MIDDLE REPORT MARKET US PE 2Q H 2016 MM ACTIVITY DIMINISHED BY 7% FROM LAST YEAR. Company Inventory Shifting Younger PAG E 1 5»

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1 1H 2016 MM ACTIVITY DIMINISHED BY 7% FROM LAST YEAR US PE MIDDLE MARKET REPORT 2Q 2016 Cybersecurity Insurance PAG E S 8-9» Company Inventory Shifting Younger PAG E 1 5»

2 Since 2001, Madison Capital has taken on: $ O 260 billion of net commitments new transactions private equity sponsors 95% of transactions closed as administrative agent, sole lender, or co-lead arranger since 2012.

3 Credits & Contact PitchBook Data, Inc. JOHN GABBERT Founder, CEO ADLEY BOWDEN Vice President, Market Development & Analysis CONTENTS 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 Content NIZAR TARHUNI Senior Analyst BRIAN LEE Senior Analyst JENNIFER SAM Senior Graphic Designer Contact PitchBook pitchbook.com RESEARCH reports@pitchbook.com EDITORIAL editorial@pitchbook.com SALES sales@pitchbook.com ACG Global GARY 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. Cover photo credit: Thomas Moskal 3

4 PREPARATION FOR WHATEVER MAY COME Introduction 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, PEbacked 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 reports@pitchbook.com. NIZAR TARHUNI Senior Analyst 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 Request a free trial demo@pitchbook.com US UK +44 (0) pitchbook.com 4

5 ACG/PITCHBOOK PARTNERSHIP GAINS NATIONAL RECOGNITION by Gary LaBranche 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 researchers at the University of Wisconsin to develop GrowthEconomy. Updated information on the website (through 2015) will be 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 5

6 THE BUYOUT CYCLE SLOWLY WINDS DOWN Overview Middle-market PE activity continued to decline in step with the broader PE marketplace midway through $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. A distinct slowdown US PE middle-market activity 1,428 $275 Deal value ($B) 1,833 $339 1,255 $197 *As of 6/30/ $93 1,448 1,280 $241 # of deals closed $273 1,760 1,644 $301 $301 2,041 $421 2, * $ $180 US PE middle-market activity 245 Deal value ($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 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

7 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 $1 billion saw volume spike more than Median US PE middle-market transaction size ($M) $160 $140 $120 $100 $80 $60 $40 $20 $0 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. $139.5 $128.3 *As of 6/30/ * In 2Q, it was the LMM s turn to experience a plunge in completed deals US PE MM deals (#) by segment The UMM saw its value rebound somewhat, but overall, a slight decline was registered US PE MM deals ($B) by segment 600 LMM CMM UMM $120 LMM CMM UMM 500 $ $ $ $ $20 0 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q $0 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q

8 CYBERSECURITY INSURANCE: WHAT YOU REALLY NEED TO KNOW by 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 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

9 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-aservice 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 thirdparty 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

10 A SHARP DECLINE Lower-middle-market activity US PE LMM deal flow 219 Deal value ($B) # of deals closed $9 $9 $7 $8 $8 $6 $8 $7 $9 $8 $6 $6 $8 $8 $6 $7 $14 $5 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q After a spike in both value and volume, a regression to the mean was to be expected, but the steepness of the LMM decline was considerable US PE LMM deal flow Timing played a factor, as did the quality of the companies in the market. 1H 2016 is still exhibiting robust LMM numbers overall Deal value ($B) 748 *As of 6/30/ # of deals closed $32 $37 $37 $18 $22 $26 $33 $28 $30 $28 $19 US PE LMM deals (#) by sector in 1H * 10% 2% 7% 3% B2B 10% B2C 41% 27% Energy Financial Services Healthcare IT Materials & Resources 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. 10

11 ACTIVITY SPIKES Core-middle-market activity US PE CMM deal flow $41 $35 $ $49 $24 $ $39 $51 $55 $49 $45 $55 $56 $40 $42 $39 $50 $49 CMM activity ticked upward, with value staying relatively flat; both remained at the upper end of the historical range. 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q Deal value ($B) # of deals closed US PE CMM deal flow Deal value ($B) # of deals closed 1,037 1,007 At $99B, the CMM is well on track to record another blockbuster year, potentially matching the $203B of $ $163 *As of 6/30/ $111 $43 $ $ $152 $148 $203 $ $ * US PE CMM deals (#) by sector in 1H % 5% 9% 27% B2B B2C Energy Financial Services Healthcare Consolidation by PE platforms of fragmented healthcare providers is still occurring. 9% 29% IT Materials & Resources 11

