boyarmiller breakfast forum: the current state of the capital markets 2012

www.boyarmiller.com

The Current State of the Capital Markets Breakfast Forum September 12, 2012

This presentation is provided by AllianceBernstein L.P. Bernstein Global Wealth Management is a unit of AllianceBernstein L.P. This presentation booklet has been provided to you for use in a private and confidential meeting to discuss a potential or existing investment advisory relationship. This presentation is not an advertisement and is not intended for public use or distribution beyond our private meeting. Bernstein does not provide tax, legal or accounting advice. In considering this material, you should discuss your individual

circumstances with professionals in those areas before making any decisions.

Michael U. Ellington, Jr. Senior Vice President

Senior Manager Director

Equity and the Public Markets

Bernstein Adv_All 4Q11_PRINT Bernstein.com

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One business: investment research and management

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Integrity and Honesty

Best-in-Class Research

Success Is Meeting Your Goals

FAGC 2Q 2012 Bernstein.com

(30)

0

30

60

90

Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 Jan 12

Per

cent

89%

25%

36% (16)%

(23)%

(13)%

(24)%

Cumulative Returns 2009–2012: 48.5% YTD 2012: 5.7%

Stocks Are Up Despite Shifting Sentiment…

Past performance does not guarantee future results. *Total returns represented by the MSCI All Country World Index (in USD) Source: FactSet and AllianceBernstein

Global Stock Returns*


37

20

16

1

(12)

(29)

…But Investors Prefer Safety Above All Else

Price/Earnings Change* Since Jan 2011

+41%

+30%

+10%

(41)%

(20)%

(25)%

*12-month forward earnings Source: FactSet, S&P and AllianceBernstein

YoY Earnings Growth Percent

Telecom

Utilities

Healthcare

Consumer Discretionary

Technology

Energy

2012 Cap Markets Bernstein.com

…As Anxieties Keep Rates Near Generational Lows

As of August 17, 2012 Source: Bloomberg, US Department of the Treasury and AllianceBernstein

10-Year US Treasury Yields

0

6

12

18

60 65 70 75 80 85 90 95 00 05 10

Per

cent

1.8%


4.9%

2.9%

2.5%

2.4%

0.0%

(0.5)%

Emerging Markets

Japan

US

Global

UK

Global Economic Growth Remains Slow and Faces Challenges

As of June 30, 2012 Source: AllianceBernstein

AllianceBernstein 2012 Real GDP Growth Forecasts

No near-term resolution

Austerity measures impede growth

Strong consumer/corporate balance sheets

Mixed economic signals

Slowdown in China and Brazil

Euro Area


Regional Austerity/growth balance Need for deeper fiscal

integration Debt monetization/eurobonds

European Sovereign-Debt Crisis: No Quick Solution

GDP Growth Forecast 2012E: Consensus (%)

(1.8)

(1.6)

(0.9)

(0.4)

0.3

0.9

Spain

Italy

0

2

4

6

8

08 09 10 11 12

Perc

ent

Italy

Sovereign 10-Year Bond Yields

Spain

Germany

Euro Area

The situation in the euro area has many aspects and requires significant policy action to resolve

The economic picture varies country by country

Fears persist in sovereign bond markets

France

Germany

Netherlands

As of June 30, 2012 Source: Bloomberg and AllianceBernstein

Country Specific Bloated deficit and debt levels Uncompetitive labor force Hostile economic environments

AllianceBernstein.com

US Consumers Have Reduced Debt Burdens

Household Financial Obligations Ratio

15

16

17

18

19

91 93 95 97 99 01 03 05 07 09 11

Rat

io (×

)

The amount of disposable income used for financial payments; through June 30, 2011 Source: Haver Analytics, McGraw-Hill Construction, US Bureau of Labor Statistics, US Federal Reserve and AllianceBernstein


Job Creation Rising After Slow Recovery

Employment growth through February 29, 2012; financial obligations ratio through December 31, 2011. Source: Haver Analytics, McGraw-Hill Construction, US Bureau of Labor Statistics, US Federal Reserve and AllianceBernstein

Household Employment Rolling Six-Month Total

(6)

(3)

0

3

91 94 97 00 03 06 09 12

Milli

ons

of J

obs


2

4

6

8

10

12

14

82 86 90 94 98 02 06 10

Per

cent

Strong Balance Sheets: Potential for Shareholder Friendly Uses

US cash/assets as of December 31, 2011 S&P 500 Index ex-financials Source: FactSet, Standard & Poor’s and AllianceBernstein

US Cash/Assets

Uses of Cash: Increased

dividends Share buybacks Capital investment M&A


Earnings Growth Slowing but Still Positive

Earnings per share data as of July 31, 2012 Consensus earnings estimates 1Q:2012 through 1Q:2013 Source: FactSet, Standard & Poor’s and AllianceBernstein

S&P 500 Quarterly Earnings Per Share* USD

(30)

(20)

(10)

