ENTERPRISE SOFTWARESECTOR UPDATE

1Q2020

April 2020www.brentwoodcapital.com

Q1 2020 Overall Market Update and Economic Review

Brentwood Capital Advisors LLC | 5000 Meridian Boulevard, Suite 350, Franklin, TN 37067 | Phone: (615) 224-3830

Q1 2020 M&A UpdateAn M&A market that has been gradually weakening over the last two years is now on life support thanks to COVID-19. Smallcracks in valuation and lending markets that appeared in March have become unbridgeable fissures in April. Most deals in theprocess of being closed have been delayed indefinitely. The few deals fortunate to close were significantly restructured, requiringlower purchase prices, seller notes, more onerous securities and terms and, in some cases, higher shareholder rollover.

New deal flow has slowed to a trickle. If sellers don’t have a significant amount of recurring revenue, an M&A process is likely tobe unsuccessful. Most companies can’t forecast full-year results, making it nearly impossible to value the company and to attractthe requisite debt and equity financing. To bridge this valuation gap, PE firms are utilizing more structured equity that combines apreferred security and fixed return with warrants, significantly improving the risk/reward profile for the buyer.

Lenders have become more conservative overnight, dampening valuations and the chances for successful deals. Oncecommonplace to have deals levered at 5-6x cash flow, lenders now struggle to allow more than 2x cash flow in senior debt. Dueto the previously strong economy, banks entered this crisis with solid balance sheets; however, most are dramatically boostingreserves in anticipation of higher loan defaults. Many loans underwritten at 5-6x cash flow will be leveraged at twice that levelwhen factoring the full effects of a shuttered economy.

Key Market Developments

All major market indices are experiencing volatility associated with the COVID-19 pandemic and falling crude oil prices. As theoutlook for the number of COVID-related deaths in the U.S. has improved, major indices have recovered ~25% of their value.Markets have also been bolstered by plans to gradually reopen the economy beginning with six states sometime this week. Thelargest five states account for over 40% of U.S. GDP. Of these, California and Illinois are scheduled to be closed until May 31st, andNew York may be closed longer. Without these states fully re-opened, any economic recovery will look more like a “U” than “V”.

Oil prices are even more volatile. Initially, the Russians and Saudis were flooding the market trying to break the back of the U.S.petroleum industry. Although the Saudis have agreed to curtail production, crude oil prices briefly fell to -$37.63/barrel last weekon fears of global COVID-induced depression and lack of storage. With most of the world’s productive capacity shutdown, there isvirtually no demand for crude oil.

Middle-Market Quarterly M&A Activity – All Sectors

1,842 1,517 1,601 1,506

1,712 1,559 1,646 1,889 1,838 1,638 1,783 1,660 1,772 1,627 1,552

1,778 1,534

$0

$50

$100

$150

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$250

$300

-

500

1,000

1,500

2,000

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3,000

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q

2016 2017 2018 2019 2020

Total Transaction Value($ in Billions)

Tran

sact

ion

Volu

me

$25M-$100M $100M-$500M $500M-$1B Total Transaction Value

Source: Pitchbook

Source: Yahoo Finance

Major U.S. Stock Market Indices Crude Oil

$66.30

$20.28

$0

$20

$40

$60

$80

Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Mar-20100%

110%

120%

130%

140%

Jan-19 Apr-19 Jul-19 Oct-19 Jan-20

S&P 500 NASDAQ DJIA

Mar-20

Historical Change in Non-Farm Payrolls

The employment landscape has changed so rapidly and drastically over the last month that is it difficult to measure. Assuming 30million unemployed out of 180-200 million workers, unemployment currently stands at 15.0-16.7%. Unemployment claims arelikely to continue to rise over the next few weeks and could reach as high as 15-20% depending on consumers’ willingness toreengage with a reopened economy.

Brentwood Capital Advisors LLC | 5000 Meridian Boulevard, Suite 350, Franklin, TN 37067 | Phone: (615) 224-3830

All signs pointed to a booming economy in early 2020. New job creation was setting records, particularly for this late in aneconomic recovery. Overnight, the situation changed when COVID-19 hit our shores and states enacted stay-at-home policies.The U.S. economy collapsed. Jobless claims that typically averaged 180-220K per month were increasing by 5.0 million per weekon average. The number of people out of work now totals 30+ million and counting. Essentially, the shutdown has erased everynew job created since 2009.

