1H 20 16 MM AC T IV I T Y DIMINISHED BY 7 % F ROM L A S T Y E AR
Company Inventory Shifting YoungerPAGE 15»
MIDDLEMARKETREPORT
2Q 2016
US PE
S P O N S O R E D B Y
Cybersecurity InsurancePAGES 8-9»
SPONSORED BYIN PARTNERSHIP WITH
Since 2001, Madison Capital has taken on:
$23.2 91O 260billion of net commitments new transactions private equity sponsors
95% of transactions closed as administrative agent, sole lender, or co-lead arranger since 2012.
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Credits & ContactPitchBook Data, Inc.
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Market Development & Analysis
Content
NIZAR TARHUNI Senior Analyst
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Contact PitchBook pitchbook.com
RESEARCH
EDITORIAL
SALES
ACG GlobalGARY LABRANCHE President & CEO
KRISTIN GOMEZ Vice President,
Communications & Marketing
DEBORAH COHEN Editor in Chief
COPYRIGHT © 2016 by PitchBook Data, Inc. All rights reserved. No part of this publication may be reproduced in any form or by any means—graphic, electronic, or mechanical, including photocopying, recording, taping, and information storage and retrieval systems—without the express written permission of PitchBook Data, Inc. Contents are based on information from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. Nothing herein should be construed as any past, current or future recommendation to buy or sell any security or an offer to sell, or a solicitation of an offer to buy any security. This material does not purport to contain all of the information that a prospective investor may wish to consider and is not to be relied upon as such or used in substitution for the exercise of independent judgment.
Introduction 4
Note from ACG 5
Overview 6-7
Cybersecurity Insurance 8-9
Lower Middle Market 10
Core Middle Market 11
Upper Middle Market 12
Q&A: Madison Capital Funding 14
Company Inventory 15
Middle-Market Public Policy Update 16
Exits 17
Grant Thornton: Creating Value 18
Fundraising 19
League Tables 20
Methodology 21
CONTENTS
Cover photo credit: Thomas Moskal
3 PITCHBOOK 2Q 2016 US PE MIDDLE MARKET REPORT
SPONSORED BYIN PARTNERSHIP WITH
PREPARATION FOR WHATEVER MAY COMEIntroduction
At the halfway point of 2016, private equity activity continues to taper off. Deal
flow numbers are lagging along with the total amount of capital invested and
despite the middle market showing itself to be more resilient, it certainly isn’t in
any position to sidestep the overall slump we’ve been experiencing. Further, PE-
backed company inventory has risen, however, the concentration of that inventory
has shifted toward younger companies, so as they are still in the beginning years of
their sponsor hold periods, PE-backed exits are off and declining at a rapid pace.
Volume today has stagnated as all dealmakers are forced to re-asses the best
paths to move forward. Limited partners have continued to trust in the PE asset
class, but capital deployment will continue to move at a slower pace as managers
will have to adjust how they operate their existing portfolio companies and
how they vet prospective deals. To help prepare for a potentially volatile future
marketplace, general partners will continue to focus inward at the company level
to help drive and streamline operations and ensure their companies are operating
at a level that is sustainable for the future. With that in mind, changes will need to
be made earlier on in the hold period to protect against the global headwinds that
financial literature and media continue to emphasize.
As always, feel free to reach out with any questions at [email protected].
NIZAR TARHUNI
Senior Analyst
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4 PITCHBOOK 2Q 2016 US PE MIDDLE MARKET REPORT
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A solid partnership can make the difference between a good project and a great one.
Such is the case with GrowthEconomy.org, an endeavor that ACG undertook three years ago to measure the power of private
investment on middle-market companies. The project relies on the integration of PitchBook’s wealth of transactional data and a
separate commercial database maintained by researchers at University of Wisconsin-Extension to deliver an incredibly powerful
resource.
Using data on millions of business establishments from 1995 to 2013, GrowthEconomy.org was developed to quantify the impact
of private capital on companies. The project revealed that PE-backed firms grew revenue four times greater and jobs three times
greater than all other business establishments. The datasets are available by state, metropolitan statistical area and Congressional
district.
The project became a vital tool in ACG’s ongoing efforts to educate Congress, regulators, media and others about the positive
impact of PE. Visitors can conduct their own research at GrowthEconomy.org.
In June, ACG was recognized with a prestigious ‘Power of A’ Summit Award for GrowthEconomy.org from the American Society of
Association Executives. The Summit Award is ASAE’s highest, given to associations that make exemplary commitments to “solve
problems, advance industry/professional performance, kickstart innovation and improve world conditions.” ACG was one of six
winners picked from 147 candidate associations.
This national accolade was made possible thanks to PitchBook. The PitchBook team worked tirelessly in collaboration with ACG and
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available in the fall.
PitchBook partners with ACG in many other ways, such as providing ACG CapitaLink, an exclusive benefit for ACG members. ACG
appreciates all that PitchBook has done for ACG and the industry, and we look forward to continued collaboration.
