Q2 2013: Inside this Issue

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1 Q2 2013: Inside this Issue Welcome to the latest issue of the Valuations & Opinions Group Deal Reader, a newsletter offering insights on valuation topics of interest to financial executives, business owners, and investment and valuation professionals. We are pleased to provide commentary regarding relevant valuation topics of interest and keep you informed about recent developments at our firm. Valuations & Opinions Group Key topics covered in the issue include: International Perspectives on Valuation: An Interview with Joe Chang Regulatory Update on Fair Value Measurement Lincoln s Perspectives on the Middle Market BDC Update: Trading & Capital Raising Activity International Perspectives on Valuation: An Interview with Joe Chang Joe Chang is the head of Lincoln International s Beijing, China office, which opened in January James has over fifteen years of experience in financial services, working with publicly-traded clients, private equity firms, and leading private companies. Lincoln: What is the state of the Chinese M&A market? Given the macro economic climate, what are the valuation trends in the Chinese M&A market? Chang: The Chinese M&A market, both domestic and cross-border, is increasingly active. The short term driver for recent domestic activity, especially for smaller deals, is the slowdown in the domestic IPO market. This is helping to reshape expectations by VCs and entrepreneurs and encourage more exits through M&A instead of IPOs. The long term driver, especially for larger deals, is the slower growth of the Chinese economy. In most sectors there is overcapacity, and as the economy slows down there is increasing pressure to consolidate in the domestic market and to expand overseas to search for new growth and improve margins. Lincoln International established its Beijing office in January 2013 and has already announced a crossborder transaction by a Chinese listed company buying in New Zealand. We have a busy pipeline and are working on both cross-border and domestic M&A transactions. Valuation is more reasonable due to the slow down in the IPO market. Chinese blue chip companies in the domestic exchanges are trading at historic low multiples, which also helps to manage valuation expectations. Lincoln: Have you seen M&A activity in China increase over the past few years? Are there any factors holding M&A activity in China back? Chang: Chinese M&A activity has increased more than 20% in the past year. M&A activity can grow even more if two factors are improved. First, most Chinese companies have not been through an M&A process before, so they need more experience to become comfortable with the M&A approach. Second, there are few M&A advisors in the Chinese market. To compound the challenges for the middle market, there are few M&A advisors in China who are willing and able to help execute deals under total enterprise value of $300 million. Bulge bracket global firms won t take these engagements and traditional Chinese investment bankers who specialize in IPOs are not familiar with the M&A process. M&A activity will grow significantly as Chinese companies get more comfortable with the M&A process, and also as M&A advisors become more sophisticated. Lincoln: What do Chinese companies consider in evaluating M&A deals, especially internationally? Chang: Chinese companies looking at cross-border deals are interested in buying technology and brands which can be used to increase their competitiveness in the domestic market, and increasingly they are also using M&A as a market entry strategy into global markets. It's still more difficult for Chinese businesses to participate in an auction process, which in most cases requires bidders to adhere to a tight timeline. Chinese government regulations related to Chinese cross-border investments and Chinese stock exchanges' regulations related to listed companies' overseas investments combined create speed bumps in cross-border deals. However, as shown in recent Lincoln International's experience, these speed bumps can be managed and Chinese businesses can participate competitively in auction processes as long as there is sufficient foresight. Lincoln: How developed is the private equity market in China? Chang: Private equity in China is a developed and crowded market. There are more than 1,400 active PE firms in China. Most U.S. technology investors have a presence in China, with Silicon Valley holding a strong establishment. Many of the largest private equity firms in the U.S. have done deals in China. The main difference between the U.S. market and the Chinese market is that exits for Chinese companies until recently were only through IPOs, while in the U.S. only about a third are through IPOs. However, there is a definite shift towards an M&A exit. Lincoln: What have been the main drivers of M&A activity in China? Who are typically more successful: foreign buyers or domestic buyers? Chang: In 2013, the new driver for domestic M&A activity is the slow down in domestic IPO market which forces many pre-ipo companies to seek M&A as an alternative exit. There are very few sectors which are closed or limited to foreigners and, in most cases, foreign buyers are treated the same as domestic buyers. The rules and regulations are transparent enough to participate now, so long as you have the right advisor. 1 Lincoln International DEALREADER VOG Q2 2013

Lincoln s Perspectives on the Middle Market About Lincoln s Valuation Database: Lincoln maintains an extensive proprietary database in connection with its quarterly portfolio valuation activities

The database offers a glimpse into the middle-market where reliable data is otherwise limited. Valuation metrics reflect observed transaction multiples.

