CAPITAL MARKETS

2013 State of the Industry

Chairman’s Letter

To Our Readers,

At BoyarMiller, when we partner with clients, we work as

a strategic part of their business team, and that means

we have to be experienced in more than just law. We also

need to understand their industry so that we are able to work

collaboratively with them and add value to their business.

That’s why we bring together the top insights into industry trends

and best practices, and deliver it to you. Not only has this infor-

mation been invaluable to us and to our clients, but we hope

it will be beneficial to you as well.

The information in this publication has been gathered from

industry-leading clients we have partnered with and from our

own capital markets team. If you find value in it and would like

to hear more, join us for our next BoyarMiller Breakfast Forum.

Sincerely,

Chris Hanslik

Firm Chairman

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TABLE OF CONTENTS

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Your strategic partner should be an expert in your industry, not just law.At BoyarMiller, we’re committed to providing insightful, versatile expertise to organizations

of all sizes as we guide them through complex business issues. We know that in order

to understand how best to collaborate with you, we need to know your industry and

your business.

To this end, we gathered the best insights into capital markets trends and best practices

from industry-leading clients we have partnered with and from our own capital markets

team. It’s our hope that the information we’ve accumulated through years of collaborative

work in the capital markets industry will be beneficial for you.

INTRODUCTION

Your strategic partner requires knowledge of trends, industry and law.

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SHIFT IN INVESTMENT PRIORITIESThe “great rotation” from bonds to

stocks is on the horizon. There has

been a falling 10-year treasury yield

for the last 30 years. As long as the

Federal Reserve continues to set and

manipulate rates, the marketplace

can be expected to look the same.

But the Fed has been 70% of the bid in

recent treasury auctions; once their bid goes away, who can make up the difference?

Smart investors are trading interest rate risk for credit risk – going away from the treasury –

and watching for the Fed to taper its bond buying.

JOB CREATION STILL ON THE RISESmall- and mid-sized companies are

the majority contributor of net new jobs

in the United States. As the beneficiaries

of middle market private equity trans-

actions, they have benefited from

continued low interest rates. In Houston

specifically, the ongoing growth of the

energy market has helped the city to lead the nation in employment growth. Only Dallas

ties Houston’s employment growth rate of 3.6%.

FOREIGN MONEY TALKSCross-border capital into the U.S. remains

strong. Canadian asset managers and

REITs, Singaporean sovereign wealth

funds, German investment managers,

and Chinese private HNW individuals

have been highly active this year-to-date. Canada leads the charge with $7.09 billion in

capital this year. Meanwhile, South Korea, which has invested $1.45 billion this year, has

generated a lot of interest in Houston and in the broader energy market.

STATE OF THE INDUSTRY

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HOUSTON’S EMPLOYMENT GROWTH RATE IS 3.6%

$7.09B IN CANADIAN CAPITAL

HISTORICALLY, FEDERAL RESERVE HAS BEEN 70% OF TREASURY AUCTION BIDS

Private Equity and M&A ActivityWHAT SETS HOUSTON APART?Houston is now considered the No. 4 gateway market, listed behind the expected leaders Manhattan, L.A. and D.C. The bottom line is that energy is a great place to be, and Hous-ton has cornered the energy market. As we take advantage of the opportunities provided by cheap domestic energy, other industries will begin to grow as well and make Houston and the U.S. more competitive.

2013 REGULATORY TRENDSCliff Atherton, PhD, CFA, Managing Director, GulfStar Group

• MIDDLE MARKET PRIVATE EQUITY DRIVES GROWTH: While middle market deals – those under $250 million – normally represent about 25% of total deal value, they are 80-90% of deal volume. These transactions are very important for the U.S. in terms of providing compa-nies with new capital – primary dollars.

• HOUSTON IS “DIFFERENTIATED” – AT LEAST WITHIN ENERGY: While Houston has made little progress in differentiating outside of the energy industry, its upstream, midstream and downstream markets are strong. Private equity is getting ahead of the coming uptick in pipeline services, which will have a tremendous number of projects in 2014 and 2015.

