PPCMP Capital Markets2012FIN

SURVEY REPORT
I 2 011-2012
B y Dr. Jo h n K. Pagl i a
Denney Academic Chair and Associate Professor of Finance
is your Business ready to Access Capital?

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PEPPERDINEPRIVATECAPITALMARKETSPROJECT|CAPITALMARKETSREPORT20112012
PEPPERDINEPRIVATECAPITALMARKETSPROJECT SeniorResearcher JOHNPAGLIA,PhD,MBA,CPA,CFA ResearchSupport IRINASHAYKHUTDINOVA,MBA ExecutiveOfficer PublicRelations MICHAELSIMS F.DOUGLASSGORE KPPUBLICAFFAIRS AdvisortoProject RACHELWILLIAMS Design R&RPARTNERS ACKNOWLEDGEMENTS
Thisresearchwasmadepossiblebythegenerousfunding fromtheDenneyEndowedProfessorship.
PEPPERDINEUNIVERSITY DeanLindaA.Livingstone,PhD AssociateDeanDavidM.Smith,PhD MarkW.S.Chun,PhD,Director,CenterforAppliedResearch DianneKing JuanMena MichaelStamper JingZhang DarleneKiloglu DorisJones RogerLotho DUN&BRADSTREETCREDIBILITYCORP. JeffreyStibel,ChairandChiefExecutiveOfficer AaronStibel,SeniorVicePresident,Technology JudyHackett,ChiefMarketingOfficer ErikSimon BrendaGary
2011|PEPPERDINEUNIVERSITYGRAZIADIOSCHOOLOFBUSINESSANDMANAGEMENT.AllRightsReserved.|1
ORGANIZATIONALSUPPORT AllianceforMergersandAcquisitionsAdvisors(AM&AA) InternationalBusinessValuationAssociationLinkedinGroup AssociationforCorporateGrowth(ACG) InternationalFactoringAssociation(IFA) BusinessValuationResources(BVR) LinkedBusinessLinkedinGroup CaliforniaBankersAssociation(CBA) LosAngelesVentureAssociation(LAVA) CaliforniaMortgageBankersAssociation(CMBA) NationalAssociationforSmallBusinessInvestment CaliforniaSmallBusinessAssociation(CSBA) Companies(NASBIC) CommericalFinanceAssociation(CFA) NationalAssociationofWomenBusinessOwners DealFlowSourceLinkedinGroup PE/VCRoundtable ExitPlanningInstitute PepperdinePrivateCapitalMarketsProjectLinkedinGroup FinanceClubLinkedinGroup RiskManagementAssociation(RMA) ValuationLinkedinGroup GraziadioAlumniNetwork(GAN) VentureCapitalLinkedinGroup Harvard/USCBusinessGrowthConference VirginiaActiveAngelNetwork(VAAN) InternationalBusinessBrokerAssociation(IBBA) SURVEYDESIGN,DISTRIBUTION,ANDOTHERSUPPORT RobertT.Slee MichaelMcGregor TimRhine BarryD.Yelton EverettWalker SamirDesai RichardJ.Crosby LeonardLanzi GrayDeFevere JanHanssen RobertZielinski KevinD.Cantrell ScottJones DeidreA.Brennan EricNath GuntherHofmann MichaelPainter JamesA.Nelson,MD JohnDavis LarryGilson AndrewSpringer JeriHarmon LetitiaGreen GloriaGuenther StevenBrandt DatT.Do AndyWilson YingpingHuang JasonBaum JasonKumpf HalSpice JanePak RalphAdams EricWilliams DanDeeney JohnGraham JeffNagle GregHowath NevenaOrbach JohnDmohowski BradTriebsch GaryW.Clark M.ToddStemler PatrickGeorge SeanSamet MarkWalker KellySzejko KevinHalpin AndreSuskavcevic ChrisM.Miller BrianCove JeffThomas JohnLonergan RobBrougham BrettPalmer GaryLaBranche JamieSchneier TroyFukumoto DennisGano LinhXavierVuong ChrisdeVries TuckerHerring MichaelNall SimonJames,PhD

TABLEOFCONTENTS
BUSINESSAPPRAISERSURVEYINFORMATION................................................................................................... 0 1 OperationalandAssessmentCharacteristics..................................................................................................... 0 1 INVESTMENTBANKERSURVEYINFORMATION.................................................................................................. 4 1 OperationalandAssessmentCharacteristics..................................................................................................... 4 1 BROKERSURVEYINFORMATION....................................................................................................................... 4 2 OperationalandAssessmentCharacteristics..................................................................................................... 4 2 LIMITEDPARTNERSURVEYINFORMATION........................................................................................................ 2 3 OperationalandAssessmentCharacteristics..................................................................................................... 2 3 ANGELINVESTORSURVEYINFORMATION......................................................................................................... 9 3 OperationalandAssessmentCharacteristics..................................................................................................... 9 3 VENTURECAPITALSURVEYINFORMATION........................................................................................................ 6 4 OperationalandAssessmentCharacteristics..................................................................................................... 6 4 PRIVATEEQUITYSURVEYINFORMATION .......................................................................................................... 4 . 5 OperationalandAssessmentCharacteristics..................................................................................................... 4 5 MEZZANINESURVEYINFORMATION ................................................................................................................. 3 . 6 OperationalandAssessmentCharacteristics..................................................................................................... 3 6 BANKANDASSETBASEDLENDINGSURVEYINFORMATION............................................................................... 0 7 OperationalandAssessmentCharacteristics..................................................................................................... 1 7 AssetBasedLendingSpecificCharacteristics..................................................................................................... 9 7 ABOUTTHEAUTHOR......................................................................................................................................... 1 8 INDEXOFTABLES.............................................................................................................................................. 2 8 INDEXOFFIGURES............................................................................................................................................ 4 8
EARN A CERTIFICATE IN PRIVATE CAPITAL MARKETS
he Certificate in Private Capital Markets (CIPCM) is a 3-day curriculum-
based training program developed by Dr. John Paglia in association with his ground-breaking research, Pepperdine Private Capital Market Project.
noveMBer 14-16, 2011 and aPril 18-20, 2012
Designed for business owners and professionals employed within the finance,
banking, investment, mergers and acquisitions, valuation, management consulting, legal, and accounting fields
PePPerdine University Graziadio school of BUsiness and ManaGeMent

6100 Center Drive Los Angeles, CA 90045 For more information, visit: http://bschool.pepperdine.edu/cipcm or contact Rachel Williams at rachel.Williams@pepperdine.edu
Learn in-depth critical analysis and evaluation skills necessary for successfully
operating a business within the private capital markets
Overview of Private Capital Markets Theory and Sources of Capital The Role of Intermediaries Angel Investments, Venture Capital, and other Early Stage
Financing Sources
Senior Debt, Cash Flow Based, Asset Based Lending and Factoring Mezzanine and Private Equity Capital Determining the Cost of Capital Using The Pepperdine Private Cost of
Capital Model
CPA, MCLE, CFP Continuing Education Credit Available
REGISTER: bschool.pepperdine.edu/cipcm
Building wealth by making better investment and financing decisions.
Master the leader in you.
FOREWORD
Growth Capital Fixated on Large Companies

ByJOHNPAGLIA
Since its onset in late 2007, the Great Recession has created neverbeforeseen economic conditions for economies around the world. Private capital markets have endured significant turbulence during the economic downturn.Frombusinessclosurestobankfailurestofinancialservicebailouts,wehaveseensomesurvivorsand many,manylosers. Sincethe2008passageoftheTroubledAssetReliefProgram(TARP),wehaveseenrapidevolutionofthecapital providersindustry.Atthesametime,capitalseekershavestruggledtosecurefunding.Theeraofeffortlesscredit linesandbankloansforsmallbusinessesislittlemorethanafondmemory.Venturecapitalistshavebecomemore focused on investments in safer, more established companies. Angel Investors are increasingly taking up opportunitiesvacatedbyVCs.Privateequityandinvestmentbankersareenduringlongerperiodstoprofitablyexit deals. Theserapidchangeshaveleftpolicymakersfumblingforhastilyformedgovernmentbasedsolutionstocorrectthe markets.Atthesametime,overstretchedbusinessownersandcapitalprovidersarestrugglingtocreateworkable marketbasedsolutions. One thing is clear; businesses, capital providers, policy makers and economists would benefit from more upto date,preciseinformationtoaidtheprivatecapitalmarkets.Improvedunderstandingoftheentiremarket,notjust individual segments, from capital providers to individual businesses would improve operations and market efficiency.Italsowouldsavebusinessownersincalculablehoursspentchasingcapitalandcapitalproviderstime reviewingonlythosecompaniesthataredeservingofinvestment. ThePepperdinePrivateCapitalMarketsProjectisthefirstcomprehensivesetofdatatolookatthemarketfrom businesses to capital providers perspective. The Capital Markets 20112012 Report allows capital providers to betterunderstandtheissuesasdeterminedbypeerlendersacrossthemajorcapitalsegments.Thereportalso sharesbehindthescenesinsightsintothemindsofcapitalproviders. The Capital Markets 20112012 Report has uncovered data that highlights the state of the overall market. For example,PrivateequityfirmsandInvestmentbankershavecloselymatchingpointsofviewregardingaccessibility ofcapital.Accordingtothemostrecentdata,76%ofthe253investmentbankerssurveyedsaidthatthenumberof companieswith$1millionEBITDA(acompany'searningsbeforethedeductionofinterest,taxandamortization expenses)whoareworthyofinvestmentexceedstheamountofcapitalavailable.Whereas,58%oftheinvestment banker respondents said the capital available exceeds the number of companies with $100 million EBITDA that meetinvestmentcriteria.Intermsofprivateequityrespondents,63%ofthe288surveyedsaythatthenumberof companieswith$5millionEBITDAthatareinvestmentworthyexceedsthecapitalavailable.Ontheotherhand, 58%ofprivateequityrespondentssaidthatthecapitalavailableexceedsthenumberofcompanieswithover$100 millionEBITDAwhoareworthyofinvestment.
Historically,agreementamonginvestmentbankersandprivateequityfirmsisuncommonbuttheiragreementis corroborated by the fact that larger safer companies enjoy access to growth capital. However, smaller companiesseekingcapitalgreatlyoutweightheavailablecapital. Otherrevealingfindingsinclude: Dealsaretakinglonger.Respondentsinprivateequitysurveysaidonly12%plannedIPOs.Respondents exitstrategiesincludesellingtoaprivatecompanyat28%,another26%ofrespondentsplantosellto anotherprivateequitygroupand22%saytheywouldselltoapubliccompany.PEfundersalsosaidthey arewaiting4yearsormoretoexitregardlessofinvestmentsize. Refinancingcomprisesalmosthalfofbankloans.Respondentstothebankssurveysaidrefinancing accountedfornearly49%ofalllendingactivityfollowedbyexpansion(22%)andworkingcapital(11%). Thelargestconcentration(58%)ofloansizeswasbetween$1millionand$25million. Privateequityfearsfutureregulation.While11%saidtheyfearedgovernmentregulationandtaxes today,28%saiditwasanemergingissue.Thiscouldbeinresponsetoarecentlyapprovedrulefromthe CommodityFuturesTradingCommission(CFTC)(October31st)requiringthelargestU.S.hedgefundsand privateequityfundstoreportfinancialinformationtothegovernmentstartingnextyear.TheCFTCrule wasalsopassedbytheSecuritiesandExchangeCommission.Thereportingrequirementsweremandated underthe2010financialoverhaullaw.
In2004,RobertT.Sleewrote"PrivateCapitalMarkets:Valuation,Capitalization,andTransferofPrivateBusiness Interests, in which he discussed the importance of the private capital markets but relatively little market wide understanding or research. The Private Capital Markets Projects Capital Markets 20112012 Report seeks to improve the innerworkings of the private capital markets based on real world responses and reactions from professionals. Through improved understanding of market wide conditions and interconnectedness based on responsesfrombusinessownersandcapitalproviders,publicandpolicymakerswillbebetterabletoencourage marketdrivensolutions.
PEPPERDIN NEPRIVATECAP PITALMARKETSPROJECT|CAPIT TALMARKETSR REPORT20112012
PEPPE ERDINEPRIVAT TECAPITALMA ARKETSSURVE EY ThePeppe erdineprivatec costofcapital survey(PCOC)isthefirstco omprehensive andsimultane eousinvestigat tionof the major private capita market segm al ments. The survey deployed in Septembe 2011, specif d er fically examine the ed behavior of senior lende assetbase lenders, mezzanine fund private equ groups, ve o ers, ed ds, uity enture capital firms, angel investors, privatelyheld busine esses, investme bankers, b ent business broke limited par ers, usiness rtners, and bu dine PCOC sur rvey investigat ted, for each private capital market segm ment, the important appraisers. The Pepperd ks b er w al accessible, what the benchmark that must be met in orde to qualify for capital, how much capita is typically a requiredre eturnsarefor extendingcap pitalintodays seconomicenv vironment,andoutlookson demandforv various capitaltypes,interestrat tes,andtheec conomyingene eral. gsindicatetha atthecostofc capitalforpriv vatelyheldbus sinessesvaries ssignificantlyb bycapitaltype e,size, Ourfinding and risk assumed. This relationship is depicted in the Pepperdin Private Capital Market L s ne Line, which ap ppears below. Figure 1. Priv F vate Capital Market Requ uired Rates o Return of
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
Angel (38% 45 5%)
38%) VC(28% 3 PEG(23% 3 30%) (18% 23%) Mezz( ABL(4% 7 7%) Banks (5 7%) )
1stQ Quartile
Median
3rdQ Quartile
MedianSp pring2011
2011|PEPPERDINEUNIVERSITY YGRAZIADIOSCHO OOLOFBUSINESS SANDMANAGEME ENT.AllRightsRes served.|7
Thecostofcapitaldatapresentedbelowidentifiesmedians,25thpercentiles(1stquartile),and75thpercentiles (3rdquartile)ofannualizedgrossfinancingcostsforeachmajorcapitaltypeanditssegments.Thedatarevealthat loanshavethelowestaveragerateswhilecapitalobtainedfromangelshasthehighestaveragerates.Asthesizeof loanorinvestmentincreases,thecostofborrowingorfinancingfromanyofthefollowingsourcesdecreases.
Table 1. Private Capital Market Required Rates of Return

1st quartile Bank ($1M CF loan) Bank ($5M CF loan) Bank ($10M CF loan) Bank ($25M CF loan) Bank ($50M CF loan) Bank ($100M CF loan) ABL ($1M loan) ABL ($5M loan) ABL ($10M loan) ABL ($25M loan) ABL ($50M loan) ABL ($100M loan) Mezz ($1M EBITDA) Mezz ($5M EBITDA) Mezz ($10M EBITDA) Mezz ($25M EBITDA) Mezz ($50M EBITDA) Mezz ($100M EBITDA) PEG ($1M EBITDA) PEG ($5M EBITDA) PEG ($10M EBITDA) PEG ($25M EBITDA) PEG ($50M EBITDA) PEG ($100M EBITDA) VC (seed) VC (startup) VC (early stage) VC (expansion) VC (later stage) Angel (seed) Angel (startup) Angel (early stage) Angel (expansion) 6% 6% 5% 5% 5% 4% 4% 4% 4% 3% 3% 3% 21% 21% 18% 18% 16% 15% 25% 24% 24% 23% 23% 21% 28% 23% 23% 18% 18% 30% 28% 28% 18% Median 6% 6% 6% 6% 5% 5% 7% 7% 7% 5% 4% 4% 23% 21% 19% 18% 18% 18% 30% 26% 25% 25% 25% 23% 38% 30% 28% 28% 28% 45% 45% 40% 38% 3rd quartile 7% 7% 7% 6% 6% 5% 9% 9% 9% 5% 4% 4% 25% 24% 21% 19% 18% 18% 34% 30% 30% 30% 30% 30% 46% 46% 51% 38% 38% 95% 83% 70% 47%
EARN YOUR EDGE
The Certified Merger & Acquisition Advisor Certificate Program
DEC. 9-11, 2011 FEB. 13-17, 2012 or DEC 3-7, 2012

PEPPERDiNE UNivERsitY
6100 Center Drive, Ste. 314 Los Angeles, California 90045 For any questions or a FREE CM&AA Preview Video, call or email AM&AA headquarters. 877.844.2535 info@amaaonline.org
Pepperdine Universitys Graziadio School of Business and Management, home of the Pepperdine Private Capital Markets Project, is proud to host the CM&AA Certification Program.
Who Should Attend:
CPAs, M&A intermediaries, investment bankers, private equity professionals, attorneys, business valuators, management consultants, and financial advisors/executives focused on M&A corporate development.
objectiveS:
Establish M&A advisory services as a recognized advanced professional business credential by identifying the role of the professional, the underlying body of knowledge, and a course of study by which such knowledge is acquired. Encourage higher educational standards in the middle market M&A and corporate financial advisory fields. Establish an objective measure of an individuals knowledge and competence in the fields of middle market M&A and corporate financial advisory fields.
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BU USINESSA APPRAISE ERSURVE EYINFORMATION

Accordingt tothesurveyre espondentsthemostimportan ntissuesfacing privatelyheldbusinesstodayaredomestic economicu uncertaintyand daccesstocapit tal.Lookingfor rward12month hs,however,th heyexpectgove ernmentregulations andtaxestoemergeastheprevailingissuefacingprivat tebusinessesfo ollowedbydom mesticeconomicuncertainty.O Over thelastsixmonthsrespon ndentsindicated dincreasesinc costofcapital,r riskpremiumsa andDLOMs,wo orsenedgeneral businessco onditionsandap ppetiteforrisk. .Theyalsoexpe ecttoseeincre easingcostofca apital,riskprem miums,andsligh htly improvingg generalbusines ssconditionsov verthenext12months. findingsinclude e: Otherkeyf In ncomevaluation napproachistheoverwhelmingfavoriteamo ongresponden nts ket(equity)risk Re espondentsuse eanaverageris skfreerateof3 3.9%andamark kpremiumof6.3% Av veragelongter rmterminalgro owthisestimate edat3.2% Th hemajorityofr respondentsanticipateanincr reaseinbusines ssengagements soverthenext12months
Operatio onalandAss sessmentCh haracteristics s