There continues to be a high amount of liquidity in the financial markets. Equity markets performed exceptionally well, with the major indices increasing approximately 12% for the quarter.

Based on the data collected by Lincoln, middle market company performance in the first few months of 2013 softened quarter-over-quarter.

For the first time since we began tracking this data in Q1 2011, the number of companies in our data set showing quarterly year-over-year revenue and EBITDA declines exceeded 50%.

Not only did more companies show declines this quarter, but the rate of decline also accelerated. This represents a continuation of a trend which we first observed in Q3 2012.

Presented below are selected data from our Q1 valuation activities as captured by our proprietary database.

Total leverage (4.3x) and senior leverage (3.4x) increased in Q1 2013, and remain slightly higher than the 2012 averages of 4.2x and 3.2x, respectively.

2 Lincoln s Perspectives on the Middle Market About Lincoln s Valuation Database: Lincoln maintains an extensive proprietary database in connection with its quarterly portfolio valuation activities containing valuation and financial data for a diverse group of companies across ten primary industry segments. The database offers a glimpse into the middle-market where reliable data is otherwise limited. Valuation metrics reflect observed transaction multiples. Financial results reflect information available at the end of each calendar quarter (typically, financial statements for one or two months preceding the end of each calendar quarter). There continues to be a high amount of liquidity in the financial markets. Equity markets performed exceptionally well, with the major indices increasing approximately 12% for the quarter. The credit markets were similarly robust. LBO activity was slower than expected, but low pricing and attractive and increasingly competitive loan terms drove a further surge of refinancing activity. Based on the data collected by Lincoln, middle market company performance in the first few months of 2013 softened quarter-over-quarter. Despite improvement in some macro-economic indicators, middle market companies continue to be challenged and are more likely than not to be experiencing revenue declines and margin compression. For the first time since we began tracking this data in Q1 2011, the number of companies in our data set showing quarterly year-over-year revenue and EBITDA declines exceeded 50%. In fact, nearly 60% of companies evidenced a decline in EBITDA, a sharp increase over the prior quarter. Declining performance was broadbased, impacting all size strata and most industry segments. Not only did more companies show declines this quarter, but the rate of decline also accelerated. This represents a continuation of a trend which we first observed in Q Flat to declining top line revenue on lower-than-expected demand and margin compression from higher input costs combined with various industry-specific factors are contributing to this trend. Presented below are selected data from our Q1 valuation activities as captured by our proprietary database. M&A Transactions % Financial Growth Rates (Mean) Commentary: Average total enterprise value (TEV) to LTM EBITDA multiple implied by closed M&A transactions in Q remains elevated at 7.7x. Total leverage (4.3x) and senior leverage (3.4x) increased in Q1 2013, and remain slightly higher than the 2012 averages of 4.2x and 3.2x, respectively. Average senior leverage remains higher than the average levels observed in 2011 due to the continued proliferation of unitranche facilities. Revenue & EBITDA Trends Total Leverage (By Size) Commentary: Since Q financial performance has trended downward, as evidenced by the percentage of companies reporting revenue and EBITDA growth. Approximately 47% of the companies observed reported revenue growth in Q vs. Q This was a decrease from 59% in the prior quarter. Similarly, the proportion of EBITDA gains decreased from 51% in Q to 42% in Q Note: Aerospace & Defense, Automotive & Truck, Chemicals, Energy, and Financial Services excluded due to limited historical data 2 Lincoln International DEALREADER VOG Q2 2013

