What is Fueling this Prolonged, Heightened M&A Cycle? Five Questions We Get Asked Frequently

What is Fueling this Prolonged, Heightened M&A Cycle? Five Questions We Get Asked Frequently Presented by: Cedric Fortemps, CFA, Managing Director Spencer Cavalier, CFA, Managing Director Aji Fadahunsi, Managing Director Annual Conference November 7, 2018

The Five Most Popular Questions 1. What are the macro and C&G industry conditions driving this prolonged, heightened M&A cycle? 2. How is tax law impacting M&A today? 3. How do I compete against larger, better capitalized companies for acquisitions? 4. Should I be thinking of growing or selling, or is remaining the same size ok? 5. Is this the peak of the M&A cycle? 2 2

Macro: Conditions for an Active M&A Market & Compelling Valuations Business Confidence Economic certainty & sentiment Deal spending firepower (i.e. cash reserves and credit facilities) Robust Financial Markets Favorable Tax & Regulatory Environment Multiple capital providers and low volatility Strong stock market Attractive cost of capital: interest rates, cap rates, ROE Liquidity: ability to monetize Capital gains rates Lower ordinary tax rates for C-corporations and most passthrough entities Ability to shield investment costs to enhance returns Corporate Imperative Requirement to grow shareholder value and/or maintain distributions Need to scale operations to improve margins & free cash flow Activist shareholders Industry Convergence Young industries consolidating for intellectual property & market share Mature industries consolidating for scale and market share Industries being disrupted by new products, services, etc. 3 3

Macro: U.S. Business Sentiment is Very Strong 102 Business Tendency Surveys for Manufacturing: Confidence Indicator for US 101 Normalized (Normal = 100) 100 99 98 97 96 95 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: Organization for Economic Co-operation and Development (OECD) 4 4

Macro: 10 Year U.S. Treasury vs. Interbank Lending (LIBOR) Rates Source: S&P Capital IQ 5 5

Macro: S&P 500 Performance since January 1, 2009 4000 3500 3000 2500 2000 1500 1000 500 0 Source: Federal Reserve Bank of St. Louis 6 6

Macro: U.S. Real GDP Growth Source: Federal Reserve Bank of St. Louis 7 7

Macro: U.S. M&A Deal Value ($B) & Deal Count 2007 2Q 2018 8 8

C&G Industry: Three M&A Waves Since 1995 & Enterprise Value/Corporate EBITDA Multiples Source: S&P Capital IQ 9 9

C&G Industry: M&A Waves Since 2000 & Conditions During Waves M&A Wave 1995-2000 Business confidence Robust Financial Markets Corporate imperative M&A Wave 2005 2008 Robust financial markets Corporate imperative M&A Wave 2012 - Present Business confidence Robust financial markets Favorable tax & regulatory environment Corporate imperative Industry convergence 10 10

C&G Industry: Conditions Prolonging & Heightening Current Cycle Condition 2012-2013 2014-2015 2016-2017 2018 Business Confidence Low interest & cap rates High capital availability Low interest & cap rates High capital availability Low interest & cap rates High capital availability Low interest & cap rates High capital availability Robust Financial Markets IPOs of 2 MLPs: Susser Petroleum Partners (now Sunoco LP) & Lehigh Gas Partners (now CrossAmerica Partners). Other MLPs forming IPOs of CST Brands & Murphy USA. Other MLPs still forming Federal Reserve ends QE Due to sale of PTRY and CST, C&G industry public companies go from 8 to 6 Federal Reserve shrinks balance sheet & raises Fed Funds rate slowly Federal Reserve increases Fed Fund rate by ¼ point 3x, but buyers and sellers continue to view interest rates & cap rates at historically low levels Tax & Regulatory Environment Marketer electrification concerns Marketer electrification concerns Donald Trump elected 45 th U.S. President; lowers regs Tax Cuts & Jobs Act of 2017 (TCJA) Passed Marketer electrification concerns TCJA goes into effect President Trump continues to lower regulations Fed banking regulators lower liquidity ratio, freeing up more assets to fund more loans and invest in higher yield assets Marketer electrification concerns Corporate Imperative Activist investment firm invests in Hess Corporation Activist investment firms invest PTRY, CST & TA PTRY sold to Couche-Tard Activist investment firm invests in MPC CST sold to Couche-Tard Activist investment firm invests in Casey s General Store Industry Convergence 24 privately held marketers sold ETP buys Susser Holdings MPC buys Hess Retail Holdings 25 privately held marketers sold 11 30 privately held marketers sold MPC acquires Andeavor 7-Eleven acquires Sunoco s retail assets 22 privately held marketers sold year-to-date 11

