Approximately 71% of businesses have net income less than or equal to $500,000, 8% of those have negative net income. Figure 111. Net Income 3%
Negative
5% 8%
11%
$0 ‐ $100,000
10%
$100,001 ‐ $500,000
37%
$500,001 ‐ $1,000,000
26%
$1,000,001 ‐ $5,000,000
$5,000,001 ‐ $10,000,000
Greater than 10 million
Approximately 32% of respondents are currently not financed by any external capital sources. Nearly 36% and 22% of respondents’ businesses are financed by bank business loans and business credit card financing, respectively.
Figure 112. Current Sources of Financing 36%
40%
30%
22%
20%
15% 17%
12%
10%
3%
32%
22%
12%
2% 4% 2% 3% 2% 5% 3% 0% 4%
1%
0%
Among the businesses that tried to raise capital in the last 12 months 33% applied for bank business loan and 77% were successful, whereas 35% of respondents didn’t try to raise capital from any source.
Figure 113. Capital Sources Contacted To Raise Capital in the Last 12 Months 40%
35%
30%
25%
20%
15%
10%
5%
0%
35%
33%
13%
6% 8%
7%
1%
11%
14%
7%
4%
4% 5% 3% 5% 6% 6% 4%
1%
© 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 70 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 BUSINESS OWNER cont. Figure 114. Success Rates 89%
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
94%
87%
79%
87% 90%
77%
56%
46%
67%
59%
44% 39%
38%
26%
11%
20%
20%
Among respondents who successfully raised capital the average number of capital providers contacted was 2.9. Figure 115. Average Number of Capital Providers Contacted 7
6
5
4
3
2
1
0
6.14
3.81
4.49
4.13
2.95
1.74 1.88 1.6 2.09 1.89
5.03 4.81 4.89
4.52
4.54
3.75
2.2 2.48
© 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 71 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 BUSINESS OWNER cont. Approximately 75% of respondents attempted to raise less than $1 million in the last 12 months. Figure 116. Amount of Capital Attempted to Raise in the last 12 Months 5%
5%
less than $100,000
4% 2% 1%
$100,000 ‐ $499,999
$500,000 ‐ $999,999
8%
$1 million‐ $1.999 million
49%
7%
$2 million ‐ $4.999 million
19%
$100 million or more
Approximately 31% of respondents took less than 7 days to complete financing process. Figure 117. Average Time to Complete Financing Process in Days 35%
30%
25%
20%
15%
10%
5%
0%
31%
17% 18%
10%
7%
6%
3%
2%
1%
0%
2%
3%
Less 7 days ‐ 15 days 1 ‐ 2 2 ‐ 3 3 ‐ 4 4 ‐ 5 5 ‐ 6 6 ‐ 8 8 ‐ 10 10 ‐ 12 More than 7 15 days
‐ 1 months months months months months months months months than 12 days
month
months
31% of respondents spent less than one day during the process to successfully obtain financing (time spent by all employees and hired outsiders making inquiries, submitting proposals, meeting with capital providers, furnishing documents). Figure 118. Days Spent During the Process to Successfully Obtain Financing 40%
30%
20%
10%
0%
31%
14% 11%
8%
3%
7%
3%
4%
4%
3%
2%
2%
8%
Less 1 day 2 days 3 days 4 days 5 days 6 days 7 days 10 days 11 ‐ 15 16 ‐ 20 21 ‐ 30 More than 1 days days days than 30 day
days
© 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 72 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 BUSINESS OWNER cont. Among those respondents who were not able to obtain external financing in the last 12 months 42% are planning to improve the financial health of their businesses before attempting to raise capital in the future. Figure 119. Next Steps to Satisfy Financial Needs 0%
Improve financial 'health' of the company to obtain …
Look for alternative sources of financing
Continue looking for traditional capital providers
Look for a partner/equity investor
Other
Sell part of a business
Sell a whole business
Cease operations/liquidate
5%
10% 15% 20% 25% 30% 35% 40% 45%
42%
17%
14%
9%
6%
5%
4%
3%
Among those respondents who didn’t attempt to obtain any external financing in the last 12 months 23% said they are waiting for a better financial situation, followed by 21% who mentioned unfavorable conditions as a main reason for not trying to obtain capital. 21% of respondents had no need for external financing. Figure 120. Reasons for Not Trying to Obtain Capital in the Last 12 Months 0%
5%
10%
15%
20%
25%
I am waiting for a better financial situation
23%
No need in external financing
21%
Unfavorable economic conditions
21%
My business would be rejected for funding
18%
No use of external financing at any cost
Ceasing operations / Liquidating
Other
6%
2%
10%
© 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 73 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 BUSINESS OWNER cont. According to the respondents, “bank loans” as a category is the most appealing option to obtain financing, whereas “personal credit card financing” is the least desirable source of capital to obtain. Figure 121. Willingness to Obtain Financing Willing to use 5.0
4.17
4.5
Somewhat willing
4.0
3.5
Neutral
3.0
2.5
2.0
Somewhat unwilling
3.66 3.61
2.58
3.54
2.87
2.59
3.72
3.69
3.45
2.89
2.66
3.04 2.91 3.13 3.03
2.68
1.5
Not willing 1.0
Approximately 47% of respondents indicated increasing revenues from current products or services as the area their businesses are most focused on today. Figure 122. The Most Important Area to Focus On 50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
47%
21%
10%
10%
9%
3%
Increasing revenues Expanding Reducing expenses
from current product/service lines
products/services
Finding talented people
Raising financing/securing capital
Other
© 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 74 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 BUSINESS OWNER cont. Approximately 57% of respondents are planning to hire additional workers in the next twelve months. Figure 123. Plans to Hire Additional Workers in the Next 12 Months 15%
28%
Yes
57%
No
Don't know
Only 42% of privately‐held businesses whose annual revenues are less than $1 million are planning to hire additional workers in the next twelve months. Figure 124. Plans to Hire Additional Workers by Annual Revenues Sizes 100%