Unemployment

Gross Domestic Product

Source: Bureau of Labor Statistics

Source: Bureau of Labor Statistics

Similarly, COVID-19’s impact on GDP is extremelydifficult to gauge. The outlook for 3+% GDP growthin 2020 has been shattered. 1Q20 GDP was down4.8%, including only 2 weeks of shutdown. April hasbeen and May is likely to be a complete washout,potentially leading to huge drops in GDP, maybe asmuch as a 20% decline.

We are in trouble here, and therefore, so is the restof the world. In addition to large reductions in GDP,relief bills and expansion of the Fed’s balance sheethave added $3-4 trillion in additional national debt,totaling ~$25 trillion. This amount is likely toincrease dramatically as government spending onrelief pivots to stimulus. Regardless of the shape ofthe recovery, this pile of debt will slow the speed ofour recovery.

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Historical Traditional Unemployment Rate

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M

2017 2018 2019 2020

Q1 2020 Overall Market Update and Economic Review

Non-Farm Payroll

Sources: Bureau of Economic Analysis, Federal Reserve Bank of Atlanta

GDP Growth

-5.0%

-3.0%

-1.0%

1.0%

3.0%

5.0%

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1

2016 2017 2018 2019 20

Median = 2.2%

U.S. PE Buyout Multiples

Brentwood Capital Advisors LLC | 5000 Meridian Boulevard, Suite 350, Franklin, TN 37067 | Phone: (615) 224-3830

Private equity (“PE”) funds invested $92 billion in 591 transactionsin 1Q20, an 8.6% YoY increase, as 2020 began with a flurry of dealactivity before COVID-19 shut down parts of the market in mid-March.

The full impact of COVID-19 will be felt through at least 2Q20, asmany PE firms focus on assisting existing portfolio companies innavigating current uncertainty, rather than evaluating newinvestment opportunities.

PE firms that are actively pursuing new near-term opportunitiesare likely to prioritize add-on acquisitions or smaller transactionsas they face obstacles in obtaining debt financing. Some mayconsider creative structures, such as closing with seller notes thatcould be refinanced when the debt capital markets rebound.

Given these dynamics, M&A activity is expected to remain low forthe remainder of 2020.

U.S. PE middle-market exit activity declined sharply in 1Q20, withonly $34 billion realized across 179 transactions. Private equityinvestors are opting to hold portfolio companies until the marketstabilizes. Both exit activity and fundraising are expected toremain muted for the remainder of 2020.

Recent Leveraged Loan Statistics

Fitch Leveraged Loan Default Forecast

Leveraged Loan Market

The leveraged loan market is under immense stress as lendersbrace for higher defaults due to strain from mandatory COVID-19shutdowns and the potential resulting recession. Many lendersare vulnerable to loans made at 5.0-6.0x pre-COVID EBITDA.

In anticipation of defaults, large banks including JPMorgan Chase,Wells Fargo, Bank of America, Citigroup and Goldman Sachsincreased reserves by nearly $20 billion combined in 1Q20.

A vast majority of lenders are not actively pursing newopportunities as they (i) assess their existing portfolio, (ii) providecash to the extensive number of current corporate clients drawingon existing lines of credit and (iii) assist smaller customers inapplying for federal Paycheck Protection Program (“PPP”) loansand other borrowing options under the CARES Act.

In an effort to soften the blow of the COVID-19 shutdown, theFOMC completed two rate cuts in 1Q20 to bring the target federalfunds rate to between 0.0% and 0.25%. In addition, the FederalReserve implemented a new quantitative easing plan that will buyat least $500 billion in U.S. Treasuries and $200 billion inmortgage-backed securities.

The leveraged loan market is expected to stay fairly illiquidthrough 2Q20 as lenders re-evaluate market risk and theirexposure.

Middle-Market(1) Acquisition Activity

Middle-Market PE Fundraising Activity

Middle-Market PE Exit Activity

$227

$213

$201

$215

$216

$184

$34

1,070 1,086 1,008 1,057 1,045 864

179

2014 2015 2016 2017 2018 2019 1Q20Exit Value ($B) # of Exits

$118

$101

$119

$127

$122

$150

$34

155 153174 185

157161

42

2014 2015 2016 2017 2018 2019 1Q20Capital Raised ($B) # of Funds Closed

$356

$320

$314

$387

$448

$472

$92

2,205 2,319 2,425 2,684 3,232 3,422

591

2014 2015 2016 2017 2018 2019 1Q20Deal Value ($B) # of Deals Closed

Q1 2020 Financial Markets Activity

Private Equity Activity

Source: Pitchbook

Source: Pitchbook; Fitch Ratings

(1) Middle-market includes deal values of $25M - $1B.