0

10

20

30

Mar 07 Mar 09 Mar 11 Mar 13

2Q: 2012

Estimates


As of July 31, 2012 Data do not represent past performance and are not a promise of actual future results or a range of future results. Based on 10,000 simulated trials using the Bernstein Capital Markets Engine; Bonds are represented by 60% global investment-grade bonds and 40% global sovereign bonds; stocks are represented by a universe similar to the MSCI World Index. Both are reported in and hedged into US dollars. Source: Barclays Capital, Bloomberg, MSCI and AllianceBernstein

Estimated Annual Return Premium: Stocks over Bonds

5.1%

2.5%

July 31, 2012

Normal

Stocks Have High Expected Returns Relative to Bonds

Next 10 Years


We’ve Seen This Before

THE DEATH

OF EQUTIES

“How inflation is destroying

the stock market”

August 13, 1979

AllianceBernstein.com 2012 Cap Markets

Average: 5.8%

(1.6)%

(3.8)% (4.9)%

(4.1)%

(2.4)% (3.0)%

(1.4)% (2.5)% (2.2)%

(0.3)% (0.3)%

5.4% 6.9%

4.5% 6.3%

11.2%

6.8%

4.1% 4.8% 5.1% 4.7% 4.0%

1932 1937 1938 1939 1940 1974 1975 1977 1978 1979 1982

Stocks Roared Back After Each Decade that They Lagged

S&P 500 Return Minus 10-Year Treasury Return

Includes all 10-year rolling periods when the S&P 500 lagged 10-year Treasury bonds from 1901 through the beginning of the 2008 credit crunch; the average is for the green bars Source: Global Financial Data, Standard & Poor’s, and AllianceBernstein

Past 10 Years Next 10 Years

SIO_Individuals_2011_PRINT Bernstein.com

94 96 98 00 02 04 06 08 10

Chasing Performance Leads to Bad Decisions

US Equity Example 1994–2011

1Q:2000 +$142 Bil.

3Q:2002 $(72) Bil.

As of December 31, 2011 Past performance does not guarantee future results. Fund flows represented by total net new cash flow into US equity funds. Source: BusinessWeek, Investment Company Institute, Standard & Poor’s and AllianceBernstein

Growth of $1 Mil.

Average Quarterly Fund Flows: $23.8 Bil. 4Q:2008

$(109) Bil.

3Q:2011 $(74) Bil.

SIO_Individuals_2011_PRINT Bernstein.com

9.1%

Index Return

Annualized Returns 1991–2010

Inflation: 2.6%

These Biases Cost the Average Investor

Past performance does not guarantee future results. There can be no assurance that working with a financial advisor will improve investment results. Investors cannot invest directly in indexes. Average equity investor and average bond investor performances were used from the Dalbar study “Quantitative Analysis of Investor Behavior” (QAIB), 2011. QAIB calculates investor returns as the change in assets after excluding sales, redemptions and exchanges. This method of calculation captures realized and unrealized capital gains, dividends, interest, trading costs, sales charges, fees, expenses and any other costs, annualized over the period. The Standard & Poor’s 500 Index (S&P 500) is an unmanaged index of 500 common stocks generally representative of the US stock market. Inflation is measured by the Consumer Price Index (CPI). Source: Dalbar, Inc., “Quantitative Analysis of Investor Behavior,” 2011

3.8%

Average Individual Investor Return

–5.3%

US Stocks

FAN Value Investing Opportunity Bernstein.com

Opportunity, Yes. But Where Is the Catalyst?

Sustained outperformance probably requires economic clarity

Odds of economic catastrophe reduced

Malaise continues, and uncertainty about sustainable rate of growth remains high

Performance highly leveraged to small changes in perceived growth rates

Investor conviction in valuation as a catalyst is hostage to uncertainty

What to do?

Uncertain outlooks and attractive valuations go hand in hand— we cannot remain true to our discipline and avoid it

Temper uncertainty with evidence of current success and balance-sheet strength


Disclosure

MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This presentation is not approved, reviewed or produced by MSCI.


Notes on Dynamic Asset Allocation Simulation Results

The asset allocation framework discussed in this presentation is a new strategy for which actual data are not yet available. The portfolios and their performance are hypothetical and do not represent the investment performance or the actual accounts of any investors or any mutual funds. The securities in these hypothetical portfolios were selected with the full benefit of hindsight, after their performance over the period shown was known. The results achieved in our simulations do not guarantee future investment results. The model performance information in this presentation is based on the back-tested performance of hypothetical investments over the time periods indicated. “Back-testing” is a process of objectively simulating historical investment returns by applying a set of rules for buying and selling securities, and other assets, backward in time, testing those rules, and hypothetically investing in the securities and other assets that are chosen. Back-testing is designed to allow investors to understand and evaluate certain strategies by seeing how they would have performed hypothetically during certain time periods. It is possible that the markets will perform better or worse than shown in the projections; that the actual results of an investor who invests in the manner these projections suggest will be better or worse than the projections; and that an investor may lose money by investing in the manner the projections suggest. The projections assume the reinvestment of dividends and include transaction costs of 0.6% for purchases and sales of equities and bonds and 1.0% for real estate investment trusts (REITs). For equity and bond derivatives, we assume total one-way transaction costs and cost of financing of 0.5%. We assume no deduction for advisory fees, and that assets are allocated in the manner the projections suggest for nearly 40 years and are rebalanced monthly. Although the information contained herein has been obtained from sources believed to be reliable, its accuracy and completeness cannot be guaranteed. While back-testing results reflect rigorous application of the investment strategy selected, back-tested results have certain limitations and should not be considered indicative of future results. In particular, they do not reflect actual trading in an account, so there is no guarantee that an actual account would have achieved these results shown. Back-tested results also assume that asset allocations would not have changed over time and in response to market conditions, which might have occurred if an actual account had been managed during the time period shown. AllianceBernstein L.P. may have a different investment perspective and maintain different asset allocations or other recommendations from those shown here.