GARY LABRANCHE, FASAE, CAE
President & CEO
ACG Global
ACG/PITCHBOOK PARTNERSHIP GAINS NATIONAL RECOGNITIONby Gary LaBranche
5 PITCHBOOK 2Q 2016 US PE MIDDLE MARKET REPORT
SPONSORED BYIN PARTNERSHIP WITH
THE BUYOUT CYCLE SLOWLY WINDS DOWNOverview
Middle-market PE activity
continued to decline in step with
the broader PE marketplace midway
through 2016. $180 billion was invested
across 925 completed transactions in
1H 2016, equating to an 8.5% decline
in total deal value compared to the
second half 2015, and a drop of more
than 14% when looking at total volume
during the same period. On a quarterly
basis, 2Q total deal value was down
just under 3% QoQ with volume sliding
roughly 8% during that same period.
While these quarterly figures reinforce
the continuous decline we’ve seen
across the PE world, they do point to
the resilience of the US middle market,
which saw activity decline at a much
slower pace than what was seen across
the broader PE marketplace.
US PE middle-market activity
Source: PitchBook
A distinct slowdown
US PE middle-market activity
$275
$339
$197
$93
$241
$273
$301
$301
$421
$390
$180
1,428
1,833
1,255
702
1,280 1,448
1,760 1,644
2,041 2,058
925
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016*
Deal value ($B) # of deals closed
$49
$53
$53
$86
$65
$66
$66
$75
$64
$65
$68
$105
$70
$59
$83
$89
$110
$97
$107
$108
$93
$100
$99
$97
$91
$89
245 271 293
470
333
378
353
383375 382
399
603
348309
493493
553
492
524
472 475
507556 520
482
442
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q
2010 2011 2012 2013 2014 2015 2016
Deal value ($B) # of deals closed
Source: PitchBook
*As of 6/30/2016
6 PITCHBOOK 2Q 2016 US PE MIDDLE MARKET REPORT
SPONSORED BYIN PARTNERSHIP WITH
The UMM saw its value rebound somewhat, but
overall, a slight decline was registered
US PE MM deals ($B) by segment
In 2Q, it was the LMM’s turn to experience a plunge in
completed deals
US PE MM deals (#) by segment
Source: PitchBook Source: PitchBook
The lower middle market experienced
the most pronounced quarterly decline
in 2Q, an interesting event given the
surge we saw LMM activity undergo
during the first quarter of the year.
As auction processes have driven
prices higher across businesses of
less than optimal quality, we saw a
notable amount of PE players move
lower down the MM spectrum to
source less competitive, and ultimately
more affordable transactions. Such
deals have also traditionally served as
attractive add-on opportunities, yet
the buy-and-build angle has been used
at a record level in recent quarters, and
we think part of the decline in LMM
2Q deals may be correlated to many
sponsors needing to pump the brakes
and focus inward. With both economic,
revenue and earnings projections
subdued, GPs need to ensure their
portfolio company management teams
are ready to drive growth organically.
Leverage levels will also likely receive
more attention from owners, and thus,
certain add-on deals might not seem
as attractive in an uncertain economic
backdrop as in a high-growth world
where the ability to service debt
over time wouldn’t be a heightened
concern.
While LMM activity slipped, the core
and upper middle market size buckets
performed stronger than what we
anticipated last quarter. Transactions
valued between $100 million and $500
million actually saw volume jump 22%
on a quarterly basis and transactions
valued between $500 million and $1
billion saw volume spike more than
36% during the same period. Although
the expectation has been to see a
continued surge in LMM deals, 1Q
did see dealmakers pull back from
committing large sums of capital as
we emerged from a volatile 2H 2015,
and with that, the 2Q surge in these
size buckets could be attributed to
managers finally completing lenghtier
dilligence processes that extended
closing times.
$0
$20
$40
$60
$80
$100
$120
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q
2013 2014 2015 2016
LMM CMM UMM
0
100
200
300
400
500
600
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q
2013 2014 2015 2016
LMM CMM UMM
Median US PE middle-market transaction size ($M)
$139.5 $128.3
$0
$20
$40
$60
$80
$100
$120
$140
$160
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016*
Source: PitchBook
*As of 6/30/2016
7 PITCHBOOK 2Q 2016 US PE MIDDLE MARKET REPORT
SPONSORED BYIN PARTNERSHIP WITH
CYBERSECURITY INSURANCE: WHAT YOU REALLY NEED TO KNOWby Israel Martinez, President & CEO of Axon Global
The net
increase in
corporate
costs
related to
cybercrime
is more than
80% over
the last
six years,
according
to the Ponemon Institute, a leader in
cybercrime statistics. The study also
reports a mean annualized cost of $15
million per year for 85 benchmarked
organizations, up 19% from 2014.