Mostofthe ecompaniesvaluedbyrespondentshaveann nualrevenuesfr rom$2,000,000 0to$50,000,00 00.
Figure 2. Annual Rev venues of Co ompanies Va alued 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 62% 6 42% 30% 64 4% 63 % 42% % 31% 15%
essthan Le $5 500,000
$50 00,000 $2m million $5million $10miillion $50million $100million Greaterth han $1million $5m million $10m million $50m million $100million 0 $500million $500 million
Appraisers, ,onaverage,ap pplya50%weig ghttoincomea approacheswhe envaluingapri vatelyheldbus siness.
Figu 3. Usage of Valuation Approaches ure s
17% 12% 21% 50% %
Inco omemethod(D DCF,NPV,IRR) Tran nsactionmetho od Publiccompanym method Othe er
2011|PEPPER RDINEUNIVERSITY YGRAZIADIOSCHO OOLOFBUSINESS ANDMANAGEME ENT.AllRightsReserved.|10

APPRAISER RScont.
Responden ntsusingmultiplesbasedapproachesindicate eapreferencef forusingrecast t(adjusted)EBIT TDAmultiples( (34%), followedby yrevenuemultiples(22%).
Figure 4. Usage of Mu U ultiples Revenuem multiple 22% 2 Recast(ad djusted)EBITDA Amultiple EBITDA(u unadjusted)mu ultiple EBITmulti iple 12% 34% Cashflowmultiple Netincom memultiple Other
5% 4% 17% 6%
Responden ntsindicatedusinganaverageriskfreerateof3.9%,average emarket(equit ty)riskpremium mof6.3%and sizesofcompa averagelon ngtermgrowth hrateof3.2%.F Figure7indicatesconsiderable edifferencesinDLOMsacross anies andsubject tinterests.
Figure 5. Average Risk-Free Ra Market (equity) Risk Premium an Long-Term Growth Ra e ate, ( k nd m ate 0% Risk freerate Market(equity)riskp premium mterminalgro owthrate Longterm 3.2% 1% 2% 3 3% 4% 3.9 9% 6.3% % 5% 6% 7%
Figure 6. Discount for Lack of Marketability (DLOM) by Revenue Siz M y zes 0% $100,000inrevenues $1Minrevenues $25Minrevenues $250Minrevenues Controlinter rest
10% 1
20% 19.0% 17.0% 14 4.6% 11.1% Minor rityinterest 2 23.2%
30% 34.0% 31.4% 27.8% %
40% 4

APPRAISER RScont.
Figu 7. Explicit Forecast Period for Hig ure P gh-Growth C Companies b Revenue S by Sizes (years) )
$1million $25million $250million 5.5
5.6 5.8
ntsindicatedinc creasesincosto ofcapital,riskp premiumsandD DLOMs,andwo orsenedgenera albusinesscond ditions Responden overthelas stsixmonths.
Ta able 2. Gene Business and Industr Assessme eral s ry ent: Today v versus Six Mo onths Ago
Stayed Net Decr reased Decreas sed Increased Inc creased % % about the crease/ inc slightly sign signif ficantly slight tly nificantly increa decrease ase same decrease 3% 3 1% 1 2% 2 0% 0 1% 1 0% 0 0% 0 1% 1 3% 3 19% % 11% % 18% % 3% 18% % 11% % 6% 3% 32% % 27% 65% 63% 63% 53% 57% 73% 54% 40% 34% 19% 15% 27% 27% 29% 18% 37% 20% 17% 4% 1% 7% 2% 3% 3% 4% 5% 51% % 23% % 16% % 34% % 28% % 32% % 21% % 42% % 25% % 22% 13% 20% 3% 19% 11% 6% 4% 35% 29% 10% -4% 30% 9% 21% 16% 37% -10%
Characteris stics Number of engagements e Time to com mplete a typical appraisal Fees for ser rvices Competition Cost of capital Market (equity) risk premium ms DLOM Company sp pecific risk premiums General bus siness conditions s
Responden ntsexpectincreasingcostofca apital,riskprem miums,andsligh htlyimprovingg generalbusines ssconditionsov verthe nextyear.
Table 3. General Business and Industry Assessment E e B A Expectations over the Ne 12 Month s ext hs
Net Stay Increase In ncrease Decrease % % about the inc crease/ slightly sign slight tly nificantly increa decrease ase decrease same 5% % 10% % 6% % 2% % 7% % 7% % 4% % 6% % 19% % 36% 78% 63% 72% 66% 66% 78% 64% 51% 49% 9% 29% 24% 24% 25% 14% 26% 23% 8% 1% 1% 1% 1% 1% 1% 1% 2% 56% % 10% % 30% % 24% % 25% % 26% % 16% % 26% % 25% % 6% 10% 6% 2% 7% 7% 4% 7% 22% 51% -1% 24% 23% 19% 19% 11% 19% 3% 2011|PEPPER RDINEUNIVERSITY YGRAZIADIOSCHO OOLOFBUSINESS ANDMANAGEME ENT.AllRightsReserved.|12
Characteris stics
Dec crease signif ficantly 1% 1% 0% 0% 0% 0% 0% 1% 3%
Number of engagements e Time to com mplete a typical appraisal Fees for ser rvices Competition Cost of capital Market (equity) risk premium ms DLOM Company-sp pecific risk premi iums General bus siness conditions s

APPRAISER RScont.
Responden ntsbelieveecon nomicuncertain ntyisthemosti importantissue efacingprivatelyheldbusines ssestoday. Governmen ntregulationsa andtaxesasacategoryisindic catedasthemo ostimportantem mergingissue.
Figure 8. Issues Facin Privatelyng -Held Busine esses 0% To otal Economicuncer rtainty(domes stic) Accesstocap pital Governmentregu ulationsandta axes omicuncertain nty(internation nal) Econo Competit tionfromforei igntradepartn ners Inflat tion 3% 1% 1% Emergiingissue
20%
% 40%
60%
80%
100% 100%
120 0%
6 65% 15% 13% 1
Currentissue

INV VESTMEN NTBANKE ERSURVE EYINFOR RMATION N

Themajorit tyofthe253re espondentstotheinvestmentbankersurvey indicatedincreasingmarginpr ressureon companiesoverthelastsixmonths.They yalsoreportedslightincreases sindealflow,r relativelyflatleverageanddea al multiples,increasedprese enceofstrategic cbuyers,andw worsenedbusin essconditions.Domesticecon nomicuncertain nty wasidentif fiedasthemost timportantissu uefacingprivatelyheldbusine essestoday.Governmentregulationsandtaxes wereindica atedasthemos stimportantem mergingissue. findingsinclude e: Otherkeyf Ap pproximately84%ofresponde entsexpecttoc closebetweeno oneandfivede ealsinthenext12months.Thi isisup fromtheroughly y72%ofrespon ndentsinSpring g2011. Th hetopthreerea asonsfordealsnotclosingwerevaluationga p(29%),econo omicuncertainty(18%),and un nreasonablesellerorbuyerde emand(17%). Re espondentsind dicatedagenera alimbalancebe etweencompan niesworthyoff financingandca apitalavailablefor th hesame.Thereisareportedsh hortageofcapit talforthoseco ompanieswithlessthan$10m millioninEBITDA A,but ageneralsurplus sforcompanies swith$25millio oninEBITDAor rmore. Th hemostpopula arvaluationapp proachesusedb byrespondents swhenvaluingp privatelyheldb businesseswere e in ncomeandtransactionapproaches.

Approximately25%ofthe erespondentsd didntcloseanydealsinthelas stsixmonths;5 57%closedbetw weenoneandf five deals,while e9%closedmo orethansix.
Figure 9. Private Busin P ness Sales Transactions Closed in th Last Six M T he Months 3% 6% 6% 7% 7 % 24% 9% 25% 0 1 2 3 20% 4 5 6 Greaterthan6


IBANKE ERcont.
Approximately20%ofallt transactionsclo osedinthelastsixmonthsinvo olvedmanufact turing,followed dby15%that involvedbu usinessservices s,and12%thatinvolvedwhole esaleandmanu ufacturing.
Figure 10. Business Types That Were Involve in the Tra 1 ed ansactions C Closed in the Last Six Mo onths Manufacturing 7% 8% 8% 9% 11% 11% 12% 20% % 15% Businessser rvices Wholesale& &distribution Healthcare Informationtechnology Retail&con nsumerservices Financialser rvices Basicmaterials&energy Other
tyofdeals(58% %)tooksixto12 2monthstoclo ose.Rarelydida anydealtakem morethanoney yeartoclose(4% %). Themajorit
Figure 11. Average Number of Month to Close O Deal hs One 4% 7% 22% 2 68m months 13% 29% 1012 2months Greate erthan18mon nths
Nearly7%o oftheresponde entsdontexpe ecttocloseanydealsinthene ext12months;8 84%expecttoc closebetweenone andfivedeals,whileonly2%expecttoclosemorethan6deals.
9% 16%
24m months
46m months 810months 1218 8months
Figure 12. Pri F rivate Busine Transacti ess ions Expecte to Close i the Next 1 Months ed in 12 2% 12% % 16% 20% 6 Greaterthan6 7% 7% % 13% 23% 4 5 0 2 1 3

IBANKE ERcont.
Approximately42.7%ofdealsterminated dwithouttrans sactingoverthe epastyear.
Figu 13. Perce ure entage of Bu usiness Sales Engageme s ents Terminated Without Transacting g
42.7% 57.3 3%
Tr ransacted %Nottransacted
Topthreer reasonsfordealsnotclosing:v valuationgapin npricing(29%), economicunce ertainty(18%),andunreasona able Seller/buye erdemands(17%).
Figure 14. Reasons for Busines Sales Eng s ss gagements N Transacti Not ting 2% 6% 8% 14% 1 17% 18% 29% Valuationg gapinpricing Economicu uncertainty Unreasonab blesellerorbu uyerdemand Lackofcapiitaltofinance forbusiness Nomarketf Insufficient cashflow Sellermisre epresentations s Other
Ofthosetra ansactionsthat tdidntclosedu uetoavaluationgapinpricing g,approximatel ly39%hadava aluationgapinp pricing between21 1%and30%.
6%
Figure 15. Valuatio Gap in Pric on cing for Tran nsactions Th Didnt Clo hat ose 7% 7% 8% 9% 29% 010% 1120% 2130% 39% % 3140% 4150% Greatertha an50%

IBANKE ERcont.
Theweight tsofthevarious svaluationapproachesusedb byrespondents whenvaluingp privatelyheldb businessesincluded 34%forbot thincomeandtransactionapp proaches.
Figur 16. Usage of Valuation Approache re n es
% 11% 15%
6%
34%
Incomeappr roach(DCF,NP PV,IRR) Transactiona approach Publiccompa anyapproach
34%
Assetbased approach Other
RecastEBIT TDAmultiples(3 39%)andEBITD DAmultiples(21 1%)carriedthe mostweightw whenusingmult tiplestodeterm mine valuations.
Figure 17. Usage of Mu ultiples
Rev venuemultiple e 3% 12% 5% 21% 39% 7% 13% % RecastEBITDAm multiple EB ITDAmultiple EB ITmultiple shflowmultip Cas ple(excludingE EBITDAorEBIT T) Ne etincomemult tiple Ot her
Averagede ealmultiplesontransactionsfr romthepriorsixmonthsasob bservedbyresp pondentsvaried dfrom2to9.
Table 4. Media Deal Mult Ta an tiples by EBI ITDA Size of Company f

Retail and consumer services 3.5 4 7 6.5 4.5 7.25 Wholesale & distribution 3.5 4.5 5.5 6 6.25 6 Business B services 4 5 6 6 6 7.5 Ba asic mat terials & en ergy 3 3.5 4 5 5 7 7.5 8 Health care 4 5 6 5.75 7 6.5 Information technology 4.25 5.5 6 7.5 7.75 8.75 Financial services 3.5 4 5 5.25 5 6.75
EBITDA $1M $5M $10M $25M $50M $100M
Manufacturing g 4 4.5 5.25 6 6.5 6.5
A Average 4 5 6 6 6 7

IBANKE ERcont.
Averagetot talleveragemu ultiplesobserve edbyresponden ntsvariedfrom m1.5to6.
Table 5. Median Total Leve erage Multipl by Size o Company les of

Retail & consumer services 2.75 3.5 4 2.75 3 5 Wholesale & W distribution 2.5 3 3 2.5 3 3.5 Bas sic Business materia & als services ener rgy 3 2.5 3 4 4.75 5.5 2.5 5 2.7 75 2.5 5 2.5 5 5 6 Health care 2 3 3 3.5 3.75 5 Information technology 3 2.5 3.75 3 5 5 Financial services 3 3 3.5 3.25 3.5 3.5
Manufacturing $1M $5M $10M $25M $50M $100M 3 3 3 3.25 4.5 5.75
Av verage 3 3 3 3 4 5
Averagetot talleveragemu ultiplesobserve edbyresponden ntsvariedfrom m1.5to6.
Tab 6. Median Senior Leve ble n erage Multip ples by Size o Company of
Retail & consumer services 2 3 3 3 3 3.25 Wholesale & W distribution 1.75 2 2 2 2.25 3 Bu usiness se ervices 1.75 2.5 2.75 4 4.5 4 sic Bas Information materia & Health care als re technology ener rgy n/a a 2.5 5 2 2 5 n/a a 1.5 2.75 2.5 2.75 2.5 n/a 2.5 2 2.5 1.5 n/a n/a Financial services 2 3.5 3.5 3.5 5 4
Manufacturing $1M $5M $10M $25M $50M $100M 2 2.5 2 3.25 3 3.75
Av verage 2 3 3 3 4 4
Approximately37%ofbus sinesssalestran nsactionsclosed dinthelast12 monthsinvolve edcontingente earnouts.
Figu 18. Comp ure ponents of C Closed Deals s 40% 30% 20% 10% 0% arnout Contingentea Sel llerfinancing/ /seller note Low weredmultiple eof EBITDA Adjus stedamounto of e equitysold 37% 32%
28%
27%


IBANKE ERcont.
Approximately19%ofrespondentsdidntwitnessanyp premiumpaidb bystrategicbuyers,while51%sawpremiums between1% %and20%.
Figure 19 Premium Paid by Strategic Buyers Relative to Financial Bu 9. P s uyers 2% 13% 13% 23% 28% 19 9% No Yes,110%more Yes,1120%more Yes,2130%more Yes,3140%more Yes,4150%more Yes,>50%m more
3%
Responden ntsindicatedag generalimbalan ncebetweenco ompaniesworth hyoffinancinga andcapitalavailableforthesa ame. Thereisar reportedshortageofcapitalfo orthosecompan nieswithlessth han$10million ninEBITDAbutageneralsurpl lusfor companieswith$25millio oninEBITDAormore.
Ta able 7. Balance of Availab Capital w ble with Quality C Companies

Comp panies worth of hy finan ncing GREA ATLY exceed capital d avail lable 45 5% 20 0% 6% % 6% % 5% % 2% % Co ompanies worthy of w fi inancing exceed capital available a 31% 39% 31% 25% 19% 11% Capital available exceeds companies worthy of financing 8% 13% 22% 25% 26% 35% Capital available e GREATL LY exceeds s companie es worthy o of financing g 4% 6% 7% 8% 18% 23%
EBITDA
General balance
Scor re (-2 to 2)
$1M $5M $10M $25M $50M $100M
12% 22% 34% 36% 32% 29%
-1.04 4 -0.55 -0.07 0.06 6 0.33 3 0.66 6
Responden ntsindicatedag generaldifficult tywitharrangin ngseniordebtf forbusinessesw withlessthan$ $5millionin EBITDA.
Tab 8. How Di ble ifficult to Arr range Senior Debt for Tra r ansactions o over the Past Six Months t
EBITDA $1M $5M $10M $15M $25M $50M $100M Extremely difficult 38% 11% 1% 2% 3% 4% 7% Difficult 34% 19% 19% 15% 12% 12% 7% Somewhat difficult 14% 23% 22% 20% 14% 10% 16% Neutral 8% 22% 20% 15% 21% 18% 7% S Somewhat easy 6% 15% 15% 23% 14% 10% 13% Easy 0% 8% 15% 12% 14% 14% 18% Extremely e easy 1% 2% 9% 1 13% 2 22% 3 33% 3 33% Score (-3 t 3) to -1 1.9 -0 0.6 0.1 0.3 0.6 0.9 1.0 IBANKE ERcont. 2011|PEPPER RDINEUNIVERSITY YGRAZIADIOSCHO OOLOFBUSINESS ANDMANAGEME ENT.AllRightsReserved.|19
Approximately79%ofrespondentsagree ethatamongco ompaniesthatt theyhavework kedwith,senior rmanagers,suc chas chiefexecu utives,wouldbe enefitfromadditionalleadersh hipandskillstra aining.
2 enior Manage and Chie Executives Benefit from Additional Leadership and ers ef s m l Figure 20. Would Se Skil Training? lls ? 4% 1% 17% 30% Stron nglyagree Agree Neut tral 49% Disag gree Stron nglydisagree
torespondentsleadershipskillsarethemostimportantfors seniormanagem menttohave. Accordingt
Figure 21. Skills That Are Impo e T ortant for Se enior Manage ement to Hav ve 0% Leader rship Understa andingcompet titiveenvironm ments Strategicplan nning Sa alesandmarke eting Knowled dgeofbusinessandworldev vents Corporatefinance nspiringinnova ation In Legalandreg gulatoryknowle edge Manag gementaccoun nting Quantitative eanalysis/rese earch Globalbusinessmanagem ment Humanresou urces Today y 38% 37% 36% 32% 30% Inthefut ture
IBANKE ERcont.
10% 20% 30% 40% 50% 60% 70% 80% 90% 10 % % 00% 94 4% 88% 86% 69% % 67% 60% 58%
Respondentsindicatedincreasesindealflow,marginpressureoncompanies,strategicbuyersmakingdeals,and worsenedgeneralbusinessconditionsrelativetosixmonthsago.
Table 9. General Business and Industry Assessment: Today versus Six Months Ago
Stayed Net Decreased Decreased Increased Increased % % about the increase/ significantly slightly slightly significantly increase decrease decrease same Deal flow Leverage multiples Deal multiples Amount of time to sell business Difficulty financing/selling business General business conditions Strategic buyers making deals Margin pressure on companies Buyer interest in minority transactions 9% 8% 5% 2% 2% 10% 3% 2% 13% 21% 15% 19% 12% 13% 42% 14% 7% 20% 23% 47% 42% 47% 50% 29% 35% 34% 49% 32% 29% 31% 25% 23% 17% 40% 41% 16% 14% 0% 2% 14% 11% 2% 7% 16% 1% 46% 29% 34% 39% 35% 19% 48% 58% 17% 30% 23% 24% 13% 15% 52% 17% 9% 34% 16% 6% 9% 26% 20% -33% 31% 49% -16%

