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Company Inventory Shifting YoungerPAGE 15»

MIDDLEMARKETREPORT

2Q 2016

US PE

S P O N S O R E D B Y

Cybersecurity InsurancePAGES 8-9»

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95% of transactions closed as administrative agent, sole lender, or co-lead arranger since 2012.

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Content

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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.

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

CONTENTS

Cover photo credit: Thomas Moskal

3 PITCHBOOK 2Q 2016 US PE MIDDLE MARKET REPORT


http://pitchbook.com/

mailto:[email protected]



PREPARATION FOR WHATEVER MAY COMEIntroduction

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, PE-

backed 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 [email protected].

NIZAR TARHUNI

Senior Analyst

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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

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researchers at the University of Wisconsin to develop GrowthEconomy. Updated information on the website (through 2015) will be

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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

ACG/PITCHBOOK PARTNERSHIP GAINS NATIONAL RECOGNITIONby Gary LaBranche



http://growtheconomy.org/



THE BUYOUT CYCLE SLOWLY WINDS DOWNOverview

Middle-market PE activity

continued to decline in step with

the broader PE marketplace midway

through 2016. $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.

US PE middle-market activity

Source: PitchBook

A distinct slowdown

US PE middle-market activity

$275

$339

$197

$93

$241

$273

$301

$301

$421

$390

$180

1,428

1,833

1,255

702

1,280 1,448

1,760 1,644

2,041 2,058

925

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016*

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

245 271 293

470

333

378

353

383375 382

399

603

348309

493493

553

492

524

472 475

507556 520

482

442

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

2010 2011 2012 2013 2014 2015 2016


Source: PitchBook

*As of 6/30/2016



The UMM saw its value rebound somewhat, but

overall, a slight decline was registered

US PE MM deals ($B) by segment

In 2Q, it was the LMM’s turn to experience a plunge in

completed deals

US PE MM deals (#) by segment

Source: PitchBook Source: PitchBook

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

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.

$0

$20

$40

$60

$80

$100

$120

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

2013 2014 2015 2016

LMM CMM UMM

0

100

200

300

400

500

600

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

2013 2014 2015 2016

LMM CMM UMM

Median US PE middle-market transaction size ($M)

$139.5 $128.3

$0

$20

$40

$60

$80

$100

$120

$140

$160

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016*

Source: PitchBook

*As of 6/30/2016



CYBERSECURITY INSURANCE: WHAT YOU REALLY NEED TO KNOWby 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 2014.

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



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-a-

service 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 third-

party 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.



US PE LMM deal flow

US PE LMM deal flow

US PE LMM deals (#) by sector in 1H 2016

Source: PitchBook

A SHARP DECLINELower-middle-market activity

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.

Timing played a factor, as did the quality of the companies in the market. 1H 2016 is still exhibiting robust LMM numbers overall.

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.

$9 $9 $7 $8 $8 $6 $8 $7 $9 $8 $6 $6 $8 $8 $6 $7 $14

$5

182 184

163

219

145 116

201

171

199

180 171

148 156

196

185 165

228

124

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

2012 2013 2014 2015 2016


$32

$37

$37

$18

$22

$26

$33

$28

$30

$28

$19

617

786

669

416

497 551

748

633

698 702

352

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016*


Source: PitchBook

*As of 6/30/2016

41%

27%

7%

2%

10%

10%3% B2B

B2C

Energy

Financial Services

Healthcare

IT

Materials & Resources

Source: PitchBook



US PE CMM deal flow

US PE CMM deal flow

US PE CMM deals (#) by sector in 1H 2016

ACTIVITY SPIKESCore-middle-market activity

Source: PitchBook

Source: PitchBook

Consolidation by PE platforms of fragmented healthcare providers is still occurring.

At $99B, the CMM is well on track to record another blockbuster year, potentially matching the $203B of 2014.

CMM activity ticked upward, with value staying relatively flat; both remained at the upper end of the historical range.

$41

$35

$27

$49

$24

$35

$39

$51

$55

$49

$45

$55

$56

$40

$42

$39

$50

$49

170165

173

283

135

166

228

262285

246253 254

273

213

264 257

209

256


2012 2013 2014 2015 2016Deal value ($B) # of deals closed

$141

$163

$111

$43

$102

$134

$152

$148

$203

$177

$99

660

817

508

232

570

705 791 790

1,037 1,007

465

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016*


Source: PitchBook

*As of 6/30/2016

27%

29%9%

5%

21%

9%B2B

B2C

Energy

Financial Services

Healthcare

IT




US PE UMM deal flow by

US PE UMM deal flow

US PE UMM deals (#) by sector in 1H 2016

Source: PitchBook

REBOUNDUpper-middle-market activity

Source: PitchBook

UMM activity rebounded somewhat, along with total deal value, but is still a far cry from the heights of much of 2014 or 2015.

As trepidation still reigns, 2016 is likely to see declining value. Most of the worthwhile targets in that range have already been purchased.

Well-regarded consumer brands can still command considerable attention, particularly as retail and other segments face industry shifts.