My experience with Fortune 500
companies demonstrates that when a
company’s valuation and reputation
impact are factored in, the cost of
cybercrime is an order of magnitude
higher.
The Market
There are more than 50 companies
in today’s marketplace selling some
facet of cybersecurity insurance. Unlike
other types of property and casualty
insurance, cyberpolicies are new to
the industry. These products lack the
years of meaningful quantitative data
and actuarial analysis necessary for
balanced pricing and coverage. You
will find that the cost of premiums,
coverage, exclusions and even
prerequisites for qualification vary
dramatically.
Fundamentally, cybersecurity
insurance is designed to help
businesses cover legal expenses,
public relations, notification, forensic
discovery, incident response and/or
remediation, as well as other costs due
to an unauthorized cybercompromise
or breach.
Potential Pitfalls
Be careful not to let your broker
sweet-talk you into a false sense of
security. Some policies provide only
“data breach insurance,” excluding
anything not related to theft of
personal information (e.g., intellectual
property theft and valuation impact)
Often, definitions of simple terms such
as “breach” are conflicting, unclear
or incomplete when compared with
federal, state and industry definitions.
Do your homework and compare
definitions for your industry and state.
Attorneys representing companies vs.
shareholders in breach scenarios can
have sound but opposing definitions
of important terms because there isn’t
enough case precedent in this complex
field. Additionally, most policies do a
poor job of covering the majority of
costs in a breach, including reputation
damage, valuation impact or loss of
intellectual property.
Range of Coverage
Policies are often broken down by
industry, revenue, limits of payout per
incident and premiums per year. Even
within financial services, costs vary
greatly. Recently, I have seen insurance
companies asking what risk categories
the customer wants covered and
then pricing the policy accordingly.
Increasingly, pricing is becoming either
prohibitive or laden with exceptions
that are difficult for customers to avoid.
Be aware that sublimits for each
potential claim category can be
capped (e.g., legal expenses or hiring
a forensics company for analysis of
damage) and will often have a limit
well below the maximum payout. As an
example, a $3 million policy may offer
only $500,000 of coverage in six claim
categories. So take time to run through
the cybercrime scenarios most relevant
to your industry and company type.
Most providers offering cyberpolicies
between 2013 and 2015 were quite
helpful and eager to help cover costs
after a breach. However, the recent
increase in cybercrime has led to policy
renewals fraught with exclusions, such
as for cybercrime ransom scenarios.
Become familiar with the fine-print
limitations and exceptions that surprise
customers when they need coverage
most—during or after the breach. In the
case of ransom scenarios, if you have
a policy exclusion, find multiple ways
8 PITCHBOOK 2Q 2016 US PE MIDDLE MARKET REPORT
SPONSORED BYIN PARTNERSHIP WITH
to mitigate ransomware cybercrime
specifically, because data shows this
trend increasing.
This threat will remain part of the
landscape for the foreseeable future,
and most IT professionals should
continue to adhere to strict protocols
and countermeasures, with the
understanding that no industry or line
of business is immune.
Get the Most Out of Your Policy
I’ve put together a few helpful tips for
you to consider about your company’s
cybercoverage:
• Beware of exclusions that result in
non-payment. For example, if you
have anti-virus or anti-malware
software that was “recording
and alarming” but no one saw it,
or if you happened not to have
effectively updated software or
firmware in your organization, you
may have a disqualifying event.
• Know your definitions, such as
“incident” versus “breach,” and
how those are defined for your
industry, as well as federal, state
and local regulators; then make
sure your policy integrates these.
“Cyberincidents” usually refer to
a broader range of attacks and
compromises versus “breaches,”
which are usually specific to theft
of personal information.
• Be diligent about notification
requirements to your insurance
company. Some insurance
companies require you to report
cybercompromises and/or
cyberincidents even when there
was no breach of data. If you
neglect to report such incidents
and they’re discovered after
reporting a legitimate breach
event, you could be disqualified.
• Take time to see if the policy
covers regulatory fines. These are
sure to mount even if you’ve met
compliance standards yet still
experience a breach.
• Beware of deadlines from the
time you discover a breach to the
time you report to your insurance
company. These may also be
mandatory.
• Be careful how you conduct
discovery during a cyberincident.
Many inexperienced cybersecurity
companies inadvertently report
incidents, compromises or
breaches to management in a
way that, unbeknownst to them,
invalidates or limits the policy
coverage. Make sure you have
a reputable and experienced
company working cyberincidents.
• Ensure the cybersecurity insurance
decision is made as part of the
organization’s enterprise risk
management program. It should be
a board-level or C-suite decision,
independent of IT.
• Do not believe, because you
have met regulatory compliance
standards, that you’re safe from
cybercrime or policy coverage
exclusions. Many large retailers
were compliant with retail industry
cybersecurity requirements and
were not only breached but also
disqualified for policy coverage
in the category of “regulatory
investigation costs or fines.”