Duringthenexttwelvemonths,respondentsexpectfurtherincreasesindealflow,marginpressureoncompanies, strategicbuyersmakingdeals,andworseninggeneralbusinessconditions.
Table 10. General Business and Industry Assessment Expectations over the Next 12 Months
Decrease Decrease Stay about Increase significantly slightly the same slightly Deal flow Leverage multiples Deal multiples Amount of time to sell business Difficulty financing/selling business General business conditions Strategic buyers making deals Margin pressure on companies Buyer interest in minority transactions 2% 4% 3% 1% 0% 10% 2% 2% 8% 15% 18% 24% 20% 24% 28% 10% 9% 16% 27% 43% 34% 42% 42% 36% 40% 40% 55% 46% 35% 39% 29% 26% 25% 40% 38% 19% Net Increase % % increase/ significantly increase decrease decrease 9% 0% 1% 7% 9% 2% 8% 11% 3% 55% 35% 39% 37% 35% 27% 48% 49% 22% 17% 22% 27% 21% 24% 38% 12% 11% 23% 38% 13% 13% 16% 11% -11% 36% 38% -1%

IBANKERcont.
Responden ntsbelieveecon nomicuncertain ntyisthemosti importantissue efacingprivatelyheldbusines ssestoday. temergingissu Governmen ntregulationsa andtaxesareindicatedasthemostimportant ue.
Figure 22. Issues Faci Privately ing y-Held Busin nesses
0% 0 Econo omicuncertaint ty(domestic) Accesstocapital Governmentregulatio onsandtaxes Economicuncertainty(international) titionfromfore eignpartners Compet Other Inflation
5%
10% 1
15%
2 20%
25%
30% 29%
35%
40%
45% 43%
50%
1 17% 11% 10% 2% 2% 2% 0% 4% Currentiss sue Emerg gingissue 9% 15% % 24%
32%
BROKERSURV VEYINFO ORMATIO ON

Approximately39%ofthe e99participant tsinthebroker rsurveysaidth eyexpecttoclo osemorethan fivedealsinth henext 12 months. This is up fro 25% of respondents in th Spring 2011 report. Respo om he 1 ondents believe domestic eco e onomic uncertainty yisthemost im mportantissue facingprivatel lyheldbusines ssestoday.Gov vernmentregulationsandtaxesand domesticeconomicuncert taintyareindicatedasthemo ostimportantem mergingissues. . Otherkeyf findingsinclude e: Th hemajorityofd deals(87%)tooklessthan1ye eartoclosewith hthelargestco oncentrationbe eingtheinsixto o eightmonthcate egory.Another9%tookaboutayearandaha alfandrarelyd didadealtakem morethanonea anda ha alfyearstoclos se. Ap pproximately45%ofresponde entsexpectworseningbusines ssconditionsin nthenext12mo onths.Respond dents alsofurtherincre easesindealflo ow,marginpres ssureoncompa anies,andstrat tegicbuyersma akingdeals. To opthreereason nsfordealsnotclosing:valuationgapinpricin ofcapitaltofina ance(23%); ng(24%);lacko ec conomicuncert tainty(19%).

Approximately25%ofthe erespondentsd didntcloseanydealinthelast tsixmonths;57 7%closedbetw weenoneandfiv ve deals,while e9%closedmo orethansix.
Figure 23. Private Busi iness Sales Transactions Closed in th Last Six M T s the Months 2% 6% 5% 6 0% 19 9% 20% 24% 0 2 4 6 1 3 5 Greaterthan n6
8% 16%
Approximately20%ofallt transactionsclo osedinthelastsixmonthsinvo olvedmanufact turingfollowed dby15%that involvedbu usinessservices sand12%thati involvedwholesaleandmanuf facturing.
Figure 24. Private Business Sal Transact B les tions Expecte to bClose in the Next Twelve Mon ed e nths 3% 16% % 11% 6% 14% 16% 6% 8% 20% 0 2 4 6 Greaterthan10
1 3 5 710

BROKE ERcont.
Approximately58%ofrespondentsarep planningtoclose ebetweenoneandfivebusine esssalestransa actionsinthene ext12 months.
Fig gure 25. Priva Business Sales Trans ate s sactions Exp pect to Close in the Next 12 Months e t 3% 4% 3% 6% 8% 20% % 11% 1 6% 14% 16% 2 4 6 8 10 3 5 7 9 Greaterthan10
4% 5% %
Themajorit tyofdeals(51% %)tookfourtoe eightmonthsto oclose.
Figure 26. Average Number of Month to Close O Deal hs One 24mo onths 9% 16% 13% 29% 4% 7% 22% 46mo onths 68mo onths 810m months 1012months 1218months rthan18mont Greater ths
Approximately46%ofdea alsterminatedw withouttransac ctingoverthep pastyear.
Figu 27. Perce ure entage of Bu usiness Sales Engageme s ents Terminated Without Transacting g
46% 54%
Transacted
Nottransacted

BROKE ERcont.
Topthreer reasonsfordealsnotclosing:v valuationgapin npricing(24%), lackofcapitalt tofinance(23% %),andeconom mic uncertainty y(19%).
Figure 28. Reasons for Busines Sales Eng s ss gagements N Transacti Not ting 2% 7% 13 3% 23% 19% 7% 5% 5 24% Valuationgap inpricing Lackofcapitalltofinance Economicunce ertainty Unreasonablesellerorbuyerdemand(non nprice) Insufficientcashflow Nomarketfor rbusiness esentations Sellermisrepre Other
Ofthosede ealsthatdidntcloseduetoav valuationgapin npricing,appro oximately42%h hadavaluation ngapinpricing between21 1%and30%.
Figure 29. Valuatio Gap in Pric on cing for Tran nsactions Th Didnt Clo hat ose
2% 23%
5% 6% 23% 0 10% 21 130% 42% 41 150% 11 120% 31 140% Gr reaterthan50% %
popularvaluatio onapproachesu used(byweight t)byresponden ntswhenvaluin ngprivatelyheldbusinessesw were Themostp incomeand dtransactionap pproaches.
5% 13% 5%
13%
30%
Incom meapproach( (DCF,NPV,IRR) Tran sactionapproa ach Publiiccompanyap pproach
34%
Assetbasedapproa ach Costs stocreateapp proach Othe er

BROKE ERcont.
Mostofres spondentsuser recastEBITDAm multiples(34%)andcashflow multiples(23% %).
Figure 31. Usage of Mu ultiples 5% 7% % 12% 15% 23% 4% 34% Reca astEBITDAmultiple Cash hflowmultiple e EBIT TDAmultiple Reve enuemultiple Othe er Netincomemultip ple EBIT Tmultiple
Averagerev venuemultiplesondealsobse ervedbyrespon ndentsvariedfr rom1to3.
Table 11. Median Re 1 evenue Deal Multiples by Revenue S l y Size of Comp pany
B Basic Retail & Wholesale & Business Health consu umer mat terials & distribution services care servic ces nergy en 1.4 4 1.7 7 1.6 6 1.5 5 2 2 1.3 1.4 0.8 1 3 3 1.5 1.1 1.4 1 1 2 2 2 2.1 2 2.4 3 2 2.1 0.8 1.2 3 2.1 Information technology 2 2.1 2.4 3 2.8 3 Financial services 1 1.2 1.8 1.4 2.7 2.8
Revenue
Manufacturing
Ave erage
$100,000 $500,000 $1M $5M $10M Greater than $10M n
1.9 1 1 2 1.4 1 1.6 1 2.3 2
2 2 2 2 2 3
AverageEB BITDAmultiplesondealsobser rvedbyrespond dentsvariedfro om2to7.
Table 12. Median EBITDA Deal Multiples by Revenue Si of Compa 1 E y ize any
Retail & Wholesale & Bus siness consumer distribution ser rvices services 2 3 3 4 5 3.5 3.25 3 4 4 3 3 3.5 3 4 4.75 4 c Basic s materials & y energy 2.75 4 3.5 4.5 7 Health care 5.5 4 4 7 6 Information technology 5 3 4.75 5.5 7 Financial services 3.25 3.75 5 2.5 5
Revenue
Manufacturing
Ave erage
$100,000 $500,000 $1M $5M $10M
3 3.25 3.5 4.5 4.75
3 3.5 3 3.4 3 3.8 4 4.5 5 5.4

BROKE ERcont. 2011|PEPPER RDINEUNIVERSITY YGRAZIADIOSCHO OOLOFBUSINESS ANDMANAGEME ENT.AllRightsReserved.|27
Approximately61%ofbus sinesssalestran nsactionsclosed dinthelast12 monthsinvolve edsellerfinancingorsellernote.
Figu 32. Comp ure ponents of C Closed Deals s 70% 60% 50% 40% 30% 20% 10% 0% 61% 49% 36% 15%
SellerFinancing S g/Seller Note
Contingentearn nout
Low wereddealpric ce
Lower redamountof f eq quitysold
ntsindicatedag generaldifficult tywitharrangin ngseniordebtf forbusinessesw withlessthan$ $1millionin Responden revenues.
Figure 33. How Difficult to Ar D rrange Senio Debt for Tr or ransactions over the Pas Six Months st s
Revenu ue size $100K $500K $1M $5M $10M $15M $25M+ Extrem mely difficu ult 71% % 41% % 31% % 14% % 12% % 13% % 12% % Difficult 8% 23% 27% 22% 19% 9% 12% Somewhat difficult 3% 9% 10% 19% 27% 22% 18% Neutral 16% 11% 16% 17% 12% 9% 12% S Somewhat easy 0% 7% 10% 14% 15% 26% 29% E Easy 3% 9% 6% 14% 8% 9% 0% Extremely eas sy 0% % 0% % 0% % 0% % 8% % 13% 18% e Score (-2 to 2 2) -1.26 -0.52 -0.33 0.36 0.54 1.04 1.06
3 enior Manage and Chie Executives Benefit from Additional Leadership and ers ef s m l Figure 34. Would Se Skil Training? lls ?
23%
5%
36%
Stronglyagre ee Agree
36%
Neutral Disagree
Accordingt torespondents, ,leadershipskills,strategicpla anning,andund derstandingcom mpetitiveenvironmentsareth he mostimpor rtantforsenior rmanagementt tohave.
Figure 35. Skills That Are Impo e T ortant for Se enior Manage ement to Hav ve 0% Leade ership Strategicpla anning Underst tandingcompe etitiveenvironm ments Salesandmarketing Knowle edgeofbusine essandworlde events Corporatefinance Inspiringinnov vation Mana agementaccou unting Humanreso ources Legalandre egulatoryknow wledge Quantitativ veanalysis/res search Globalbu usinessmanage ement Other 10 0% 20% 30% 40% 50% 60% 70% 80% 90% 1 % % 100% 75% 77% 73% 73% 86% 86% 86%
27 7% 26 6% 4% % 6% 6 Today y Inthefut ture
58% 62% 59% 56% 48 8% 53% 64% 41%47% 42% 52% 40% 41% 41% 55%
Responden ntsbelieveecon nomicuncertain ntyisthemosti importantissue efacingprivatelyheldbusines ssestoday. Governmen ntregulationsa andtaxesandeconomicuncert taintyareindic catedasthemo ostimportantem mergingissues. .
Figure 36. Issues Faci Privately ing y-Held Busin nesses
0% Ec conomicuncert tainty(domest tic) Accesstocapital Econo omicuncertaint ty(internation nal) Gov vernmentregulationsandtax xes Competiti ionfromforeig gntradepartne ers Oth her 0%
10%
20%
30% 27%
40%
50% 48%
60%
16% % 10% 8% 7% 7% % 5% Currentiss sue 16% %
27%
27%
Emerg gingissue

Comparedtosixmonthsago,respondentsindicatedincreasesindealflowanddifficultyfinancingorsellingbusiness, increaseinmarginpressureoncompaniesanddeterioratedgeneralbusinessconditions.Respondentsalsoindicated decreaseddealmultiples.
Table 13. General Business and Industry Assessment: Today Versus Six Months Ago
Stayed Net Decreased Decreased Increased Increased % % about the increase/ significantly slightly slightly significantly increase decrease same decrease Deal flow Ratio of businesses sold/total listings Deal multiples Business exit opportunities Amount of time to sell business Difficulty selling business Business opportunities for growth General business conditions Margin pressure on companies 11% 13% 3% 6% 0% 4% 4% 15% 1% 10% 4% 23% 26% 11% 16% 20% 33% 8% 32% 49% 59% 30% 39% 36% 42% 29% 37% 36% 28% 13% 33% 38% 24% 28% 22% 39% 11% 6% 3% 6% 11% 20% 6% 0% 14% 47% 33% 16% 39% 49% 44% 33% 22% 54% 21% 17% 26% 31% 11% 20% 25% 49% 10% 26% 16% -10% 7% 38% 24% 9% -26% 44%
Duringthenexttwelvemonths,respondentsexpectfurtherincreasesindealflow,marginpressureoncompanies,and worseninggeneralbusinessconditions.
Net Decrease Decrease Stay about Increase Increase % % increase/ significantly slightly the same slightly significantly increase decrease decrease Deal flow Ratio of businesses sold/total listings Deal multiples Business exit opportunities Amount of time to sell business Difficulty selling business Business opportunities for growth General business conditions Margin pressure on companies 10% 12% 7% 8% 2% 2% 5% 12% 2% 14% 12% 24% 28% 17% 15% 24% 33% 14% 34% 47% 59% 30% 37% 37% 37% 30% 41% 32% 27% 9% 30% 32% 25% 29% 25% 34% 10% 2% 2% 3% 13% 20% 5% 0% 10% 42% 29% 10% 33% 45% 46% 34% 25% 44% 24% 24% 31% 37% 18% 17% 29% 45% 15% 19% 5% -21% -3% 27% 29% 5% -20% 29%
LIMITEDP L PARTNER RSURVEY YINFORM MATION

Approximately20%ofthe e71respondent tsinthelimited dpartnersurve eyreportedbuy youtprivateequityasbeingth hebest risk/return tradeoff inve estment class, followed by direct investme d ents at 19%. W When asked a about which in ndustry currently offers the best risk/return tra o adeoff, 48% of respondents reported healt care, followed by 36% rep f th porting information ntechnology.C Confidenceinth heenergyindus stryisdownto3 30%from44%intheSpring20 011report.Oth herkey findingsinc clude: Ap pproximately26%ofresponde entsreportedtheirassetcateg gorybeinglessthan$50millio on,while23%w were be etween$50mil llionand$500m million. Onaveragerespo ondentstargettoallocate20% %oftheirassets stoventurecap pital,19%tobu uyoutprivateeq quity an nd15%todirec ctinvestments.Respondentse expectthehighe estreturnsof2 20%frominvest tmentsinventu ure ca apital,buyoutp privateequityanddirectinvest tments. Re espondentsind dicatedincrease edallocationtodirectinvestm entsandprivat teequityandde ecreasedalloca ation to oallotheraltern nativeassetsin nthelastsixmo onths.Theyalso oreportedwors senedbusiness conditionsbut t in ncreasedexpect tedreturnsonn newinvestments. Re espondentssee ebestdomestic copportunitiesinCalifornia,Te exasandNewE Englandstates.Theyalsoexpe ect in ncreasingallocationtoalternat tiveassets,sligh htlyimprovingb businesscondit tions,increaseindirectinvestm ments an ndfurtherincre easeinexpected dreturns.