M&A Transaction Activity: Convenience Retail & Fuels Distribution Criteria for Transactions Included in Data Transaction has closed At least 10 convenience stores included or 25 fuel supply accounts Convenience stores and/or fuels distribution business a substantial component of transaction US assets included as part of transaction For stock transactions, majority ownership in company was acquired by buyer/investor Sale/leaseback transactions not included Buyer considered private equity buyer only for its platform acquisition 12 12

M&A Transaction Activity: Convenience Retail & Fuels Distribution (cont d) 13 13

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The Tax Cuts Jobs Act: How Is It Impacting M&A? Signed into law on December 22, 2017 Most significant aspects to tax law changes affecting M&A: Reduction in corporate income tax rate: Top marginal rate of 35% for C-Corps changed to flat 21% rate Pass-through entities owners are eligible for up to 20% of Qualified Business Income (QBI) as tax deduction Immediate expensing for qualifying capital investments (i.e. accelerated depreciation) Ability to depreciate 50% of original use value changed to 100% of buyers first use value Limitation on business interest expense deduction 30% of Adjusted Taxable Income (ATI), which is similar to EBITDA, limit on deductibility of interest expenses The TCJA changes are allowing buyers to pay more for acquisitions and/or get higher returns and also results in less taxes payable by sellers on transactions 16 16

Example of the Impact of TCJA on a Hypothetical C&G M&A Transaction In the example, the 3 tax law changes would allow a buyer to get the same returns paying $147 million (14.7x Corporate EBITDA) as it would have generated paying $120 million (12.0x Corporate EBITDA) under the previous tax laws For those concerned about the impact that potential future interest rate increases would have on M&A multiples, the tax law changes in the example above could offset interest rate increases of approximately 250 basis points, assuming all other factors, including EBITDA, do not change 17 17

Market Update Deal volume was at an all time high 2017 with no signs of slowing in 2018. The U.S. leveraged loan market finished 2017 with a record $646 billion of total volume topping the $607 billion post-crisis high in 2013, beating prior year s level by 33%, and beating the 2007 total by 21% The global M&A markets posted another strong year in 2017, as buyout value and exits showed healthy gains amid the strongest fiveyear stretch for private equity fund-raising in history. PE Funds dry powder hitting a record high of $1.7 trillion in 2017. With deal volume down at traditional banks and nearly $250 billion of investable assets available to non-bank lenders, the debt markets are red hot, offering buyers (often private equity firms) a golden opportunity to fund transactions with significant levels of lowcost leverage. The markets for leveraged loans are as robust as they ve ever been, as banks and investors clamor for outstandings or higher yields to augment their positions in a sustained low-interest-rate environment Significant investor/lender demand and short deal supply is creating a supply/demand imbalance in the markets intense competition for deal flow has led to a shift towards looser deal structures and, in certain markets, covenant-lite (or wide) executions, reduced restrictions on dividends or acquisitions, reduction or elimination of excess cash flow recaptures, and the further erosion of other structural protections As competition remains fierce and capital remains abundant, transaction timelines for lenders continue to compress while requiring full underwriting support The competitive landscape in the broader leveraged loan market has led to a disintermediation of traditional banks by non-banks in certain markets yielding a continued focus on markets like C&G by banks 19 $350 $300 $250 $200 $150 $100 $50 $0 1,464 $225 1,875 $272 Middle Market Deal Activity by Year 1,313 $164 731 $75 1,515 1,328 $183 $202 1,913 1,722 $237 $231 2,242 2,245 2,335 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Deal Value ($B) Estimated Deal Value ($B) # of Deals Closed Estimated # of Deals Closed $326 $307 $284 75 2500 2,231 $312 2000 1500 1000 500 0 19

