AND COMPANY INVENTORY

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1 AND COMPANY INVENTORY 2015 Annual IN PAST TWO YEARS, PE-BACKED EXIT VALUE TOTALS $1.07T PAG E 4» CORPORATE ACQUISITIONS SURGE IN TOTAL VALUE, HITTING $360B IN 2015 PAG E 7» PE-BACKED IPO VALUATION SLIDES FOR SECOND YEAR IN A ROW PAG E 9»

2 Credits & Contact PitchBook Data, Inc. JOHN GABBERT Founder, CEO ADLEY BOWDEN Vice President, Market Development & Analysis Content NIZAR TARHUNI Senior Analyst BRIAN LEE Data Analyst JENNIFER SAM Senior Graphic Designer JESS CHAIDEZ Graphic Designer Contents Contact PitchBook pitchbook.com RESEARCH Introduction 3 Overview 4 5 EDITORIAL editorial@pitchbook.com SALES sales@pitchbook.com Exits by Type & Industry 6 Corporate Acquisitions 7 Secondary Buyouts 8 IPOs 9 Company Inventory 10 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. 2

3 A disequilibrium between sellers and buyers Introduction 2015 remained a strong year for private equity sellers as the quantity of acquisitive buyers in the market outpaced that of sellers, contributing to sustained high valuations for those looking to exit. While seller expectations remained high, and many were certainly able to negotiate attractive terms in sales processes, those same sellers faced issues finding attractive deals to put capital to work, continuing a bifurcation between success in buying and selling for PE. Trends around popular exit ramps remained similar to what we ve observed recently, with strategic acquisitions accounting for the bulk of PE-backed sales, followed by PE-to-PE buyouts. Strategic and PE buyers have found themselves in the same processes bidding for deals, increasing competition and helping pad exit values for sellers again a double-edged sword for PE as they look to close deals on both sides of the table. With a wave of new fund managers spinning out vehicles focused on utilizing operational expertise and a deeper understanding of certain sectors, these general partners have been able to help underpin growth in secondary buyouts, deeming their expertise a strategic advantage over other bidders and subsequently bidding much more aggressively. PE-backed inventory levels remain inflated, and with managers scouring for opportunities after years of overly successful fundraising efforts, we don t expect this to change in a meaningful way. The rate of investments in the past, such as those made in 2007, has contributed to a rise in zombie vehicles, as fund managers face substantial challenges exiting various companies. Consequently, when you consider these aging assets in conjunction with the dire need of dealmakers to capitalize on any market stutters that could open up a window for investors to become more aggressive, that inventory will remain at least flat in the coming future. 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 This report spans PE-backed exits in North America and Europe. We hope you find the enclosed data and insights helpful as you assess the macro PE landscape. As always, feel free to contact us with any questions. NIZAR TARHUNI Senior Analyst US UK +44 (0) demo@pitchbook.com pitchbook.com 3

4 Record year for PE-backed exits Overview With PE-backed exit value growing at a near 20% CAGR since 2010, the seller s market extended in 2015, as PE investors sought to take advantage of the froth we ve seen in multiples. Total exit value last year came in at a record $554 billion across 2,320 completed sales, representing a year-over-year (YoY) climb of 7.5% and 8.6%, respectively. With GPs unloading many of their top-tier holdings in 2013 and 2014, corporate acquisitions remained the primary exit avenue for private equity in 2015, helping drive elevated deal multiples. Seeking transactions that are strategic in nature, corporations are able to pay top dollar despite concerns regarding sustained revenue growth and the quality of current earnings, if 2014 and 2015 combined for $1.07T in PE-backed exit value Global PE-backed exit activity by year 1,261 $300 Exit value ($B) 1,553 $373 1,087 $ $92 1,332 $225 # of exits closed 1,633 1,787 $295 $337 1,908 $461 2,136 $516 2,320 $554 Three of the past five quarters have exceeded $150B in total quarterly exit value Global PE-backed exit activity by quarter Exit value ($B) # of exits closed $50 $100 $77 $68 $52 $72 $73 $140 $50 $167 $104 $141 $124 $117 $123 $151 $102 $155 $144 $154 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q Note: Unless otherwise stated, the datasets cover PE-backed exits in Europe and North America. 4