80%
60%
67%
84%
78%
73%
62%
42%
40%
20%
0%
Less than $1 $1 million ‐
million
$5 million
$5 million ‐ $10 million ‐ $25 million ‐ Greater than $10 million $25 million $50 million $50 million
Approximately 40% of respondents believe economic uncertainty in the U.S. market is the reason preventing them from hiring, followed by government regulations and taxes (34%). Figure 125. Reasons Preventing Privately‐Held Businesses from Hiring 0%
5%
10% 15% 20% 25% 30% 35% 40% 45%
Economic uncertainty/confidence (domestic)
40%
31%
Consumer/business demand (spending)
25%
Other
25%
Ability to find qualified employees
24%
Access to capital
16%
International economic uncertainty
Inflation
Competitiveness with foreign trade partners
6%
3%
1%
© 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 75 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 BUSINESS OWNER cont. Among those respondents who do expect to hire, 37% are planning to hire one or two additional employees in the next twelve months. Figure 126. Amount of Employees Planned to be Hired 40%
37%
28%
30%
20%
12%
9%
10%
7%
3%
1%
2%
0%
1 ‐ 2
3 ‐ 5
6 ‐ 10
11 ‐ 20
21‐50
51‐100
More than Unknown
100
For those businesses who do plan to hire, skilled labor is in greatest demand (47%) followed by sales and marketing skills (44%) and service/customer service (37%). Figure 127. The Skills in Demand for New Hires 0%
5%
Skilled labor
Sales & marketing
Service/customer service
Management
Finance/financial management
Unskilled labor
Entrepreneurship
Other
Global business
Human resources
10%
15%
20%
25%
30%
35%
40%
45%
50%
47%
44%
37%
28%
25%
24%
17%
14%
12%
8%
8%
87% of business planning to hire indicate they would need to train those they hire. Figure 128. Need for Training of New Hires 13%
Yes
87%
No
© 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 76 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 BUSINESS OWNER cont. According to respondents of those policies most likely to lead to job creation in 2014, increased access to capital emerged as number one (26%) followed by “repeal or modify affordable care act” (21%). Figure 129. Government Policies to Lead to Job Creation Increased access to capital
4% 4%
8%
26%
Repeal or modify Affordable Care Act
18%
Regulatory reform
Tax incentives
21%
19%
Education reform
Increased competitiveness with foreign trade partners
Other
Approximately 15% of respondents indicated their business cost of equity capital is in the range of 8% ‐ 10%. Figure 130. Cost of Equity Capital 15%
16%
14%
12%
12%
10%
9% 9%
10%
8%
4%
2%
6%
5%
6%
3%
4%
3%
2%
3%
1%
1%
2% 2%
1% 1% 1% 1% 1%
0%
© 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 77 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 BUSINESS OWNER cont. Privately‐held businesses with revenues less than $5 million on average have almost the same desire to execute growth strategies (85%) as privately‐held businesses with revenues greater than $5 million. However, privately‐held businesses with smaller revenues report lower levels of necessary resources (people, money, etc.) to grow (45%) as compared to privately‐held businesses with higher revenues (70%). Figure 131. Usage of Financial Analysis by Revenue Sizes 0%
20%
40%
60%
80%
61%
Prepare an annual budget
81%
65%
Have a mission and vision statement made known
Engage in planning beyond the current year
12%
Have an outside board of directors
75%
74%
86%
29%
66%
Have key performance indicators reviewed
64%
Have a solid growth strategy
45%
Have necessary resources (people, money, etc.) to …
86%
85%
70%
85%
Have the desire, drive, and enthusiasm to grow and …
Revenues less than $5 million
120%
85%
44%
Have financial statements audited or reviewed (not …
100%
97%
Revenues more than $5 million
Most of the respondents are planning to transfer their ownership interest in more than five years from now while only 4% plan to transfer their ownership at the first available opportunity. Figure 132. Anticipation of the Ownership Transfer 30%
27%
25%
20%
16%
15%
10%
5%
15%
12%
4%
4%
In less than one year
1 year
6%
7%
2 years
3 years
6%
4%
0%
4 years
5 years
Between Between Between After 20 5 and 10 10 and 15 15 and 20 years
years
years
years
© 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 78 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 BUSINESS OWNER cont. Privately‐held businesses with annual revenues less than $5 million are more concerned about access to capital than those with revenues greater than $5 million. Larger privately‐held businesses are more concerned about government regulations and taxes. Figure 133. The Number One Issue Facing Privately‐Held Businesses Today by Revenue Sizes 0%
5%
10%
15%
20%
25%
30%
22%
23%
21%
24%
Access to capital
18%
14%
14%
14%
Health care costs
9%
10%
5%
5%
5%
5%
Inflation
3%
3%
2%
2%
Other
Figure 134. The Number One Emerging Issue Facing Privately‐Held Businesses by Revenue Sizes 0%
5%
10%
15%
25%
19%
15%
15%
Health care costs
14%
11%
Inflation
10%
9%
Access to capital
6%
Other
20%
2%
© 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 79 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 BUSINESS OWNER cont. Most of respondents indicated slightly increased unit sales and prices of labor and materials, flat access to capital, and slightly improved general business conditions. Table 54. General Business and Industry Assessment: Today Versus Twelve Months Ago Decreased significantly Decreased slightly Stayed about the same