• Try negotiating discounts for
things you’re doing well today,
such as mitigating the SANS
Institute’s 20 Critical Security
Controls, encrypting data,
implementing the DHS NIST
framework, or demonstrating
how your board has received
cyber-enterprise risk management
training. Be prepared to show
documentation.
• Pay attention to your software-/
infrastructure-/other-as-a-
service contracts. Outsourcing
your business process or data
management will not absolve
you from fiduciary and other
responsibilities in the event of
a breach of your third-party
provider.
• Consider leveraging a third-
party company to discover if
your firm has been unknowingly
compromised in the form of
cyberthreat intelligence. Don’t
trust your internal IT department to
have this capability, and don’t use
a penetration test or vulnerability
assessment as a substitute
here. You need an independent
assessment of what the bad guys
may be exploiting today.
Israel Martinez is president and CEO of
Axon Global, a cyber-counterintelligence
company recognized by the Department
of Homeland Security as a leader in its
field. Martinez is certified by the DHS in
cyber-counterterrorism and defense, and
has more than 20 years of experience in
cyber-enterprise risk management and
governance.
9 PITCHBOOK 2Q 2016 US PE MIDDLE MARKET REPORT
SPONSORED BYIN PARTNERSHIP WITH
US PE LMM deal flow
US PE LMM deal flow
US PE LMM deals (#) by sector in 1H 2016
Source: PitchBook
A SHARP DECLINELower-middle-market activity
After a spike in both value and volume, a regression to the mean was to be expected, but the steepness of the LMM decline was considerable.
Timing played a factor, as did the quality of the companies in the market. 1H 2016 is still exhibiting robust LMM numbers overall.
At 68% of all LMM activity in 1H 2016, B2B and B2C remain most targeted by PE buyers at the lower end of the MM.
$9 $9 $7 $8 $8 $6 $8 $7 $9 $8 $6 $6 $8 $8 $6 $7 $14
$5
182 184
163
219
145 116
201
171
199
180 171
148 156
196
185 165
228
124
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q
2012 2013 2014 2015 2016
Deal value ($B) # of deals closed
$32
$37
$37
$18
$22
$26
$33
$28
$30
$28
$19
617
786
669
416
497 551
748
633
698 702
352
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016*
Deal value ($B) # of deals closed
Source: PitchBook
*As of 6/30/2016
41%
27%
7%
2%
10%
10%3% B2B
B2C
Energy
Financial Services
Healthcare
IT
Materials & Resources
Source: PitchBook
10 PITCHBOOK 2Q 2016 US PE MIDDLE MARKET REPORT
SPONSORED BYIN PARTNERSHIP WITH
US PE CMM deal flow
US PE CMM deal flow
US PE CMM deals (#) by sector in 1H 2016
ACTIVITY SPIKESCore-middle-market activity
Source: PitchBook
Source: PitchBook
Consolidation by PE platforms of fragmented healthcare providers is still occurring.
At $99B, the CMM is well on track to record another blockbuster year, potentially matching the $203B of 2014.
CMM activity ticked upward, with value staying relatively flat; both remained at the upper end of the historical range.
$41
$35
$27
$49
$24
$35
$39
$51
$55
$49
$45
$55
$56
$40
$42
$39
$50
$49
170165
173
283
135
166
228
262285
246253 254
273
213
264 257
209
256
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q
2012 2013 2014 2015 2016Deal value ($B) # of deals closed
$141
$163
$111
$43
$102
$134
$152
$148
$203
$177
$99
660
817
508
232
570
705 791 790
1,037 1,007
465
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016*
Deal value ($B) # of deals closed
Source: PitchBook
*As of 6/30/2016
27%
29%9%
5%
21%
9%B2B
B2C
Energy
Financial Services
Healthcare
IT
Materials & Resources
11 PITCHBOOK 2Q 2016 US PE MIDDLE MARKET REPORT
SPONSORED BYIN PARTNERSHIP WITH
US PE UMM deal flow by
US PE UMM deal flow
US PE UMM deals (#) by sector in 1H 2016
Source: PitchBook
REBOUNDUpper-middle-market activity
Source: PitchBook
UMM activity rebounded somewhat, along with total deal value, but is still a far cry from the heights of much of 2014 or 2015.
As trepidation still reigns, 2016 is likely to see declining value. Most of the worthwhile targets in that range have already been purchased.
Well-regarded consumer brands can still command considerable attention, particularly as retail and other segments face industry shifts.