Approximately26%ofrespondentsrepor rtedtheirasset tcategorybeing glessthan$50million,while2 23%werebetw ween $50millionand$500million.
Figure 37. As F ssets under Managemen t or Investab Funds M ble 15% 9% 18% 8% Le essthan$50million $5 50million$50 00million $5 500million$1 1billion 23% $1 1billion$5billion $5 5billion$10b billion Gr reaterthan$10 0billion
Responden ntsreportedontheir%oftotalassetallocatio onsforAlterna ativeAssets.
26%
Figure 38. Current and Target Asset Alloca e t A ations for "A Alternative As ssets" (% of total portfol lio) 100% 52% 50% 0% cation Currentalloc Targ getallocation
55%

LPcont.
Onaverage e,respondentst targettoallocate20%oftheir rassetstoventu urecapital,19% %tobuyoutpriv vateequity,and d15% todirectinv vestments.
Figur re 39. Curren Target Ass Allocation nt set n Venturecapital Privateequitybuyo out Di irectinvestments Privateequitygrow wth Realestatefu und Hedgefu und Secondaryfun nds Privateequitydistress sed Mezzanine Fundoffun nds 20% 19% % 15 5% 11% 9% 8% 5% 4% 3% 2% 2
Onaverage erespondentse expectthehighe estreturnsfrom minvestments inventurecapital,buyoutpriv vateequityanddirect investment ts.
Fi igure 40. Ann nual Return Expectations for New Inv E s vestments 25% 20% 15% 10% 5% 0% 20% 20% % 20% 18% 18% % 15% 15% 15% % 14% 13% % 12%


LPcont.
Approximately20%ofrespondentsrepor rtedbuyoutprivateequityasb beingthebestrisk/returntrad deoffinvestme ent class,follow wedbydirectin nvestmentsat1 19%.
Figure 41. Asse with the Best Risk/Re ets B eturn Trade-o Currently off
Private eequitybuyo outs Directinvestments 6% 7% 7% % 7% 11% % 13% 19% 6% 4% 20% Ventu recapital Private eequitygrow wth Private eequitydistr ressed Secon daryfunds Hedge efund Mezza anineinvestme ent Realestatefunds Fundo offunds
Whenaskedaboutwhichindustriescurre entlyoffertheb bestrisk/return ntradeoffs,48% %ofresponden ntsreportedhe ealth care,follow wedby36%reportinginformat tiontechnology y.
Figure 42. Industry with the Be Risk/Retu e y est urn 60% 50% 40% 30% 20% 10% 0% 48% 36% 34% % 30% 24% 12% 10% 10 0% 8%


LPcont.
Inregardto othegeographicregionswiththebestrisk/re eturntradeoffs s,57%ofrespondentsreporte edNorthAmeric ca, followedby ytheLatinAme erica(41%),and demergingAsia a(35%)areas.
Figure 43. Geograp e phic Regions of the Worl Offering th Best Risk s ld he k/Return Trad deoff Curren ntly 60% 50% 41% 40% 30% 20% 10% 0% North America Latin America A Em merging Asia Deve eloped Asia A Wes stern Euro ope Other ging emerg mark kets Centraland rn Easter Europ pe r Other 20% 2 6% 16 % 10% 4% 2% 35% 57%
Accordingt to38%ofrespo ondentsthegeo ographicregionwithbestrisk/ /returntradeof ffsisSiliconValleywithanothe er24% selectingBa ayArea,followedbyTexas(35 5%),andNewEngland(27%).
Figure 44. Geographic Regions of the USA with the Best Ris G R t h sk/Return Cu urrently 40% 35% 30% 25% 20% 15% 10% 5% 0% iliconValley Si Texas NewEngland BayArea NewYork Metro Southern California Washingto on DC 27% 24% 22% 19% 11% 38% 35%

LPcont. 2011|PEPPER RDINEUNIVERSITY YGRAZIADIOSCHO OOLOFBUSINESS ANDMANAGEME ENT.AllRightsReserved.|35
Accordingt torespondents, ,thegeneralpa artneristhemo ostimportantfa actorwheneva aluatinginvestm mentfollowedb by specificstra ategyandhisto oricalfundperfo ormance.
Table 15 Importance of Factors When Evalua 5. e ating

Characteris stics General pa artner Specific strategy Historical fund performance on all funds Returned capital from most recent m fund (distribution to paid-in or DPI) Residual value of most recent fund v (residual va alue to paid-in or RVPI) r Gut feel/ins stinct Specific loc cation Other - ple ease specify Un nimportant 2% 0% 2% 22% 4% 6% 6% 4% Of little O importance 2% 0% 2% 0% 10% 8% 12% 27% Mod derately Im mportant 2% 8% 2 21% 0% 3 31% 2 29% 3 38% 2 29% Imp portant 3 37% 4 40% 4 42% 2 2% 4 40% 5 50% 3 35% 2 9% ery Ve impo ortant 58 8% 52 2% 33 3% 56 6% 15 5% 8% % 10 0% 12 2% ore Sco (1 to 5) o 4.4 46 4.4 44 4.0 02 3.5 54 3.4 46 3.3 31 3.17 3.8 89
4 enior Manage and Chie Executives Benefit from Additional Leadership and ers ef s m l Figure 45. Would Se Skil Training? lls ? 4% 8% 36% 52% 5
Stronglyagree e Agree Neural Disagree

LPcont. 2011|PEPPER RDINEUNIVERSITY YGRAZIADIOSCHO OOLOFBUSINESS ANDMANAGEME ENT.AllRightsReserved.|36
Accordingt torespondents, ,importantskillstohaveinseniormanageme entareleaders ship,strategicp planning,and understand dingcompetitiveenvironments s.
Figure 46. Skills That Are Impo e T ortant for Se enior Manage ement to Hav ve 0% Leader rship Strategicplan nning Understa andingcompet titiveenvironm ments Sa alesandmarke eting Knowled dgeofbusinessandworldev vents Humanresou urces Globalbusinessmanagem ment nspiringinnova ation In Legalandreg gulatoryknowle edge Corporatefinance Quantitative eanalysis/rese earch Manag gementaccoun nting Today y 20% 0% 40 60% 80% 100% 12 20%
71% 64% 68% 61% 57% % % 61% 72% 57% % 79% 54% 49% 43% 45% 39% 42% 32 % 30% Inthefut ture
91% 100% 89% 79% 86 6% % 83%
Responden ntsindicatedinc creasedallocationstodirectin nvestmentsand dprivateequity anddecreased dallocationstoall otheraltern nativeassetsin nthelastsixmo onths.Responde entsalsoindica atedincreasede expectedreturn nsonnewcapit tal deployedb butworsenedge eneralbusiness sconditions.
Ta able 16. Gene Business and Indust Assessm eral try ment: Today v versus Six M Months Ago
Net Stayed De ecreased Decre eased % % Increased In creased about the in e ncrease/ significantly sligh htly gnificantly increa ase decrease slightly sig same decrease 6% 0% 4% 11% 8% 8% 4% 4% 2% 15% % 11% % 22% % 16% % 8% % 10% % 6% % 43% % 19% % 69% 70% 67% 68% 77% 74% 47% 35% 38% 10% 15% 7% 5% 5% 5% 23% 17% 38% 0% 4% 0% 0% 3% 3% 19% 0% 4% 10% % 19% % 7% % 5% % 8% % 8% % 43% % 17% % 42% % 21% 11% 27% 27% 15% 18% 11% 48% 21% -10% 9% -20% -22% -8% -10% 32% -30% 21% LPcont. 2011|PEPPER RDINEUNIVERSITY YGRAZIADIOSCHO OOLOFBUSINESS ANDMANAGEME ENT.AllRightsReserved.|37
Characteris stics
Allocation to venture capital o Allocation to private equity o Allocation to mezzanine o Allocation to hedge funds o Allocation to secondary fund o ds Allocation to real estate fund o ds Direct invest tments General bus siness conditions s Expected returns on new capital deployed
Responden ntsexpectfurtherincreasesinallocationtodirectinvestmen ntsandprivatee equity,aswellasrealestatefu unds.
Table 17. General Business an Industry Assessment Expectation over the N nd A ns Next 12 Month hs
Decrease signif ficantly Net ase Stay about Increase Inc crease % Decrea % ncrease/ in the same slightly sign ificantly increas decrease slightly se d decrease 13% % 6% 14% % 5% 13% % 13% % 4% 22% % 13% % 79% 81% 74% 78% 68% 56% 57% 40% 54% 8% 11% 7% 8% 8% 23% 26% 30% 26% 0% 2% 2% 3% 5% 3% 1 11% 6% 4% 8% 13% 9% 11% 13% 26% 37% 36% 30% 13% 6% 16% 11% 18% 18% 7% 24% 15% -4% 6% -7% 0% -5% 8% 30% 12% 15%
Characterist tics
Allocation to venture capital o Allocation to private equity o Allocation to mezzanine o Allocation to hedge funds o Allocation to secondary fund o ds Allocation to real estate fund o ds Direct invest tments General bus siness conditions s Expected returns on new capital deployed
0% 0 0% 0 2% 2 5% 5 5% 5 5% 5 2% 2 2% 2 2% 2
Responden ntsbelieveaccesstocapitalandeconomicunc certaintyareth hemostimportantissuesfacin ngprivatelyheld businessestoday.Governm mentregulation nsandtaxesan ndeconomicun ncertaintyarein ndicatedasthemostimportan nt emergingis ssues.
Figure 47 Issues Faci Privately 7. ing y-Held Busin nesses 5% 5 10% 2 20% 15% 0% Accesstocapital Ec conomicuncert tainty(domest tic) Gov vernmentregulationsandtax xes Econo omicuncertaint ty(internation nal) Competiti ionfromforeig gntradepartne ers Inflation her Oth 2% 2% 4% 4% 12% 8% 17% 17% 13%
25%
30% 30% 28%
35%
33%
29%
2%
Currentiss sue
Emerg gingIssue
ANGELIN A NVESTORSURVEYINFORMATION
Approximately14%ofthe e93respondent tstotheangeli investorsurvey yplantoinvest outsideoftheU.S.overthene ext12 months,themajority(56% %)ofresponden ntsplantomakebetweenone eandfiveinvest tments.Otherk keyfindingsinc clude: Ap pproximately30%ofresponde entsbasevaluationsonabasic cmethod(quickestimate)whenvaluingpriva ately he eldbusinesses. Th hetypesofbusinessesrespond dentsplantoin nvestinoverne ext12monthsa areverydiverse ewithover34% % ta argetinginformationtechnolog gyandanother22%planningt toinvestinhea althcare. y, Re espondentsind dicatedasharpincreaseindem mandforangelc capital,andinc creasesinsizeo ofangelindustry fo ollowoninvestm ments,andexp pectedreturnso onnewinvestm ments.Theyalso oreportedincre easedqualityof f co ompaniesseekinginvestments sandtimetoex xitdeals,decrea asedopportuni itiestoexit,wo orsenedgeneral l bu usinessconditio onsandappetit teforrisk. Re espondentsexitstrategiestha atincludesellin ngtoaprivatec companytotal3 34%,whileanot ther34%of re espondentsplan ntoselltoapu ubliccompany.

Approximately47%ofrespondentsmade eeitheroneortwoinvestmen ntsoverthelast tsixmonths.
Figure 48. Total Nu e umber of Inv vestments Ma in the La Six Mont ade ast ths
2% 8%
% 12%
7%
12% % 25%
0 2 4 610
1 3 5 M Morethan10
15%
19%
Figure 49 Number of Follow-on Investments Made in the Last Six Mo 9. I e onths 4% 1% 5% 4% 18% 20% 25 5% 4 610 5 Morethan10 23% % 0 2 1 3

ANGELcont.
Themajorit ty(56%)ofresp pondentsplant tomakebetwee enoneandfive einvestmentso overthenext12 2months.
Figure 50. Number of Total Inve r estments Pla anned over N Next 12 Mont ths
18% 18% 7%
8%
0 15% 23% 2 2 4 610
1 3 5 Mo orethan10
5% 6%
Figure 51 Number of Follow-on In 1. f nvestments Planned ove Next 12 Mo er onths
14% 10% 1% 7%
6%
21% % 20%
0 2 4 610
1 3 5 M Morethan10
21%
Thetypeso ofbusinessesre espondentsplan ntoinvestinov vernext12mon nthsareverydiversewithove er34%targeting g information ntechnologyan ndanother22% %planningtoinvestinhealthc care.
Figure 52 Type of Bu 2. usiness for In nvestments P Planned ove Next 12 Mo er onths 1% 7% 9% 9% 9 10% 22%
3% 5% 34%
Inform mationtechno ology Healt thcare Basic materials&en nergy Retail&consumers services Busin nessservices Manu ufacturing Finan ncialservices Whollesale&distrib bution Other r
ANGELcont.
Respondentsreportedonavarietyofstatspertainingtotheirinvestments.
Table 18. General Information on Investments by Company Stages

Seed Number of investments made in last six months 1st quartile Median 3rd Quartile 1 1 4 1 2 2 1 1 2 1 2 3 Startup Early stage Expansion
Average size of investment ($ thousands) 1st quartile Median 3rd quartile $25 $150 $250 $75 $150 $150 $75 $150 $250 $75 $150 $250
Average % of total equity purchased (fully diluted basis) 1st quartile Median 3rd quartile 5% 15% 25% 4% 6% 20% 3% 6% 10% 1% 2% 9%
Total EXPECTED returns (gross cash on cash pretax IRR) on new investments (%) 1st quartile Median 3rd quartile Expected time to exit (years) 1st quartile Median 3rd quartile 4 5 5 4 5 5 3 4 5 3 4 4 30% 45% 95% 28% 45% 83% 28% 40% 70% 18% 38% 58%
Average company pre-money value ($ millions) 1st quartile Median 3rd quartile 0.45 1.5 1.5 0.65 1.5 2.5 1.5 2.5 4.5 0.95 2.5 10
Average company value at time of investment (post-money $ millions) 1st quartile Median 3rd quartile 0.750 1.5 3.5 1 2 4.5 2 3 7 1.5 3.5 8

ANGELcont.
Responden ntsreportedonwheretheypla antoinvestove erthenext12m months.Theres sultsreflectinve estmentthroug ghout theU.S.,14 4%ofrespondentsareplanningtoinvestouts sideoftheU.S.
Figure 53. Geographic Location of Planned Inv . c f vestment ov Next 12 M ver Months 14% 17 7% 8% 7% 6% 4% South hernCalifornia Texas s NewE England Silicon nValley NewY YorkMetro Wash hingtonDC BayA Area herUS Alloth deofUS Outsid
39% 2% 3% %
Approximately35%ofrespondentsdont thavegeograph hicalrestriction nsfortheirfutureinvestments s.
Figure 54. Geograp e phical Limit for Investme ent
35%
15% 12% % 18% % 21%
2hou urdrive 4hou urdrive State/ /province Regio on Nore estrictions
Approximately30%ofrespondentsbasevaluationsona abasicmethod (quickestimate e)whenvaluing gprivatelyheld d businesses. .Only14%ofre espondentsuse eanincomeapp proach.
Figur 55. Usage of Valuation Approache re n es Basic method(quick kestimate) 7% % 9% % 5% 14% 30% Transa actionapproac ch Incom meapproach(D DCF,NPV,IRR) 14% 21% Public ccompanyapp proach Costs tocreateappr roach Assetbasedapproac ch Other r
ANGELcont. 2011|PEPPER RDINEUNIVERSITY YGRAZIADIOSCHO OOLOFBUSINESS ANDMANAGEME ENT.AllRightsReserved.|42
Responden ntsreportedonitemsrequired dtocloseonedeal.
Figure 56. Items Required to C e R Close One De eal 50 40 30 20 10 0 Meet Businessplans sor tingswithprincipals Propos sallettersorte erm morandumsre eviewed sheetsissued conducted mem 1stQuartile Median 3rdQuartile ofintentsigne Letterso ed 8 5 6.5 20 10 0 1 2 3 1 1 2
40 4
ntsexitstrategi iesthatincludesellingtoapriv vatecompanyt total34%,while eanother34%ofrespondents splan Responden toselltoapubliccompany y.
Figure 57. Exit Plan for Portfo Compani e ns olio ies 5% 5% 3% 34% Sellt toaprivatecom mpany Sellt toapubliccom mpany Sellt toprivateequit tygroup Liquidateorbankru upt 34% IPO Sellt toaVC Mana agementbuyo out Othe er
5% 7% 7%
5 enior Manage and Chie Executives Benefit from Additional Leadership and ers ef s m l Figure 58. Would Se Skil Training? lls ? 5% 5% 41% Str ronglyagree Ag gree 50% Ne eutral Dis sagree
ANGELcont. 2011|PEPPER RDINEUNIVERSITY YGRAZIADIOSCHO OOLOFBUSINESS ANDMANAGEME ENT.AllRightsReserved.|43
Accordingt torespondents, ,leadershipskills,understandingcompetitive eenvironments sandstrategicp planningarethe mostimpor rtantforsenior rmanagementt tohave.
Figure 59. Skills That Are Impo e T ortant for Se enior Manage ement to Hav ve Leader rship Understa andingcompet titiveenvironm ments Sa alesandmarke eting Strategicplan nning In nspiringinnova ation Knowled dgeofbusinessandworldev vents Corporatefinance Quantitative eanalysis/rese earch Legalandreg gulatoryknowle edge Humanresou urces Manag gementaccoun nting Globalbusinessmanagem ment Other O 8% % 6% % Today y 17% 3 36% 39% 33 3% 3 3% 30% % 3 3% 27% 36% 24% % 30% 41% 83% 83% 74% 2% 74%82 77% 71% 64% 63% 58 8% 54% 98%
Inthefut ture
Responden ntsindicatedas sharpincreaseindemandfora angelcapital,in ncreasesinsizeofangelindust try,followon investment tsandexpected dreturnsonnew winvestments.Theyalsorepo ortedincreased dqualityofcom mpaniesseeking g investment tsandtimetoe exitdeals,decre easedopportun nitiestoexit,wo orsenedgenera albusinesscond ditions,andapp petite forrisk.
Net Stayed % Decr reased Decreas sed Increased Incr reased % inc crease/ about the signif ficantly slightly se slightly sign ificantly increas decrease same decrease Demand for angel capital Size of ange finance industr el ry Quality of co ompanies seeking investment Follow-on in nvestments Average investment size Exit opportunities Time to exit deals Expected returns on new inv vestments Value of por rtfolio companies s General bus siness conditions s Appetite for risk 2% 2 3% 3 0% 0 0% 0 3% 3 6% 6 3% 3 2% 2 2% 2 20 0% 15 5% 2% 25% % 14% % 17% % 23% % 33% % 14% % 9% 28% % 31% % 38% % 32% 25% 43% 43% 45% 43% 34% 60% 34% 25% 31% 28% 25% 34% 28% 26% 13% 27% 25% 34% 20% 11% 3 37% 2 22% 9% 1 12% 3% 5% 2 22% 5% 3% 5% 5% 65% 47% 43% 40% 29% 17% 48% 29% 37% 25% 15% 3% 28% 14% 17% 26% 40% 17% 11% 29% 51% 54% 62% 19% 29% 23% 3% -22% 31% 18% 8% -26% -38% ANGELcont. 2011|PEPPER RDINEUNIVERSITY YGRAZIADIOSCHO OOLOFBUSINESS ANDMANAGEME ENT.AllRightsReserved.|44
Responden ntsexpectfurtherincreasesinbusinesscharacteristicsexcep ptgeneralbusin nessconditions.
Decrease signif ficantly Demand for angel capital Size of ange finance industr el ry Quality of co ompanies seeking investment Follow-on in nvestments Average investment size Exit opportunities Time to exit deals Expected returns on new inv vestments Value of por rtfolio companies s General bus siness conditions s Appetite for risk 0% 0 5% 5 5% 5 0% 0 0% 0 6% 6 3% 3 3% 3 2% 2 16% 13% ase Decrea slightly 0% 8% 9% 14% % 17% % 14% % 9% 16% % 14% % 23% % 28% % Stay about the same 20% 35% 48% 38% 48% 47% 47% 52% 36% 28% 39% Net Increase Inc crease % % inc crease/ slightly sign ificantly increas decrease se dec crease 56% 41% 34% 41% 32% 27% 31% 25% 44% 25% 17% 2 23% 1 11% 3% 6% 3% 6% 9% 5% 5% 8% 3% 80% 52% 38% 48% 35% 33% 41% 30% 48% 33% 20% 0% 13% 14% 14% 17% 20% 13% 19% 16% 39% 41% 80% 40% 23% 33% 17% 13% 28% 11% 33% -6% -20%
Responden ntsbelieveaccesstocapitalist themostimpor rtantissuefacin ngprivatelyheldbusinessesto oday.Governme ent regulations sandtaxesareindicatedasthe emostimporta antemergingiss sue.
Figure 60. Issues Faci Privately ing y-Held Busin nesses 0% Accesstocapital Ec conomicuncert tainty(domest tic) Econo omicuncertaint ty(internation nal) Gov vernmentregulationsandtax xes Competiti ionfromforeig gntradepartne ers Inflation her Oth Currentiss sue 0% 0% 3% 8% 11% Emerg gingissue 5% 6% 8% 11% 26% 5% 10% 15% 20% 25% 22 2% 25% 36% 30% 35% 3 40% 45% 41 1%