$13

$20

$34

$49

$39

$18

$36

$32

$45

$41

$55

$47

$29

$53

$51

$51

$28

$34

23

33

64

101

68

28

65

60

6866

101

70

46

98107

99

46

62


2012 2013 2014 2015 2016


$101

$139

$49

$31

$116

$112

$116

$125

$189

$185

$62

152

230

78 54

212

193

221 221

306 349

108

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016*

Deal value ($B)

# of deals closedSource: PitchBook

*As of 6/30/2016

23%

30%15%

16%

17 B2B

B2C

Energy

Financial Services

Healthcare

IT




S A V E T H E D A T E

W W W . E U R O G R O W T H . O R G

# E U R O G R O W T H

http://www.eurogrowth.org/

CHRISTOPHER TAYLOR

Managing Director,

Head of Relationship Management

Madison Capital

[email protected]

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 cash-

flow lenders outside of the regulated

banking industry, and a lot fewer

PE sponsors. This is back when a $3

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 2001.

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,

In commemoration of Madison Capital Funding’s 15th anniversary, we have included a segment from an interview that will be available later at http://www.newyorklife.com/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-1702210

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.

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.

HUGH WADE Chief Executive Officer

Madison Capital

[email protected]

Look for the upcoming, full video interview online at http://www.newyorklife.com/madisoncapitalfunding/news.



http://www.newyorklife.com/madisoncapitalfunding/news




SHIFTING YOUNGERUS PE middle-market company inventory

Inventory is increasingly concentrated in relatively younger companies

US PE middle-market company inventory by count and year

US PE MM median hold period (years) by exit type and year

As inventory grows increasingly concentrated among more youthful companies, whatever is left continues to fuel the growth of secondaries as a means of liquidity.

1,9352,255

2,697

3,272

3,7263,927

4,2184,472

4,7604,983

5,2445,542 5,643

0

1,000

2,000

3,000

4,000

5,000

6,000

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016*

2011-2016*

2006-2010

2000-2005

Pre-2000

Year of investment

Source: PitchBook

*As of 6/30/2016

6.1

4.7

5.5

6.5

4.7

4.1

0.5

1.5

2.5

3.5

4.5

5.5

6.5

7.5

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016*

IPOs Corporate SBO

Source: PitchBook

*As of 6/30/2016



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.

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. 5424 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.

5424 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-fits-

all 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.

BILL TO MODERNIZE PE COMPLIANCE GETS STRONG SUPPORTby Amber Landis, Vice President of Public Policy for ACG Global



mailto:mailto:alandis%40acg.org?subject=ACG%20Public%20Policy%20Efforts

mailto:mailto:alandis%40acg.org?subject=ACG%20Public%20Policy%20Efforts

EXITS STAY OFF PACEUS 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 Capital-

backed 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

2010. 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.

SBOs and strategic M&A are utilized in relatively equal proportions

US PE-backed MM exits (#) by type

US PE-backed middle-market exits

$69

$84

$41

$25

$71

$76

$86

$76

$115

$103

$36

574

713

452

258

615684

850

776

993 981

379

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016*

Exit value ($B) # of exits

Source: PitchBook

*As of 6/30/2016

0

200

400

600

800

1,000

1,200

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016*

Corporate Acquisition IPO Secondary Buyout

Source: PitchBook

*As of 6/30/2016



CREATING VALUEby 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-thought-

out 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.

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FUNDRAISING

US PE middle-market fundraising by year

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 MM fund count by size

saw a significant uptick in the amount

of smaller and niche vehicles come to

market in 1Q, looking to adapt to a slow-

growth environment by exploiting a

level of operational expertise generalist

funds did not possess. Yet the opposite

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.

$125

$146

$141

$85

$68

$105

$108

$124

$148

$131

$62

178

218196

112 110

136140

189 186174

90

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016*

Capital raised ($B)

# of funds closed

Source: PitchBook

*As of 6/30/2016

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016*

$100M-$250M $250M-$500M $500M-$1B $1B-$5BSource: PitchBook

*As of 6/30/2016



MM LEAGUE TABLES2Q 2016

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

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

9

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

4

McDermott Will & Emery 4

Morris Manning & Martin 4

Stikeman Elliott 4

Wilson Sonsini Goodrich & Rosati

4

Most active investors by deal count Most active law firms 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

4

Deutsche Bank 4

NewStar Financial 4

RBC Capital Markets 4

Silicon Valley Bank 4

Most active lenders by deal count

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

Stifel 4

Most active advisors by deal count

Source: PitchBook

Source: PitchBook

Source: PitchBook

Source: PitchBook



METHODOLOGY



MIDDLE MARKET DEFINITIONFor 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 VALUETotal 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.

FUNDRAISINGPitchBook 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.

EXITSThe 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 multi-dimensional 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 TABLESAll 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 2016. 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: www.mcfllc.com

http://www.mcfllc.com

I T ’ S Y O U R D E A L .

W W W . I N T E R G R O W T H . O R G

# I N T E R G R O W T H

A P R I L 2 4 – 2 6 , 2 0 1 7 | A R I A R E S O R T A N D C A S I N O | L A S V E G A S , N V

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