State of the Middle Market January 24, 2017
Middle Market Sponsored Lending Volume Has Remained Low Total Sponsored Middle Market Loan Volume 80.0 69.6 72.5 69.5 Average annual sponsored loan volume of $62.9 billion ($ in billions) 60.0 40.0 20.0 50.3 52.6 0.0 Source: Thomson Reuters LPC Note: Thomson Reuters defines middle market transactions as those with borrower sales under $500 million and total loan volume under $500 million Commentary In 2016, sponsored middle market loan volume totaled $52.6 billion, remaining below its five year average of $62.9 billion - Despite the abundance of debt capital available in the middle market and improving economic conditions, loan volumes for the previous two years have remained at relatively low levels - In 2016, loan volume was down 27.5% from its peak of $72.5 billion in 2013 2
Primarily Driven by a Decline in Refinancings and Recapitalizations Sponsored Middle Market M&A Loan Volume Sponsored Middle Market Opportunistic Financing Volume 50.0 40.0 44.7 30.0 25.0 $39.9 billion 23.6 $24.2 billion $25.5 billion ($ in billions) 30.0 20.0 10.0 16.0 5.1 21.5 26.7 27.9 17.7 29.7 26.1 27.1 ($ in billions) 20.0 15.0 10.0 5.0 7.0 9.3 15.9 15.6 4.3 4.0 3.6 6.3 0.0 0.0 Refinancing Dividend Recap Other Source: Thomson Reuters LPC Source: Thomson Reuters LPC Commentary On an annual basis, sponsor-backed middle market M&A loan volumes improved slightly in 2016 The improvement in M&A volumes was tempered by a lack of opportunistic financings in the middle market, which decreased from a total of $30.6 billion in 2014 to $19.2 billion in 2016 - Middle market refinancing and dividend recapitalization transaction volumes have decreased 34% and 48%, respectively, since 2014 3
And A Lagging First Quarter Sponsored Middle Market M&A Loan Volume 1 Sponsored Middle Market Opportunistic Financing Volume 1 8.0 8.0 7.1 ($ in billions) 6.0 4.0 2.0 3.0 5.1 4.1 5.7 ($ in billions) 6.0 4.0 2.0 1.2 2.0 5.7 0.0 0.0 Source: S&P Capital IQ Leveraged Commentary & Data Note: LCD defines the middle market as borrowers with less than or equal to $50 million in EBITDA Commentary Source: S&P Capital IQ Leveraged Commentary & Data Sponsored Middle Market Total Loan Volume Sponsor-backed middle market M&A loan volumes in 2016 were tempered by a slow Q1, with deal flow increasing to $5.7 billion in the final quarter Sponsored middle market opportunistic financings also lagged in the first half of 2016, but gained significant momentum during the back-half of the year - In 1H 16, opportunistic loan volumes were $3.2 billion; in 2H 16, volumes increased sharply to $12.8 billion as lenders sought to deploy excess capital While actual 2016 middle market loan volume remained relatively low for the year, annualized 2H 16 volume was $60.3 billion, just under the five year historical average ($ in billions) 80.0 70.0 60.0 50.0 40.0 Average annual sponsored loan volume of $62.9 billion 60.3 72.5 69.6 69.5 50.3 52.6 2012 2013 2014 2015 2016 Actual / 2 Annualized Note: (1) Quarterly data procured from different source than annual data on Source: Thomson Reuters LPC the previous slide, with differing definitions of middle market Note: (2) Represents annualized 2H 16 volumes 4
