state of private capital markets 2011: update
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Prepared for the AM&AA Private Capital Markets LaunchPad, June 10, 2011TRANSCRIPT
The State of the Private Capital Markets
Private Capital Markets LaunchPadJune 10, 2011John K. Paglia, Ph.D., CFA, CPA
Associate Professor of FinanceSenior Researcher, Pepperdine Private Capital
Markets Project
• What is cost of capital for privately-held businesses?
• The project launched in 2007; first report in July 2009
• We now survey 12 segments semi-annually
• Survey asks about firm profile, behavior, returns, view of next 12 months
• Next report to be released Monday
• Certificate in Private Capital Markets
Pepperdine Private Capital Markets Project
What is the Status of Privately-Held Businesses
as of Spring 2011?
What are Owners Focusing on Today?
• Nearly 95% of business owners report having the enthusiasm to execute growth strategies
• Yet just 53% report having the necessary financial resources to successfully execute growth strategies
State of Financing
• How much senior leverage is available for transactions?
• How much junior leverage is available and what are the total debt thresholds?
• How much equity is available for growth capital and transactions?
Capital Access Drives Valuations and Deal Flow in the Middle Markets
Median Deal Multiples by Financial BuyersInvestment Banker Survey (Spring 2011)
Industry$1M
EBITDA
$5M
EBITDA
$10M
EBITDA
$15M
EBITDA
$25M
EBITDA
$50M
EBITDA
$100M
EBITDA
Service 4.0 5.0 6.0 7.0 7.0 8.0 12.0
Mfg. 4.0 5.0 6.0 5.3 6.0 7.0 10.0
Retail 3.5 5.0 6.0 7.0 6.0 7.5 8.5
Wholesale 4.8 5.3 3.3 4.0 6.5 7.0 8.0
Distribution 4.3 5.3 5.0 4.5 5.3 6.5 6.0
Oil and Gas 4.5 4.0 4.0 5.0 6.0 7.0 NA
Restaurant 3.0 3.0 3.5 4.0 6.0 6.0 NA
Healthcare 5.0 6.5 6.8 6.0 6.0 7.0 7.0
Technology 5.0 7.0 8.0 9.0 8.0 10.5 9.0
Media / Ent. 5.5 5.5 4.0 7.0 7.0 8.0 7.5
Average 4.4 5.2 5.3 5.9 6.4 7.5 8.5
Business Transfer Intentions (Spring 2011)
Business Transfer Timing (Spring 2011)
Overall Impressions of Capital SourcesCapital Source
Very unfavorable Unfavorable
Slightly Unfavorable Neutral
Slightly Favorable Favorable
Very favorable
Score(-3 to 3)
Bank loan
6% 5% 6% 11% 15% 34% 22% 1.48
Asset based lender
4% 6% 9% 21% 20% 29% 11% 1.08
Private equity fund
6% 12% 11% 24% 20% 20% 7% 0.51
Angel investor
9% 13% 14% 23% 21% 14% 5% 0.12
Venture capital fund
10% 17% 14% 22% 19% 15% 2% -0.07
Mezz Fund
9% 14% 14% 35% 16% 11% 2% -0.12
Friends and family
19% 18% 11% 18% 10% 15% 9% -0.22
Factor 15% 19% 13% 29% 11% 9% 4% -0.48
Capital Providers
• 37% of activity from refinancing; 17% acquisitions; 12% growth financing
• 60% of applications declined, 36% lack high-quality earnings/cash flow
• Demand for loans up, due diligence efforts increased significantly
• Leverage increased slightly
What’s Happening in Banks
• Personal guarantees and collateral requirements mandatory under $15 million
• Regulatory pressure to avoid risky loans increased, 76% report feeling increased pressure
• 60% indicate that increased pressure led to declining loans that otherwise would have been made
What’s Happening in Banks (Cont’d)
• 26% of investments in next 12 months in business services, 25% in manufacturing, 14% in wholesale and distribution
• Demand for investment up considerably along with leverage and deal multiples
• Confidence and conditions improving
• Warrant coverage and expected returns down slightly
What’s Happening in Mezz
• 25% of investments in next 12 months in manufacturing, 14% in business services, 14% healthcare
• Demand for investment up considerably along with leverage and deal multiples
• Confidence and conditions improving
What’s Happening in PE
• Power of LPs increasing! 30% say beneficial; 38% say detrimental
• 56% now looking at larger/smaller investments to deploy capital
• Making more minority investments; 60% indicate no change in expected returns
What’s Happening in PE (cont’d)
Insights from Investment Bankers
• Deal flow has increased slightly
• Leverage multiples have improved slightly, as have deal multiples, particularly for later-stage companies
• Due diligence efforts by banks and buyers have increased
Compared to Six Months Ago
40% of Business Sale Engagements Expired Without a Transaction
Valuation Gaps for Non-Transacted Engagements
Difficulty Securing Senior Debt?
Very
difficultDifficult
Somewhat
DifficultNeutral
Somewhat
EasyEasy Very Easy
%
Difficult
$1M EBITDA 41.3% 27.3% 19.8% 8.3% 2.5% 0.0% 0.8%88.4%
$5M EBITDA 12.7% 14.4% 33.9% 23.7% 10.2% 1.7% 3.4%61.0%
$10M EBITDA 6.6% 10.5% 15.8% 25.0% 27.6% 11.8% 2.6%32.9%
$15M EBITDA 5.8% 5.8% 19.2% 19.2% 28.8% 19.2% 1.9%30.8%
$25M EBITDA 6.5% 4.3% 17.4% 21.7% 19.6% 21.7% 8.7%28.2%
$50M EBITDA 11.4% 5.7% 5.7% 20.0% 28.6% 14.3% 14.3%22.8%
$100M+ EBITDA 12.9% 6.5% 3.2% 25.8% 22.6% 12.9% 16.1%22.6%
Balance of Capital with Opportunities Companies worthy of
financing GREATLY
exceed capital available
Companies
worthy of
financing exceed
capital available
General balance
between companies
worthy of financing
and capital available
Capital available
exceeds companies
worthy of
financing
Capital available
GREATLY exceeds
companies worthy
of financing
Score
$1M EBITDA 28.6% 37.1% 20.0% 11.4% 2.9% -0.8
$5M EBITDA 13.2% 30.9% 32.4% 17.6% 5.9% -0.3
$10M EBITDA 5.7% 17.0% 39.6% 24.5% 13.2% 0.2
$15M EBITDA 4.9% 22.0% 29.3% 31.7% 12.2% 0.2
$25M EBITDA 6.3% 15.6% 31.3% 18.8% 28.1% 0.5
$50M EBITDA 13.8% 10.3% 13.8% 31.0% 31.0% 0.6
$100M EBITDA 18.5% 11.1% 14.8% 22.2% 33.3% 0.4
> $100M EBITDA 14.8% 11.1% 14.8% 11.1% 48.1% 0.7
Top Issues Facing Privately Held Businesses (Today versus Emerging)
Today
Emerging
• Business owners are more optimistic, back to focusing on expansion, and looking for exit opportunities
• Capital availability is robust for larger companies, still a concern for smaller ones
• Deal market active for larger companies, improving for smaller ones
M&A OutlookThe Road Ahead
John K. Paglia, Ph.D., CFA, CPA
Associate Professor of Finance
Senior Researcher, Pepperdine Private Capital Markets Project
bschool.pepperdine.edu/privatecapital
Thank You!