Increased slightly Unit sales 11% 12% 23% 33% 21% 54% 23% 31% Prices of labor and materials 1% 3% 28% 52% 16% 68% 4% 65% Net income 11% 15% 25% 34% 15% 49% 26% 23% Inventory levels 4% 13% 57% 19% 7% 26% 17% 9% Capital expenditures 7% 9% 46% 24% 13% 38% 17% 21% Opportunities for growth 4% 10% 27% 34% 24% 59% 14% 45% Access to bank loans 10% 10% 58% 16% 6% 22% 20% 1% Access to equity capital 10% 10% 58% 17% 6% 23% 20% 3% Prices of your products or services 2% 6% 45% 43% 3% 47% 9% 38% Time to collect receivables 2% 8% 58% 25% 8% 33% 9% 24% Number of employees 2% 8% 62% 23% 5% 27% 10% 17% Competition 1% 8% 53% 28% 9% 38% 9% 28% General business conditions 6% 17% 40% 30% 7% 37% 23% 14% Appetite for risk 5% 13% 52% 25% 4% 29% 19% 11% Probability of business closure 20% 21% 41% 14% 4% 18% 41% ‐23% Time worrying about economy 9% 15% 41% 21% 15% 36% 24% 12% Characteristics Increased % % increase significantly decrease Net increase/ decrease © 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 80 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 BUSINESS OWNER cont. Participants of the survey believe almost all general business characteristics will increase in the next 12 months. Table 55. General Business and Industry Assessment Expectations Over the Next 12 Months Stayed Increased about slightly the same
Decreased slightly Unit sales 1% 4% 21% 47% 27% 74% 5% 69% Prices of labor and materials 0% 2% 30% 60% 8% 68% 2% 67% Net income 2% 8% 21% 45% 24% 70% 9% 61% Inventory levels 1% 9% 55% 26% 9% 35% 10% 25% Capital expenditures 3% 8% 45% 33% 10% 44% 12% 32% Opportunities for growth 2% 5% 26% 40% 27% 67% 7% 59% Access to bank loans 3% 5% 61% 24% 7% 30% 8% 22% Access to equity capital 4% 4% 61% 19% 11% 30% 9% 22% Prices of your products or services 1% 5% 41% 49% 4% 54% 6% 48% Time to collect receivables 1% 6% 73% 18% 3% 21% 7% 14% Number of employees 1% 3% 42% 45% 9% 54% 3% 51% Competition 1% 5% 55% 32% 7% 39% 6% 33% General business conditions 4% 10% 43% 37% 7% 43% 14% 30% Appetite for risk 4% 9% 57% 25% 6% 30% 12% 18% 20% 21% 46% 9% 3% 13% 41% ‐28% 9% 14% 52% 14% 11% 25% 23% 2% Probability of business closure Time worrying about economy Increased % increase % decrease significantly Net increase/ decrease Decreased significantly Characteristics © 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 81 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 ABOUT THE AUTHOR Craig Everett, PhD, MBA Director, Pepperdine Private Capital Markets Project Craig R. Everett is an assistant professor of finance at Pepperdine University Graziadio School of Business and Management and director of the Pepperdine Private Capital Markets Project. His teaching and research interests include entrepreneurial finance, private capital markets, business valuation and behavioral corporate finance. He holds a PhD in finance from Purdue University, an MBA from George Mason University, and a BA in quantitative economics from Tufts University. Dr. Everett is the author of the best‐selling children's fantasy novel, Toby Gold and the Secret Fortune, which incorporates such financial literacy topics as saving, investing, banking, entrepreneurship, interest rates, return on investment, and net worth. 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. Craig Everett is member of the Beta Gamma Sigma Honor Society, Financial Executives International, and the Los Angeles World Affairs Council. Dr. Everett is a certified mergers & acquisitions advisor (CM&AA), and a registered investment advisor (RIA) with the state of California. Contact: [email protected] © 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 82 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 ABOUT PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT A leader in cultivating entrepreneurship and digital innovation, The Graziadio School of Business and Management at Pepperdine University focuses on the real‐world application of MBA‐level business concepts. The Graziadio School provides student‐focused, globally‐oriented education through part‐time, full‐time, and Executive MBA programs at our 5+ Southern California campuses, Northern California campus, as well as through online and hybrid formats. In addition, The Graziadio School offers a variety of Master of Science programs, a Bachelor of Science in Management degree completion program, Presidential and Key Executives MBA and executive education certificate programs. Follow the Graziadio School at www.facebook.com/pepperdine.graziadio and https://twitter.com/graziadioschool © 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 83 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 INDEX OF TABLES Table 1. Private Capital Market Required Rates of Return ............................................................................................. 5 Table 2. Median Deal Multiples by EBITDA Size of Company .......................................................................................... 9 Table 3. Median Total Leverage Multiples by Size of Company ..................................................................................... 10 Table 4. Median Senior Leverage Multiples by Size of Company ................................................................................... 10 Table 5. Balance of Available Capital with Quality Companies ...................................................................................... 12 Table 6. How Difficult to Arrange Senior Debt for Transactions over the Past 12 Months ............................................. 12 Table 7. General Business and Industry Assessment: Today versus 12 Months Ago ...................................................... 12 Table 8. General Business and Industry Assessment Expectations over the Next 12 Months ........................................ 13 Table 9. PEG Fund Data ................................................................................................................................................. 