Leverage Pricing and FeesBank Non-Bank

Pricing L + (4.0 - 4.75%) L + (5.0 - 6.0%) Floor - - Upfront Fees 50 bps 100 bps Unused 25 - 37.5 bps 50 bps

Senior Debt Total DebtHealthcare Services 4.0x 5.0xHealthcare IT 5.0x 6.0xNon-Healthcare 4.0x 5.0x

Debt as a Multiple of EBITDA

6.2x 6.1x 6.1x 6.3x 5.8x 5.7x 5.9x 5.8x 5.5x 5.7x 5.6x 5.9x 5.9x

5.8x 5.7x 5.7x 5.9x 5.7x 5.7x 6.4x 5.8x 6.0x 5.7x 5.6x 6.8x 7.1x

0.0x

5.0x

10.0x

15.0x

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q

2017 2018 2019 2020

Debt/EBITDA Equity/EBITDA

1.8% 1.8% 2.1%

5-6%

8-9%

0.0%

3.0%

6.0%

9.0%

2018 2019 LTM 2020P 2021P

Ann. TEV/LTM TEV/NTM % RevenueDate Target Acquirer Target Business Description TEV ($M) Growth

3/2/20 Compuware BMC Software Mainframe application development and delivery. N/A N/A N/A N/A

2/25/20 Vlocity Salesforce Industry-specifc cloud and mobile software. 1,330.0 13.3x N/A N/A

2/20/20 Ultimate Software Kronos Human capital management and payroll software. 22,000.0 7.3x N/A N/A

2/6/20 Forescout Advent Internation Device visibil ity and control. 1,900.0 5.6x 4.9x 14.3%

1/23/20 Regulatory DataCorp Moody’s Corporation Risk and compliance intell igence solutions. 700.0 N/A N/A N/A

1/17/20 Decision Resources Group Clarivate Analytics Analytics and data solutions for l ife sciences companies. 950.0 4.6x N/A N/A

1/13/20 Plaid Technologies Visa Inc. Development platform for fintech and financial services. 5,300.0 35.3x 17.7x 100.0%

1/9/20 Veeam Software Insight Partners Cloud data management software. 5,000.0 5.0x N/A N/A

Revenue

$64 $68 $76 $72

$65 $66 $63 $63 $52

480542 524 561

485 477523 504

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2018 2019 2020$ Invested ($B) Deal Count

Sell-Side

Sell-Side Advisory to

Representative Software TransactionsIndustry Bankers

Select M&A Transactions

Middle-Market(1) Enterprise Software M&A TrendsLTM Enterprise Software Index vs. S&P & NASDAQ

Growth Equity

Equity Investment Led by

(1) Middle-market includes deal values of $25M - $1B.

John Kibler | Managing Director(615) 224-3825jkibler@brentwoodcapital.com

Cook Wylly | Director(615) 224-3829 cwylly@brentwoodcapital.com

Brentwood Capital Advisors LLC | 5000 Meridian Boulevard, Suite 350, Franklin, TN 37067 | Phone: (615) 224-3830

S&P 500SaaS Index SaaS Average TEV / NTM Revenue

Software companies across the board have been affected by the COVID-19 response, with the impact and timing varyingbased on factors including target vertical, customer profile, go-to-market model and product attributes.

Most software businesses will see negative impacts from challenged customers and potential IT spending deferrals or cuts;companies serving cyclical verticals or SMBs have likely already been hit, while other software companies may not have seenan effect yet.

Outliers in software that have performed well include companies that enable virtual work environments, telehealth solutionproviders and businesses that help respond to or defend against emergency events (e.g. YTD through 3/31 ZM up 115%,TDOC up 85%, NET up 41%, EVBG up 32%, WORK up 15% vs. Nasdaq down 14%).

As of 3/31, public software share prices and valuations have pulled back on average ~30% and ~20% from February highs to7.3x NTM rev vs. 5-year average of 5.9x. Public SAAS stocks currently trade at 8.2x NTM rev and 0.29x on a growth-adjustedbasis vs. 5-year average of 0.26x.

Secular trends driving long-term software demand such as digitization of the enterprise, shift to cloud, enabling smarter andmore efficient workplaces through automation/AI/ML, and the need to secure these digital environments remain in place.

NASDAQ Software Index

Brentwood Capital Advisors

Q1 2020 Enterprise Software Sector Overview

BCA Market Commentary

111%107%

92%99%

8.2x

75%

95%

115%

135%

155%

Apr-19 Jul-19 Oct-19 Jan-20 Mar-20