$13
$20
$34
$49
$39
$18
$36
$32
$45
$41
$55
$47
$29
$53
$51
$51
$28
$34
23
33
64
101
68
28
65
60
6866
101
70
46
98107
99
46
62
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q
2012 2013 2014 2015 2016
Deal value ($B) # of deals closed
$101
$139
$49
$31
$116
$112
$116
$125
$189
$185
$62
152
230
78 54
212
193
221 221
306 349
108
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016*
Deal value ($B)
# of deals closedSource: PitchBook
*As of 6/30/2016
23%
30%15%
16%
17 B2B
B2C
Energy
Financial Services
Healthcare
IT
Materials & Resources
12 PITCHBOOK 2Q 2016 US PE MIDDLE MARKET REPORT
SPONSORED BYIN PARTNERSHIP WITH
S A V E T H E D A T E
W W W . E U R O G R O W T H . O R G
# E U R O G R O W T H
CHRISTOPHER TAYLOR
Managing Director,
Head of Relationship Management
Madison Capital
Walk me through the story of how
Madison Capital came to be.
It’s an interesting story. A group of
people whom I had worked with for
many years in the banking industry
and I realized that we were all planning
on exiting the banking industry before
it exited the business line. At the same
time, New York Life had brought over
a new Chief Investment Officer who
had happened to start up a competitor
of ours at his previous firm, so we
approached him and said, “Are you
ready to do this again?” And he said,
“Yes, absolutely.”
What did the lending landscape for
middle-market companies look like at
that time?
It was not nearly as competitive
as it is today. It was a bank-driven
industry. There were not many cash-
flow lenders outside of the regulated
banking industry, and a lot fewer
PE sponsors. This is back when a $3
billion fund was seen as enormous.
In short, the business was still in its
infancy. Middle-market sponsors were
buying companies that came to market
as the generation that came back
from World War II were retiring and
transferring their businesses on to their
first institutional owners. So it was
great timing for us to begin. We had
fresh capital when nobody else did, as
the economy was emerging from the
recession of 2001.
One of the core principles at
Madison Capital is that you are a
lead shop. How has that element
and interactions with other lenders
changed?
There are more participants in the
market nowadays, so it is more
competitive. All these participants
have larger hold sizes now. It used to
be that when we’d have, say, a $150
million deal, that had 11 participants,
but now, you can club that up with
two or three. Hold size is a huge,
In commemoration of Madison Capital Funding’s 15th anniversary, we have included a segment from an interview that will be available later at http://www.newyorklife.com/madisoncapitalfunding/news. This segment has been edited and condensed for clarity.
Madison Capital Funding LLC is a subsidiary of New York Life Insurance Company. MCF-1702210
competitive differentiator, as it’s a very
different interaction to communicate
with 11 partners versus two or three.
That is a post-crisis phenomenon,
much of which was born out of
the need for certainty of close and
streamlined execution. So that feeds
into the types of structures sponsors
are focused on today as well, whether
it be unitranche or senior stretch.
It’s really understanding the lenders
and trying to minimize any sort of
consensus risk.
Over the last 15 years, Madison
Capital has invested over $23 billion
into nearly 1,000 transactions,
across several different business
cycles. What are some of the lessons
learned?
The biggest lesson—and one of the
biggest advantages of playing in
the middle market—is that we are
able to communicate so quickly, so
immediately with both the company
management and the ownership.
It’s an intimacy we have with our
sponsor clients and borrowers that is
unachievable in a larger marketplace.
We’ve been fortunate to work with
some phenomenal management
teams—you can’t underestimate their
importance in how these transactions
play out.
Another lesson we’ve learned is there
are some fundamental characteristics
in businesses you can’t structure
around. We pride ourselves on being a
very diligent lender and so we spend
a lot of time dissecting deals upfront.
We are in direct communication with
the management team at least once a
month, if not more, especially if there
are events going on, or the deal is
being amended. If companies enter
into buyouts for the first time, we
spend a lot of time acclimating the
teams into a leveraged environment,
walking them through the credit
agreement and what it entails.
HUGH WADE Chief Executive Officer
Madison Capital
Look for the upcoming, full video interview online at http://www.newyorklife.com/madisoncapitalfunding/news.
14 PITCHBOOK 2Q 2016 US PE MIDDLE MARKET REPORT
SPONSORED BYIN PARTNERSHIP WITH
SHIFTING YOUNGERUS PE middle-market company inventory
Inventory is increasingly concentrated in relatively younger companies
US PE middle-market company inventory by count and year
US PE MM median hold period (years) by exit type and year
As inventory grows increasingly concentrated among more youthful companies, whatever is left continues to fuel the growth of secondaries as a means of liquidity.
1,9352,255
2,697
3,272
3,7263,927
4,2184,472
4,7604,983
5,2445,542 5,643
0
1,000
2,000
3,000
4,000
5,000
6,000
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016*
2011-2016*
2006-2010
2000-2005
Pre-2000
Year of investment
Source: PitchBook
*As of 6/30/2016
6.1
4.7
5.5
6.5
4.7
4.1
0.5
1.5
2.5
3.5
4.5
5.5
6.5
7.5
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016*
IPOs Corporate SBO
Source: PitchBook
*As of 6/30/2016
15 PITCHBOOK 2Q 2016 US PE MIDDLE MARKET REPORT
SPONSORED BYIN PARTNERSHIP WITH
Amber Landis is Vice President of Public Policy for ACG Global. For more information about ACG’s public policy efforts or to get
involved, contact Amber Landis at alandis@
acg.org.