14 Table 10. General Characteristics – Buyout Transactions (medians) .............................................................................. 17 Table 11. General Characteristics – Non‐Buyout Transactions (medians) ...................................................................... 17 Table 12. Deal Multiples Among Industries (medians) .................................................................................................. 18 Table 13. The Balance of Available Capital with Quality Companies for the Following Size ........................................... 20 Table 14. General Business and Industry Assessment: Today versus 12 Months Ago .................................................... 20 Table 15. General Business and Industry Assessment Expectations over the Next 12 Months ...................................... 21 Table 16. All‐in Rates by Loan Size and Industry ........................................................................................................... 23 Table 17. All‐in Rates by Loan Type ............................................................................................................................... 23 Table 18. Senior Leverage Multiple by EBITDA Size ....................................................................................................... 24 Table 19. Fees Charged ................................................................................................................................................. 24 Table 20. Importance of Financial Evaluation Metrics ................................................................................................... 25 Table 21. Financial Evaluation Metrics Average Data .................................................................................................... 25 Table 22. Personal Guarantee and Collateral Percentage of Occurrence by Size of Loan (%) ......................................... 25 Table 23. Applications Data .......................................................................................................................................... 25 Table 24. General Business and Industry Assessment: Today versus 12 Months Ago .................................................... 27 Table 25. General Business and Industry Assessment Expectations over the Next 12 Months ...................................... 28 Table 26. All‐in Rates on Current Asset‐Based Loans (medians) .................................................................................... 29 Table 27. Standard Advance Rate (or LTV ratio) for Assets (%) ...................................................................................... 30 Table 28. Mezzanine Fund Data .................................................................................................................................... 32 Table 29. Sponsored Deals by EBITDA Size (medians) ................................................................................................... 34 Table 30. Investment Type by Size of Investee Company, Sponsored Deals .................................................................. 34 Table 31. Non‐Sponsored Deals by EBITDA Size (medians) ............................................................................................ 35 Table 32. Investment Type by Size of Investee Company, Sponsored Deals .................................................................. 35 Table 33. Importance of Financial Evaluation Metrics ................................................................................................... 36 Table 34. Financial Evaluation Metrics Average Data .................................................................................................... 37 Table 35. General Business and Industry Assessment: Today versus 12 Months Ago .................................................... 38 © 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 84 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 Table 36. General Business and Industry Assessment Expectations over the Next 12 Months ...................................... 38 Table 37. Importance of Factors When Evaluating ........................................................................................................ 43 Table 38. General Business and Industry Assessment: Today versus 12 Months Ago .................................................... 44 Table 39. General Business and Industry Assessment Expectations over the Next 12 Months ...................................... 44 Table 40. VC Fund Data ................................................................................................................................................. 46 Table 41. General Information on Investments by Company Stages ............................................................................. 47 Table 42. General Business and Industry Assessment: Today versus 12 Months Ago .................................................... 50 Table 43. General Business and Industry Assessment Expectations over the Next 12 Months ...................................... 50 Table 44. General Information on Investments by Company Stages ............................................................................. 53 Table 45. General Business and Industry Assessment: Today versus 12 Months Ago .................................................... 56 Table 46. General Business and Industry Assessment Expectations over the Next 12 Months ...................................... 56 Table 47. General Business and Industry Assessment: Today versus 12 Months Ago .................................................... 59 Table 48. General Business and Industry Assessment Expectations over the Next 12 Months ...................................... 59 Table 49. How Difficult to Arrange Senior Debt for Transactions over the Past 12 Months ........................................... 