Notes on Wealth Forecasting System

1. Purpose and Description of Wealth Forecasting Analysis

Bernstein’s Wealth Forecasting Analysis is designed to assist investors in making their long-term investment decisions as to their allocation of investments among categories of financial assets. Our planning tool consists of a four-step process: (1) Client-Profile Input: the client’s asset allocation, income, expenses, cash withdrawals, tax rate, risk-tolerance level, goals and other factors; (2) Client Scenarios: in effect, questions the client would like our guidance on, which may touch on issues such as when to retire, what his cash-flow stream is likely to be, whether his portfolio can beat inflation long-term, and how different asset allocations might impact his long-term security; (3) The Capital-Markets Engine: our proprietary model that uses our research and historical data to create a vast range of market returns, which takes into account the linkages within and among the capital markets, as well as their unpredictability; and finally (4) A Probability Distribution of Outcomes: based on the assets invested pursuant to the stated asset allocation, 90% of the estimated ranges of returns and asset values the client could expect to experience are represented within the range established by the 5th and 95th percentiles on “box-and-whiskers” graphs. However, outcomes outside this range are expected to occur 10% of the time; thus, the range does not establish the boundaries for all outcomes. Expected market returns on bonds are derived taking into account yield and other criteria. An important assumption is that stocks will, over time, outperform long bonds by a reasonable amount, although this is in no way a certainty. Moreover, actual future results may not meet Bernstein’s estimates of the range of market returns, as these results are subject to a variety of economic, market and other variables. Accordingly, the analysis should not be construed as a promise of actual future results, the actual range of future results or the actual probability that these results will be realized. The information provided here is not intended for public use or distribution beyond our private meeting.

2. Rebalancing

Another important planning assumption is how the asset allocation varies over time. We attempt to model how the portfolio would actually be managed. Cash flows and cash generated from portfolio turnover are used to maintain the selected asset allocation between cash, bonds, stocks, REITs and hedge funds over the period of the analysis. Where this is not sufficient, an optimization program is run to trade off the mismatch between the actual allocation and targets against the cost of trading to rebalance. In general, the portfolio allocation will be maintained reasonably close to its target. In addition, in later years, there may be contention between the total relationship’s allocation and those of the separate portfolios. For example, suppose an investor (in the top marginal federal tax bracket) begins with an asset mix consisting entirely of municipal bonds in his/her personal portfolio and entirely of stocks in his/her retirement portfolio. If personal assets are spent, the mix between stocks and bonds will be pulled away from targets. We put primary weight on maintaining the overall allocation near target, which may result in an allocation to taxable bonds in the retirement portfolio as the personal assets decrease in value relative to the retirement portfolio’s value.


Cash Equivalents Three-month Treasury bills 100% Intermediate-Term Diversified Municipals AA-rated diversified municipal bonds with a seven-year maturity 30% US Value S&P/Barra Value Index 15% US Growth S&P/Barra Growth Index 15% Developed International MSCI EAFE Unhedged 15% Emerging Markets MSCI Emerging Markets Index 20%


3. Expenses and Spending Plans (Withdrawals)

All results are generally shown after applicable taxes and after anticipated withdrawals and/or additions, unless otherwise noted. Liquidations may result in realized gains or losses, which will have capital gains tax implications.

4. Modeled Asset Classes

The following assets or indexes were used in this analysis to represent the various model classes:

5. Volatility

Volatility is a measure of dispersion of expected returns around the average. The greater the volatility, the more likely it is that returns in any one period will be substantially above or below the expected result. The volatility for each asset class used in this analysis is listed on the Capital Markets Projections page at the end of these Notes. In general, two-thirds of the returns will be within one standard deviation. For example, assuming that stocks are expected to return 8.0% on a compounded basis and the volatility of returns on stocks is 17.0%, in any one year it is likely that two-thirds of the projected returns will be between (8.9)% and 28.0%. With intermediate government bonds, if the expected compound return is assumed to be 5.0% and the volatility is assumed to be 6.0%, two-thirds of the outcomes will typically be between (1.1)% and 11.5%. Bernstein’s forecast of volatility is based on historical data and incorporates Bernstein’s judgment that the volatility of fixed income assets is different for different time periods.