12 REBOUND Upper-middle-market activity US PE UMM deal flow by Deal value ($B) # of deals closed UMM activity rebounded somewhat, along with total deal value, but is still a far cry from the heights of much of 2014 or $13 $20 $34 $49 $39 $18 $36 $32 $45 $41 $55 $47 $29 $53 $51 $51 $28 $34 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q US PE UMM deal flow As trepidation still reigns, 2016 is likely to see declining value. Most of the worthwhile targets in that range have already been purchased. 152 $ $139 Deal value ($B) # of deals closed *As of 6/30/ $49 $31 $ $ $116 $ $ $ $ * US PE UMM deals (#) by sector in 1H % 16% 15% 30% B2B B2C Energy Financial Services Healthcare IT Materials & Resources Well-regarded consumer brands can still command considerable attention, particularly as retail and other segments face industry shifts. 12

13 SAVE THE DATE #EUROGROWTH

14 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. HUGH WADE Chief Executive Officer Madison Capital Hugh_Wade@mcfllc.com 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 cashflow lenders outside of the regulated banking industry, and a lot fewer PE sponsors. This is back when a $3 CHRISTOPHER TAYLOR Managing Director, Head of Relationship Management Madison Capital Christopher_Taylor@mcfllc.com In commemoration of Madison Capital Funding s 15th anniversary, we have included a segment from an interview that will be available later at 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 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 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, 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. Look for the upcoming, full video interview online at madisoncapitalfunding/news. 14

15 SHIFTING YOUNGER US PE middle-market company inventory Inventory is increasingly concentrated in relatively younger companies US PE middle-market company inventory by count and year 6,000 5,000 4,000 *As of 6/30/2016 3,726 3,927 4,218 4,472 4,760 4,983 5,244 5,542 5,643 Year of investment 3, * 3,000 2,255 2, ,000 1, ,000 Pre * US PE MM median hold period (years) by exit type and year *As of 6/30/ IPOs Corporate SBO * As inventory grows increasingly concentrated among more youthful companies, whatever is left continues to fuel the growth of secondaries as a means of liquidity. 15

16 BILL TO MODERNIZE PE COMPLIANCE GETS STRONG SUPPORT by Amber Landis, Vice President of Public Policy for ACG Global 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 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 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-fitsall 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. 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. 16

17 EXITS STAY OFF PACE US 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 Capitalbacked 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 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. US PE-backed middle-market exits 574 $ $ $ $25 $ SBOs and strategic M&A are utilized in relatively equal proportions US PE-backed MM exits (#) by type $ $ $ * 1,200 1, Exit value ($B) # of exits $115 $103 Corporate Acquisition IPO Secondary Buyout 379 $36 *As of 6/30/ * *As of 6/30/

18 CREATING VALUE by 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-thoughtout 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. 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 US UK +44 (0) demo@pitchbook.com pitchbook.com Search: PitchBook 18

19 FUNDRAISING 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 middle-market fundraising by year 178 $ $ $ $85 US PE MM fund count by size # of funds closed Capital raised ($B) $ $105 saw a significant uptick in the amount of smaller and niche vehicles come to market in 1Q, looking to adapt to a slowgrowth environment by exploiting a level of operational expertise generalist funds did not possess. Yet the opposite $ * 100% 90% 80% $124 $ $ $62 *As of 6/30/2016 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. 70% 60% 50% 40% 30% 20% 10% 0% * $100M-$250M $250M-$500M $500M-$1B $1B-$5B *As of 6/30/

20 MM LEAGUE TABLES 2Q 2016 Most active investors by deal count 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 Most active lenders 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 Deutsche Bank 4 NewStar Financial 4 RBC Capital Markets 4 Silicon Valley Bank 4 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 4 Most active advisors by deal count Most active law firms by deal count 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 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 McDermott Will & Emery 4 Morris Manning & Martin 4 Stikeman Elliott 4 Wilson Sonsini Goodrich & Rosati Stifel 4 20

21 METHODOLOGY MIDDLE MARKET DEFINITION For 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 VALUE Total 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. FUNDRAISING PitchBook 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. EXITS The 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 multidimensional 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 TABLES All 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 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: 21

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