5 targets offer various synergies or help drive efficiencies in existing process that can reap impactful cost savings. PE buyers, however, are forced to be more selective. While many valuedriven and operational managers are also deploying capital to new deals, these transactions typically occur at the lower ends of the middle market, Last year saw the first decline in time taken to exit in six years Median time to PE exit (years) yet many dealmakers simply need to write bigger checks as they sit on piles of dry powder. That said, buyers are wary of overpaying unless they have an operational advantage. The current competitive pricing environment has dampened deal flow, which we ve seen show up in a continued move lower in the investments-to-exit multiple. Corporate acquisition IPO Secondary buyouts That figure came in at 1.9x in 2015 compared to 2.1x in 2014, 2.8x in 2010 and 3.9x in 2009, when firms were able to capitalize on distressed opportunities and acquire businesses at depressed prices. The median time to exit for PE-backed sales in 2015 came in as rather positive news. Across all exit ramps, portfolio companies coming to market during the year had been acquired just 5.1 years prior; this compares to a reported value of 6.1 for all companies exiting in 2014, which saw companies endure a steeper portion of their respective J-curves as they weathered the recession. Moving forward, acquisitive buyers should continue to outnumber sellers. PE-backed company inventory remains high, yet many of those companies are still too premature to come to market and so while we ll see exits move higher, they ll likely do so at a lower percentage, similarly to what we ve seen over the past few years. The PE investment-to-exit multiple hit a decade low, dipping below 2x Global PE investment vs. exits by year 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1, Investments/exits # of investments (excl. add-ons) # of exits 2.9x 2.9x 3.5x 3.9x 2.8x 2.4x 2.3x 2.2x 2.1x 1.9x 4.5x 4.0x 3.5x 3.0x 2.5x 2.0x 1.5x 1.0x 0.5x 0.0x 5

6 Exits by type & industry The number of secondary buyouts eclipsed 950 to reach a high for the decade Global PE-backed exits (#) by type 2,500 Strategic M&A has been the primary driver of exit value for PE sellers, although SBOs played a considerable role. Strategics dominate, but 2015 saw $153B in value exited through SBOs Global PE-backed exits ($B) by type $600 $500 $400 $300 $200 Corporate acquisition Secondary buyout IPO 2,000 Corporate acquisition IPO $100 1,500 Secondary buyout $0 1, IT saw a whopping $98.8B in total exit value last year, an increase of 50% over 2014 Global PE-backed exits ($B) by industry 0 $600 $500 B2B Energy Healthcare B2C Financial services IT $400 Materials & resources B2B and B2C combined accounted for nearly 60% of all PE-backed exits last year Global PE-backed exits (#) by industry 2,500 2,000 1,500 B2B Energy Healthcare Materials & resources B2C Financial services IT $300 $200 $100 $0 1, Healthcare exits grew in count by 19% YoY, accounting for a massive $67.7B in 2015, 12% of total annual exit value. 6

7 Strategics predominate Corporate acquisitions Accounting for more than 54% of all PE-backed exits in 2015, the corporate acquisition ramp remains the most sought-after exit avenue for In the past three years, strategic M&A value has totaled $963B Global corporate acquisitions by year 606 $ $151 Exit value ($B) # of exits closed 646 $ $ $ $201 PE. Since the $133.6 billion in total exit value generated via sales to strategics in 2010, the ramp has seen total exit value grow at a CAGR of 22%, with 1,023 1,038 1,125 $193 $296 $307 1,263 $360 $360 billion being exited across 1,263 corporate buys last year. The record amount of PE-backed inventory continues to contribute to the asset class serving as a playground for corporate acquirers unable to show appealing growth to shareholders amid a changing business landscape and an ostensibly slowing global economy. Further, as competitors continue to seek acquisitive growth, companies are at times being forced to shift their strategies away from traditional organic growth in fear of losing market share. The healthcare and technology sectors accounted for the largest percentage growth in total capital exited to strategics. PE-backed tech sector sales in 2015 amounted to over $64 billion while healthcare represented $55.5 billion, representing respective yearly growth rates of 63% and near 80%. A slight decline year-over-year Median corporate acquisition valuation/ebitda multiples Despite sliding from 2014, last year sustained a high level of median deal size Median corporate acquisition size ($M) 14.0x 12.0x $200 $180 $160 $180 $ x 8.0x 6.0x 9.7x 9.0x $140 $120 $100 $80 4.0x $60 2.0x $40 $20 0.0x $0 7