• M&A ACTIVITY BACK TO PRE-CRASH LEVELS: Middle market companies are back up and trading above the multiples they were trading at before the crash, at least partly because of low interest rates. Because of the availability of capital, the marketplace for these assets is going to be pretty robust for the near future.

• IS THE DEAL MARKET REALLY SLOWING DOWN?: This question has gotten a lot of play recently, but we’ve seen our volume of activity pick up since the first quarter. You’ll see those closings begin to happen late in Q3 and Q4, and on into the first of next year. It looks like plenty of capital is coming into private companies until year’s end.

EXPERT INSIGHT

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Cliff Atherton is an investment banker with more than 25 years of experience in corporate finance and more than 30 years of experience in teaching finance at the graduate level. As Managing Director at GulfStar Group, Cliff works with entre-preneurs and family-owned businesses with enterprise values between $25 and $250 million. He earned a BA from Rice University, MBA and PhD degrees from The University of Texas, and holds the Chartered Financial Analyst (CFA) designation.

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Equity and the Public MarketsWHAT SETS HOUSTON APART?In comparison to the U.S. GDP growth rate of 2%, Texas is growing at 5% and Houston is

growing at 4.8%. We’re getting to borrow money at interest rates based on much lower

national growth rates. We have a 300 basis point spread between the GDP growth rate of

Houston and the 10-year treasury, which is very high in comparison to both other markets

and Houston’s historical spread.

2013 PUBLIC MARKET TRENDSDrew Kanaly, Chairman and CEO, Kanaly Trust

• “GREAT ROTATION” FROM BONDS TO EQUITIES IS IN ITS EARLY STAGES: The Federal Reserve is

preparing to normalize monetary policy. While it’s unlikely that we’ll see a major rate rise

from the Fed before 2015, smart investors should look at the possibility that a 30-year bull

market in bonds could soon be over.

• WILL RISING RATES DERAIL THE STOCK MARKET?: Historically, even when interest rates rose

significantly, you still made money in stocks in the long run. However, we haven’t seen an

unwind of a Fed policy of this magnitude. While the effect of this rise may prove similar

to those before, it’s worth watching closely.

• KANALY TRUST INVESTMENT PRIORITIES: At Kanaly, we’re going to avoid long-duration fixed

income strategies. For our municipal bonds, we’re in for less than five years. Some of the

funds we’ve utilized have a duration of less than two years. We’re swapping interest rate

risk for credit risk in the hopes that with selective management we can insulate ourselves

from a rising interest rate environment.

• MOVEMENT TOWARD PRIVATE EQUITY, REAL ASSETS: Clients with the ability to do so are

moving into private equity and real asset plays. As some of our favorite risk management

tools go away, we’re thinking about other asset allocation options.

Drew Kanaly has more than 30 years of experience in trust and investments. He leads Kanaly Trust as Chairman and CEO. Since earning his BBA in Finance from the University of Houston, he has attended the American Bankers Association’s National Graduate Trust School in Northwestern University and The Texas Bankers Association Regional Trust School at Southern Methodist University, and earned a Certified Trust and Financial Advisor (CTFA) designation.

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Real Estate FinanceWHAT SETS HOUSTON APART?Houston is the No. 1 ranked apartment market in the nation with more than 15,000 units to

be delivered in the next 12 months. And in the office space, Houston accounts for 28.6% of

construction starts in the top 11 markets since Q1 2012. Despite all that new construction,

more than 70% of that space is pre-leased.

2013 REAL ESTATE FINANCE TRENDSTom Fish, Executive Managing Director/Co-Head Real Estate Investment Banking, Jones Lang LaSalle

• COST INCREASES HAVE LESS EFFECT THAN EXPECTED: We have had a net increase of

roughly 50 basis points in the cost of long-term real estate borrowing in about a five-

month period of time. While that’s pretty dramatic, the good news is that we have seen

little effect on real estate values. It’s likely that because overall borrowing rates were so

low, we were able to absorb much of that increase. That may change moving forward.