VENTURECAPITAL V LSURVEY YINFORM MATION

Ofthe139participantswh horespondedtotheventurec capitalsurvey,a approximately3 32%saythatth heyexpectwors sening generalbus sinesscondition nsoverthenext12months,48 8%ofresponde entsalsoexpect tashrinkingoftheventureca apital industry.Th hemajority(52%)ofresponde entsplanstoma akebetweentw woandfiveinve estmentsovert thenext12months. findingsinclude e: Otherkeyf Th hetypesofbusinessesrespond dentsplantoin nvestinthenex xt12monthsar reverydiversew withover43% ta argetinginformationtechnolog gyandanother19%planningt toinvestinhea althcare.Appro oximately39%o of re espondentsplan ntomakenewinvestmentsou utsideoftheU. S. Re espondentsexitstrategiestha atincludesellin ngtoapublicco ompanytotal41 1%,whileanoth her27%of re espondentsplan ntoselltoapu ubliccompany. Re espondentsbelieveaccesstoc capitalisthemostimportanti ssuefacingpriv vatelyheldbusinessestoday. Do omesticeconom micuncertainty yisindicatedas sthemostimpo ortantemerging gissue.

Approximately47%ofrespondentsmade ebetweenoneandthreeinve stmentsoverth helastsixmont ths.
Figure 61. Total Nu e umber of Inv vestments Ma in the La Six Mont ade ast ths 11% 18% 5% 5% 15%
14%
13% 19%
0 2 4 610
1 3 5 M Morethan10
Figure 62 Number of Follow-on Investments Made in the Last Six Mo 2. I e onths
19% 10% 6% %
8% 16% % 12% 12% 17%
0 2 4 610
1 3 5 M Morethan10


VENTURACAPITA ALcont.
Themajorit ty(52%)ofresp pondentsplanstomakebetwe eentwoandfiv veinvestmentsoverthenext1 12months.
Figure 63. Number of Total Inve r estments Pla anned over N Next 12 Mont ths 19% 18% 21% 12% % 7% 7% 4% 12%
0 2 4 610
1 3 5 Mo orethan10
4. f nvestments Planned ove Next 12 Mo er onths Figure 64 Number of Follow-on In 18% 17% 8% 8 6% 13% 11% 1
9% 18% 1
0 2 4 610
1 3 5 More ethan10
Responden ntsreportedonbusinesspracti icesandtheres sultsarereflect tedbelow.
Table 21. VC Fund D Data

1st quarti ile Vintage ye (year in which first investment made) ear h t Size of fun ($ millions) nd Targeted number of total in n nvestments Target fund return (gross pretax cash on ca annual IRR %) d p ash % Expected fund return (gross pretax cash on cash annual IRR %) f n 2004 20 11 20 15 Median n 2007 58 16 25 21 3rd qua artile 2009 9 131 25 30 30
Thetypeso ofbusinessesre espondentsplan ntoinvestinov vernext12mon nthsareverydiversewithove er43%targeting g Information ntechnologyan ndanother19% %planningtoinvestinhealthc care.
Figure 65 Type of Bu 5. usiness for In nvestments P Planned ove Next 12 Mo er onths 1% 4% 4% 5% 5% 6% Inform mationtechno ology Healt hcare Basic materials&en nergy Manu ufacturing Busin nessservices Retaill&consumers services Finan ncialservices Wholesale&distrib bution Other r
13%
43%
19%
VENTURACAPITALcont.
Respondentsreportedonavarietyofstatspertainingtotheirinvestments.
Table 22. General Information on Investments by Company Stages

Seed Startup Early stage Expansion Later stage
Number of investments made in last six months 1st quartile Median 3rd quartile 2 2 3 1 2 3 1 2 3 2 2 4
1 1 4
$3 $3 $8
Average size of investment ($ millions) 1st quartile Median 3rd quartile <1 <1 <1 <1 $2 $3 <1 $2 $3 <1 $3 $4
Average % of total equity purchased (fully diluted basis) 1st quartile Median 3rd quartile 15% 25% 25% 15% 15% 25% 5% 15% 20% 5% 15% 15% 5% 5% 15%
Total expected returns (gross cash on cash pretax IRR) on new investments 1st quartile Median 3rd quartile Expected time to exit 1st quartile Median 3rd quartile 5 5 7 4 5 6 3 4 5 3 3 5 28% 38% 78% 23% 30% 45% 23% 28% 50% 18% 28% 38%
25% 28% 55%
2 2 2
Average company pre-money value 1st quartile Median 3rd quartile 1.5 1.5 2.5 2.5 2.5 8.0 3.5 8.0 15.0 8.0 15.0 35.0 25.0 35.0 80.0
Average company value at time of investment (post-money $ millions) 1st quartile Median 3rd quartile 1.0 2.5 3.5 3.5 8.0 10.0 3.5 8.0 15.0 15.0 25.0 35.0
25.0 45.0 90.0


Responden ntsreportedonwheretheypla antoinvestove erthenext12m months.Theres sultsreflectinve estmentthroug ghout theU.S.,39 9%ofrespondentsareplanningtoinvestouts sideoftheU.S.
Figure 66. Geographic Location of Planned Inv . c f vestment ov Next 12 M ver Months Sili iconValley 11% % 39% 26% 11% 5% 5% 3% BayArea Ne ewEngland Ne ewYorkMetro SouthernCaliforn nia AllOtherUS Ou utsideofUS
Whenvalui ingthecompan ny,approximate ely40%ofthew weightoftheva aluationisputo onatransaction napproachwhe en valuingpriv vatelyheldbusinesses.
5% 11 1% 15% 1
12%
Tr ransactionapp proach 40% Pu ubliccompanyapproach Incomeapproac ch(DCF,NPV,IRR)
17% %
Co oststocreatea approach As ssetbasedapp proach Ot ther
ntsreportedonitemsrequired dtocloseonedeal. Responden
Figure 68. Items Required to C e R Close One De eal 120 100 80 60 40 20 0 100 60 30 10 20 30 0 2 3 5 1 1 2
Meet Businessplan nsor tingswithprin ncipals Propos sallettersorte erm Letterso ofintentsigned d emorandumsr reviewed conducted sh heetsissued me 1stQuartile 1 Median 3 3rdQuartile

Responden ntsexitstrategi iesthatincludesellingtoapub bliccompanyto otal41%,while another27%o ofrespondentsplan toselltoaprivatecompan ny.
Figure 69. Exit Plan for Portfo Compani e ns olio ies 4% 4% % 4%3% 41% Selltoapublicco ompany Selltoaprivatec company IPO O Selltoprivateeq quitygroup SelltoanotherV VC Ma anagementbuyout Liq quidateorbankrupt Other
5% 12%
27%
ethatamongco ompaniesthatt theyhavework kedwith,senior rmanagers,suc chas Approximately76%ofrespondentsagree utives,wouldbe enefitfromadditionalleadersh hipandskillstra aining. chiefexecu
7 enior Manage and Chie Executives Benefit from Additional Leadership and ers ef s m l Figure 70. Would Se Skil Training? lls ? 16% % 7% 22% Stro onglyagree Agr ree 54% Neu utral Disa agree
Accordingt torespondents, ,leadershipskills,strategicpla anning,andund derstandingcom mpetitiveenvironmentsareth he mostimpor rtantforsenior rmanagementt tohave.
Figure 71. Skills That Are Impo e T ortant for Se enior Manage ement to Hav ve Leader rship Strategicplan nning Understa andingcompet titiveenvironm ments Sa alesandmarke eting In nspiringinnova ation Knowled dgeofbusinessandworldev vents Humanresou urces Corporatefinance Legalandreg gulatoryknowle edge Manag gementaccoun nting Globalbusinessmanagem ment Quantitative eanalysis/rese earch Other O 9 91% 89% 72% 83% 7 70% 79% 7 70% 81% 60% % 65% 51% % 46% 49 9% 57% 44% 51% 39% 40% 37% 31% 54% 30% 37% Inthefut ture
2.9% % 5% Today y
VENTURACAPITALcont.
Respondentsindicatedincreasesindemandforventurecapital,qualityofcompaniesseekinginvestment,followon investments,andpresenceofsuperangelsinspaceformerlyoccupiedbyVCs.Theyalsoreporteddecreasedsizeof venturecapitalindustryandworsenedgeneralbusinessconditions.
Stayed Net Decreased Decreased Increased Increased % % about the increase/ significantly slightly slightly significantly increase decrease same decrease Demand for venture capital Quality of companies seeking investment Follow-on investments Average investment size Exit opportunities Time to exit deals Expected returns on new investments Value of portfolio companies General business conditions Presence of super angels in space formerly occupied by VCs Size of venture capital industry 1% 1% 0% 2% 4% 0% 0% 1% 15% 0% 14% 10% 7% 5% 9% 34% 12% 33% 28% 36% 11% 47% 40% 46% 41% 56% 26% 32% 43% 33% 31% 26% 29% 30% 34% 33% 26% 25% 44% 16% 30% 16% 43% 8% 18% 12% 22% 8% 10% 12% 7% 7% 1% 20% 3% 48% 46% 55% 33% 35% 56% 24% 37% 18% 62% 11% 12% 9% 5% 11% 38% 12% 33% 30% 51% 11% 61% 36% 37% 50% 23% -3% 44% -9% 7% -33% 51% -50%
Respondentsexpectfurtherincreasesinallbusinesscharacteristicsexceptgeneralbusinessconditionsandsizeof venturecapitalindustry.
Decrease significantly Demand for venture capital Quality of companies seeking Investment Follow-on investments Average investment size Exit opportunities Time to exit deals Expected returns on new investments Value of portfolio companies General business conditions Presence of super angels in space formerly occupied by VCs Size of venture capital industry 3% 0% 0% 0% 3% 2% 2% 3% 15% 3% 8% Net Decrease Stay about Increase Increase % % increase/ slightly the same slightly significantly increase decrease decrease 3% 5% 5% 5% 21% 3% 25% 14% 17% 12% 41% 27% 39% 27% 41% 32% 44% 40% 32% 40% 55% 38% 52% 48% 48% 47% 35% 41% 29% 40% 23% 23% 11% 15% 8% 20% 8% 9% 11% 5% 11% 5% 7% 3% 67% 56% 69% 55% 44% 52% 34% 51% 28% 30% 14% 6% 5% 5% 5% 24% 5% 26% 17% 32% 15% 48% 61% 52% 64% 50% 20% 47% 8% 34% -5% 15% -34% 2011|PEPPERDINEUNIVERSITYGRAZIADIOSCHOOLOFBUSINESSANDMANAGEMENT.AllRightsReserved.|51

Responden ntsbelieveaccesstocapitalist themostimpor rtantissuefacin ngprivatelyheldbusinessesto oday.Domestic economicu uncertaintyisin ndicatedasthemostimportan ntemergingissu ue.
Figure 72. Issues Faci Privately ing y-Held Busin nesses 0% Accesstocapital Ec conomicuncert tainty(domest tic) Econo omicuncertaint ty(internation nal) Gov vernmentregulationsandtax xes Oth her Competiti ionfromforeig gntradepartne ers Inflation 1% 0% 3% % Emerg gingissue 4% 4 % 3% 5% 10% 18% 20 0% 23% % 5% 10% 15% 20% 20 0% 28 8% 26% 25% 0% 30 35% 40% 3 37%
Currentiss sue
PRIVATEEQUITYS SURVEYI INFORMA ATION

Consistent with previous iterations of the report, 43% of the 288 p t % participants wh responded t the private equity ho to groupssurv veyindicatedth hattheymake investmentsinthe$10millio nto$25millionrange.Nearly y52%ofrespon ndents saidthatde emandforprivateequityisup pfromsixmonthsago,thisisslightlydown from57%ofre espondentsindicating increasedd demandinsprin ng2011.Otherkeyfindingsinc clude: Re espondentsind dicatedincrease esinthequality yofcompanies seekinginvestm mentandtheamountofnon co ontrolinvestme ents,aswellasaslightincrease eindealmultip ples.Theyalsor reportedadecr reaseinexpected re eturnsonnewinvestmentsand dworsenedgen neralbusinessc conditions. eningbusiness Re espondentsexp pectfurtherincreasingdemandforprivateeq quityanddealm multiples,worse co onditions,anda alowerappetite eforrisk. Th hetypesofbusinessesrespond dentsplantoin nvestinoverne ext12monthsa areverydiverse ewithover19% % ta argetingmanufa acturingandan nother16%plan nningtoinvest inbusinessserv vices. Re espondentsbelievedomestice economicuncertaintyisthem mostimportantissuefacingprivatelyheld bu usinessestoday y.Nearly28%ofrespondentsindicatedgover rnmentregulati asthenumberone ionsandtaxesa em mergingissue.

Thelargestconcentrationofcheckswritt tenwasinthe$ $10$25millio nrange(35%), followedby$2 25$50million(33%), and$5$1 10million(33%) )
Figure 73. Ty F ypical Investm ment Size 40% 30% 20% 10% 0% essthan$1 $1 5million Le million $5$10 million m $1 1025 mi illion $25 $50 mil lion $50$ $100 milliion $100$500 Greatert than millio on $500million 8% 18% % 16% % 3% 30% 33% 35% 3 33 3%
Table 25 PEG Fund Data 5.