Among this Backdrop, Demand for Debt Funds Continues to Grow Price / Book Value of Externally-Managed Public BDCs Middle Market Direct Lending Capital Raised 1.20x 1.10x 35.0 30.0 28.8 1.00x 0.90x 0.80x ($ in billions) 25.0 20.0 15.0 10.0 16.3 20.4 0.70x 5.0 0.60x 0.0 Source: S&P Capital IQ Mkt Cap >$500MM Mkt Cap $200MM-$500MM Mkt Cap <$200MM Source: Thomson Reuters LPC Commentary Middle Market CLO Volume Average share prices for public BDCs have approached, and in some cases surpassed, book value, making it once again possible for BDCs to access the public equity markets - There was a significant level of fundraising activity in the BDC market in Q4 2016 and early 2017, as an increase in interest rates by the Federal Reserve attracted fresh capital inflows 2016 was a banner year for middle market private debt fundraising, as funds closed $28.8 billion of direct lending capital Additionally, middle market CLO volume reached a postrecession high of $7.7 billion in 2016 ($ in billions) 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 0.5 4.6 4.3 6.6 5.8 7.7 Source: Thomson Reuters LPC 5
Private Credit Funds Are Forming to Fill the Gap Left by Banks Exiting the Leveraged Loan Market Leveraged Loan Volume by Type of Capital Provider Examples of New Private Debt Platforms 100% 80% 25% 17% 10% 8% 60% 40% 75% 83% 90% 92% 20% 0% Q1 '16 Q2 '16 Q3 '16 Q4 '16 Institutional Investors and Finance Companies Banks & Securities Firms Source: S&P Capital IQ Leveraged Commentary & Data Commentary Examples of Expanding Private Debt Platforms In Q4 16, non-bank institutional capital represented 92% of leveraged loan volume - Given the regulatory environment, relatively high leverage levels and increased competition from private debt funds, banks and larger financial institutions are continuing their shift away from leveraged loans - As banks retreat, capital continues to flow into institutional debt vehicles such as privately managed funds, CLOs and BDCs The private debt markets have seen strong inflows both to new entrants and existing lending platforms 6
Leverage Levels Remain Healthy Middle Market Overall Debt Multiples Middle Market LBO Debt Multiples 6.0x 5.5x 5.0x 4.5x 4.0x 3.5x 3.0x 2.5x 2.0x 5.5x 5.0x 4.8x 4.8x 4.7x 4.5x 4.6x 4.7x 5.0x 4.9x 4.6x 4.8x 3.6x 3.5x 3.6x 3.5x 3.4x 3.8x 3.8x 3.8x 4.0x 4.3x 3.6x 4.0x 6.5x 6.0x 5.5x 5.0x 4.5x 4.0x 3.5x 3.0x 2.5x 2.0x 6.2x 6.3x 6.0x 5.6x 5.7x 5.4x 5.3x 5.2x 5.3x 5.3x 4.9x 4.8x 4.1x 4.5x 4.4x 4.4x 4.3x 4.2x 4.7x 4.7x 4.0x 4.3x 4.4x 3.9x Senior Leverage Multiple Total Leverage Multiple Senior Leverage Multiple Total Leverage Multiple Source: S&P Capital IQ Leveraged Commentary & Data Source: Thomson Reuters LPC Commentary Middle Market Equity Cushion Middle market debt multiples have remained healthy, increasing in Q4 16, primarily due to robust valuations Healthy leverage levels are also a result of heavy competition amongst private equity buyers and middle market lenders - However, despite lenders investing into more aggressively levered deals, there is an absolute level of leverage that most lenders will underwrite In addition to healthy leverage levels, sponsors continue to over-equitize capital structures, despite lender willingness to accept higher leverage levels 55% 50% 45% 40% 35% 30% 25% 20% 49% 46% 44% 43% 43% 43% 42% 2010 2011 2012 2013 2014 2015 2016 Source: Thomson Reuters LPC 7
In Addition to Higher Leverage Levels, the Market Is Also Open to Riskier Credits Spread to Maturity by Credit Rating L+2500 L+2000 L+1964 L+1500 L+1000 L+500 L+473 1491 bps spread 890 bps spread L+1219 L+329 L+0 BB CCC Source: S&P Capital IQ Leveraged Commentary & Data Commentary Investors greater risk tolerance can be observed in the tightening of the spread between CCC and BB rated paper from Q1 16 to today s market - Since February 2016, the spread between CCC and BB rated credits compressed from 1491 bps to 890 bps Despite greater appetite for risk, lenders remain bound by their cost of capital and investment parameters, as indicated by a hypothetical creditloss scenario: - Assuming an interest rate spread of 5.0%, a lender would need to issue $500 million in new loans to recoup a $25 million credit loss in the same year. As competitive dynamics have largely eliminated equity-like features from the majority of leveraged loan structures, loss-avoidance can be a significant driver of loan fund performance. - Many deals remain extremely challenging to execute from a credit quality perspective 8
