VOLUME FALLS, LOWEST DEAL VALUE SINCE 2Q 2013

Transcription

1 US 2Q 2016 IN PARTNERSHIP WITH VOLUME FALLS, LOWEST DEAL VALUE SINCE 2Q 2013 PAGE 5» DEBT PERCENTAGES STAY LOW PAGE 7» EXITS AT 2013 LEVELS PAGE 10» LEAGUE TABLES PAGE 17»

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3 Credits & Contact PitchBook Data, Inc. JOHN GABBERT Founder, CEO ADLEY BOWDEN Vice President, Market Development & Analysis Content NIZAR TARHUNI Senior Analyst BRIAN LEE Senior Analyst JENNIFER SAM Senior Graphic Designer Contents Contact PitchBook pitchbook.com RESEARCH Introduction 4 Overview 5-6 EDITORIAL editorial@pitchbook.com SALES sales@pitchbook.com Deal Multiples & Debt Levels 7 Q&A: Merrill Corporation 8 Deals by Size & Sector 9 Exits Q&A: Murray Devine Company Inventory 14 Fundraising Q 2016 League Tables 17 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. 3

4 A continued decline for US PE Introduction As we ve moved halfway through 2016, the private equity world continues to see activity decline at an elevated pace. PE-backed inventory remains full of relatively new portfolio companies, and with that, we ve also seen exit trends decline rapidly. The aforementioned trends can look fairly imposing on a chart, but as the industry as a whole finds itself in limbo, maybe we can address it as a reorganization period. Growth prospects are dim, and as sponsors look to source attractive opportunities, the base case of where they model out transactions should probably incorporate a more negative outlook. Borrowing costs remain low for many targets, yet the credit window can also be narrower for many deals that would have been better received over the first part of 2015, prior to the volatility we ve seen impact most asset classes over recent quarters. So as managers look to assess the quality of the deals on their table, in addition to the financing options utilizable to both get deals done and sustain their businesses through an external economic shock, things are naturally moving slower, which we don t think is necessarily a bad thing. It will take an extended period for PE to work its way through this cycle. While traditional buyout numbers might not look as robust as they have over the past few years, the current environment has provided late-stage opportunities for niche secondaries, distressed or sector-focused managers to enter the market and provide limited partners with additional avenues to continue deploying capital to an asset class that has outperformed for them historically. The continued resilience of PE fundraising numbers also speaks to the patience and understanding of these investors, so in a world where central-bank-fueled capital markets have shown increasing signs of irregular behavior, LPs appear set to lock up capital and wait it out with PE. Please feel free to reach us at reports@pitchbook.com should you have any questions or comments. YOUR JOURNEY TO STRONGER RETURNS STARTS HERE The PitchBook Platform for private equity Strengthen your LP relationships Build a better portfolio Exit efficiently and successfully Elevate your firm with award-winning technology With data on: Companies Investors Deals M&A Limited partners Funds Financials Advisors People NIZAR TARHUNI Senior Analyst Request a free trial demo@pitchbook.com US UK +44 (0) pitchbook.com 4

5 Trends remain the same Overview Buoyed by the $14 billion takeprivate of Keurig Green Mountain, the first quarter of 2016 saw total PE deal value rise on a quarterly basis, despite the pronounced decline in volume we observed during the same period. However, as we ve moved through the year, 2Q 2016 has brought activity back to the trends we previously anticipated, with both aggregate deal value and volume sliding. PE sponsors deployed nearly $135 billion last quarter across 719 completed transactions, representing (quarter-over-quarter) QoQ drops of 18% and 14%, respectively. If we back out and look at the numbers from a midyear perspective, the data lends itself to a more nuanced analysis, with aggregate deal value trends actually coming in a bit stronger Midway through the year, volume is off pace even as value is stable US PE activity 2,719 $494 Deal value ($B) 3,414 $910 2,715 $369 1,808 $164 # of deals closed 2,649 $362 2,945 $415 3,311 3,216 $464 $530 3,918 3,880 $630 $634 1, * $298 Volume returns to 2013 levels US PE activity by quarter Deal value ($B) # of deals closed 1, , $72 $82 $83 $126 $101 $101 $95 $118 $86 $92 $96 $190 $100 $114 $145 $172 $149 $150 $166 $166 $149 $147 $188 $150 $164 $135 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