64 Table 50. Median Seller’s Discretionary Earnings (SDE) Deal Multiples by Revenue Size .............................................. 64 Table 51. Median EBITDA Deal Multiples by Revenue Size of Company ....................................................................... 65 Table 52. General Business and Industry Assessment: Today versus 12 Months Ago .................................................... 66 Table 53. General Business and Industry Assessment: Expectations over the Next 12 Months ..................................... 66 Table 54. General Business and Industry Assessment: Today Versus Twelve Months Ago ............................................ 80 Table 55. General Business and Industry Assessment Expectations Over the Next 12 Months ...................................... 81 © 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 85 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 INDEX OF FIGURES Figure 1. Private Capital Market Required Rates of Return ............................................................................................. 4 Figure 2. Private Business Sales Transactions Closed in the Last 12 Months .................................................................... 6 Figure 3. Business Types That Were Involved in the Transactions Closed in the Last 12 Months ..................................... 7 Figure 4. Average Number of Months to Close One Deal ................................................................................................ 7 Figure 5. Private Business Transactions Expected to Close in the Next 12 Months .......................................................... 7 Figure 6. Percentage of Business Sales Engagements Terminated Without Transacting .................................................. 8 Figure 7. Reasons for Business Sales Engagements Not Transacting ................................................................................ 8 Figure 8. Valuation Gap in Pricing for Transactions That Didn’t Close ............................................................................. 8 Figure 9. Usage of Valuation Methods ............................................................................................................................ 9 Figure 10. Usage of Multiple Methods ............................................................................................................................ 9 Figure 11. Components of Closed Deals ........................................................................................................................ 10 Figure 12. Percent of Transactions Involved Strategic and Financial Buyers ................................................................. 11 Figure 13. Premium Paid by Strategic Buyers Relative to Financial Buyers ................................................................... 11 Figure 14. Percent of Transactions Involved Strategic and Financial Buyers ................................................................. 11 Figure 15. Issues Facing Privately‐Held Businesses ........................................................................................................ 13 Figure 16. Typical Investment Size ................................................................................................................................ 14 Figure 17. Type of Business for Investments Planned over Next 12 Months .................................................................. 15 Figure 18. Total Number of Investments Made in the Last 12 Months .......................................................................... 15 Figure 19. Number of Follow‐on Investments Made in the Last 12 Months .................................................................. 15 Figure 20. Number of Total Investments Planned over Next 12 Months ....................................................................... 16 Figure 21. Number of Follow‐on Investments Planned over Next 12 Months ................................................................ 16 Figure 22. Size of Buyout Investments in the Last 12 Months ........................................................................................ 16 Figure 23. Size of Non‐Buyout Investments in the Last 12 Months ................................................................................ 17 Figure 24. Usage of Valuation Approaches .................................................................................................................... 18 Figure 25. Usage of Multiple Methods .......................................................................................................................... 18 Figure 26. Items Required to Close One Deal ................................................................................................................ 19 Figure 27. Exit Plans for Portfolio Companies ................................................................................................................ 19 Figure 28. Issues Facing Privately‐Held Businesses ........................................................................................................ 21 Figure 29. Description of Lending Entity ........................................................................................................................ 22 Figure 30. Participation in Government Loan Programs ................................................................................................ 22 Figure 31. Typical Investment Size ................................................................................................................................ 23 Figure 32. Borrower Motivation to Secure Financing (past 12 months) ......................................................................... 