• COMMERCIAL BANK LENDING REBOUNDS FROM DOWNTURN: For the first time since the

recession, commercial banks’ net exposure has gone up. They’re funding much of the

construction around the city. They’re also providing, more than ever, longer-term

stabilized property asset loans. They’re competing for loans that would usually be

funded by the commercial mortgage-backed security market, life insurance

companies or other lenders.

• TEXAS IS FILLING UP THE NATION’S OFFICE SPACE: 25% of all office absorption in the country

is occurring in two markets: the energy markets in Dallas and Houston. While the tech

market is still taking a large share of the office space, it’s made up of many more

markets: Silicon Valley, Austin, Portland, San Francisco and Seattle.

• OPTIMISM ABOUNDS IN THE REAL ESTATE CAPITAL MARKETS: We’re very optimistic about the

ongoing flow of capital into the commercial real estate space. This is still a disciplined

space that requires deals to make sound economic sense. Attracting capital has

become easier, and a continued cautious approach will keep the markets in check.

Tom Fish co-leads the Real Estate Investment Banking (REIB) practice, which is part of the Jones Lang LaSalle Capital Markets Group. As Executive Managing Director, Tom focuses on national lender relation-ships, high profile loan originations and debt restructurings for owner and lender clients. He has specifically advised clients on more than $8 billion of debt/equity origination and/or product disposition over the past 10 years.

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Middle Market M&A and Private EquityBy BoyarMiller’s Philip Dunlap and Bill Boyar

With the September 18th announcement that the U.S. Federal Reserve will not reduce its

current $85 million pace of monthly bond buying, the anticipated “great rotation” away

from a decades-long bull market in bonds will likely be delayed at least until the Fed

begins to taper its bond buying. What does this decision mean for the capital markets for

M&A and private equity in the middle market? How will these sectors be affected when

the Fed ultimately does begin to taper its current pace of bond buying? The answers to

these questions will guide middle market M&A activity and private equity investing

through the end of 2013 and into 2014.

M&ABecause the Fed will continue to purchase bonds at the same rate as it has recently, the

rise in interest rates that many economists and industry experts were predicting will likely

be delayed. This may be good news for M&A activity, especially as it relates to private

equity funds’ ability to finance their transactions. As interest rates remain at historically

low levels, senior debt should continue to be an attractive and readily available source

for financing M&& transactions.

In the first half of 2013, senior debt accounted for an average of 42.1% of the total

enterprise value (TEV) of transactions, while mezzanine or other subordinate debt only

accounted for 10.8% of TEV. When compared to 2011 and 2012 levels where senior debt

accounted for approximately 36.5% of TEV and mezzanine debt accounted for approxi-

mately 16% of TEV, it is apparent that senior lenders have been increasingly willing to lend

to purchasers on buyout deals.

With senior debt comprising a larger piece of the TEV pie, buyers are willing to pay higher

EBITDA multiples. In 2012, the average middle market transaction was valued at 6.3 times

EBITDA. The multiples change when looking at different deal sizes. Smaller middle market

deals (those between $10 million and $25 million) saw an average EBITDA multiple of 5.7x in

2012, while larger middle market deals (those between $100 million and $250 million) saw

an average EBITDA multiple of 7.5x. These multiples are similar to what was seen prior to the

economic crash in 2008 and 2009. As long as senior debt is available on terms similar to

what has been available in 2012 and the first half of 2013, EBITDA multiples should remain

near the ranges that have been typical of the past 18 months.

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However, in the event that interest rates rise (whether as a result of the Fed’s tapering of

bond buying or due to separate issues), it should be expected that senior financing would

not be as plentiful. In that situation, buyers will likely turn back to mezzanine/subordinate

debt sources to fill the gap in their financing needs. This will in turn affect the EBITDA multi-

ples that buyers will likely pay in any given transaction. EBITDA multiples of 6.2x to 6.3x for

middle market deals may ultimately decrease when interest rates rise.

PRIVATE EQUITYWhile the capital overhang of unin-

vested private equity commitments

is declining, there is still significant dry

powder remaining in 2009 and older

funds. This overhang, coupled with

the current attractive senior financing

opportunities should continue to drive

substantial activity in the private equity

market – both in aggregate capital

invested and total deal count. Addition-

ally, because private equity funds currently hold almost 4,000 portfolio companies that

we purchased in 2008 or earlier, there should not be a significant slowdown in M&A

and private equity led recapitalization activity for those portfolio companies through

2014 and into 2015.