6 than expected. Driven by a series of transactions involving publicly traded targets, the first half of 2016 saw over $298 billion worth of deals close, representing a 12% decline relative to the back half of 2015 and a slight increase over the same period last year. If we back out the $55 billion Kraft-Heinz mega merger that closed in early July 2015, however, 1H 2016 deal value would actually come in higher by close to 6% relative to 2H 2015, an interesting statistic given that transactions the size of Kraft-Heinz aren t frequent occurrences. Global economic and growth forecasts remain tepid at best. Factset estimates that 2Q S&P 500 earnings will drop by 5.6%, marking the first time corporate earnings have experienced five consecutive quarters of YoY declines. Although that estimate will likely come down once all companies in the index report final quarterly earnings, that number is a downward revision from a previously expected earnings slide of just under 3% in March. Looking at economic growth estimates, the World Bank forecasts that global real GDP will grow at 2.4% through 2016 (revised down from 2.9% in January), with domestic real GDP set to increase at just 1.9% (shifted lower from 2.8%). The above estimates continue to paint a sluggish macro picture for dealmakers. PE managers also face additional domestic headwinds including prospective wage growth pressures to both portfolio and target companies, along with a persistently strong US dollar that has only added to an increasingly impactful trend of slowing emerging-market demand. Despite public equities recently reaching record highs, much of the movement in the stock market has been undoubtedly fueled by an era of cheap debt and accommodative QE policies. Nothing new. Yet as publicly traded companies continue to have difficulty finding the right levers to pull to achieve acceptable growth, especially with the rise of activist investors paying a closer eye to management teams, an opportunity does appear to be arising for PE to intervene. Looking at the top 10 transactions of 2H 2015, eight were take-privates, with one PEbacked corporate divestiture. With a tremendous amount of capital yet to be deployed, and the stock of PEbacked inventory remaining relatively new, writing a bigger check in a worthwhile publicly traded acquisition could continue to interest PE at a heightened clip. Traditional buyouts are relatively down in 1H 2016 US PE deal flow by type Add-ons retain a commanding proportion US add-on % of buyout activity 100% 90% 80% 70% 60% 50% 40% 30% 43% 1,221 Add-on Non add-on Add-on % of buyout 64% 60% 61% 59% 56% 55% 53% 47% 49% 52% 1,448 1, , ,140 1,147 20% 10% 0% * Buyout Add-on Recap PE Growth Platform Creation 940 1,294 1, ,048 1,275 1,402 1,338 1,744 1, *

7 Debt usage signals wariness Deal multiples & debt levels In this report edition, we combined our PE and M&A transaction multiple datasets to capture a more comprehensive and accurate view of the deal markets in terms of pricing and debt usage. With that caveat, EV/EBITDA multiples midway through 2016 came in at approximately 11.3x, a whole turn Median EBITDA multiples of US M&A (including PE buyouts) 65% 60% 55% 50% 45% 40% 8.9x 3.9x 5.0x Debt / EBITDA Equity / EBITDA Valuation / EBITDA 9.6x 4.1x 5.5x 8.8x 3.7x 5.1x 10.3x 10.0x 3.9x 6.3x 4.3x 5.7x 10.3x 4.5x 5.8x 11.3x * 56.1% 57.1% 57.9% 61.6% higher than what we saw throughout As deal volume continues to plummet moving out of the most recent buyout boom, the distinct split in the level of quality transactions coming to market has become a bit more apparent, which has had a pronounced impact on multiples. Delving deeper into the debt-to-equity Median debt percentages for US M&A (including PE buyouts) 57.0% 56.5% 5.8x 5.5x 48.9%. Figures are likely to adjust as more data is collected * mix dealmakers are employing, we ve noticed a couple trends that speak to the nuances an uncertain global landscape can induce. The median equity-to-ebitda multiple in 1H 2016 came in at 5.8x, a significant jump from the 4.5x figure we saw last year, and by far the largest number we ve seen since at least Concurrently, the median debt percentage has also moved lower rapidly, coming in at just under 49%. According to data released by the Federal Reserve Bank of St. Louis, US nonfinancial corporate debt levels have risen to over $5.6 trillion as of the end of 1Q 2016, with more than $2.1 trillion of that coming after The rising increase in corporate credit levels has also held true across foreign and emerging economies; with many PE-backed businesses operating at a multinational level, the financial stresses experienced abroad can manifest domestically. Regardless of what potential negative catalysts there may be, any external shocks could affect sponsors from two primary angles: the first being the simple ability to service existing debt and the second the ability to secure debt financing from banks when looking to complete larger transactions. Therefore, the consistent decline in median debt percentages speaks to the wariness of many dealmakers, leading to a more risk-averse approach to deal structuring. As the bulk of PE deals occur in the middle market, many dealmakers are still able to secure the covenant-lite packages they need to complete deals within the parameters they model out, but they too could be looking to operate at a baseline that includes less debt, in turn reducing the risk their portfolio companies could experience in the face of future external headwinds. 7