A bipartisan
bill to
modernize
longstanding
reporting
requirements
for PE firms
received
strong
support in
the US House
Financial
Services Committee in mid-June,
following its introduction into
Congress earlier.
Led by Reps. Robert Hurt, R-Va.; Juan
Vargas, D-Calif.; Steve Stivers, R-Ohio;
and Bill Foster, D-Ill., the Investment
Advisers Modernization Act (H.R.
5424) would tailor requirements of
the Investment Advisers Act of 1940
to reflect the PE investor model, while
also maintaining SEC oversight and
investor protections.
H.R. 5424 received a vote of 47
to 12 and is expected to move for
consideration on the House floor in
the fall. The legislative action follows
efforts by ACG Global and its Private
Equity Regulatory Task Force, known
as PERT, to support the bill.
As a result of Dodd-Frank, advisers
of private funds with $150 million or
more in assets under management
must register with the Securities and
Exchange Commission and comply
with the reporting and compliance
standards of the IAA. The new bill
updates antiquated rules enacted prior
to the development of private equity
funds.
Among other changes, H.R.
5424 adjusts books and records
requirements to provide advisers with
a set of guidelines that can be easily
interpreted, exempts them from some
advertising restrictions and removes
duplicate reporting requirements.
The Association for Corporate
Growth on Thursday applauded the
introduction of the bill. Earlier, it joined
several other business organizations in
a public letter of support.
“Middle-market investment is vital to
growth in the US economy,” said Gary
A. LaBranche, ACG Global’s president
and CEO. “By passing this bipartisan
product, Congress will help advisers to
small and midsize funds better comply
with reporting requirements under
the IAA and enable them to focus on
growing Main Street companies and
the jobs that follow.”
LaBranche noted that the legislation
helps the advisers to small and midsize
funds better comply with reporting
requirements under the IAA and allows
them to focus more attention on Main
Street companies, ultimately resulting
in more jobs. The existing one-size-fits-
all compliance requirements cost small
and midsize advisers critical time and
hundreds of thousands of dollars, he
added.
In mid-May, ACG PERT member
Joshua Cherry-Seto, CFO of Blue Wolf
Capital, testified before the House
Financial Services Subcommittee
on Capital Markets and Government
Sponsored Enterprises in support of
the bill.
BILL TO MODERNIZE PE COMPLIANCE GETS STRONG SUPPORTby Amber Landis, Vice President of Public Policy for ACG Global
16 PITCHBOOK 2Q 2016 US PE MIDDLE MARKET REPORT
SPONSORED BYIN PARTNERSHIP WITH
EXITS STAY OFF PACEUS PE-backed middle-market exits
$20 billion worth of PE-backed
exits were completed last quarter
across 190 completed sales, and while
that latter figure was roughly on par
with 1Q 2016, 2Q saw YoY exit activity
decline for the fourth consecutive
quarter. The jump in 2Q exit value
can be attributed to a group of UMM
exits being sold to strategic acquirers,
including the sale of Genstar Capital-
backed Netsmart Technologies to
Allscripts and GI Partners as well as
that of Clarion Partners to Legg Mason.
With inventory concentrated among
younger companies and PE funds
holding on to a plethora of capital
they’d like to put to work if possible,
GPs are either looking to focus on
improving and growing the assets
they’ve recently acquired, or on being
net buyers, a trait that has been highly
visible in the MM. $14 billion was exited
in 2Q via corporate acquisitions, a
sharp increase from the $10.8 billion
exited to strategics during the first
quarter of the year, yet a number that
falls towards the median on a historical
basis. With other exit routes used less
and less in recent quarters, that figure
does amount to an extremely high
70% of all exit value, the same number
seen in 1Q, and the fourth highest
percentage of any quarter since at least
2010. Eight IPOs listed last quarter
raising an aggregate of just over $2
billion, a calming figure coming out of
a first quarter that saw no IPOs. Lastly,
secondary buyouts saw a 13.8% QoQ
slide in total exit value, but counts
remained roughly flat over the same
period.
SBOs and strategic M&A are utilized in relatively equal proportions
US PE-backed MM exits (#) by type
US PE-backed middle-market exits
$69
$84
$41
$25
$71
$76
$86
$76
$115
$103
$36
574
713
452
258
615684
850
776
993 981
379
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016*
Exit value ($B) # of exits
Source: PitchBook
*As of 6/30/2016
0
200
400
600
800
1,000
1,200
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016*
Corporate Acquisition IPO Secondary Buyout
Source: PitchBook
*As of 6/30/2016
17 PITCHBOOK 2Q 2016 US PE MIDDLE MARKET REPORT
SPONSORED BYIN PARTNERSHIP WITH
CREATING VALUEby Danielle Fugazy, Special to Grant Thornton, LLP
Creating true value—meaning a
stronger, more sustainable company—
is the only way for PE firms to generate
returns.