24 Figure 33. Reason for Declined Loans............................................................................................................................ 26 Figure 34. Issues Facing Privately‐Held Businesses ........................................................................................................ 26 © 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 86 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 Figure 35. Industries Served by Asset‐Based Lenders .................................................................................................... 29 Figure 36. Typical EBITDA Sizes for Companies Booked ................................................................................................. 29 Figure 37. Valuation Standards Used to Estimate LTV Ratio .......................................................................................... 30 Figure 38. Asset‐Based Loans Decline Rate ................................................................................................................... 30 Figure 39. SBIC (small business investment) Firms ........................................................................................................ 31 Figure 40. Typical Investment Size ................................................................................................................................ 31 Figure 41. Type of Business for Investments Planned over Next 12 Months .................................................................. 32 Figure 42. Total Number of Investments Made in the Last 12 Months .......................................................................... 32 Figure 43. Number of Follow‐on Investments Made in the Last 12 Months .................................................................. 33 Figure 44. Number of Total Investments Planned over Next 12 Months ....................................................................... 33 Figure 45. Number of Follow‐on Investments Planned over Next 12 Months ................................................................ 33 Figure 46. Size of Sponsored Deals in the Last 12 Months ............................................................................................. 34 Figure 47. Size of Non‐Sponsored Deals in the Last 12 Months ..................................................................................... 35 Figure 48. Borrower Motivation to Secure Mezzanine Funding (past 12 months) ......................................................... 36 Figure 49. Items Required to Close One Deal ................................................................................................................ 36 Figure 50. Issues Facing Privately‐Held Businesses ........................................................................................................ 37 Figure 51. Entity Type ................................................................................................................................................... 39 Figure 52. Assets under Management or Investable Funds ........................................................................................... 39 Figure 53. Current Asset Allocation for "Alternative Assets" (% of total portfolio) ........................................................ 40 Figure 54. Target Asset Allocation for "Alternative Assets" (% of total portfolio) .......................................................... 40 Figure 55. Target Asset Allocation by Assets ................................................................................................................. 40 Figure 56. Annual Return Expectations for New Investments........................................................................................ 41 Figure 57. Assets with the Best Risk/Return Trade‐off Currently ................................................................................... 41 Figure 58. Industry with the Best Risk/Return .............................................................................................................. 42 Figure 59. Geographic Regions of the World Offering the Best Risk/Return Tradeoff Currently .................................... 42 Figure 60. Geographic Regions in the US Offering the Best Risk/Return Tradeoff Currently .......................................... 42 Figure 61. Issues Facing Privately‐Held Businesses ........................................................................................................ 43 Figure 62. Total Number of Investments Made in the Last 12 Months .......................................................................... 45 Figure 63. Number of Follow‐on Investments Made in the Last 12 Months .................................................................. 45 Figure 64. Number of Total Investments Planned over Next 12 Months ....................................................................... 46 Figure 65. Number of Follow‐on Investments Planned over Next 12 Months ................................................................ 46 Figure 66. Type of Business for Investments Planned over Next 12 Months .................................................................. 46 Figure 67. Geographic Location of Planned Investment over Next 12 Months .............................................................. 48 Figure 68. Usage of Valuation Methods ........................................................................................................................ 48 Figure 69. Usage of Multiple Methods .......................................................................................................................... 48 Figure 70. Items Required to Close One Deal ................................................................................................................ 