8 Richard A. Martin, Jr. Senior Director Merrill Corporation Richard A. Martin, Jr. is a Senior Director at Merrill Corporation, responsible for Merrill DataSite s global marketing group. His 18 years of marketing experience working and residing in the US, U.K. and Europe has developed Martin s understanding of disparate business cultures and the global financial industry, evidenced by a successful record of growing businesses. Martin currently works closely with financial professionals to provide first class virtual data room (VDR) solutions for their transaction and due diligence needs. Prior to joining Merrill, Martin led the hedge fund marketing strategy group at Morgan Stanley Capital International and the global equity product strategy group at Reuters International, London. He received his B.A. from Dartmouth College, a marketing certificate from the University of Michigan Business School and currently resides in New York City with his wife and children. In today s market environment, exit activity has clearly slowed. That said, what are some things sponsorbacked businesses may be doing to better market themselves to a more hesitant buyer? Today, dealmakers are forced to spend additional energy and time vetting deals to make sure they are ready for unpredictable swings in the global or domestic economy, fundamental industry shifts and/or market changes that can impact their cost structures and financing capabilities, among other issues. With exits recently hitting record numbers, companies that haven t come to market may be facing headwinds or challenges that they are trying to address before soliciting buyers to optimize their exit value. That said, there could be a push to exit in a quicker fashion to avoid any external effects that could drop attainable value, so sellers should be working closely with their strategic and diligence partners to make sure they can properly find solutions to any issues that could deter buyers. Further, growth via acquisition is imperative for sponsor-backed companies as well; on that front, transition and integration processes need to be properly structured to ensure post-acquisition value can be unlocked sooner rather than later and that prospective buyers see a solid foundation on which they too can build in future quarters. What are some of the ways PE buyers have adjusted to a lower-quality market, given the amounts of dry powder they continue to hold? While quality has ostensibly declined, valuations haven t necessarily declined at the same pace. So while many buyers will only take some of the companies out there at lower prices, many sellers still expect outstretched multiples, which can push a lot of bidders away. With the mandate to put money to work, finding relative value in the lower middle market continues to be a play for many managers, despite the additional hands-on effort often required. Managers can also tap that market in a few different ways. They can look to do multiple transactions in a consolidation effort to create a broader entity, or look to combat a higher price they had to pay for a platform with a group of add-ons that bring down their aggregate entry price. As we ve moved a few quarters out since the debt market debacle of last year, how are both lenders approaching the deal market today? Are lenders continuing to plow ahead, or has there been an increased level of scrutiny around the packages they are willing to put together? The abrupt pause we saw for a few weeks late last year hasn t really come up as much. Lenders are definitely cognizant of the inherent risk in certain transactions, while the high-yield struggles we saw certainly planted seeds in the minds of lenders, but There might also be a much more developed relationship between many middle-market lenders and the PE firms they serve more so than what we see from some larger diversified banks. That relationship piece has been vital for sponsors today, who really need flexible capital in various forms to make sure they are ready for an uncertain market. Lenders are also seeing competition among themselves. Accordingly there is still certainly strong appetite to provide attractive debt packages, especially across the middle market. Given the aforementioned market concerns, how do you think new managers raising capital will fair with limited partners over the next few quarters? I think fundraising will be pared back a fair amount from what we ve seen in the last couple of years, yet I think newer funds coming to market will still have success. There will just be fewer parties fundraising. The returns PE has been able to provide over the years have reinforced that the asset class is a very necessary place for LPs to be, so if you are a fundraising manager with a tailored and differentiated strategy, you should be able to find some traction. To that point, I think fundraising strategies will also shift alongside deal-sourcing strategies. We could continue to get smaller funds with lesser capital deployment needs and, as we ve seen with some larger players extending out fund lifecycles for new vehicles, others could court a similar strategy in order to withstand some volatility in the buyout cycle over the coming years. 8