“PE firms need to have a well-thought-
out plan and strong track record
of how they create value to attract
investors in today’s environment,” says
Sal Fira, a partner in Grant Thornton’s
Transaction Advisory Services practice
and Private Equity lead for Advisory
Services.
Here’s a look at what some PE firms
are doing to create value today.
Specialize in Sectors. Some of the
most successful PE firms have become
specialized, focusing on one sector or
a few sectors where they have deep
industry knowledge. According to
Private Equity Institutional Investor
Trends for 2016, a survey of limited
partners completed by Probitas
Partners, 37% of respondents want to
invest in middle-market funds focused
on single industries.
Develop a Strategic Plan. “Creating
a roadmap for the company after the
investment is the first step to value
creation. What has really enriched
that strategy is extending our team to
include noninvestment professionals
with functional area expertise, such
as sales, talent and operations,” says
Christian Bullitt, a principal with LLR
Partners. “They roll up their sleeves
and help drive growth based on
specific experience in the portfolio
company’s niche industry or business
model.”
Use a 100-day Plan. “Laying out
the right strategy is key,” says Ben
Siebach, a managing director in Grant
Thornton’s Transaction Advisory
Services practice who specializes in
performance improvement. “The first
100 days are essential—employees are
expecting change. Later—down the
road—change can be a disruption. It’s
best to start things off right.”
However, implementation of a 100-
day plan does not always go as
expected, Siebach notes. In fact, it
rarely does. Operators and company
management need to be agile enough
to react appropriately when things
go sideways. The key is to remember
that throughout implementation, even
when things aren’t going exactly as
planned, it’s important to continue to
push forward, he says.
Hold Everyone Accountable. Often
the conversation related to hitting
goals circles around “what” and
“when,” but the question of “who”
will handle implementation is less
established. This can be a big mistake.
“Accountability is about understanding
who is responsible for what and then
being able to bring resources to the
employee,” Siebach says. “It shouldn’t
be looked at as punitive, but as
helpful.”
Driving strong returns and creating
value is not going to get easier as the
PE industry continues to mature. But
PE firms that put the right talent in
place, along with the right plan and
support, will generate solid returns and
ultimately keep LPs re-upping.
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18 PITCHBOOK 2Q 2016 US PE MIDDLE MARKET REPORT
SPONSORED BYIN PARTNERSHIP WITH
FUNDRAISING
US PE middle-market fundraising by year
Similar to what we saw unfold
across the broader PE fundraising
environment, the second quarter of
2016 experienced a reversal of the
most prevalent trends that played out
during the first quarter of the year. We
US PE MM fund count by size
saw a significant uptick in the amount
of smaller and niche vehicles come to
market in 1Q, looking to adapt to a slow-
growth environment by exploiting a
level of operational expertise generalist
funds did not possess. Yet the opposite
occurred in 2Q, with total capital
raised hiking more than 28% QoQ and
total closings actually sliding near 13%
over the same period. As LPs seemed
to accept the aforementioned niche
strategies, the 2Q trend observed
could be a testament to a small number
of larger, middle-market-focused
funds finally closing, as evidenced by
the median time to close for vehicles
coming in at 19 months in 1H, the second
highest figure we’ve ever tracked. The
median time to close for buyout vehicles
came in at just over 18 months, the third
highest number we’ve tracked.
In total, funds have been smaller thus
far into 2016, yet a select group of
mega funds have skewed the average
fund size midway through 2016, led by
Brookfield Capital Partners IV along
with the KKR Special Situations Fund
II, both oversubscribed restructuring
funds that closed on $4 billion and $3.4
billion, respectively. As we remain late
in the cycle, a variety of opportunities
will continue to arise where managers
will be able to acquire discounted
companies in need of sophisticated
deleveraging and restructuring
strategies. The entire US PE market saw
distressed strategies raise more capital
in 1H than 2015 in its entirety, and the
closings of the above two vehicles only
further reinforces that trend.