3 Valuations & Opinions Group BDC Capital Raising Activity BDC Stocks Continue Rally in 2013 BDC Developments 120.0% 115.0% 110.0% 105.0% 100.0% 95.0% YTD 2013 BDC +5.5% S&P +16.4% 3/26/2013 Garrison Capital Inc. IPO 5/2//2013 Harvest Capital Credit Corp. IPO The equity markets have continued to rally in 2013, spurring additional BDC issuances. Two BDCs successfully completed IPOs this year, in addition to four in the fourth quarter of Existing BDCs continue to raise significant capital through follow-on equity issuances with 16 follow-on issuances already recorded during Through the initial months of 2013, BDCs have continued to issue equity at a pace consistent with BDC Index S&P 500 Recent BDC Follow-On Issuances Amount Post-Deal Offer Price Offered Market / NAV Pricing Issuer Ticker ($MM) ($MM) (%) 5/21/2013 TCP Capital Corp. TCPC $70 $ % 5/15/2013 Apollo Investment Corporation AINV 163 1, /7/2013 Golub Capital BDC, Inc. GBDC /11/2013 Fifth Street Finance Corp. FSC 146 1, /9/2013 Medley Capital Corporation MCC /3/2013 Ares Capital Corporation ARCC 290 4, /21/2013 PennantPark Floating Rate Capital Ltd. PFLT /20/2013 New Mountain Finance Corporation NMFC /19/2013 TICC Capital Corp. TICC /7/2013 Hercules Technology Growth Capital, Inc. HTGC /6/2013 TICC Capital Corp. TICC /5/2013 Fidus Investment Corporation FDUS /5/2013 KCAP Financial, Inc. KCAP /15/2013 Golub Capital BDC, Inc. GBDC /14/2013 Solar Senior Capital Ltd. SUNS /8/2013 Solar Capital Ltd. SLRC 146 1, Q2 $834 $9, Q , YTD Total $1,461 $13, and 2013 BDC IPOs Amount Post-Deal Offer Price Offered Market / NAV Pricing Date Issuer Ticker ($MM) ($MM) (%) 5/2/2013 Harvest Capital Credit Corporation HCAP $51 $85 102% 3/26/2013 Garrison Capital Inc. GARS /4/2012 Whitehorse Finance, LLC WHF /7/2012 OFS Capital Corporation OFS /7/2012 Stellus Capital Investment Corporation SCM /24/2012 Monroe Capital Corporation MRCC /3/2012 TCP Capital Corp. TCPC BDC IPOs in the Pipeline (1) Issuer Ticker To Be Offered ($MM) ALDA Capital Corp ACA $50 COR Business Development LLC - 86 Crescent Capital Finance Group Inc CCFG 175 Hercules Clean Technology Capital, Inc. HCTC 1 Non-Traded and Private BDCs Issuer Business Development Corporation of America Corporate Capital Trust CION Investment Corporation FS Energy and Power Fund FS Investment Corporation FS Investment Corporation II (1) Does not include recent filers utilizing the Jobs Act Issuer Goldman Sachs BDC, Inc. HMS Income Fund, Inc. Sierra Income Corp. TPG Specialty Lending, Inc. Triton Pacific Investment Corporation, Inc. VII Peaks-KBR Co-Optivist Income BDC II, Inc. $6,000 $5,000 7 IPO, 16 FO Historical BDC Equity Issuances BDC IPOs BDC Follow-Ons BDC Rights Offerings ($ in Millions) $4,000 5 IPO, 35 FO $3,000 $3,752 $2,000 3 IPO, 10 FO 2 IPO, 9 FO 5 IPO, 15 FO 1 IPO, 7 FO, 4 RO 6 IPO, 11 FO $3,263 2 IPO, 16 FO $1,593 $1,475 $378 0 IPO, 14 FO $1,498 $1,000 $907 $1,065 $1,461 $1,060 $477 $467 $141 $823 $534 $627 $480 $131 $ YTD 2013 Source: Capital IQ, BB&T, Dealogic ECM Analytics, Thomson Financial 3 Lincoln International DEALREADER VOG Q2 2013