Leveraged Loan Market Statistics Average Leveraged Loan Debt Multiples US Syndicated Loan Volume (US $billion) 6x 5x 4x 3.7 3.8 3.9 4.2 4.3 4.4 4.9 3.8 4.0 3.9 4.4 4.5 4.7 4.9 4.7 5.0 5.0 5.1 5.0 1,600.0 1,400.0 1,200.0 Leveraged I-Grade Other 1,000.0 3x 800.0 2x 600.0 1x 400.0 200.0 0x 2001 2002 2003 2004 2005 2006 2007 2008 2009 FLD/EBITDA SLD/EBITDA Other Sr Debt/EBITDA Sub Debt/EBITDA 2010 2011 2012 2013 2014 2015 2016 2017 1H18 2Q18 0.0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018TD Leveraged Buyout Equity Contributions Primary Investor (Banks vs. Non-Banks) 55% 100% Equity contributions (%) 50% 45% 40% 35% 30% 25% 20% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1H04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 2008 1H10 4Q10 2Q11 4Q11 2Q12 4Q12 2Q13 4Q13 2Q14 4Q14 2Q15 4Q15 2Q16 4Q16 2Q17 4Q17 2Q18 Source: S&P Global Market Intelligence, Thomson Reuters LPC, PitchBook 20 1996 1997 1998 1999 2000 2001 2002 2003 Banks 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Non-Banks 2016 2017 1H18 2Q18 20

US Middle Market Loan Statistics Middle Market Loan Volume by Year Middle Market Loan Spreads 140.0 120.0 Non-sponsored Sponsored L+700 L+600 100.0 L+500 80.0 L+400 60.0 L+300 40.0 L+200 20.0 L+100 0.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 1Q- 3Q18 225.0 200.0 175.0 150.0 125.0 100.0 75.0 50.0 25.0 Middle Market Use of Proceeds Refinancing New money (beg. 1Q03) L+0 2005 2007 2009 2011 2013 2015 2017 3Q18 Middle Market Covenant-Lite Volume 0.0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 1Q- 3Q18 Source: S&P Global Market Intelligence, Thomson Reuters LPC, PitchBook 21 21

Leveraged Loan Deal Structures (Banks) Pre-Crisis Immediately Post-Crisis (2008-2009) Today Leverage Thresholds 5.00x 3.80x 5.00x+ Pricing Range L + 275-350 L + 400-500 L + 300-400 Tenor (Average) 5.2 years 3.4 years 4.8 years Covenants 29% of institutional loans were covenant-lite Of the non-covenant-lite deals, 69% had two or less covenants, 24% had three covenants and 7% had four or more covenants 4% of institutional loans were covenantlite Of the non-covenant-lite deals, 32% had two or less covenants, 51% had three covenants and 17% had four or more covenants 75% of institutional loans are covenantlite Of the non-covenant-lite deals, 100% had two or less covenants, 0% had three covenants and 0% had four or more covenants Average LBO Multiples 9.0x 7.4x 10.5x Equity Contribution ~30% ~50% ~40-45% Source: S&P Global Market Intelligence, Thomson Reuters LPC, PitchBook 22 (1) Pricing range depicted includes leveraged loans only. Estimated pricing for C&G industry is as follows: Pre Crisis: L + 200-300; Immediately Post-Crisis: L + 400; Today: L + 150-300 22