While Underlying Rates May Be Increasing, Competitive Dynamics May Keep Total Rates in Check Historical and Forecasted 3-Month LIBOR Senior Spread on Sponsored Term Loans 2.50% 2.00% 10.00% 8.00% 8.24% 1.50% 6.00% 3.24% 5.89% 1.00% 0.50% 4.00% 2.00% 5.00% 4.89% 0.00% 0.00% 1.00% Source: Bloomberg Source: Thomson Reuters LPC LIBOR Spread Commentary Middle Market New-Issue All-In Yields At the end of December 2016, 3-month LIBOR broke through 1.00% for the first time since 2009 7.50% - Sponsors and borrowers must take into account the increase of rates when establishing a pro-forma capital structure 7.00% 6.89% 6.62% - Select lenders have recently begun submitting term sheets with LIBOR floors at 1.25% 6.50% Historical data indicates that as LIBOR rates (either indexes or floors ) increase, loan spreads will contract to keep all-in corporate yields within a relatively stable range 6.00% Middle market loan pricing increased slightly in Q4 16, yet remains within a relatively narrow band 5.50% Source: S&P Capital IQ Leveraged Commentary & Data 9
Overview of U.S. Middle Market Pricing and Terms Lincoln s View on Pricing and Terms Borrowers by EBITDA: <$15mm of EBITDA $15mm to $40mm of EBITDA >$40mm of EBITDA Pricing Multiples Pricing Multiples Pricing Multiples Asset Based Senior L + 200-275 LIBOR Floor: none N/A L + 175-250 LIBOR Floor: none N/A L + 150-225 LIBOR Floor: none N/A Cash Flow Senior L + 475-575 2.75x - 3.25x EBITDA L + 450-550 3.00x - 4.00x EBITDA L + 425-525 3.00x - 4.00x EBITDA Senior Stretch N/A N/A L + 525-625 3.75x - 4.75x EBITDA L + 500-600 4.00x - 5.00x EBITDA Unitranche L + 750-850 4.00x - 5.00x EBITDA L + 725-825 4.50x - 5.50x EBITDA L + 700-800 4.75x - 6.00x EBITDA 2 nd Lien Loans L + 1000-1100 4.00x - 5.00x EBITDA L + 900-1000 4.50x - 5.50x EBITDA L + 900-1000 4.75x - 6.00x EBITDA Cash of 11.0% - 13.0% Cash of 10.0% - 11.0% Cash of 10.0% - 11.0% Sub Debt PIK of 1.0% - 2.0% 4.00x - 5.00x EBITDA PIK of 1.0% - 2.0% 4.50x - 5.50x EBITDA PIK of 1.0% - 2.0% 4.75x - 6.00x EBITDA All-in of 12.0% - 14.0% All-in of 11.0% - 13.0% All-in of 11.0% - 12.0% Equity N/A Approximately 35% - 40% of Total Capitalization N/A Approximately 35% of Total Capitalization N/A Approximately 35% of Total Capitalization As regularly published in: 10
As the Middle Market Lending Landscape Shifts, Transaction Structures Continue to Evolve Term loan lenders are reluctant to sit behind large funded ABL Revolvers in the capital structure Increasing prevalence of mezzanine tranches sitting behind Unitranche term loans Traditional Senior Cash Flow lenders are competing more aggressively by offering Senior Stretch facilities Decreased appetite for First Out / Last Out structures by certain market participants 11
Middle Market Healthcare Update Nick Konstantinou, Managing Director
Optimistic Mood at this Year s JPM Healthcare Conference Industry Overview In January, 12 Lincoln bankers from the Healthcare M&A, Debt Advisory Group and Financial Sponsor Coverage teams were in attendance at the J.P. Morgan Healthcare Conference, hosting more than 140 meetings - 2017 is expected to be as active or more active than 2016 in terms of M&A The healthcare industry is performing well across most sub-sectors Private equity professionals and company executives are optimistic about growth and profitability The healthcare regulatory and reimbursement environment is seen as stable for the next year with substantive