6. Technical Assumptions

Bernstein’s Wealth Forecasting System is based on a number of technical assumptions regarding the future behavior of financial markets. Bernstein’s Capital Markets Engine is the module responsible for creating simulations of returns in the capital markets. These simulations are based on inputs that summarize the current condition of the capital markets as of December 31, 2009. Therefore, the first 12-month period of simulated returns represents the period from December 31, 2009, through December 31, 2010, and not necessarily the calendar year of 2009. A description of these technical assumptions is available on request.

Asset Class Modeled As Annual Turnover Rate


7. Tax Implications

Before making any asset allocation decisions, an investor should review with his/her tax advisor the tax liabilities incurred by the different investment alternatives presented herein, including any capital gains that would be incurred as a result of liquidating all or part of his/her portfolio, retirement-plan distributions, investments in municipal or taxable bonds, etc. Bernstein does not provide tax, legal, or accounting advice. In considering this material, you should discuss your individual circumstances with professionals in those areas before making any decisions.

8. Tax Rates

Bernstein’s Wealth Forecasting Analysis has used the following tax rates for this analysis:


Federal Income Federal Capital State Income State Capital Taxpayer Scenario Start Year End Year Tax Rate Gains Tax Rate Tax Rate Gains Tax Rate Tax Method Type

Sample Current 2010 2010 35.00% 15.00% 6.00% 6.00% User Defined Sample Current 2011 2012 39.60% 20.00% 6.00% 6.00% User Defined Sample Current 2013 2039 43.40% 23.80% 6.00% 6.00% User Defined

The federal income tax rate represents Bernstein's estimate of either the top marginal tax bracket or an "average" rate calculated based upon the marginal rate schedule. The federal capital gains tax rate is represented by the lesser of the top marginal income tax bracket or the current cap on capital gains for an individual or corporation, as applicable. Federal tax rates are blended with applicable state tax rates by including, among other things, federal deductions for state income and capital gains taxes. The state tax rate generally represents Bernstein's estimate of the top marginal rate, if applicable.



9. Assumptions: Capital Market Statistics

Data do not represent any past performance and are not a guarantee of future specific risk levels or returns or any specific range of risk levels or returns. Based on 10,000 simulated trials each consisting of 30-year periods Reflects AllianceBernstein’s estimates and the capital market conditions of December 31, 2009

Cash Equivalents 3.5% 3.8 3.8 0.3 10.1

Int.-Term Diversified Municipal 3.4 3.7 3.6 4.0 7.5

US Value 8.8 10.3 3.4 17.8 14.7

US Growth 8.4 10.3 2.1 20.2 15.7

Developed International 9.2 11.4 3.4 21.3 16.4

Emerging Markets 7.2 11.1 2.7 29.1 25.3

Inflation 2.9 3.1 n/a 1.2 9.5

Median Mean Mean One- 30-Year Annual 20-Year Annual Annual Year Equivalent Growth Rate Return Income Volatility Volatility

AllianceBernstein.com 2012 Cap Markets


26

The Bernstein Wealth Forecasting SystemSM (WFS) is designed to assist investors in making a range of key decisions, including setting their long-term allocation of financial assets. The WFS consists of a four-step process: (1) Client Profile Input: the client’s current assets, income, expenses, cash withdrawals, tax rate, risk tolerance, goals, and other factors; (2) Client Scenarios: in effect, questions the client would like our guidance on, which may touch on issues such as which vehicles are best for intergenerational and philanthropic giving, what his/her cash-flow stream is likely to be, whether his/her portfolio can beat inflation long term, when to retire, and how different asset allocations might impact his/her long-term security; (3) The Capital Markets Engine: our proprietary model that uses our research and historical data to create a vast range of market returns, taking into account the linkages within and among the capital markets (based on indexes, not Bernstein portfolios), as well as their unpredictability; and (4) A Probability Distribution of Outcomes: based on the assets invested pursuant to the stated asset allocation, 90% of the estimated returns and asset values the client could expect to experience, represented within a range established by the 5th and 95th percentiles of probability. However, outcomes outside this range are expected to occur 10% of the time; thus, the range does not establish the boundaries for all outcomes. Further, we often focus on the 10th, 50th, and 90th percentiles to represent the upside, median, and downside cases. Asset-class projections used in this presentation reflect initial market conditions as of March 31, 2012. They include the following median forecasts of 40-year compound rates of return: US diversified stocks (represented by the S&P 500 Index), 8.7%; US value stocks (represented by the S&P/Barra Value Index), 9.0%; US growth stocks (represented by the S&P/Barra Growth Index), 8.5%; US SMID stocks (represented by the Russell 2500 Index), 8.8%; developed international stocks (represented by the Morgan Stanley Capital International [MSCI] EAFE Index of major markets in Europe, Australasia, and the Far East, with countries weighted by market capitalization and currency positions unhedged), 9.3%; emerging markets stocks (represented by the MSCI Emerging Markets Index), 7.6%; municipal bonds (represented by AA-rated diversified municipal bonds with seven-year maturities), 4.5%; and inflation (represented by the Consumer Price Index), 3.4%. Expected total returns on bonds are derived taking into account yield and other criteria. Globally diversified equity portfolios comprise an annually rebalanced mix of 21% US diversified stocks, 21% US value stocks, 21% US growth stocks, 7% US SMID stocks, 22.5% developed international stocks, and 7.5% emerging markets stocks. An important assumption is that stocks will, over time, outperform long-term bonds by a reasonable amount, although this is by no means a certainty. Moreover, actual future results may not be consonant with Bernstein’s estimates of the range of market returns, as these returns are subject to a variety of economic, market, and other variables. Accordingly, this analysis should not be construed as a promise of actual future results, the actual range of future results, or the actual probability that these results will be realized.