8 Competition driving SBOs Secondary buyouts 961 exits worth $153 billion were exited via secondary buyouts in 2015, representing a YoY increase of 13% in terms of volume and 6.7% in terms of value. Total exit value coming through PE-to-PE sales has continued to rise in recent years, yet the YoY percentage growth rate has moved lower. Examining volume, however, the percentage growth rate has consistently grown each year coming out of Auction processes have increased valuations and, in many cases, priced PE buyers out of deals. As GPs continually scour the investment landscape to put capital to work in attractive transactions, many have been forced to look to the lower middle market to find nonauction opportunities they can close on without much competition. In such deals, PE players can become more like operational partners to family-type and less professionalized businesses, helping them ramp, scale and eventually grow to an attractive size ready to be acquired by other PE firms looking to write bigger checks. We think we ve begun to see that trend play out, exemplified by SBO volume rising in 2015, while the median deal 2015 saw a record in SBO count, if not value Global secondary buyouts by year 508 $ $ $69 Exit value ($B) 240 $ $67 size for the exit ramp plummeted more than 25% to $225 million, a testament to the increased level of activity occurring in the lower middle market. 651 $ $128 # of exits closed 755 $ $ $153 The slide in multiples is telling, although they remain quite elevated Median SBO valuation/ebitda multiples Equally telling is the rapid drop in the median size of SBOs Median SBO size ($M) 12.0x 10.0x 11.3x 10.0x $350 $300 $ x 6.0x $250 $200 $150 $ x $ x $50 0.0x $0 8

9 IPOs With corporate buyers offering PE-backed portfolio companies attractive price tags, and niche GPs able to offer outsized valuations for other PE-backed companies that fall within their operational focuses, the need and incentive to take companies public remains subdued. Capital markets remain a resource of last resort for many debt-laden companies needing to reduce leverage levels and establish relationships to help raise future capital quicker if need be, yet outside of this scenario, only best-in-class businesses are finding success via public listings. Close to $41 billion was raised in public offerings last year across just 96 listings. On a yearly basis, this represents a decline of 38% in total offering value and 41% in total listings. The median PEbacked offering size, however, was up near 9% over last year, coming in at the highest level we ve tracked at $268 million. This is again partially attributable to select, debt-strapped companies opting to go public in light of subdued interest from other PE firms and corporate acquirers wary of adequately servicing an increased debt load. Speaking to the ability of top-tier businesses to successfully float, 11% of companies going public last year were able to list at the high end of their pricing range, a pleasant surprise compared to the 4.4% seen in Further, just 14.5% of companies priced at the low end of their expected ranges, relative to near 24% of companies pricing lower in Overall, 2015 was quite the down year for PE-backed public offerings, relative to 2013 and 2014 Global PE-backed IPOs by year $41 $36 31 $7 38 $9 Offering value ($B) # of IPOs 97 $24 $ $ $ $65 Global PE-backed IPO median valuation/ebitda multiples 12.0x 96 $41 Close to three quarters of all PE-backed IPOs were within their targets last year Global PE-backed IPOs hitting range (#) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% The median IPO valuation slid to a low unseen since 2008, at $714M Global PE-backed IPO size & valuation ($M) $1, High Within target Low 10.0x 8.0x 8.5x 9.8x $1,000 $800 $853 $ x 4.0x 2.0x $600 $400 $200 Median offering size ($M) Median valuation ($M) $247 $ x $0 Note: IPO valuation calculated as the offering share price multiplied by the total number of outstanding shares. 9

10 Company inventory With deal flow declining in 2015 and exits continuing to grow, the investment-to-exit multiple declined to 1.9x and we saw the quantity of PE-backed inventory grow by a slower clip. 14,559 businesses were held by PE hands in 2015, a 5.1% increase over 2014 inventory levels and just shy of the 5.9% CAGR we ve seen PE-backed inventory grow since % of the current inventory can be attributed to investments completed between 2011 and 2015, with just over 30% of all inventory stemming from investments made between 2006 and Out of the 4,405 deals closed between 2006 and 2010, those completed in 2007 just prior to the financial collapse account for the highest quantity of portfolio companies yet to be sold, representing more than 24% of unsold inventory from deals closed during that timeframe. opportunities. But the continued rise in inventory does induce a slight edge of concern around the time taken to exit in the future. We could see hold periods lengthen a bit if strategic appetites subside at all, especially if macro concerns become Since the buyout boom, inventory increases have more or less plateaued Current global PE-backed company inventory by investment year 2,500 2,000 1,500 1, Current global PE inventory by investment year Increase in global PE-backed inventory more pronounced. However, this occurrence would only be temporary and also offset by the eagerness of PE to deploy the massive amounts of committed capital they ve raised should prices soften to more affordable levels saw the median time to exit decline to around 5.1 years, a positive note pointing to the ability of fund managers to find attractive exit 0 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 A hefty portion of inventory dating from 2006 to 2010 remains on the books Global inventory of companies that are currently PE-backed 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2, ,336 6,913 5,782 4,852 4,055 3,364 2,857 2,424 9,519 10,10810,927 11,659 12,40813,018 13,852 14,559 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 Year of Investment Pre

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