RIVATEEQUIT TYcont. 2011|PEPPER RDINEUNIVERSITY YGRAZIADIOSCHO OOLOFBUSINESS ANDMANAGEME ENT.AllRightsReserved.|54
Thetypeso ofbusinessesre espondentsplan ntoinvestinov vernext12mon nthsareverydiversewithove er19%targeting g manufacturingandanothe er16%planning gtoinvestinbu usinessservices s.
Figure 74 Type of Bu 4. usiness for In nvestments P Planned ove Next 12 Mo er onths Ma anufacturing Bu usinessservices s He ealthcare Re etail&consumerservices Ba asicmaterials& &energy Wh holesale&dist tribution Fin nancialservices Inf formationtech hnology Ot ther
6% 13% 19 9% 6% 6 7% 9% 9 12% 12%
16%
Approximately58%ofrespondentsmade ebetweenoneandthreeinve stmentsoverth helastsixmont ths.
Figure 75. Total Nu e umber of Inv vestments Ma in the La Six Mont ade ast ths 2% 3% 7%4% 26% 11% % 17% % 30% 0 2 4 610 1 3 5 Morethan10 M
Figure 76. Number of Follow-on Investments Made in the Last Six Mo I e onths 3% 2%1%1% 8% 17% % 29%
39%
0 2 4 610
1 3 5 M Morethan10
Themajorit ty(61%)ofresp pondentsplanstomaketwoorthreeinvestm mentsoverthen next12months s.
Figure 77. Number of Total Inve r estments Pla anned over N Next 12 Mont ths 1% 2% % 12% 9% 31% 30%
6% 6 9%
0 2 4 610
1 3 5 Morethan10
PRIVATEEQUIT TYcont. 2011|PEPPER RDINEUNIVERSITY YGRAZIADIOSCHO OOLOFBUSINESS ANDMANAGEME ENT.AllRightsReserved.|55
Figure 78 Number of Follow-on In 8. f nvestments Planned ove Next 12 Mo er onths 3% 14% 31% 24% 1% 6% 5% 16% %
0 2 4 610
1 3 5 Mo orethan10
Averagede ealmultiplesfor rbuyoutdealsf forthepriorsix xmonthsvaryfr romfourtosev ventimesEBITD DAdependingo onthe sizeofthec company.Expectedreturnsva aryfrom23%to o30%.
Table 26. General Characteris e l stics Buyou Transactio (medians ut ons s)

$1M EBITDA Average si of investment ($ millions) ize t Expected time to exit (year median) t rs, Equity as % of new capital structure % of total equity purchased e d Average de multiple (multiple of EBITDA) eal Total expected returns (gro cash on cash oss h pre-tax IRR R) 1 4 45% 95% 4 30% $5M EBITDA 4 5 55% 85% 5 26% $ $10M EB BITDA 15 5 50% 75% 6 25% M $25M EBITD DA 25 4 45% % 65% % 6 25% % $50M EBITDA 50 4 35% 75% 7 25% $100M EBITDA 100+ 4 45% 85% 7 25% >$ $100M EB BITDA 1 100+ 4 3 35% 8 85% 7 2 23%
Averageex xpectedreturns sonnonbuyou utdealsvaryfro om20%to25% .
Table 27 General Ch 7. haracteristic Non-Buy cs yout Transac ctions (media ans)

$1M EBITDA Average si of investment ($ millions) ize t Expected time to exit (year median) t rs, Equity as % of new capital structure % of total equity purchased e d Average de multiple (multiple of EBITDA) eal Total expected returns (gro cash on cash oss h pre-tax IRR R) 1.5 3.5 55% 25% 4 25% $5M EBITDA 4 5 35% 20% 5 25% $ $10M EB BITDA 15 4 4 45% 15% 5 25% $25M M EBITD DA 25 4 35% % 15% % 5.5 22% % $50M EBITDA 45 3 55% 45% 7.5 22% $100M EBITDA 75 3 45% 25% 8 22% >$ $100M EB BITDA 60 3.5 5% 15% 8 2 20%

PRIVATEEQUIT TYcont.
Whenvalui ingabusiness,approximately35%oftheweightisplacedon nanincomeap pproach.

Incomeap pproach(DCF,NPV,IRR) 12% % 17 7% 27 7% 9% 35% Transactio onapproach Publiccom mpanyapproac ch Assetbase edapproach Other
multiplebasedapproach,themultiplewitht helargestweig ghtistheEBITDAmultiple(30% %)or Whenrespondentsuseam recast(adju usted)EBITDAm multiples(26%).
Figure 80. Usage of Mu ultiples Revenu uemultiple 6% 3% 10% % % 18% 7% 30% 26% RecastEBITDAmultip ple EBITDA Amultiple EBITmultiple Cashflo owmultiple Netinc comemultiple Other
plesvaryfrom3 3.5to9,thehig ghestmultiplesareinhealthca areindustrywit thaverageat7. .2. Dealmultip
Table 28. Deal Multiple Among Ind D es dustries (me edians)

$1M EBITDA Manufacturing Retail & co onsumer services s Wholesale & distribution Business services s Basic mate erials & energy Health care e Information technology n Financial services s Average 4 4.5 4.5 4.5 4 5 7 4.5 4.8 $5M EBITDA 5 5.5 5 4.5 5 7 7 n/a 5.6 $10M EBITDA 5 6 5.5 5 6 7.5 n/a 6.5 5.9 $25M EBITDA 5 6 n/a 6.5 6 7.5 7 n/a 6.3 $50M EBITDA 5.5 7 n/a 7 6 n/a n/a n/a 6.4 $ $100M BITDA EB 6.5 8 5.5 7 6 9 7.5 8.5 7.3 Average 5.2 6.2 5.1 5.8 5.5 7.2 7.1 6.5 6.0

Figure 81. Items Required to C e R Close One De eal 120 100 80 60 40 20 0 Mee nsor etingswithprin ncipals Propo osallettersorterm Businessplan emorandumsr reviewed conducted s sheetsissued me 1stQuartile 1 Median 3rdQuartile Lettersofintentsigne ed 20 50 8 15 5 25 3 5 10 1 2 3 100
Responden ntsexitstrategi iesthatincludesellingtoapriv vatecompanyt total28%,while eanother26%ofrespondents splan toselltoan notherprivatee equitygroup.
Figure 82. Exit Plan for Portfo Compani e ns olio ies 1% 5% 6% 12% % 22% Sellto oaprivatecom mpany 28% Sellto oanotherPEG Sellto oapubliccompany 26% IPO Mana agementbuyou ut Liquid dateorBankru upt Other r
Responden ntsreportedonaverageitisea asierforthemto oarrangesenio ordebtforinve estmentsintoco ompanieswith $5millioninEBITDAandm more.
Ta able 29. The Ease to Arrange Senior Debt for Tran E D nsactions ov the Past S Months ver Six
Extrem mely difficult $1M EBITD DA $5M EBITD DA $10M EBIT TDA $15M EBIT TDA $25M EBIT TDA $50M EBIT TDA $100M+ EB BITDA 31% % 13% % 5% % 3% % 3% % 3% % 4% % Difficult 26% 21% 7% 8% 3% 7% 0% Somewhat Difficult 17% 28% 25% 23% 28% 21% 15% Neutral 12% 11% 16% 13% 19% 17% 15% S Somewhat Easy 3% 12% 18% 15% 19% 21% 19% Easy 5% 12% 25% 23% 14% 17% 23% Extr remely E Easy 5 5% 4 4% 5 5% 15% 14% 14% 2 23% Score (-3 to 3) o -1.5 5 -0.6 6 0.3 3 0.5 5 0.5 5 0.5 5 1.3 3
PRIVATEEQUIT TYcont.
Mostofthe erespondentsb believeworthy yoffinancinge exceedscapita alavailablefor rthecompanies swithlessthan n $10MinEB BITDA.Whereas sforthelargercompanies,ca apitalavailable exceedswort thyoffinancing g.
le alance of Ava ailable Capit with Quali Compani for the Fo tal ity ies ollowing Size e Tabl 30. The Ba
Comp panies wort of thy financing EATLY GRE exc ceed capital available $5M EBITD DA $10M EBIT TDA $15M EBIT TDA $25M EBIT TDA $50M EBIT TDA $100M EBITDA > $100M EBITDA E 39 9% 17 7% 6% 6 4% 4 4% 4 3% 3 4% 4 Companies wo orthy of fin nancing exce capital eed av vailable 24% 35% 24% 20% 12% 14% 7% Capital available exceeds companies worthy of financing 17% 21% 29% 26% 28% 39% 38% Capital available GREATLY Y exceeds companies s worthy of financing 8% 4% 10% 17% 16% 14% 20%
General balance
Score e (-2 to 2 2)
13% 22% 32% 33% 41% 30% 32%
-0.7 -0.4 0.1 0.3 0.4 0.5 0.6
Averagevaluationdiscoun ntsforlackofco ontrolimpliedt toproratavalu uesforvariouss sizedminoritys stockinterestsina typicalprivatelyheldcompanywithatot talequityvalueof$10million varyfrom10%to25%forprofitablebusiness s,and from25%to45%forunpr rofitablebusine essdependingo onpercentageo ofequityinterest.
Table 31. Valuation Discount for Minority Stock Interests in a Typical Privately-He Company with . D M eld y a Total Equity Value of $1 Million y 10
Profitable bus siness 1st quartile 10% equity interest y 20% equity interest y 30% equity interest y 40% equity interest y 50% equity interest y 15% 15% 11% 10% 2% Median n 25% 20% 18% 15% 10% 3rd quarti ile 35% 25% 24% 20% 19% 25% 24% 24% 20% 19% Unprofitable business 1st quarti ile Median n 45% 35% 25% 30% 25% 3rd quart tile 65% 50% 50% 55% 45%
8 enior Manage and Chie Executives Benefit from Additional Leadership and ers ef s m l Figure 83. Would Se Skil Training? lls ? 17% 44% 4% 35% Stronglyagree Agree Neutral Disagree
Accordingt torespondentsleadershipskills,strategicplanning,andund derstandingcom mpetitiveenviro onmentsarethe mostimpor rtantforsenior rmanagementt tohave.
Figure 84. Skills That Are Impo e T ortant for Se enior Manage ement to Hav ve 0% Leader rship Understa andingcompet titiveenvironm ments Strategicplan nning Sa alesandmarke eting Knowled dgeofbusinessandworldev vents nspiringinnova ation In Humanresou urces Corporatefinance Legalandreg gulatoryknowle edge Manag gementaccoun nting Globalbusinessmanagem ment eanalysis/rese earch Quantitative Today y % 51% 61% 52% 56% 4 48% 46% 41% 41% % 41% 40% 36% 40% 34% 31% 33% 30% 36% Inthefut ture 52% 10 0% 20% 30 0% 40% 5 0% 60% 7 70% 80% 90% 9
84% 74% 8 77% 68% 75% 70%
Relativetosixmonthsago o,respondentsindicatedincrea asesindemand dforprivateequity,qualityofcompaniessee eking investment t,amountofno oncontrolinves stmentsandslig ghtincreasesin ndealmultiples s.Theyalsoreportedadecreas sein expectedre eturnsonnewi investmentsan ndworsenedgeneralbusiness conditions.
Net Stayed % Decr reased Decreased Increased Inc reased % inc crease/ about the signif ficantly slightly nificantly increas decrease se slightly sign same de ecrease Demand fo private equity or Quality of companies seeki c ing investment t Average in nvestment size Non-contro investments ol Expected investment holdin ng period Deal multip ples Exit opport tunities Expected returns on new r investment ts Value of po ortfolio companie es General bu usiness condition ns Size of priv vate equity indus stry 1% 1 1% 1 1% 1 0% 0 0% 0 3% 3 9% 9 2% 2 2% 2 12% 2% 2 7% 25% % 14% % 9% 7% 25% % 34% % 31% % 32% % 47% % 27% % 41% 29% 52% 55% 40% 32% 27% 45% 23% 22% 43% 35% 38% 30% 28% 35% 31% 25% 21% 38% 17% 22% 17% 7% 3% 8% 18% 9% 5% 1% 5% 2% 5% 52% 45% 33% 36% 53% 40% 30% 21% 43% 19% 28% 8% 26% 15% 9% 7% 28% 43% 34% 35% 59% 29% 44% 19% 18% 27% 46% 11% -13% -12% 8% -40% -2%
Responden ntsexpectfurtherincreasesinallbusinesscha aracteristicsexc ceptgeneralbu usinessconditio onsandsizeof privateequ uityindustry.
Decr rease signif ficantly Demand for private equity Quality of co ompanies seeking investment Average investment size Non-control investments Expected inv vestment holding period g Deal multiple es Exit opportunities Expected returns on new investments s Value of por rtfolio companies s General bus siness conditions s Size of priva equity industr ate ry 0% 0 1% 0% 0 1% 0% 0 3% 3 6% 6 2% 2 4% 4 11 1% 4% 4 ase Decrea slightly 5% 16% 14% 12% 6% 25% 27% 26% 22% 33% 23% Stay about the same 32% 32% 46% 49% 48% 38% 39% 47% 36% 28% 47% N Net Increase Incr rease % % incr rease/ slightly signif ficantly increase decrease e dec crease 50% 43% 36% 32% 37% 31% 25% 25% 32% 25% 20% 1 3% 9 9% 5 5% 6 6% 9 9% 2 2% 3 3% 1 1% 6 6% 3 3% 6 6% 63% 51% 41% 39% 45% 34% 29% 26% 38% 28% 26% 5% 17% 14% 13% 6% 28% 33% 27% 26% 44% 27% 5 58% 3 35% 2 27% 2 26% 3 39% 6 6% -4% -2% 1 12% -1 17% -1%
ntsbelievedomesticeconomic cuncertaintyisthemostimpor rtantissuefacin ngprivatelyheldbusinessesto oday. Responden
Figure 85. Issues Faci Privately ing y-Held Busin nesses 0% Accesstocapital Ec conomicuncert tainty(domest tic) Econo omicuncertaint ty(internation nal) Gov vernmentregulationsandtax xes Oth her Competiti ionfromforeig gntradepartne ers Inflation 1% 0% Currentiss sue Emerg gingissue 4% 4 % 3% 5% 10% 18% 20 0% 23% % 5% 10% 15% 20% 0% 20 28 8% 26% 25% 0% 30 35% 40% 3 37%

MEZZA ANINESU URVEYINF FORMATION

Ofthe75p participantsthat trespondedtothemezzaninesurvey,58%re eportedmaking gdealsoverthe epastsixmonthsin the$5milli ionto$10millio onrangeand39 9%madeinvestmentsinthe$ $1millionto$5 millionrange.Over22%planon %inmanufactu investingin nbusinessservicesoverthene ext12months,f followedby21% uring.Otherkey yfindingsinclud de: Re espondentsind dicatedincrease esindemandfo ormezzanineca apital,qualityo fborrowerssee ekinginvestment, av verageinvestmentsize,andleveragemultiple es.Theyalsore eporteddecreas sesinwarrantc coverage,PIK (p paymentinkind d)features,exp pectedreturnsonnewinvestm ments,andwor rsenedgeneralbusinessconditions. Re espondentsexp pectfurtherincreaseindeman ndformezzanin necapital,butf flatleveragemu ultiples;aslight t in ncreaseinunderwritingstanda ards;relativelyf flatloanfees,P PIK,andwarrant tcoverage;asignificantdecre easein ge eneralbusiness sconditions;andIncreasingsiz zeofmezzanine eindustrywithadditionalcom mpetitionfrom bu usinessdevelop pmentcompani ies(BDCs)andS SBIC(smallbus inessinvestment)funds. Th hemajorityofr respondents(62 2%)believedom mesticeconom icuncertaintyisthemostimportantissuefac cing pr rivatelyheldbu usinessestoday y.

Approximately42%ofrespondentsareSBICFirms.
Figure 86 SBIC (small business i 6. investment) F Firms
42% Yes 58% No
Thelargestconcentrationofloansizeswasbetween$5 millionand$10 0million(58%).
Figure 87. Ty F ypical Investm ment Size 70% 60% 50% 40% 30% 20% 10% 0% 58% 39% 37% 18% 6% Lessthan$1 $15million million $5$10 million $1025 million $25$50 million 10%
5% $100$500 million
$50$100 million

MEZZANIN NEcont.
Table 34. Mezzanine Fu M und Data

Thetypeso ofbusinessesre espondentsplan ntoinvestinov vernext12mon nthsareverydiversewithove er22%targeting g businessse ervices,followedby21%whop plantoinvestin nmanufacturin g.
Figure 88 Type of Bu 8. usiness for In nvestments P Planned ove Next 12 Mo er onths 2% 3% 8% 8% 10% 12% 14% 21% Businessservices Manufacturing g Healthcare Retailandcon nsumerservice es Wholesale&d distribution Informationte echnology Basicmaterials&energy Financialservi ices Other
22% 2
Approximately57%ofrespondentsmade ebetweenoneandfiveloanso overthelastsix xmonths.
Figure 89. Total Nu e umber of Inv vestments Ma in the La Six Mont ade ast ths
9% 20% 11% 3% 14%
14% % 11%
0 2 18% 4 610
1 3 5 Mor rethan10
MEZZANIN NEcont. 2011|PEPPER RDINEUNIVERSITY YGRAZIADIOSCHO OOLOFBUSINESS ANDMANAGEME ENT.AllRightsReserved.|64
Figure 90 Number of Follow-on Investments Made in the Last Six Mo 0. I e onths 2% 2% 5% 6% 15% 2 17% % 19% 4 610 3 5 Morethan10 34% 0 1
Approximately32%ofrespondentsplantomakebetwe eensixand10in nvestmentsove erthenext12m months.
Figure 91. Number of Total Inve r estments Pla anned over N Next 12 Mont ths 2% 2% % 23% 2 4% 14% 9% 32% % 14% 4 610 5 M Morethan10 0 2 1 3
2. f nvestments Planned ove Next 12 Mo er onths Figure 92 Number of Follow-on In 2% 10% 13% 8% 13% % 17 7% 12% % 25% 0 2 4 610 1 3 5 Mo orethan10

MEZZANIN NEcont.
ResultsofresponsestosponsoreddealsbasedonsizeofinvesteeEBITDAarereportedbelow.
Table 35. Sponsored Deals by Size of Investee Company EBITDA (medians)

$1M EBITDA % of deals with warrants Average loan terms (years) Senior leverage ratio (multiple of EBITDA) Total leverage ratio (multiple of EBITDA) Average loan size Cash interest rate PIK Warrants expected return (IRR contribution) Total expected returns (gross cash on pre-tax IRR) 100% 5 2 3 4 12% 0% 2% 23% $5M EBITDA 100% 5 2.25 3.25 4 12% 2% 7% 21% $10M EBITDA 46% 5 2.5 3.5 7.5 12% 3% 4% 18.5% $25M EBITDA 30% 5 3.25 4.25 15 11% 3% 2% 18% $50M EBITDA 26% 6 3.25 4.75 25 11% 3% n/a 18% $100M EBITDA 7% 6.5 4 5.25 90 9.5% n/a n/a 17.5%
Table 36. Investment Type by Size of Investee Company, Sponsored Deals