Disclosures and Important Information

Disclosure on Security Examples References to specific securities are presented to illustrate the application of our investment philosophy only and are not to be considered recommendations by AllianceBernstein. The specific securities identified and described in this presentation do not represent all of the securities purchased, sold or recommended for the portfolio, and it should not be assumed that investments in the securities identified were or will be profitable. Upon request, we will furnish a listing of all investments made during the prior one-year period. Past performance is not a guide to future performance. Additional Information The value of investments and the income from them can fall as well as rise and you may not get back the original amount invested. The value of non-domestic securities may be subject to exchange-rate fluctuations. The views and opinions expressed in this presentation are based on AllianceBernstein’s internal forecasts and should not be relied upon as an indication of future market performance or any guarantee of return from an investment in any AllianceBernstein services. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This presentation is not approved, reviewed or produced by MSCI.

Private Equity & Merger and Acquisition Update

Cliff Atherton Managing Director

Total Debt Multiples

Source: GF Data for 1,439 transactions between $10 million and $250 million

2.3x 1.8x

2.2x 2.3x 2.2x

1.0x

1.1x 0.8x

0.9x 1.1x

0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

3.0x

3.5x

2008 2009 2010 2011 2012 1H

Senior Debt / EBITDA Sub Debt / EBITDA

3.3X

Total debt multiples in middle market transactions have returned to pre-crash (2008) levels

3.3X

Average equity investment in middle market deals remained in the 48% - 50% range in the first half of 2012, 3% above pre-crash levels but less than necessary in 2009-2010

Equity and Debt as a % of Total Enterprise Value (TEV)


6.0x 6.0x 5.9x

6.1x 6.2x

165

89

169 158

150

0

50

100

150

5.0x

5.4x

5.8x

6.2x

2008 2009 2010 2011 2012*

TEV/Adj. EBITDA Deals/Year

Average multiples in middle market deals reached 6.2 times in 2012 while the number of deals has been falling since 2010

Average Multiples and Deal Volume

*2012 1H number of deals is annualized


Multiples increase as you move from the lower end to the upper end of the middle market

Buyout Multiples within the Middle Market by Deal Size


Middle Market deals normally represent more than 30% of Total Deal Value and 80% to 90% of Deal Volume (# of Transactions)

*Through 6/30/2012 Source: PitchBook

Percentage of Total Deals

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2004 2005 2006 2007 2008 2009 2010 2011 2012*

Value of Deals Under $250MM Value of Deals $250MM to $2.5BB Number of Deals Under $250MM*

Deal Value in 2010 & 2011 for all transactions matched 2008

$76 $147 $219 $300 $491 $817 $345 $151 $336 $344

858

1,227

1,694

2,029

2,545

3,035

2,229

1,411

1,870 1,893

-

500

1,000

1,500

2,000

2,500

3,000

3,500

$-

$100

$200

$300

$400

$500

$600

$700

$800

$900

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Capital Invested ($B) # of Deals Closed

Billions

Source: PitchBook

# of Deals

…but the Trend in 2012 is to lower value and fewer deals

$76 $147 $219 $300 $491 $817 $345 $151 $336 $344

858

1,227

1,694

2,029

2,545

3,035

2,229

1,411

1,870 1,893

-

500

1,000

1,500

2,000

2,500

3,000

3,500

$-

$100

$200

$300

$400

$500

$600

$700

$800

$900

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Capital Invested ($B) # of Deals Closed

Billions

Source: PitchBook

167 106

978

666

0

200

400

600

800

1,000

$0

$50

$100

$150

$200

1H 2011 1H 2012

Billions # of Deals

# of Deals

Estimate of Uninvested Private Equity Capital =$432 Billion

PE Firms will be busy. They hold more than 4,000 portfolio companies purchased in 2008 or earlier, and they have more than 8 quarters worth of dry powder to invest

Portfolio Companies by Year of Investments

Source: PitchBook

0

1,000

2,000

3,000

4,000

5,000

6,000

2000 to

2004

2005 to

2008

2009 to

2012

Energy drives Houston’s economy and the world’s, so it will continue to be an active space

…all wealth creating economic activities require some form of energy and involve manipulations of matter and/or information. -Eric Beinhocker, The Origin of Wealth

Energy is a sector of consistent interest for PE Firms

*Through 6/30/2012

*

Source: PitchBook

Business Products and Services (B2B)

Consumer Products and Services (B2C)

Energy ($ in billions)

Financial Services

Healthcare

Information Technology

Materials and Resources

U.S. Rig Count vs. OSX Index vs. Oil Prices

Historically, the Rig Count has followed the OSX…but not lately

$0

$100

$200

$300

$400

0

600

1,200

1,800

2,400

Aug-07 Aug-08 Aug-09 Aug-10 Aug-11 Aug-12

Rig Count - Total US OSX Index

U.S. Rig Count vs. OSX Index (July 20, 2007 – July 20, 2012)

The OSX actually tracks very closely with Oil Prices. The question is “How will the current gap between the Rig Count and OSX be closed?”