9 Deals by size and sector Sponsors continue to stay active primarily within the core and lower reaches of the middle market US PE deals (#) by deal size 100% 90% 80% 70% $2.5B+ $1B-$2.5B Deals between $25M and $100M accounted for over 25% of all activity in 1H 2016, the highest proportion since % $500M-$1B US PE deals (#) by sector 50% 40% 30% 20% $100M- $500M $25M-$100M 4,500 4,000 3,500 B2B B2C Energy Financial Services Healthcare IT Materials & Resources 10% Under $25M 3,000 0% 2, * 2,000 US PE deals ($B) by deal size 1,500 1, % 90% 80% 70% $2.5B+ $1B-$2.5B * 60% $500M-$1B US PE deals ($B) by sector 50% 40% 30% 20% 10% 0% $100M- $500M $25M-$100M Under $25M $1,000 $900 $800 $700 $600 B2B Energy Healthcare Materials & Resources B2C Financial Services IT * $500 $400 $300 Financial services deal value in 1H stood at approximately $53B. $200 $100 $ * 9

10 PE-backed sales plunge Exits Given the slowdown in the number of companies ready to come to market, exits have continued to move considerably lower in $113 billion was exited during the first half of the year amid 459 sales, representing a 47% plunge in total exit value compared to the back half of 2015 and a 28% decline in volume. On a quarterly basis, 2Q saw just shy of $50 billion exited across 222 sales, equating to 21% and 6% respective QoQ drops aggregate 2Q exit value was down more than 55% on a yearly basis. One bright spot for PE managers looking to sell came in the IPO market, which saw 10 completed PE-backed listings come to market last quarter, raising an aggregate of $3.1 billion. While previous quarters have certainly seen the public markets take kindly to PE-backed listings, this number stands out given that 1Q 2016 served as the first quarter since 1Q 2009 that no PE portfolio companies listed on public exchanges. Outside of IPOs, PE-backed exit trends were business as usual, with the only caveat being total SBO counts actually experiencing US PE-backed exit activity 696 $149 Exit value ($B) 870 $ $ $ $ a slight quarterly bump. A total of 99 sales came via the secondary buyout route in 2Q, representing an increase of 5.3% compared to the 94 SBOs completed during 1Q $155 # of exits 1,051 Sustained dip in exit activity US PE-backed exit activity Exit value ($B) # of exits $24 $38 $34 $52 $29 $54 $33 $39 $33 $47 $41 $102 $19 $31 $54 $101 $73 $59 $63 $103 $68 $112 $87 $126 $63 $50 $ $205 1,191 1, * $299 $ $113 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

11 Strategic buyers remain PE sellers salvation US PE-backed exits (#) by type 1,400 1,200 Corporate Acquisition IPO Secondary Buyout SBOs stood at 42% of all exits in 1H 2016, while IPOs rebounded from the shutout in 1Q. 1, Only IT is seeing relatively on-pace selling US PE-backed exits (#) by sector 100% 90% B2B * M&A is crucial particularly in terms of exit value US PE-backed exits ($B) by type $450 $400 $350 $300 Corporate Acquisition IPO Secondary Buyout 80% 70% 60% 50% 40% 30% 20% 10% 0% * B2C Energy Financial Services Healthcare IT Materials & Resources $250 $200 Select huge exits skew sector totals US PE-backed exits ($B) by sector $150 $ % 90% B2B $50 $ * 80% 70% 60% B2C Energy 50% 40% 30% Financial Services Healthcare The consumer sector dominated total exit value achieved in 1H 2016, at 27.6% of the whole. 20% 10% 0% * IT Materials & Resources 11