Senior debt only $0M - $1M EBITDA $1M - $5M EBITDA $5M - $10M EBITDA $10M - $25M EBITDA $25M - $50M EBITDA $50M+ EBITDA 0% 0% 8% 10% 17% 25% Sub debt only 67% 40% 33% 20% 17% 25% Blended Sr./Jr. 33% 60% 50% 60% 67% 50% Other 0% 0% 8% 10% 0% 0%
ResultsofresponsestononsponsoreddealsbasedonsizeofinvesteeEBITDAarereportedbelow.
Table 37. Non-Sponsored Deals by Size of Investee Company EBITDA (medians)
$1M EBITDA % of deals with warrants Average loan terms (years) Senior leverage ratio (multiple of EBITDA) Total leverage ratio (multiple of EBITDA) Average loan size Cash interest rate PIK Warrants expected return (IRR contribution) Total expected returns (gross cash on pre-tax IRR) 88% 4 2 4 4 11% 2% 8% 17.5%
$5M EBITDA 83% 5 2.5 3.5 4 11% 2% 10% 18%
$10M EBITDA 60% 5 3 3.5 7.5 11% 2% 5% 18%
$25M EBITDA 75% 5 3 4.25 15 9% 3% 8% 18.5%
$50M EBITDA 100% 7 n/a n/a 100 9% 2% 6% 21%
$100M EBITDA 100% 3 n/a n/a n/a n/a 0% 6% 23%

MEZZANINEcont. 2011|PEPPERDINEUNIVERSITYGRAZIADIOSCHOOLOFBUSINESSANDMANAGEMENT.AllRightsReserved.|66
Table 38. Investment Type by Siz of Investee Company, Sponsored D . ze e Deals

Senior debt only d $0M - $1M EBITDA $1M - $5M EBITDA $5M - $10M EBITDA M $10M - $25 EBITDA 5M $25M - $50 EBITDA 0M $50M+ EBITDA 0% 0% 20% 20% 0% 100% Sub debt only y 0% 5 53% 4 40% 2 20% 0% 0% Blende Sr./Jr. ed 100% 47% 40% 60% 100% 0% Other 0% 0% 0% 0% 0% 0%
Acquisitionloanwasreportedby31%ofrespondentsas sborrowermot tivation,followedbymanagem mentbuyoutsat 22.6%.
Figure 93. Borrower Mo B otivation to Secure Mezza S anine Fundin (past six m ng months) Acquisitionloan 31% Managemen ntbuyout Refinancing g 29% Financinggr rowth Workingcap pitalfluctuatio ons Financewor rseningoperat tionscondition ns
6% 2% 16% % 16%
Figure 94. Items Required to C e R Close One De eal 100 90 80 70 60 50 40 30 20 10 0 90
50 35 18.5 5.75 5 10 4 5.5 10 1 2 3
Meet Businessplan nsor tingswithprincipals Propos sallettersorte erm Lettersofintentsigned d emorandumsr reviewed sh heetsissued conducted me 1stQuartile 1 Median 3 3rdQuartile
Figure 95. Would Se 9 enior Manage and Chie Executives Benefit from Additional Leadership and ers ef s m l Skil Training? lls ? 2% 18% 29% Stronglyagree e Agree Neutral 51% Disagree
Accordingt torespondents, ,leadershipskills,understandingcompetitive eenvironments sandstrategicp planningarethe mostimpor rtantforsenior rmanagementt tohave.
Figure 96. Skills That Are Impo e T ortant for Se enior Manage ement to Hav ve 0% Leader rship Understa andingcompet titiveenvironm ments Strategicplan nning Sa alesandmarke eting Knowled dgeofbusinessandworldev vents Corporatefinance nspiringinnova ation In Manag gementaccoun nting Legalandreg gulatoryknowle edge Quantitative eanalysis/rese earch Humanresou urces Globalbusinessmanagem ment Today y

10% 20% 30% 40% 50% 60% 70% 80% 90% 10 % % 00% 84% 93 3%
65% 53% 5 51% 49 9% 42% 42% 35% 40% 38% 35% 33% 3 30% 20% 35% Inthefut ture 5 51% 58%
89% 84% 82% 79% 7 73%
Totaldebttocashflowratiowasthemostimportantfactorwhendecidingwhethertoinvestornot,followedbytotal debtservicecoverageratio.
Table 39. Importance of Financial Evaluation Metrics

Unimportant Senior DSCR or FCC ratio Total DSCR or FCC ratio Senior debt-to-cash flow ratio Total debt-to-cash flow ratio 17% 3% 6% 0% Of little importance 6% 3% 0% 0% Moderately important 17% 6% 18% 6% Important 37% 34% 47% 24% Very important 23% 54% 29% 70% Score (1 to 5) 3.43 4.34 3.94 4.64
Table 40. Financial Evaluation Metrics Average Data

Average borrower data Senior DSCR or FCC ratio Total DSCR or FCC ratio Senior debt to cash flow ratio Total debt to cash flow ratio 1.4 1.4 2.5 4 Limit not to be exceeded 1.4 1.2 3 4 Financial ratio covenant after booking 1.4 1.2 3 4
Relativetosixmonthsago,respondentsindicatedincreasesindemandformezzaninecapital,qualityofborrowers seekinginvestment,averageinvestmentsize,andleveragemultiples.Theyalsoreporteddecreasesinwarrantcoverage, PIKfeatures,andexpectedreturnsonnewinvestments,aswellasworsenedgeneralbusinessconditions.
Stayed Net Decreased Decreased Increased Increased % % about the increase/ significantly slightly slightly significantly increase decrease same decrease Demand for mezzanine capital Credit quality of borrowers seeking investment Average investment size Average investment maturity General underwriting standards Warrant coverage PIK features Loan fees Leverage multiples Expected returns on new investments General business conditions 0% 0% 0% 0% 5% 8% 0% 0% 0% 2% 7% 12% 19% 7% 0% 19% 31% 24% 12% 10% 45% 45% 33% 49% 62% 93% 57% 46% 63% 81% 20% 26% 29% 47% 28% 29% 7% 17% 13% 10% 7% 71% 21% 14% 9% 5% 2% 0% 2% 3% 2% 0% 0% 5% 5% 56% 33% 31% 7% 19% 15% 12% 7% 71% 26% 19% 12% 19% 7% 0% 24% 38% 24% 12% 10% 48% 52% 44% 14% 24% 7% -5% -23% -12% -5% 61% -21% -33%

MEZZANINEcont.
Responden ntsexpectfurtherincreasesinallbusinesscha aracteristicsexc ceptgeneralbu usinessconditio onsandcreditq quality ofborrowe ersseekinginvestment.
Dec crease significantly Demand fo mezzanine cap or pital Credit quality of borrowers seeking investment t Average in nvestment size Average in nvestment maturi ity General un nderwriting stand dards Warrant co overage PIK feature es Loan fees Leverage multiples m Expected returns on new r investment ts General bu usiness condition ns Size of me ezzanine industry y 0% 0 2% 2 0% 0 0% 0 0% 0 0% 0 0% 0 0% 0 2% 2 0% 0 5% 5 0% 0 Net ase Stay about Increase t In crease Decrea % % ncrease/ in slightly sign slight tly the same nificantly increas decrease se de ecrease 2% % 29% % 3% % 3% % 13% % 13% % 10% % 5% % 27% % 20% % 51% % 10% % 41% 44% 80% 93% 65% 68% 80% 83% 41% 44% 27% 49% 37% 22% 15% 3% 20% 15% 5% 10% 29% 29% 17% 34% 20% 2% 3% 3% 3% 5% 5% 2% 0% 7% 0% 7% 56% % 24% % 18% % 5% 23% % 20% % 10% % 12% % 29% % 37% % 17% % 41% % 2% 32% 3% 3% 13% 13% 10% 5% 29% 20% 56% 10% 54% -7% 15% 3% 10% 8% 0% 7% 0% 17% -39% 32%
Responden ntsbelievedomesticeconomic cuncertaintyisthemostimpor rtantissuefacin ngprivatelyheldbusinessesto oday.
Figure 97 Issues Faci Privately 7. ing y-Held Busin nesses 0% Ec conomicuncert tainty(domest tic) Econo omicuncertaint ty(internation nal) Accesstocapital Gov vernmentregulationsandtax xes Inflation Competiti ionfromforeig gntradepartne ers Oth her 2% 1% 4% % Currentiss sue Emerg gingissue 5% 5 9% 11% 17% 28% 21% 5% 10% 15% 20% 25% 30% 29% 35% 40% 45% 44% % 50%
BANKAN B NDASSET BASEDL LENDING SURVEYINFORMA ATION
Therewere e103responses stothebankss surveywithcom mmercialbanks makingup35% %intermsofindividuallending g function.O Over32%ofresp pondentsbeliev vethatgeneralbusinesscondiitionswillimpro oveoverthene ext12monthsa and over51%sa aiddemandfor rloanswillincre ease.Otherkey yfindingsinclud de: Overthelastsixmonthsrespon ndentsweresee eingworsened businesscondit tionsandappet titeforrisk,flat t emandforloansandunderwri itingstandardswithslightincr reaseincreditq qualityofborro owers,andfocuson de co ollateralasaba ackupmeansofpayment. Re espondentsalso oexpectincrea aseinlendingca apacityofbank sandSBAlending,flatunderw writingstandard dsand cr reditqualityofborrowers,slightincreasesinseniorandtota alleveragemult tiples,increasin ngduediligence e ef fforts,andfurth herpricingcompression. Cu urrently,themajorityoflende ers(56%)seedo omesticeconom micuncertainty yasthetopissu uefacingprivate ely he eldbusinesses.
onalandAss sessmentCh haracteristics s Operatio

Responden ntsreportedonthetypeofent titythatbestde escribesthema and55%reportasbeingacom mmercialbank, followedby y15%asacorp poratebank.
5%
Figu 98. Descr ure ription of Le nding Entity y 2% 2% 1% 8% 8% 8% 31% 35% Commercialban nk A Assetbasedlen nder Corporatebank k Communityban nk Commercialfina ancecompany y O Other Privatebanker R esidentialmor rtgagelender Creditunion
Themajorit ty(78%)reportparticipatingin ngovernmentloanprograms.
Figure 99. Participation in Governm P n ment Loan Pr rograms
22% Yes No
78%
BANK KScont.
5million(58%). Thelargestconcentrationofloansizeswasbetween$1millionand$25
Fi igure 100. Ty ypical Invest tment Size 30% 25% 25% 20% 15% 10% 5% 0% Lessthan$1 million $15millio on $6$10m million $112 25million $ $25$50 million G Greaterthan$50 million 11% 17% % 1 18% 14% 15%
Responden ntsreportedonallinratesforvariousindustr ries.
Table 43. All Rates by Industry T l-in y

$1M Manufacturing Retail and consumer servic ces Wholesale & distribution Business services s Basic mate erials & energy Health care e Information technology n Financial services s 5.5% 6.3% 6% 6.3% 5.5% 6% 6.3% 7% $5M 5.8% 5 6% 6% 5.5% 5 5.3% 5 6% 6% 6.3% 6 $1 10M 5. .0% 5. .8% 5. .3% 5. .3% 5 5% 5. .5% 6 6% 6 6% $25 5M 4% % 5.3 3% 5.0 0% 5.0 0% 5% % 5% % 5.8 8% 5% % $50M 3.5% % 5.0% % 3.8% % 3.5% % 4.5% % 5% % 4.5% % 4.8% % $100M 3.3% % 3.8% % 3% 3.5% % 3.8% % 5% 4.3% % 4.0% %
Table 44. All-i Rates by L Ta in Loan Type
$1M Cash flow loan Working ca apital loan Equipment loan t Real estate loan e Typical fixe ed-rate loan term (years) m 6% 6% 6% 6% 5.5
$5M 5.50% 5 5.5% 5% 6% 6
$ 10M 5. .50% 5 5.8% 4 4.8% 5 5% 5
$2 25M 5.5 50% 5. 5% 5. 3% 5 5% 5
$50 0M 5.25 5% 5.5 5% 3.5 5% 4.5 5% 5
$100 0M 5% % 5% % 4.5% % 5% % 7 BANK KScont.
Seniorleveragemultiplesarereportedbe elowforthevariousindustries sandEBITDAsi zes.

Table 45. Senior Leve erage Multipl by EBITDA Size le A
$1M EBIT TDA Manufacturing Retail and consumer servic ces Wholesale & distribution Business services s Basic mate erials & energy Health care e Information technology n Financial services s Average 1.2 25 1.2 25 1.2 25 1.2 25 1. .5 1.2 25 1. .5 1.2 25 1. .3 M $5M EBIT TDA 1.2 25 1.2 25 1.2 25 1.2 25 1.2 25 1.5 5 1.5 5 1.2 25 1.3 3 M $10M DA EBITD 1.25 5 1.25 5 1.25 5 1.25 5 1.25 5 1.75 5 1.5 5 1.5 5 1.4 4 M $25M EBITD DA 1.25 5 1.25 5 1.25 5 1.25 5 1.25 5 2 2 1.75 5 1.5 M $50M EBITD DA 1.75 5 1.25 5 1.25 5 1.75 5 1.25 5 1.75 5 1.5 1.75 5 1.5 M $100M EBITD DA 1.75 5 1.25 5 1.5 1.75 5 1.75 5 1.75 5 1.75 5 1.75 5 1.7
Variousfee esasreportedb bylendersarea asfollows.
Table 46 Fees Char 6. rged

1st quart tile Closing fee e Modificatio fee on Commitme fee ent Underwritin fee ng Arrangeme fee ent Prepaymen penalty (yr 1) nt Prepaymen penalty (yr 2) nt Unused line fee 0.5% 0.2% 0.5% 0.0% 0.0% 1.0% 0.5% 0.3% Me edian 1 .0% 0 .3% 0 .5% 0 .5% 0 .5% 2 .0% 1 .0% 0 .4% 3rd quartile 1.5% 0.5% 1.0% 1.0% 1.0% 3.0% 2.0% 0.5% % reportin ng 15% 12% 14% 11% 11% 13% 13% 11%
gwasthemostcommonlydes scribedfinancingbybuyersat5 52%,followedbyexpansionat t17%. Refinancing
Figure 101. Borrowe Motivation to Secure F er n Financing (p past six mont ths) 5% % % 11% 12% 17% 52% % Refinancing gexistingloans sorequity Expansion Workingca apitalfluctuatio ons Financewo orseningoperatingconditions Manageme entbuyout Other
3%
BANK KScont.
Totaldebtservicecoverageratiowasthemostimportantfactorwhendecidingwhethertoinvestornot,followedby totaldebttocashflow. Table 47. Importance of Financial Evaluation Metrics
Unimportant Current ratio Senior DSCR or FCC ratio Total DSCR or FCC ratio Senior debt-to-cash flow Total debt-to-cash flow Debt-to-net worth Revenue growth rate 29% 9% 9% 7% 7% 16% 6%
Of little importance 24% 15% 9% 14% 11% 18% 29%
Moderately important 29% 9% 2% 16% 13% 29% 29%
Important 13% 15% 28% 34% 42% 20% 29%
Very important 4% 52% 52% 30% 27% 18% 6%
Score (0 to 4) 1.4 2.9 3.1 2.7 2.7 2.1 2.0
Table 48. Financial Evaluation Metrics Average Data

Average borrower data Current ratio Senior DSCR or FCC ratio Total DSCR or FCC ratio Senior debt-to-cash flow Total debt-to-cash flow Debt-to-net worth Revenue growth rate 1.5 1.3 1.2 2.0 2.5 2 5% Limit not to be exceeded 1.3 1.3 1.25 2.3 2.5 1.5 5% Financial ratio covenant after booking 1.2 1.2 1.1 3 4 3 n/a
Respondentsreportedonthepercentageofloans(bysize)thatrequirepersonalguarantees..
Table 49. Personal Guarantee Percentage of Occurrence by Size of Loan (%)
$1M loan Personal guarantee 100%
$5M loan 100%
$10M loan 75%
$25M loan 25%
$50M loan 25%
$100M loan 25%
Approximately63%ofcashflowapplicationsweredeclined.
Table 50. Applications Data

Declined Cash flow-based 63%

BANKScont.
Approximately36%ofapp plicationsweredeclineddueto opoorqualityo ofearningsand/orcashflowfo ollowedby22% %that weredeclin nedduetoinsufficientcollater ral.
Figure 102. Rea ason for Decl lined Loans
Qua alityofearning gsand/orcashflow Ins sufficientcollat teral Debtload Custom merconcentrat tions Sizeofcomp pany Economicconc E cerns Sizeorav vailabilityofpe ersonalguaran ntees Weakeningindustry W Insufficientm managementteam Insufficientoperatinghis story Insufficientcr redit Lackofba ankingrelation nship Other O
3 36% 22% 10% % 6% 6% 4% 2% % 2% % 2% % 2% % 1% 1% 5%
Responden ntsagreetheyarefeelingincre easedpressuref fromregulators s(72%)toavoid dmakingriskyl loans.
Fig gure 103. Fee eling Increas Pressure from Regul sed e lators to Avo Making R oid Risky Loans 13% 4% 13% % 17% Stronglyagree 52% Ag gree Ag greesomewhat Ne eitheragreeno ordisagree Disagreesomew what
ethatamongco ompaniesthatt theyhavework kedwith,senior rmanagers,suc chas Approximately58%ofrespondentsagree chiefexecu utives,wouldbe enefitfromadditionalleadersh hipandskillstra aining.
04. enior Manag gers and Chie Executives Benefit fro Additiona Leadership and ef s om al p Figure 10 Would Se Skil Training? lls ? 12% 12% % 31 1% Stronglyagree e A Agree 46% Neutral Disagree