$125
$146
$141
$85
$68
$105
$108
$124
$148
$131
$62
178
218196
112 110
136140
189 186174
90
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016*
Capital raised ($B)
# of funds closed
Source: PitchBook
*As of 6/30/2016
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016*
$100M-$250M $250M-$500M $500M-$1B $1B-$5BSource: PitchBook
*As of 6/30/2016
19 PITCHBOOK 2Q 2016 US PE MIDDLE MARKET REPORT
SPONSORED BYIN PARTNERSHIP WITH
MM LEAGUE TABLES2Q 2016
ABRY Partners 17
Audax Group 12
Vista Equity Partners 12
HarbourVest Partners 9
Summit Partners 8
GTCR 6
Huron Capital Partners 6
Insight Venture Partners 6
Kohlberg Kravis Roberts 6
Warburg Pincus 6
AEA Investors 5
Clayton, Dubilier & Rice 5
Clearview Capital 5
Cloud Equity Group 5
Golden Gate Capital 5
Kelso & Company 5
KRG Capital Partners 5
Maranon Capital 5
Onex 5
Providence Equity Partners 5
The Carlyle Group 5
The Jordan Company 5
The Riverside Company 5
The Sterling Group 5
Thoma Bravo 5
Yukon Partners 5
Kirkland & Ellis 34
Jones Day 21
Morgan, Lewis & Bockius 19
Latham & Watkins 15
Paul Hastings 15
DLA Piper 14
Weil, Gotshal & Manges 14
Choate Hall & Stewart 11
Ropes & Gray 11
Paul, Weiss, Rifkind, Wharton & Garrison
9
Debevoise & Plimpton 8
Sidley Austin 8
Cooley 7
Willkie Farr & Gallagher 7
Goodwin Procter 6
Winston & Strawn 6
McGuireWoods 5
Arnold & Porter 4
BakerHostetler 4
Covington & Burling 4
Gibson, Dunn & Crutcher 4
Hongiman Miller Schwartz and Cohn
4
McDermott Will & Emery 4
Morris Manning & Martin 4
Stikeman Elliott 4
Wilson Sonsini Goodrich & Rosati
4
Most active investors by deal count Most active law firms by deal count
Antares Holding 22
Madison Capital Funding 16
BMO Harris Bank 11
Twin Brook Capital Partners 11
NXT Capital 9
Golub Capital 7
Credit Suisse 5
Fifth Street 5
Fifth Third Bank 5
Maranon Capital 5
Monroe Capital 5
Capital One Commercial Banking
4
Deutsche Bank 4
NewStar Financial 4
RBC Capital Markets 4
Silicon Valley Bank 4
Most active lenders by deal count
Houlihan Lokey 9
Lincoln International 9
Jefferies Group 6
Raymond James Financial 6
Robert W. Baird & Co. 6
Harris Williams & Co. 5
William Blair & Company 5
BB&T Capital Markets 4
Ernst & Young 4
Moelis & Company 4
Stifel 4
Most active advisors by deal count
Source: PitchBook
Source: PitchBook
Source: PitchBook
Source: PitchBook
20 PITCHBOOK 2Q 2016 US PE MIDDLE MARKET REPORT
SPONSORED BYIN PARTNERSHIP WITH
METHODOLOGY
21 PITCHBOOK 2Q 2016 US PE MIDDLE MARKET REPORT
SPONSORED BYIN PARTNERSHIP WITH
MIDDLE MARKET DEFINITIONFor this report, the middle market (MM) is defined as US-based companies acquired through buyout transactions between $25 million and $1 billion. Note that minority deals are not included. The middle market is further broken down into the lower middle market (LMM; $25 million to $100 million), the core middle market (CMM; $100 million to $500 million) and the upper middle market (UMM; $500 million to $1 billion). This report covers only US-based middle-market companies that have received some type of private equity investment.
TOTAL CAPITAL INVESTED/DEAL VALUETotal amount of equity and debt used in the private equity investment
Ex. $10 million of equity and $20 million of debt = $30 million of total capital investment
PitchBook’s total capital invested figures include deal amounts that were not collected by PitchBook but have been estimated using a multidimensional estimation matrix, which takes into account year of investment, deal type, platform v. add-on, industry and sector. Some datasets will include these extrapolated numbers while others will be compiled using only data collected directly by PitchBook; this explains any potential discrepancies that may be noticed.
FUNDRAISINGPitchBook defines middle-market funds as PE investment vehicles with between $100 million and $5 billion in capital commitments. The report only includes private equity funds that have held their final close. Funds-of-funds and LP secondary funds are not included.
EXITSThe report includes both full and partial exits of middle-market companies via corporate acquisition, secondary private equity buyout and initial public offering (IPO). PitchBook has utilized its multi-dimensional substitution and estimation matrix to estimate transaction sizes where the deal amount is unknown. For the MM company inventory, we included companies that are expected to exit between $25 million and $1 billion.
LEAGUE TABLESAll League Tables are compiled using deal counts for middle-market leveraged buyouts. For example, the Most Active Advisors League Table shows the number of US-based middle-market deals that a firm advised on during the second quarter of 2016. Deals on which a firm advised multiple parties will only be counted once for that firm.
Madison Capital, founded in 2001, and headquartered in Chicago, Illinois, is a premier finance company focused exclusively on the corporate financing needs of middle market private equity firms. Madison Capital has closed transactions with over 255 different private equity firms and provides enterprise-value
leveraged financing for leveraged buyouts, management buyouts, add-on acquisitions and recapitalizations. Madison Capital Funding LLC is a subsidiary of New York Life Insurance Company. Additional information may be found at: www.mcfllc.com
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