$0

$100

$200

$300

$400

0

600

1,200

1,800

2,400


Rig Count - Total US OSX Index WTI Crude (ICE) X 2.5

The prices of a BTU have diverged dramatically. The current oil-price of an BTU is 5.8x the gas-price of a BTU

0

1

2

3

4

5

6

7

8

9

10

$0

$5

$10

$15

$20

$25

$30


Natural Gas - Henry Hub (NYMEX) WTI ($/MBTU) Oil/Gas Price Ratio

2.9

16.7

$ per BTU Oil price to gas price ratio

Observations on Due Diligence and Deal Terms Sellers should always know more than the Buyer about their own accounting….but

they don’t 2009 performance…or 2010 depending on the industry…provides a measure of

management skills to navigate adverse market conditions

Credit standards and underwriting are tougher even though debt multiples are up and interest rates are down (Minsky’s Hedge Lending)

Seller debt is still a major source of subordinated debt. The yield is hard to beat. The Risk?

Back-end payments are replacing Earnouts:

• A bonus of $X million upon exit after the sponsor has achieved a negotiated cash-on-cash return (e.g. 3X)

Real Estate Finance John Fenoglio Executive Vice President

CB

RE

Capital M

arkets

Commercial Real Estate

Debt Market Overview

CB

RE

Capital M

arkets

3.5%

10.0%

24.2%

14.8%13.4%

34.0%

Banks & Thrifts Life Insurance Companies

Agency- and GSE-back mortgage pools CMBS, CDO, and other ABS issues

Other State and Local Government

U.S. Commercial & Multifamily Debt Outstanding By Capital Source Total $2.37 Trillion

Source: Mortgage Bankers Association, Q1 2012

CB

RE

Capital M

arkets

Debt Capital Markets Update Life Companies

• Life Co. volume +/-$45 Billion in 2011 – expect higher allocations in 2012 • Large loans and portfolio loans are in demand • More conservative, but great execution • Forwards returning

CMBS

• CMBS is stepping up again (secondary markets / B assets) - $33 Billion in 2011 • CMBS spreads and rates have moved in – 4.75%-5.10% or less (10 year term) • Higher LTV’s, but for a price • 15+ active lenders in the market

Banks

• Using the balance sheet again • May offer longer term loans and non-recourse for stable assets • Most active in 5-7 year terms

GSE’s (Freddie and Fannie)

• $40B plus volume in 2011, more expected in 2012 • Great execution in primary, secondary and some tertiary cities • Market share declining with competition • Uncertain future

CB

RE

Capital M

arkets

Current Debt Pricing

Source: Valerie Achtemeier, CBRE Debt & Equity Finance. As of 7/6/2012.

CB

RE

Capital M

arkets

Delinquency Rates

Source: MBA, ACLI, Wells Fargo, Fannie Mae, Freddie Mac, OFHEO and FDIC, Q1 2012

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Loan Maturities

Source: Mortgage Bankers Association, Q4 2011. Updated Annually.

By Investor Type

Loan Maturities by Investor Type

0

50

100

150

200

250

Matured 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Later

$ Billions

CMBS, CDO or the ABS Life Insurance CompaniesFannie Mae, Freddie Mac, FHA, and Ginnie Mae Credit Companies, Warehouse and Other

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Source: CBRE Research and RCA Troubled Assets Radar, June 2012

Top Metros Leading Distress Space The Metros below account for 67% of distressed and potentially troubled assets:

0 5 10 15 20 25 30 35 40 45

New York

Los Angeles

Las Vegas

South Florida

SF Metro

Washington,…

Chicago

Phoenix

Atlanta

Dallas/Ft.…

Boston

Philadelphia

Houston

Honolulu

Seattle

Detroit

Est. Asset Value ($ Billions)

Distressed

Potentially Troubled

Equity Overview

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Investor Composition

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Real Estate Investment

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Capital Raising Activity Remains Strong

• REITs continued to actively raise capital in the public equity and debt markets in the first half of the year, putting them on track to match or surpass last year’s record for the annual amount of capital raised. REITs raised a total of $33.21 billion in the first half, including $22.36 billion in equity offerings and $10.85 billion in unsecured debt offerings.

• By comparison, the U.S. REIT industry raised $51.28 billion in all of 2011, including $37.49 billion in equity and $13.79 billion in debt. REIT industry balance sheets also remained strong.