changes to Obamacare taking until at least 2018 to implement While there will be changes to Obamacare, the current low level (from 17% in 2013 to 11% today) of uninsured individuals is likely to persist, though changes in how and by whom that coverage is provided are likely While there will definitely be changes to government-sponsored and mandated healthcare insurance, most industry professionals are optimistic about the growth and profitability of their businesses Positive Outlook for HC Sectors Covered by Lincoln HC Sub-Sectors with Strong Mid-Market M&A Activity Practice Management and Provider Services Process Outsourcing Physician Group Management Overall Vision Care Services Diagnostics & Research Tools Pharmacy Services Dental Services Pain Management Medical Devices & Products Managed Care Hospital Outsourcing Behavioral Health 13
Sector Highlight: Eye Care Services Sector Commentary Eye care in the U.S. is a $40 billion industry, consisting of optometry and ophthalmology services ($28 billion) and retail products ($12 billion), and is expected to grow at a 4.1% CAGR from 2016E to 2020F - Growth will be driven by an aging U.S. population spending more on eye care Currently there are 18,000 ophthalmologists in the U.S. with no projected increase through 2020 - Highly fragmented market with 34,000 domestic operators Operational efficiencies, standardization and M&A drive activity: - More effective recruiting, hiring and retention of doctors - Patient scheduling, billing & collections and doctor utilization - Capital availability, expertise and resources to drive acquisitions While optometry services is a more mature space, ophthalmology is still in the first inning of a multi-year consolidation opportunity ($ in millions) Steady Growth in All Segments 50 47 45 35 36 37 39 40 41 43 40 30 20 10 0 2012 2013 2014 2015 2016E 2017F 2018F 2019F 2020F Optometry Ophthalmology Retail Increasing Prevalence of Eye Disease Shortage of Ophthalmologists (# in millions) 40 35 30 25 20 15 10 5 0 61% 1.8 2.9 Advanced AMD 1 47% 20.5 30.1 67% 5.5 3.3 4.1 Cataracts Blindness or Low Vision 2004 Est. 2020 75% 7.2 Diabetic Retinopathy 50% 2.2 3.3 Glaucoma 26,000 24,000 22,000 20,000 18,000 16,000 2000 2005 2010 2015 2020 Sources: IBISWorld; National Eye Institute; Jobson: State of Optometry; Prevent Blindness America: The Future of Vision; Optometric Association Note: (1) An additional 7.3 million are at substantial risk for vision loss from AMD (# of ophthalmologists) Expected Ophthalmologists Required Ophthalmologists 14
Sector Highlight: Pain Management Services Sector Commentary Pain impacts the sufferer s family, work and community, and in many cases it can be life threatening - Pain is linked to such diseases as obesity, cancer, diabetes, arthritis, HIV-AIDs and hundreds of other illnesses Total annual U.S. economic cost of pain, including treatment and lost productivity is over $600 billion - Over 50 million individuals suffer from chronic pain in the U.S. Compelling opportunity drivers: - More effective recruiting, hiring and retention of doctors - Patient scheduling, billing & collections and high doctor utilization between clinic time and procedure done in the surgery center - Capital availability, expertise and resources to drive acquisitions Pain management is a relatively new therapeutic space and early in terms of sector consolidation Market Drivers and Dynamics Continued growth of the geriatric population Continued and growing U.S. obesity Increasing recognition of the therapeutic benefits of effective pain treatment and management Effectiveness of surgical procedures in addressing chronic pain New forms of pain treatment Care of pain patients is shifting