4 Valuations & Opinions Group BDC Stock Index Remains Stable 2.00x 1.80x 1.60x P/BV Dividend Yield 70.0% 60.0% BDC Stock Index Highlights Price / Book Value 1.40x 1.20x 1.00x 0.80x 0.60x 0.40x 0.20x 0.00x 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Dividend Yield As of May 28, 2013, the BDC Stock Index was trading at a Price / Book value (P/BV) of 1.00x. However, those BDCs with market capitalizations greater than $500 million trade at approximately 112% of book value. Over the past quarter, the BDC Stock Index dividend yield declined slightly, from 9.2% to 8.8%. Market Cap Stock Price % of 52- Price to Dividend Debt to Company Name 05/28/13 05/28/13 52-Wk High Wk High BV / Share Yield % Equity Ratio American Capital, Ltd. $4,183 $13.80 $ % 0.70x 0.0% 0.12 x Apollo Investment Corporation 1, % 1.01x 9.5% 0.69 x Ares Capital Corporation 4, % 1.09x 8.5% 0.55 x BlackRock Kelso Capital Corporation % 1.06x 10.3% 0.44 x Capital Southwest Corporation % 0.83x 0.6% 0.00 x Fidus Investment Corporation % 1.20x 8.0% 0.68 x Fifth Street Finance Corp. 1, % 1.07x 10.8% 0.71 x Firsthand Technology Value Fund, Inc % 0.85x 0.0% 0.00 x Full Circle Capital Corporation % 0.96x 11.6% 0.33 x Garrison Capital Inc % 0.98x 10.5% 0.79 x Gladstone Capital Corporation % 0.96x 9.8% 0.51 x Gladstone Investment Corporation % 0.80x 8.2% 0.56 x Golub Capital BDC, Inc % 1.19x 7.3% 0.77 x GSV Capital Corp % 0.65x 0.0% 0.00 x Harris & Harris Group, Inc % 0.80x 0.0% 0.00 x Harvest Capital Credit Corporation % 0.89x 9.0% 0.00 x Hercules Technology Growth Capital, Inc % 1.16x 7.4% 0.95 x Horizon Technology Finance Corporation % 0.94x 10.9% 0.76 x Kayne Anderson Energy Development Company % 1.04x 6.5% 0.29 x KCAP Financial, Inc % 1.33x 9.4% 0.38 x Keating Capital, Inc % 0.79x 0.5% 0.00 x Main Street Capital Corporation 1, % 1.59x 5.9% 0.55 x MCG Capital Corporation % 0.97x 10.0% 0.63 x Medley Capital Corporation % 1.16x 9.6% 0.64 x Monroe Capital Corporation % 1.02x 9.1% 0.00 x MVC Capital, Inc % 0.79x 3.9% 0.13 x New Mountain Finance Corporation % 1.07x 8.9% 0.64 x NGP Capital Resources Company % 0.75x 9.0% 0.61 x OFS Capital Corporation % 0.80x 11.1% 0.68 x PennantPark Floating Rate Capital Ltd % 1.03x 6.6% 0.90 x PennantPark Investment Corporation % 1.07x 9.8% 0.56 x Prospect Capital Corporation 2, % 0.99x 11.6% 0.55 x Saratoga Investment Corp % 0.83x 23.0% 0.18 x Solar Capital Ltd. 1, % 1.03x 10.0% 0.49 x Solar Senior Capital Ltd % 1.04x 7.0% 0.11 x Stellus Capital Investment Corporation % 1.03x 9.0% 0.33 x TCP Capital Corp % 1.07x 9.9% 0.58 x THL Credit, Inc % 1.16x 8.4% 0.29 x TICC Capital Corp % 0.99x 11.4% 0.74 x Triangle Capital Corporation % 1.87x 7.2% 0.81 x Whitehorse Finance, LLC % 1.05x 8.9% 0.63 x Mean $671 92% 1.01x 8.8% 0.45 x Adjusted Mean % 1.00x 8.7% 0.45 x Median % 1.02x 9.0% 0.55 x Source: Capital IQ as of May 28, 2013 About the BDC Stock Index Similar to the S&P 500 Index, the BDC Stock Index is a market cap weighted composite index. The index is prepared by first selecting a base period, in this case, Q1 2006, and totaling the market caps of the companies in this period. This period and total market cap is set to a base index, in this case, 1,000. Next, the current period s total market cap is calculated, divided by the base period s total market cap and then multiplied by the base index (1,000). The result is the index value used for plotting in the graph on the prior page. 4 Lincoln International DEALREADER VOG Q2 2013