12 Francis X. Devine CFA, Executive Vice President Murray Devine Frank Devine is the Executive Vice President and Co-founder of Murray Devine. Frank s responsibilities include engagement management, technical review and business and new service development. He is directly involved in and supervises the due diligence and analyses required in connection with matters relating to financial valuations, financial opinions and litigation engagements. Frank manages day-to-day operations of the firm and is active in managing valuation engagements of various debt and equity securities for private and public companies. In addition, Frank performs solvency and fairness opinion analyses and provides expert testimony on valuation issues in litigation matters. Frank has been instrumental in building Murray Devine s portfolio valuation business assisting BDCs, CDOs, fund of funds and other financial firms that hold illiquid securities in complying with FASB ASC 820 Fair Value Measurements and Disclosures. Previously, Frank was a Senior Manager with Price Waterhouse s National Reorganization and Bankruptcy practice and a Manager with Coopers & Lybrand where he provided accounting and auditing services to a diverse client base. Frank is both a Chartered Financial Analyst and a Certified Public Accountant, and received a Bachelor of Science degree in Accounting from Villanova University. In the second quarter of 2016, total PE deal value and volume came in low relative to 1Q. What do you make of PE activity halfway through the year? In a lot of ways, the investment activity is a reflection of the uncertainty that is enveloping the larger financial markets. When you speak to principals at PE firms, there has been a real reluctance on their part to be too aggressive in an environment with so many unknowns, such as the pending presidential election in the US or the fallout from the Brexit vote in Europe. Both of those factors, not to mention some softening economic data, are casting a long shadow over the M&A market. That being said, the US GDP, while slowing, is still showing a growth trajectory even as consumer spending is slackening a bit and manufacturers contend with a strong US dollar. So when you consider all of the uncertainty, and even all of the unknown unknowns stemming from the Brexit decision and its impact on global growth, I don t think it is too surprising to see deal volume fall off a bit from the first quarter. It s also during these periods too when sponsors and sellers start to digest a market that may be in transition that you ll see a mismatch between buyer and seller expectations. It s one of the reasons the IPO market has fallen off quite a bit, as the number of issuers has been cut in half compared to last year. The last time we spoke, we touched on the misalignment between buyer and seller expectations and you just referred to this misalignment. How has this phenomenon evolved, if at all, through the second quarter of 2016? What do you expect in terms of closing period lengths moving forward? So far, we re seeing more of the same, although the divide between buyers and sellers probably grew a bit from the first quarter to the second quarter. Let s not forget that PE is 12 a very patient asset class, and six months for sponsors who may think in three- to five-year increments is still a very short period of time. We re not that far removed from a period of tremendous growth. Sellers who may have been able to fetch 10x or 11x EBITDA for the same assets a year ago now have to contend with a buyer universe that suddenly has questions over how the company will perform in a low-growth environment or how the evolving macro picture will affect the business. Moreover, if at this time last year sponsors were willing to fund a transaction with a capital structure comprised of 80%/20% debt to equity, this year they are probably more inclined to over-equitize a platform given the uncertainty. All of this cuts into the ultimate purchase price, but sellers may have a number set in their heads that is informed by what they could ve received in Eventually, this misalignment will resolve itself, because the market will influence which companies decide to put themselves up for sale in the first place. And if we do enter into more of a low-growth market, in which the macro factors start to impact corporate revenues, you ll see a bifurcation occur between those companies whose performance demands above-market valuations and assets that have to go up for sale. In both scenarios, buyer and seller expectations tend to match up, but the opportunity set will more closely resemble a barbell comprised of good and bad assets. Given a slow deal environment, have you noticed a change in the way or methods used to value prospective targets? How about a change in the way deals are being sourced? There are a lot of different valuation models and the discounted cash flow model is probably among the most popular, but the model itself can be pretty malleable because it s so reliant on forecasts and looks into perpetuity. So those who may be really bullish The Q&A is continued on the next page.