49 Figure 71. Exit Plans for Portfolio Companies ................................................................................................................ 49 © 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 87 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 Figure 72. Current Issues Facing Privately‐Held Businesses ........................................................................................... 49 Figure 73. Total Number of Investments Made in the Last 12 Months .......................................................................... 51 Figure 74. Number of Follow‐on Investments Made in the Last 12 Months .................................................................. 51 Figure 75. Number of Total Investments Planned over Next 12 Months ....................................................................... 52 Figure 76. Number of Follow‐on Investments Planned over Next 12 Months ................................................................ 52 Figure 77. Type of Business for Investments Planned over Next 12 Months .................................................................. 52 Figure 78. Geographic Location of Planned Investment over Next 12 Months .............................................................. 53 Figure 79. Geographical Limit for Investment ............................................................................................................... 54 Figure 80. Usage of Valuation Methods ........................................................................................................................ 54 Figure 81. Usage of Multiple Methods .......................................................................................................................... 54 Figure 82. Items Required to Close One Deal ................................................................................................................ 55 Figure 83. Exit Plans for Portfolio Companies ................................................................................................................ 55 Figure 84. Issues Facing Privately‐Held Businesses ........................................................................................................ 55 Figure 85. Annual Revenues of Companies Valued ....................................................................................................... 57 Figure 86. Usage of Valuation Methods ........................................................................................................................ 57 Figure 87. Usage of Multiple Methods .......................................................................................................................... 58 Figure 88. Average Risk‐Free Rat and Market (equity) Risk Premium and Long‐Term Growth Rate ............................... 58 Figure 89. Discount for Lack of Marketability (DLOM) by Revenue Sizes ....................................................................... 58 Figure 90. Explicit Forecast Period for High‐Growth Companies by Revenue Sizes (years) ............................................ 59 Figure 91. Issues Facing Privately‐Held Businesses ........................................................................................................ 60 Figure 92. Private Business Sales Transactions Closed in the Last Twelve Months ........................................................ 61 Figure 93. Private Business Sales Transactions Expected to Close in the Next Twelve Months ...................................... 61 Figure 94. Average Number of Months to Close One Business Transaction ................................................................... 62 Figure 95. Percentage of Business Sales Engagements Terminated Without Transacting .............................................. 62 Figure 96. Valuation Gap in Pricing for Transactions That Didn’t Close ......................................................................... 62 Figure 97. Reasons for Business Sales Engagements Not Transacting ............................................................................ 63 Figure 98. Usage of Valuation Methods ........................................................................................................................ 63 Figure 99. Usage of Multiples ....................................................................................................................................... 63 Figure 100. Components of Closed Deals ...................................................................................................................... 64 Figure 101. Percent of Transactions Involved Strategic and Financial Buyers ............................................................... 65 Figure 102. Percent of Transactions Involved Platform and Follow‐on Investments ..................................................... 65 Figure 103. Issues Facing Privately‐Held Businesses ...................................................................................................... 66 Figure 104. Respondents Distribution by State ............................................................................................................. 67 Figure 105. Description of Entity ................................................................................................................................... 68 Figure 106. Number of Employees ................................................................................................................................ 68 Figure 107. Ownership Role .......................................................................................................................................... 