Topical Issues Concerning Fair Value Measurement The Securities and Exchange Commission ( SEC ) has recently signaled that it intends to aggressively monitor the fair value measurement of illiquid

Recent enforcement actions against certain registered entities as well as strongly -worded advisories from the SEC Enforcement Division s Asset Management Unit should serve as a reminder to fund

Although many fund managers have implemented a systematic valuation approach with proper oversight, inspections by the Public Company Accounting Oversight Board ( PCAOB ) continue to identify a high

5 Topical Issues Concerning Fair Value Measurement The Securities and Exchange Commission ( SEC ) has recently signaled that it intends to aggressively monitor the fair value measurement of illiquid securities. Recent enforcement actions against certain registered entities as well as strongly -worded advisories from the SEC Enforcement Division s Asset Management Unit should serve as a reminder to fund managers that the SEC is focused on fair value measurement, including the appropriate application of the Financial Accounting Standards Board Codification Topic 820 ( ASC 820 ). Although many fund managers have implemented a systematic valuation approach with proper oversight, inspections by the Public Company Accounting Oversight Board ( PCAOB ) continue to identify a high number of audit deficiencies that relate to the measurement of financial instruments. In May 2013, Jay Hanson, a Board Member of the Public Company Accounting Oversight Board ( PCAOB ), stated that estimates and measurements are one of the most frequently identified trouble spots by the PCAOB. In fact, a recent study by Acuitas, an Atlantabased CPA firm, found that pricing issues were the primary cause of fair value measurement audit deficiencies from 2008 to 2010, which included failure to understand the valuation methods, models and assumptions used by pricing services or valuation specialists. Based on the continued focus that regulators have placed on illiquid or difficult-to-value items, fund managers should understand and be able to defend significant estimates and assumptions underlying fair values as well as the internal processes used to make valuation determinations. About Lincoln International Approximately 125 bankers in North and South America Over 100 bankers in Europe and Asia, with a 17 person advisory directors board Offices in Japan, Moscow, India, Beijing and Brazil Officer Contacts Patricia Luscombe, CFA Managing Director pluscombe@lincolninternational.com Michael R. Fisch, CPA Director mfisch@lincolninternational.com Contributors Smitha Balasubramanian, Associate Jeff McNamara, Associate Wes Trowbridge, Associate Nick Baldwin, Analyst Chris Buck, Analyst Joe DiLuia, Analyst Steven Drake, Analyst Ron Kahn, CPA Managing Director rkahn@lincolninternational.com sbalasubramanian@lincolninternational.com jmcnamara@lincolninternational.com wtrowbridge@lincolninternational.com nbaldwin@lincolninternational.com cbuck@lincolninternational.com jdiluia@lincolninternational.com sdrake@lincolninternational.com Lincoln International specializes in merger and acquisition advisory services, debt advisory services, private capital raising and restructuring advice on mid-market transactions. Lincoln International also provides fairness opinions, valuations and pension advisory services on a wide range of transaction sizes. With fourteen offices in the Americas, Asia and Europe, Lincoln International has strong local knowledge and contacts in key global economies. The firm provides clients with senior-level attention, in-depth industry expertise and integrated resources. By being focused and independent, Lincoln International serves its clients without conflicts of interest. More information about Lincoln International can be obtained at 5 Lincoln International DEALREADER VOG Q2 2013

Q2 2012: Inside this Issue

Q2 2012: Inside this Issue Welcome to the latest issue of the Valuations & Opinions Group Deal Reader, a newsletter offering insights on valuation topics of interest to financial executives, business owners,