Introduction to Direct Lending Platforms Direct lending is a term meant to describe a transaction where a lending source directly provides a loan to the borrower without the use of an intermediary. This type of direct lending is accomplished by going directly to private equity sponsors or owner/operators of large corporate or middle market companies, commercial projects or commercial real estate to originate loans that are ultimately provided by unregulated non-bank institutions Direct lending has emerged as an attractive asset class among institutional investors, generating solid risk-adjusted returns that are primarily floating rate with high current income and lower volatility compared to other similar fixed income alternatives The market opportunity for direct lending has evolved over the last several decades as commercial banks have temped their risk appetite and in many instances reduced their hold amounts of leveraged loans Supporting the growth of the direct lending market has been the increase in non-bank lenders funded by institutional investors such as insurance companies, pension funds, endowments and sovereign wealth funds Some of the largest non-bank direct lenders include: Antares, Madison Capital, NXT Capital, Twin Brook Capital, Golub Capital, Ares, etc. The proliferation of direct lending means that more banks and lenders are competing on price and terms, leading to unprecedented levels of covenant-lite loans and the use of add-backs to make borrowers seem more creditworthy. This heightened competition continues to benefit borrowers while recalibrating the risk-return profile for lenders 23 23

Unitranche Introduction The unitranche structure arose out of the desire to provide borrowers with a one-stop solution to their financing needs and offer speed to execution, certainty of closing and, for the lenders, enhanced fundings and returns These facilities combine senior and subordinated tranches of debt into one facility with a blended rate of interest This blended rate of interest approximates the combined rate a borrower would pay for two separate facilities The unitranche loan may be divided into first-out and second-out components with priority issues handed through a payment waterfall This type of financing operates under a single credit agreement, a single set of collateral documents, a single collateral pool, and has one administrative agent Source: Thomson Reuters LPC Middle Market Quarterly Data as of Q4-17 24 24

Looking Ahead Continued convergence between traditional banks and non-banks Split-lien structures, 1 st out/last out structures Jointly marketed funds between banks and private credit funds to provide certainty of close and optimal cost of capital Markets remain robust with many Banks continuing to join the industry Leverage availability at all time high with evolving debt structures Stability in markets mean you don t need rush to get things done but market volatility will return Remember how good it felt to have four or five years on your deal when the crisis hit When that time comes, buyers will need underwriters with healthy balance sheets to support scalable debt structures to finance their growth objectives 25 25

Considerations for Growing or Selling or Maintaining Reality is that it is more than a financial decision for most business owners. Ownership also means: Employment, salary, distributions for owners and in some cases other family members Future employment for next generation and potentially all future generations Ownership provides owners with an identity and status in the community Relationships and ability to take care of non-family employees important to many owners Concerns about the legacy of the family business after a transaction For owners serious about potentially selling in the next few years, it is important to find and work with a team of trusted advisors to help achieve your goals in a sale. Its never too early to start planning Corporate tax advisor Estate and trust advisor Wealth management advisor M&A advisor Corporate legal advisor 27 27

Objectively Weighing All Factors in Sale Decision Some Steps to Take Perform a SWOT analysis on your business be honest in your analysis. Ask for input from as many members of your organization as you re comfortable with. Include as considerations: Management team, strength and longevity Ability to weather additional headwinds such as lower cigarette consumption, more fuel efficient vehicles, increases in labor costs Current and future competition and ability to continue to compete in market given changes Potential impact from electrification and/or changes in consumer trips behavior Build a detailed 5 year projection model based on your plans for the company Make the model dynamic so that sensitivity analyses can be performed Start with a base case, bullish case and bearing case Include the capex that will be required to achieve the results in the projection case If the capital required to maintain or grow the business is more than you re comfortable investing, seeking a capital partner may be the answer if there s no interest in a sale Currently a considerable amount of interest from private equity groups to invest in fuels distributors and petroleum marketers and convenience retailers. Investment structures can vary and certain groups are willing to have more flexibility around structure and control 28 28

Prepare Yourself Statistical Analysis on Next Slide 29 29

Decision to Sell: Considering Diversification & Risk-Adjusted Returns In considering a hold vs sell decision, risk and diversification must be considered The Sharpe ratio is used to help investors compare the likely return on investment compared to risk being taken Calculations below based on EBT margins as a % of book value of equity to calculate annual return The higher the Sharpe ratio, the better the investment is on a risk-adjusted return basis 30 30

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