from primary care physicians to pain care specialists Primary care physicians increasingly referring patients out to pain specialists with the expertise to handle complexities of pain care Sophisticated clinical compliance and prescription management know-how is required to provide pain management services Rising U.S. Obesity Demographics (% of U.S. adult population) Obese U.S. Adults Rest of Population C A A K W A 65% 2015 35% 58% 2030 Percent of Obese Adults (BMI of 30+) N V A Z U T M T C O T X 42% 0-9.9% 10-14.9% 15-19.9% 20-24.9% 25-29.9% 30-34.9% 35%+ O R I D H I W Y N M N D S D N E K S O K Obesity contributes to chronic pain as body structures support heavier weights and wear down over time M N I A M O A R L A W I I L M S M E V T N H N Y M A M I R I C T P A N J O H I N M D D E W V V A K Y T N N C S C A L G A F L V T N H M A C T R I N J D E M D D C Source: Centers for Disease Control and Prevention, Trust for America s Health, Robert Wood Johnson Foundation, IBISWorld 15
Lincoln Debt Advisory Group Overview
Lincoln s Recent Capital Raise Assignments Lincoln closed 50+ transactions globally over the past 2 years Select Recent U.S. Capital Raise Assignments Select Recent U.K. / European Capital Raise Assignments The Vistria Group Private Equity Group has acquired has refinanced has recapitalized has recapitalized its portfolio company has received a preferred equity investment and debt financing from from Project Gabriel Senior Credit Facility Junior Debt Senior Credit Facility Senior Credit Facility Acquisition Financing Private Equity Group has raised debt financing to acquire has acquired certain assets from has acquired have recapitalized has refinanced to form Project Navigator Senior Credit Facility Senior Credit Facility Revolver Credit Facility Bifurcated Term Loan Revolving Credit Facility Bifurcated Term Loan Refinancing has refinanced has acquired has refinanced has refinanced has sold to Senior Credit Facility Revolving Credit Facility Bifurcated Term Loan Revolving Credit Facility Senior Credit Facility Junior Debt Bank Education 17
Lincoln s Debt Advisory Team Bankers with lending backgrounds, 100% dedicated to financing transactions U.S. DAG Team Ron Kahn Managing Director (312) 580-6280 rkahn@lincolni.com Robert Horak Managing Director (312) 580-2804 rhorak@lincolni.com Robust process ensures best available pricing and terms John Laws Vice President (312) 506-2705 jlaws@lincolni.com Connor Barth Analyst (312) 506-1967 cbarth@lincolni.com Christine Tiseo Managing Director (312) 580-6287 ctiseo@lincolni.com Chris Buck Associate (312) 506-2751 cbuck@lincolni.com Justin May Vice President (312) 506-1962 jmay@lincolni.com Luke Elder Analyst (312) 628-1428 lelder@lincolni.com Natalie Marjancik Managing Director (312) 506-2729 nmarjancik@lincolni.com Tom Lawler Associate (312) 506-2785 tlawler@lincolni.com Jonathan Paris Vice President (312) 506-2725 jparis@lincolni.com Zack Flint Analyst (312) 628-1424 zflint@lincolni.com Strong relationships with over 300 capital sources throughout the world Multiple capital structure alternatives enhances certainty of closing Provides clients with transparency and control over financing process Independence assures there is no conflict of interest Maximum leverage of time and resources for management team and financial sponsor International DAG Heads Jonathan Broome Managing Director U.K. +44 (0) 20 7632 5238 jbroome@lincolni.com Serge Palleau Managing Director - France +33 (1) 53 53 18 18 s.palleau@lincolninternational.fr Dominik Spanier Managing Director - Germany +49 (69) 97105-428 d.spanier@lincolninternational.de Iván Marina Managing Director - Spain +34 (91) 129 4996 i.marina@lincolninternational.es 18