68 Figure 108. Annual Revenues ........................................................................................................................................ 69 © 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 88 PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | CAPITAL MARKETS REPORT – 2015 Figure 109. Annual Revenues Change in the Last 12 Months......................................................................................... 69 Figure 110. Annual Revenues Change Expectations in the Next 12 Months .................................................................. 69 Figure 111. Net Income ................................................................................................................................................. 70 Figure 112. Current Sources of Financing ...................................................................................................................... 70 Figure 113. Capital Sources Contacted To Raise Capital in the Last 12 Months .............................................................. 70 Figure 114. Success Rates ............................................................................................................................................. 71 Figure 115. Average Number of Capital Providers Contacted ........................................................................................ 71 Figure 116. Amount of Capital Attempted to Raise in the last 12 Months ..................................................................... 72 Figure 117. Average Time to Complete Financing Process in Days ................................................................................. 72 Figure 118. Days Spent During the Process to Successfully Obtain Financing ................................................................ 72 Figure 119. Next Steps to Satisfy Financial Needs ......................................................................................................... 73 Figure 120. Reasons for Not Trying to Obtain Capital in the Last 12 Months ................................................................. 73 Figure 121. Willingness to Obtain Financing ................................................................................................................. 74 Figure 122. The Most Important Area to Focus On ........................................................................................................ 74 Figure 123. Plans to Hire Additional Workers in the Next 12 Months ............................................................................ 75 Figure 124. Plans to Hire Additional Workers by Annual Revenues Sizes ...................................................................... 75 Figure 125. Reasons Preventing Privately‐Held Businesses from Hiring ........................................................................ 75 Figure 126. Amount of Employees Planned to be Hired ................................................................................................ 76 Figure 127. The Skills in Demand for New Hires ............................................................................................................ 76 Figure 128. Need for Training of New Hires .................................................................................................................. 76 Figure 129. Government Policies to Lead to Job Creation ............................................................................................. 77 Figure 130. Cost of Equity Capital ................................................................................................................................. 77 Figure 131. Usage of Financial Analysis by Revenue Sizes ............................................................................................. 78 Figure 132. Anticipation of the Ownership Transfer ...................................................................................................... 78 Figure 133. The Number One Issue Facing Privately‐Held Businesses Today by Revenue Sizes ...................................... 79 Figure 134. The Number One Emerging Issue Facing Privately‐Held Businesses by Revenue Sizes................................. 79 © 2014‐2015| PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 89 EARN A CERTIFICATE
IN PRIVATE CAPITAL MARKETS
The Certificate in Private Capital Markets (CIPCM)
is a three-day curriculum-based training program
developed by Dr. Craig Everett in conjunction with the
ground-breaking research, Pepperdine Private Capital
Market Project.
•Designed for business owners and professionals employed within the finance, banking, investment,
mergers and acquisitions, valuation, management consulting, legal, and accounting fields
•Learn in-depth critical analysis and evaluation skills necessary for successfully operating a business within
the private capital markets
•
•
•
•
•
•
Overview of Private Capital Markets Theory and Sources of Capital
The Role of Intermediaries
Angel Investments, Venture Capital, and Other Early Stage Financing Sources
Senior Debt, Cash Flow-based, Asset-based Lending and Factoring
Mezzanine and Private Equity Capital
Determining the Cost of Capital Using The Pepperdine Private Cost of Capital Model
•CPA, MCLE, CFP Continuing Education Credit Available
June 22-24, 2015
Villa Graziadio Executive Center - Pepperdine University
24255 Pacific Coast Highway, Malibu, CA 90263
REGISTER: bschool.pepperdine.edu/programs/executive-education/cipcm/
Building wealth by making better investment and financing decisions.
PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT
6100 Center Drive, Los Angeles, CA 90045
DON’T
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2015 CAPITAL MARKETS REPORT

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