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Direct Investment Fundraising Hits Highest First-Quarter

Investment In Publicly Registered DPPs, Non-Listed REITs & BDCs

($ in millions)

1st Qtr. 2010

1st Qtr. 2011

1st Qtr. 2012

REAL ESTATE

Equity LPs/LLCs $ 0.0 $ 0.0 $ 0.0

Mortgage Loan LPs/LLCs

1.0 2.0 1.2

Equity NL-REITs 1,631.9 2,150.7 2,407.5

Mortgage NL-REITs 12.5 41.7 146.3

Total Real Estate $ 1,645.4 $ 2,194.4 $ 2,555.0

Level since 1980’s

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Commercial Real Estate • A recent survey of the Pension Real Estate Association (PREA), covering

some $2.4 trillion in assets under management, finds that real estate holdings represent about ten percent (10%) of the total assets of the surveyed fiduciary managers.

• State pension systems shifted 10% of their assets from public equities to

alternatives (32% being commercial real estate)over the five years ending June 30, 2011, keeping other asset class weights largely unchanged.

• The median returns for real estate (7.3%) year are very attractive 10 year

outcomes, particularly compared to U.S. stocks and bonds.

• Institutional investors will increase their allocations to real estate and infrastructure from 5-10% to 25% within the next decade, according to a new report from JP Morgan Asset Management.

• Recent changes in asset allocations have largely involved tactical shifts

between bonds and equities, according to the report. But uncertainty, heightened volatility and slower growth had strengthened a structural tilt towards real assets – including real estate, infrastructure and timberland.

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Commercial real estate volume up 17% during first half of 2012

• According to data release by Real Capital Analytics, U.S. commercial real estate sales totaled $108.8 billion during the first half of 2012. RCA notes that excluding mergers and acquisitions activity recorded a year ago, first half volume is up 17% - driven by a 53% increase in portfolio activity and a 10% increase in sales of individual properties.

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Transaction Volume – by Seller Capital Type

* Through Q1 2012 Source: Real Capital Analytics

Cross-Border, 15.2%

Inst'l/Eq Fund, 26.2%

Listed/REITs, 7.7%

Private, 40.7%

User/other, 7.1% Unknown, 3.1%

Cross-Border Inst'l/Eq Fund Listed/REITs Private User/other Unknown

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Transaction Volume – by Buyer Capital Type

* Through Q1 2012 Source: Real Capital Analytics

Cross-Border, 9.9%

Inst'l/Eq Fund, 24.8%

Listed/REITs, 15.4%

Private, 40.2%

User/other, 6.4%

Unknown, 3.2%

Cross-Border Inst'l/Eq Fund Listed/REITs Private User/other Unknown

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Capital Markets Concerns

1) U.S. NATIONAL DEBT CLOCK

• The Outstanding Public Debt as of 06 Sep 2012 at 07:22:48 PM GMT is:

• The estimated population of the United States is 313,456,308 so each citizen's share of this debt is $51,092.93.

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Capital Markets Concerns

2)

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Capital Markets Concerns 3) Between a Mountain of Debt and a Fiscal Cliff:

Finding a Smart Path Forward

4)

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Capital Markets Summary • Interest rates and cap rates are near historical lows • Commercial real estate capital is available but disciplined; there are no

“reckless” sources of capital as in past cycles (yet!) • Overbuilding is not on the horizon due to large equity requirements and

disciplined lending practices • Core assets are in great demand by equity investors and lenders • Opportunistic and distressed assets continue to attract capital in the search

for yield • Low yields on alternative asset classes keep commercial real estate as a

favored asset class as yields have proven to be higher than other classes • Houston is a favored market by lenders and equity investors due to our great

job growth and excellent supply/ demand dynamics • The tepid national economy should keep Houston in a “favored nation” status

for the near term future • These conditions will not last forever. You never see it coming, so get it while

you can!!!

Commercial Banking Hank Holmes Executive Vice President President, Texas Region

Operating in a Heightened Regulatory Environment

New regulations heighten oversight and compliance standards for banks of all sizes, effectively attempting childproof the industry

Dodd-Frank is 7,224 pages of new regulation that, laid end to end, would be five times the height of the Empire State Building

Managing the new regulation is a significant burden, particularly for America’s median size banks, which have an average only 37 employees

With a smaller base to absorb these rising cost of regulatory compliance, banks will either be forced to partner with larger institutions, focus on expenses, increase costs for customers, or both

Basel III fundamentally changes the way banks calculate their regulatory capital requirements

By increasing the required minimum levels of capital, banks will be forced to limit credit extension to certain asset types or increase interest expense to borrowers unilaterally

Operating in a Heightened Regulatory Environment (cont’d)

Changing the math:

Required capital ratios will face a denominator effect

By increasing the denominator and narrowing the definition of capital, banks will be required to hold more capital in order to maintain required capital ratios, which are being heightened

For example, single family primary residence mortgages will double in weighting, resulting in bank’s hindered desire to originate those loans, which could increase rates on mortgages

Bottom line: less credit for borrowers, more expensive yields

Required Capital Ratios = Risk Weighted Assets (increased)

Bank Capital (narrowed)

Accessing Capital in a More Stringent Credit Environment

Many individuals and corporations have de-levered in addition to using the protracted low interest rate environment to decrease debt service obligations

Banks are attracted to established, conservative operators who maintain significant equity in their companies and/or assets

A chicken and the egg dilemma emerges

Improving Asset Quality

Banks Reduce Loan-Loss Provisions to Five-Year Low Banks set aside $14.2 billion in provisions for loan

losses in the second quarter, a $5 billion (26.2%) decline from second quarter 2011, and is the smallest quarterly total in five years.