13 about the prospects of a particular asset and those who are more cynical can arrive at completely different valuations due to the potential disparity as it relates to the respective inputs. In these instances, though, there may be a greater tendency to rely on earnouts as a way to close that gap. I think there can also be some difficulty when it comes to aligning on comparables. For instance, one company may have a particular multiple in mind. This number may be based on the sale price of a competitor, but the makeup of their businesses and end markets may be vastly different. It wasn t that long ago, for example, when you saw a lot of media businesses rebrand themselves as digital information companies because the multiples were more attractive under that umbrella. This is still going on today, as the Tribune Company rebranded itself as tronc this past June to reflect a transition from a traditional media company to a technology and content company. The press release itself said the move was premised on creating superior value. I d argue, though, that most buyers will see through these types of rebranding efforts. This is why you have to take multiples with a grain of salt and really dig down to understand the business and its revenue drivers before assigning a valuation. In terms of sourcing, when the deal market slows, sellers tend to retrench. A lot of sponsors will step up their proactive outreach and many will tap buy-side bankers to perhaps help cover a respective industry. You ll also see more carveouts in the event that the economic picture starts to deteriorate, as companies seek to rationalize their business and focus on those areas where they have a real competitive advantage. These present great opportunities for PE to step in and give these overlooked assets the attention they need to really thrive. Also, as the equity markets become more volatile, you ll probably see an uptick in public-to-private transactions, as sponsors may be able to capture some appealing arbitrage opportunities and as sellers become more amenable to operating outside of the glare of the public markets. I think one of the biggest selling points of PE, beyond offering value-added capital, is that it really is a patient asset class and sponsors can provide management teams the time needed to carry out initiatives that otherwise wouldn t be possible under the scrutiny of a quarterly reporting schedule. Taking the backdrop of an increasingly uncertain future global economy and a historically expensive market, do you see any broader sectors that will see outsized deal activity due to a perceived ability to withstand future market/economic volatility? I think the healthcare industry will continue to attract M&A activity given the profound changes taking place there. Much of the activity in the large market has trickled down to the small and middle market as the entire industry has adapted to the new model introduced by the Affordable Care Act. In technology, you re seeing a lot of activity, again at the high end of the sector, such as Microsoft s acquisition of LinkedIn, Dell s purchase of EMC, and a number of other large, industry-shaping transactions. I think you ll continue to see deals in tech, particularly as other industries try to adopt a digital model and there will be a first mover advantage. Also, given how much capital has gone into venture capital, there will likely be some pressure on VCs to secure some realizations. Those are the two sectors that really stand out, but in any market, great assets will command attractive valuations. As long as the economy doesn t start to contract, I think we ll see deal flow start to pick up again once everyone adjusts to the new landscape and there will be a broad interest from across most industries as companies look seek out new growth catalysts in an otherwise low-growth environment. MAKE WAY FOR SMARTER, ON-THE-FLY MEETING PREP Introducing PitchBook Mobile. The same excellent data, technology and service from the PitchBook Platform, now available on a mobile device. Available for Search: PitchBook US UK +44 (0) demo@pitchbook.com pitchbook.com

14 Inventory remains lofty Company inventory Close to 36% of current inventory dates from 2010 and earlier US PE-backed company inventory by count and year 8,000 7,000 6,395 7,045 7,580 6,000 5,000 5,005 5,666 Year of Investment * 4,000 3, ,000 2,000 1,462 1,874 2, Pre ,000 0 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 16 Hold periods decline across the board US PE median hold period (years) by exit type and year IPOs Corporate SBO * 4.4. Buyout entrance only. Decreasing hold periods across the SBO exit type point to a faster recycling period among portfolio companies a consequence of a lack of original targets. 14

15 Alternatives still attract Fundraising Despite a significant amount of capital on the sidelines waiting to be deployed, fundraising performance midway through the year has been rather impressive. More than $115 billion in capital was raised across 138 PE vehicles in 1H 2016, amounting to a near 24% increase relative to the same period last year, and a decline of over 5% in terms of total closed funds. For context, if the current fundraising pace were to hold through the rest of the year, 2016 will have raised more capital for the PE asset class than any year since The first quarter of the year saw a flurry of smaller funds close, yet we saw a reversal of that trend during 2Q. $63 billion was raised during the most recent quarter across 62 closings, equating to a noticeable 20.5% QoQ increase in terms of dollars raised, but an equally noticeable 18% decline in fund counts during the quarter. In previous editions of this report, we noted a trend of smaller, more targeted vehicles having success on their fundraising trails. To a small extent, that has continued, with funds targeting between $250 million and $500 million accounting for 18% of all fund closes. Yet the overarching story so far in 2016 has been the willingness of LPs to commit outsized amounts to mega funds targeting a minimum of $5 billion. Six such vehicles have already closed this year, raising an aggregate of close to $53 billion and representing a colossal 46% of all capital raised in 1H, the most we ve seen since As the deal cycle has evolved, so has the fundraising cycle, and despite continued strong appetites to back traditional buyout managers, sophisticated restructuring and distressed players have found significant success in 2016 thus far. That strategy has raised more than $12 billion as of the end of 2Q, which is more capital than distressed managers raised in all of On a quick and somewhat related note, energy fundraising has diminished this year, with just under $5 billion earmarked for the sector saw energy PE managers raise a record amount of capital and as more traditional assetbuilding opportunities have presented themselves at a slower pace than many expected, the need for more capital simply isn t there. Further, bankruptcies have become an all-toocommon trend around the energy sector this year, a scenario that can be much more attractive to a distressed manager able to utilize their expertise with depleted balance sheets and mismatched capital structures than the aforementioned traditional private investor. Capital raised jumps higher, even as volume declines US PE fundraising Capital raised ($B) # of funds closed $34 $30 $25 $19 $29 $36 $30 $33 $37 $80 $33 $77 $53 $54 $39 $60 $59 $34 $45 $65 $52 $63 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q