Despite the positive outlook for the next 18 months, whenever the Fed does eventually

taper its bond-buying and/or increases the overnight interest rates, the resulting increase

in interest rates across the board will likely force senior financing available, the ability to

reach the fund’s targeted internal rate of return will require greater diligence and planning

as funds are forced to look at mezzanine debt or other financing sources.

CONCLUSIONThe Fed’s decision to delay the expected tapering of its bond buying should mean that the

market and activity levels for M&A and private equity of the past 18 months will continue

for the near term. This is welcome news as private equity continues to be a major source

of equity capital for the U.S. economy. In 2012, private equity funds invested 10 times

more new equity in the market than IPOs. Furthermore, small and mid-size companies –

those that are beneficiaries of middle market private equity transactions – are the majority

contributor of net new jobs in the United States.

However, when the tapering begins and interest rates eventually rise, private equity funds

and those who work with middle market companies will be required to face the chal-

lenges of how to close deals with fewer dollars of senior financing in the capital stack.

Middle Market M&A and Private Equity, continued

PRIVATE EQUITY FUNDS INVESTED 10 TIMES MORE NEW EQUITY IN THE MARKET THAN IPOS IN 2012.

Gary Miller

Chairman, Business Group

Gary oversees the firm’s corporate and commercial matters,

with emphasis in his practice on mergers and acquisitions. He has

extensive experience in capital formation, contract negotiations/

documentation, lending, factoring and day-to-day representation

of corporations and other business entities. Gary is often called

upon to represent insurance agencies in their capital transactions

Bill Boyar Shareholder, Business Group

Bill’s practice focuses on representing the various parties involved

in the acquisition, disposition, capitalization and financing of assets

and businesses on a national and international level. He has served

as lead counsel on numerous complex, multi-party acquisitions

and project financings with significant experience in experience

in corporate finance, private equity, mergers & acquisitions, real

estate and hospitality. He assists clients in strategic planning and

capital formation processes, maintaining a network of private and

institutional clients and contacts worldwide.

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FINANCE AND CAPITAL FORMATION PRACTICE LEADERS

Gus Bourgeois Shareholder, Business Group

Gus’s practice involves a wide variety of corporate transactions

including the acquisition, financing and disposition of business enti-

ties through asset and stock purchase transactions, sales of debt

and equity securities, and complex domestic and international

transactions. His clients range from small, start-up businesses to

established enterprises with international operations.

Stephen Johnson Shareholder, Business Group

Stephen’s transactional practice includes mergers and acquisitions,

asset and stock purchase and sale transactions, private equity

investments, formation of business entities, restructuring, capital for-

mation, contracts and similar agreements, and general corporate

matters. He places the utmost emphasis on providing clients with

the highest quality of service in an efficient and effective manner.

PRAC

TICE LEA

DERS

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Steve Kesten Shareholder, Business Group

Steve’s practice includes private placements and other sales and

purchases of debt or equity securities; mergers, asset acquisitions

and sales; formation and representation of private equity funds,

venture capital funds and hedge funds, entity selection and

formation (including drafting complex limited liability company

and partnership agreements and corporate charters having

multiple classes of common and preferred stock), and general

contract review. He also has experience representing both lenders

and borrower in asset-based lending transactions involving senior

lenders, mezzanine lenders and factoring companies.

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BoyarMiller4265 San Felipe, Suite 1200 Houston, Texas 77027

TEL 713.850.7766 FAX 713.552.1758

At BoyarMiller, we help our clients’ access private and institutional

equity and debt capital through our extensive network of domestic

and international capital relationships. The firm’s experience

covers a broad spectrum including:

• Capital Plan Development

• Capital Strategies

• Debt Sourcing including

Conventional Asset-Based

& Mezzanine Financing

• Equity Sourcing

• Growth Strategies

• Mergers & Acquisitions

• Private Equity &

Venture Capital

• Strategic Plan Development

• Transaction Structuring