Net Charge-Offs Decline Across All Loan Categories Net charge-offs totaled $20.5 billion in the second

quarter, an $8.4 billion (29.1%) reduction from second quarter 2011. This is the eighth consecutive quarter that charge-offs have declined from year-earlier levels and represents the lowest quarterly charge-off total since first quarter 2008.

Noncurrent Loan Balances Continue to Fall Noncurrent loan balances (loans 90 days or more

past due or in nonaccrual status) declined for a ninth consecutive quarter, falling by $12.9 billion (4.2%). Noncurrent levels fell in all major loan categories. The largest declines occurred in real estate.

Source: FDIC

http://www2.fdic.gov/qbp/2012jun/chart5.htm

Number of FDIC Insured Institutions Decreasing

More Than a Year Since Last New Charter, Number of Problem Banks Declining During the second quarter, the number of insured

institutions reporting financial results declined from 7,308 to 7,246.

Forty-five institutions were merged into other institutions and 15 institutions failed.

This is the fourth quarter in a row in which no new charters have been added. It has been more than six quarters since the last charter was created other than to absorb a failing bank.

The number of full-time equivalent employees at FDIC-insured institutions increased from 2,102,280 to 2,108,200.

The number of institutions on the FDIC’s “Problem List” fell for a fifth consecutive quarter, from 772 to 732. Total assets of “problem” institutions declined from $291 billion to $282 billion.

Source: FDIC

http://www2.fdic.gov/qbp/2012jun/chart8.htm

U.S. Financial Institutions Mergers & Acquisitions

Deals by Target Asset – Cycles Change Little 2012 YTD 65% of deals YTD have been for banks with assets

less than $250MM 82% of deals YTD have been for banks with assets

less than $500MM P/TBV rises with increase in asset size

Since 2005 72% of deals YTD have been for banks with assets

less than $250MM 84% of deals YTD have been for banks with assets

less than $500MM P/TBV rises with increase in asset size

Source: Raymond James

Since January 1, 2005

589 372

157 109 84 15

164.5%185.6%

233.1% 226.6% 229.9%253.6%

0%

50%

100%

150%

200%

250%

300%

0

100

200

300

400

500

600

700

< $100M $100M -$250M

$250M -$500M

$500M - $1B $1B - $5B > $5B

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Year-to-Date 2012

37 28

1612

7 3

118.1%100.4%

114.1%

135.6%

116.3%128.1%

0%

20%

40%

60%

80%

100%

120%

140%

160%

0

5

10

15

20

25

30

35

40

< $100M $100M -$250M

$250M -$500M

$500M - $1B $1B - $5B > $5B

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Texas Financial Institutions Mergers & Acquisitions

Price Performance Texas remains a bright spot in terms of valuation The pricing premium and P/TBV multiple publicly-

traded Texas banks benefitted from in early 2012 narrowed temporarily, but has re-emerged

Pricing By Asset Size Smaller banks trading at discount in terms of

both P/LTM EPS and P/TBV discount Causes: Liquidity discount, greater investor sensitivity

to liquidity Perception credit issues may not be fully

resolved Lack of access to capital Weakened ability to generate asset growth Lower returns on equity

Source: Bank of America, Raymond James

U.S. Banking Sector Earnings

2Q 2012 Results Super community banks are having the hardest time meeting earnings expectations, primarily due to increased

costs associated with heightened regulatory oversight and compliance Majority of income and asset growth is within large cap regionals as smaller competitors face stiff competitive

market and increasing costs Many earnings call transcripts cite competitive market for loan origination/compressing spreads However, yields being generated today are generally higher than pre-crisis levels

Source: Cadence Bank, JP Morgan *PPNR – Pre-Provision Net Revenue

Conclusion

HOUSTON TOPS OUR LIST OF AMERICA’S COOLEST CITIES

“The Bayou City may not be the first place you associate with being hip or trendy. But Houston has something many other major cities don’t: jobs.

With the local economy humming through the recession, Houston enjoyed 2.6% job growth last year and nearly

50,000 Americans flocked there in response — particularly young professionals. In fact, the median age of a Houston resident is a youthful 33.

The result? Over the past decade, the dreary corporate cityscape has been quietly transforming. Stylish housing

developments have popped up downtown, restaurants have taken up residence in former factories and art galleries like the Station Museum have been inhabiting warehouses.

Combine that with a strong theater scene, world-class museums and a multicultural, zoning-free mashup of a

streetscape and you have the recipe for the No. 1 spot on Forbes’ list of America’s Coolest Cities To Live!”

Follow us on Twitter @BoyarMiller

boyarmiller breakfast forum: the current state of the capital markets 2012

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