16 Both buyout funds and the overall PE fund population for 2016 are at the highest level in years Median US PE fund size ($M) $350 $300 $250 $200 $150 $100 $50 $0 Buyout funds $247.6 $222.5 $200.0 $171.5 All PE funds * In the first half of the year, restructuring/distressed debt vehicles pooled $12.1B in commitments, more than all of 2015 saw. By count, buyout funds accounted for a record proportion of fundraising in 1H 2016 US PE funds (#) by type 100% 90% 80% 70% 60% Co- Investment Restruct./ Distressed Debt Mezz. 50% 40% Energy US PE funds (#) to hit target 30% PE Growth 100% 90% 80% 70% 60% 20% 10% 0% * Buyout 50% 40% 30% 20% 10% Closing times normalized somewhat given 2Q results Average US PE fund closing times (months) 20 0% * Hit target Missed target % of all PE funds hit their fundraising targets through the first half of Buyout funds All PE funds * 16

17 League tables 2Q 2016 Most active investors by deal count ABRY Partners 17 Audax Group 13 Vista Equity Partners 12 Summit Partners 9 HarbourVest Partners 8 Providence Equity Partners 8 Warburg Pincus 8 Kohlberg Kravis Roberts 7 TA Associates Management 7 Clayton, Dubilier & Rice 6 Golden Gate Capital 6 GTCR Golder Rauner 6 Huron Capital Partners 6 Insight Venture Partners 6 The Carlyle Group 6 The Riverside Company 6 Yukon Partners 6 Advent International 5 AEA Investors 5 American Securities 5 Bregal Sagemount 5 Clearview Capital 5 Cloud Equity Group 5 Genstar Capital 5 Kelso & Company 5 KRG Capital Partners 5 LLR Partners 5 Maranon Capital 5 Onex 5 The Blackstone Group 5 The Jordan Company 5 The Sterling Group 5 Most active lenders by deal count Antares Holdings 28 Madison Capital Funding 15 NXT Capital 14 BMO Harris Bank 13 Twin Brook Capital Partners 12 HSBC Bank 8 Fifth Third Bank 7 Golub Capital 7 Monroe Capital 7 Maranon Capital 6 NewStar Financial 6 Capital One Commercial Banking Credit Suisse 5 Houlihan Lokey 11 Jefferies Group 11 Lincoln International 10 Harris Williams & Co. 8 Moelis & Company 6 RBC Capital Markets 6 Robert W. Baird & Co. 6 William Blair & Company 6 Stifel 5 The Goldman Sachs Group 5 Barclays 4 BB&T Capital Markets 4 Ernst & Young 4 J.P. Morgan 4 Piper Jaffray 4 Raymond James Financial 4 5 Most active advisors by deal count Most active law firms by deal count Kirkland & Ellis 42 Jones Day 24 Morgan, Lewis & Bockius 24 DLA Piper 23 Latham & Watkins 22 Weil, Gotshal & Manges 19 Paul Hastings 15 Choate Hall & Stewart 14 Paul, Weiss, Rifkind, Wharton & Garrison 13 Goodwin Procter 12 Cooley 11 Sidley Austin 11 Debevoise & Plimpton 8 McDermott Will & Emery 7 Willkie Farr & Gallagher 7 Winston & Strawn 6 Arnold & Porter 5 BakerHostetler 5 Davis Polk & Wardwell 5 Hogan Lovells 5 McGuireWoods 5 Morris Manning & Martin 5 Wachtell, Lipton, Rosen & Katz 5 Thoma Bravo 5 17

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