BANK KScont.
Accordingt torespondents, ,leadershipskills,sales,marke etingskills,andstrategicplann ningarethemo ostimportantfo or seniorman nagementtohave.
Figure 105. Skills That Are Imp e T portant for Se enior Manag gement to Ha ave 0% Leader rship Sa alesandmarke eting Strategicplan nning Understa andingcompet titiveenvironm ments Legalandreg gulatoryknowle edge In nspiringinnova ation Knowled dgeofbusinessandworldev vents Corporatefinance gementaccoun nting Manag Quantitative eanalysis/rese earch Globalbusinessmanagem ment Humanresou urces Today y 28% 42% 46% 39% 39% 39% 42% 3 36% 39% 33% % 10% 20% 30% 4 40% 50% 60% 70% 7
6 67% % 63% 64% % 63% % 61% 63% % 61% 63% %
25%30% 30% 28% 24% 28% Inthefut ture
Responden ntsbelievedomesticeconomic cuncertaintyisthemostimpor rtantissuefacin ngprivatelyheldbusinessesto oday.
Figure 106 Issues Fac 6. cing Privately y-Held Busin nesses 56%
Economicunc certainty(dom mestic) Accesstocapital Governmentre G egulationsandtaxes Eco onomicuncerta ainty(international) Compe etitionfromfor reigntradepar rtners Inflation Other O 2% % 5% 7% 5% 2% % Emerg gingissue 9% 9% 21% 1 16% 2 28%
40 0%
Currentiss sue

BANK KScont. 2011|PEPPER RDINEUNIVERSITY YGRAZIADIOSCHO OOLOFBUSINESS ANDMANAGEME ENT.AllRightsReserved.|76
Respondentsindicatedincreasesinalmostallgeneralbusinesscharacteristicsexceptgeneralunderwritingstandards, amountofnonaccrualloans,sizeofinterestratespreads,businessconditionsandappetiteforrisk.
Stayed Net Decreased Decreased Increased Increased % % about the increase/ significantly slightly slightly significantly increase decrease decrease same Demand for business loans (applications) General underwriting standards Credit quality of borrowers applying for credit Loans outstanding Nonaccrual loans Number/ tightness of financial covenants Due diligence efforts Average loan size Average loan maturity (months) Percent of loans with personal guarantees Percent of loans requiring collateral Size of interest rate spreads (pricing) Loan fees Standard advance rates Interest rate spread (pricing) Senior leverage multiples Total leverage multiples Focus on collateral as backup means of payment SBA lending Lending capacity of bank General business conditions Appetite for risk 12% 0% 7% 0% 25% 6% 0% 0% 0% 0% 0% 0% 0% 0% 6% 0% 0% 0% 10% 8% 7% 8% 12% 20% 16% 11% 38% 11% 0% 14% 7% 10% 4% 48% 42% 6% 56% 4% 8% 8% 20% 8% 29% 36% 30% 64% 37% 17% 38% 61% 48% 49% 60% 80% 76% 24% 42% 61% 17% 58% 54% 58% 35% 17% 43% 28% 35% 12% 35% 56% 0% 17% 40% 35% 28% 5% 16% 20% 14% 28% 17% 29% 29% 29% 25% 38% 21% 20% 12% 4% 5% 17% 0% 6% 12% 2% 5% 5% 4% 8% 2% 6% 6% 8% 8% 4% 10% 29% 0% 8% 47% 16% 40% 72% 0% 22% 52% 37% 33% 10% 20% 28% 16% 33% 22% 38% 38% 33% 35% 67% 21% 28% 23% 20% 23% 11% 63% 17% 0% 14% 7% 10% 4% 48% 42% 6% 61% 4% 8% 8% 30% 17% 36% 44% 23% -4% 16% 61% -63% 6% 52% 23% 26% 0% 16% -20% -26% 28% -39% 33% 29% 25% 5% 50% -14% -16%

BANKScont.
Respondentsexpectfurtherincreasesinallbusinesscharacteristicsexceptaverageloansize,loanfees,totalleverage multiples,focusoncollateral,andlendingcapacityofbank.
Decrease significantly Demand for business loans (applications) General underwriting standards Credit quality of borrowers applying for credit Due diligence efforts Average loan size Average loan maturity (months) Percent of loans with personal guarantees Percent of loans requiring collateral Size of interest rate spreads (pricing) Loan fees Senior leverage multiples Total leverage multiples Focus on collateral as backup means of payment SBA lending Lending capacity of bank General business conditions Appetite for risk 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% Net Decrease Stay about Increase Increase % % increase/ slightly the same slightly significantly increase decrease decrease 5% 8% 16% 0% 31% 17% 0% 0% 5% 14% 8% 38% 23% 0% 28% 4% 4% 44% 72% 56% 22% 56% 61% 68% 56% 70% 82% 80% 42% 63% 89% 50% 64% 60% 37% 16% 26% 61% 6% 17% 28% 42% 21% 0% 4% 17% 12% 11% 22% 28% 32% 14% 4% 2% 17% 6% 6% 4% 2% 5% 5% 8% 4% 2% 0% 0% 4% 4% 51% 20% 28% 78% 13% 22% 32% 44% 26% 5% 12% 21% 14% 11% 22% 32% 36% 5% 8% 16% 0% 31% 17% 0% 0% 5% 14% 8% 38% 23% 0% 28% 4% 4% 47% 12% 12% 78% -19% 6% 32% 44% 21% -9% 4% -17% -9% 11% -6% 28% 32%

BANKScont.
AssetBa asedLending gSpecificCh haracteristics s

Accordingt torespondentsapproximately y25%ofassetb basedloanswer reissuedforma anufacturingco ompanies.
Figure 107. Industries Served by As S sset-Based L Lenders Man nufacturing 3% 7% 8% 12 2% 12% 5% 12% 25% 16% Who olesale&distribution Heallthcare Busi nessservices Basic cmaterials&e energy Infor rmationtechnology Reta ail&consumer rservices Fina ncialservices Othe er
Approximately38%ofthe ecompaniestha atbookedasset tbasedloansin nthelastsixmo onthshadEBITD DAsizelessthan $5million.
Figure 108. Typical EBIT F T TDA Sizes for Companies Booked r s 40% 30% 20% 10% 0% NegativeEBITD N DA
38 8%
13%
16%
18% %
15%
$05m million EBIT TDA
$510million $ EBITDA
$1050m million EBITD DA
$50+millionEBITDA A
Responden ntsreportedonallinratesbyt typeandsizeof fcurrentbooke edloansandthe eresultsarereportedbelow.
Tab 53. All-in Rates on Cu ble urrent Asset-Based Loan (medians) ns

Accounts le receivabl $5 million loan $25 million loan $50 million loan $100 millio loan on Average lo length (month oan hs) 11 4 3 2.4 42 Inventory 12 4 3 2.4 42 Equipment 6 4 3 2.5 42 Real estate 7 4 3.5 2.8 39 Wo orking ca apital 10 4 3 2 2.8 48 BANK KScont.
Responden ntsreportedonstandardadvan nceratesandth heresultsarer eflectedbelow.

Tab 54. Stand ble dard Advanc Rate (or LTV ratio) for Assets (%) ce
Typical Loan 1st qu uartile Marketable securities e Accounts receivable r Inventory - low quality Inventory - intermediate quality Inventory - high quality Equipment t Real estate e Land 90 9 80 8 25 2 40 4 55 5 59 5 60 6 35 3 Media an 90 85 30 45 60 75 65 40 3rd quart tile 90 85 31 50 65 80 70 45 1st quar rtile 90 85 21 40 50 75 55 37 Upper Lim mit Median 90 85 30 50 60 75 70 42 3rd quartile 90 90 46 60 65 78 75 44
Responden ntsreportedonvaluationstand dardsusedtoe estimateLTVrat tios.
Fi igure 109. Va aluation Stan ndards Used to Estimate LTV Ratio d 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 87% 63% 44% % 35% 10% 6% Purchase price 11% 33% % 25% 25% 6% 5% Fairmarket value Forced liquidation 10% 7% Orderly n liquidation Inventory
torespondentsworkingcapita albasedloansh hadthesmalles stdeclinerate(5 59%)overthelastsixmonths. . Accordingt
6% 5% Depreciated value(book) Equipment
10% 7% 6% % Other
Facevalue Realestate
Accountsreceivable
Figure 110. Assete -Based Loan Decline Ra ns ate 100% 80% 60% 40% 20% 0% Workingcapita W al Receivable es based Equipm ment base ed Invent orybased R Realestate based O Otheroperatin ng assetbased
72% 59%
73% %
7 74%
79%
79%
ABOUTTHEAUTHOR
JohnPaglia,PhD,MBA,CPA,CFA
AssociateProfessorofFinanceandSeniorResearcher PepperdinePrivateCapitalMarkets Dr.Paglia,aformerJulianVirtueandDenneyProfessorshiprecipient,isanassociateprofessoroffinanceat PepperdineUniversityanddirectsthePepperdinePrivateCapitalMarketsProject.Hehasover10yearsof universityteachingexperienceinfinance,performsbusinessvaluationsforprivatelyheldcompanies,andhas testifiedasanexpertoneconomicdamageandvaluationmatters. HisworkonthePepperdinePrivateCapitalMarketsProjectthefirstsimultaneous,comprehensive,andon goinginvestigationofthemajorprivatecapitalmarketsegmentshasresultedinover20,000report downloadsinmorethan70countriesandhasearnedhimthe2011GeorgeAward,whichisgiventotheone facultymemberannuallywhobestleveragesthebusinesscommunitytomakeadifferenceintheclassroom.
HisresearchhasappearedintheWallStreetJournal,CNBC,USAToday,andtheNewYorkTimes,been publishedinanumberofjournalsandbeenpresentedatdomesticandinternationalconferences.Dr.Paglia holdsaPhDinfinance,anMBA,aBSinfinance,andisaCertifiedPublicAccountant(CPA)andChartered FinancialAnalyst(CFA)charterholder. Contact:privatecap@pepperdine.edu
ABOUTPEPPERDINEUNIVERSITYS GRAZIADIOSCHOOLOFBUSINESSANDMANAGEMENT
Foundedonthecorevaluesofintegrity,stewardship,courage,andcompassion,PepperdineUniversitys GraziadioSchoolofBusinessandManagementhasbeendevelopingvaluescenteredleadersandadvancing responsiblebusinesspracticesince1969.Studentfocused,experiencedriven,andgloballyoriented,the GraziadioSchooloffersfullyaccreditedMBA,masterofscience,andbachelorscompletionbusinessprograms. Moreinformationfoundat:bschool.pepperdine.edu/newsroom
INDEXOFTABLES
Table1.PrivateCapitalMarketRequiredRatesofReturn...................................................................................8 Table2.GeneralBusinessandIndustryAssessment:TodayversusSixMonthsAgo ........................................... 2 . 1 Table3.GeneralBusinessandIndustryAssessmentExpectationsovertheNext12Months............................... 2 1 Table4.MedianDealMultiplesbyEBITDASizeofCompany.............................................................................. 7 1 Table5.MedianTotalLeverageMultiplesbySizeofCompany .......................................................................... 8 . 1 Table6.MedianSeniorLeverageMultiplesbySizeofCompany ........................................................................ 8 . 1 Table7.BalanceofAvailableCapitalwithQualityCompanies ........................................................................... 9 . 1 Table8.HowDifficulttoArrangeSeniorDebtforTransactionsoverthePastSixMonths................................... 9 1 Table9.GeneralBusinessandIndustryAssessment:TodayversusSixMonthsAgo ........................................... 1 . 2 Table10.GeneralBusinessandIndustryAssessmentExpectationsovertheNext12Months............................. 1 2 Table11.MedianRevenueDealMultiplesbyRevenueSizeofCompany............................................................ 7 2 Table12.MedianEBITDADealMultiplesbyRevenueSizeofCompany.............................................................. 7 2 Table13.GeneralBusinessandIndustryAssessment:TodayVersusSixMonthsAgo......................................... 0 3 Table14.GeneralBusinessandIndustryAssessmentExpectationsovertheNext12Months............................. 0 3 Table15.ImportanceofFactorsWhenEvaluating............................................................................................. 6 3 Table16.GeneralBusinessandIndustryAssessment:TodayversusSixMonthsAgo.......................................... 7 3 Table17.GeneralBusinessandIndustryAssessmentExpectationsovertheNext12Months............................. 8 3 Table18.GeneralInformationonInvestmentsbyCompanyStages................................................................... 1 4 Table19.GeneralBusinessandIndustryAssessment:TodayversusSixMonthsAgo.......................................... 4 4 Table20.GeneralBusinessandIndustryAssessmentExpectationsovertheNext12Months............................. 5 4 Table21.VCFundData..................................................................................................................................... 7 4 Table22.GeneralInformationonInvestmentsbyCompanyStages................................................................... 8 4 Table23.GeneralBusinessandIndustryAssessment:TodayversusSixMonthsAgo.......................................... 1 5 Table24.GeneralBusinessandIndustryAssessmentExpectationsovertheNext12Months............................. 1 5 Table25.PEGFundData................................................................................................................................... 4 5
Table26.GeneralCharacteristicsBuyoutTransactions(medians)................................................................... 6 5 Table27.GeneralCharacteristicsNonBuyoutTransactions(medians)............................................................ 6 5 Table28.DealMultiplesAmongIndustries(medians)........................................................................................ 7 5 Table29.TheEasetoArrangeSeniorDebtforTransactionsoverthePastSixMonths........................................ 8 5 Table30.TheBalanceofAvailableCapitalwithQualityCompaniesfortheFollowingSize................................. 9 5 Table31.ValuationDiscountforMinorityStockInterestsinaTypicalPrivatelyHeldCompanywithaTotalEquity Valueof$10Million................................................................................................................................. 9 5 Table32.GeneralBusinessandIndustryAssessment:TodayversusSixMonthsAgo.......................................... 0 6 Table33.GeneralBusinessandIndustryAssessmentExpectationsovertheNext12Months............................. 1 6 Table34.MezzanineFundData......................................................................................................................... 4 6 Table35.SponsoredDealsbySizeofInvesteeCompanyEBITDA(medians)....................................................... 6 6 Table36.InvestmentTypebySizeofInvesteeCompany,SponsoredDeals........................................................ 6 6 Table37.NonSponsoredDealsbySizeofInvesteeCompanyEBITDA(medians)................................................ 6 6 Table38.InvestmentTypebySizeofInvesteeCompany,SponsoredDeals........................................................ 7 6 Table39.ImportanceofFinancialEvaluationMetrics........................................................................................ 9 6 Table40.FinancialEvaluationMetricsAverageData......................................................................................... 9 6 Table41.GeneralBusinessandIndustryAssessment:TodayversusSixMonthsAgo.......................................... 9 6 Table42.GeneralBusinessandIndustryAssessmentExpectationsovertheNext12Months............................. 0 7 Table44.AllinRatesbyIndustry...................................................................................................................... 2 7 Table45.AllinRatesbyLoanType................................................................................................................... 2 7 Table46.SeniorLeverageMultiplebyEBITDASize............................................................................................ 3 7 Table47.FeesCharged ..................................................................................................................................... 3 . 7 Table48.ImportanceofFinancialEvaluationMetrics........................................................................................ 4 7 Table49.FinancialEvaluationMetricsAverageData......................................................................................... 4 7 Table50.PersonalGuaranteePercentageofOccurrencebySizeofLoan(%) ..................................................... 4 . 7 Table51.ApplicationsData............................................................................................................................... 4 7 Table52.GeneralBusinessandIndustryAssessment:TodayversusSixMonthsAgo.......................................... 7 7
Table53.GeneralBusinessandIndustryAssessmentExpectationsovertheNext12Months............................. 8 7 Table54.AllinRatesonCurrentAssetBasedLoans(medians).......................................................................... 9 7 Table55.StandardAdvanceRate(orLTVratio)forAssets(%)........................................................................... 0 8
INDEXOFFIGURES
Figure1.PrivateCapitalMarketRequiredRatesofReturn .................................................................................7 . Figure2.AnnualRevenuesofCompaniesValued............................................................................................... 0 1 Figure3.UsageofValuationApproaches .......................................................................................................... 0 . 1 Figure4.UsageofMultiples.............................................................................................................................. 1 1 Figure5.AverageRiskFreeRate,Market(equity)RiskPremiumandLongTermGrowthRate........................... 1 1 Figure6.DiscountforLackofMarketability(DLOM)byRevenueSizes............................................................... 1 1 Figure7.ExplicitForecastPeriodforHighGrowthCompaniesbyRevenueSizes(years)..................................... 2 1 Figure8.IssuesFacingPrivatelyHeldBusinesses............................................................................................... 3 1 Figure9.PrivateBusinessSalesTransactionsClosedintheLastSixMonths....................................................... 4 1 Figure10.BusinessTypesThatWereInvolvedintheTransactionsClosedintheLastSixMonths....................... 5 1 Figure11.AverageNumberofMonthstoCloseOneDeal.................................................................................. 5 1 Figure12.PrivateBusinessTransactionsExpectedtoCloseintheNext12Months............................................ 5 1 Figure13.PercentageofBusinessSalesEngagementsTerminatedWithoutTransacting.................................... 6 1 Figure14.ReasonsforBusinessSalesEngagementsNotTransacting................................................................. 6 1 Figure15.ValuationGapinPricingforTransactionsThatDidntClose............................................................... 6 1 Figure16.UsageofValuationApproaches......................................................................................................... 7 1 Figure17.UsageofMultiples............................................................................................................................ 7 1 Figure18.ComponentsofClosedDeals............................................................................................................. 8 1 Figure19.PremiumPaidbyStrategicBuyersRelativetoFinancialBuyers......................................................... 9 1 Figure20.WouldSeniorManagersandChiefExecutivesBenefitfromAdditionalLeadershipandSkillsTraining? ................................................................................................................................................................ 0 2
Figure21.SkillsThatAreImportantforSeniorManagementtoHave................................................................ 0 2 Figure22.IssuesFacingPrivatelyHeldBusinesses............................................................................................. 2 2 Figure23.PrivateBusinessSalesTransactionsClosedintheLastSixMonths..................................................... 4 2 Figure24.PrivateBusinessSalesTransactionsExpectedtobCloseintheNextTwelveMonths.......................... 4 2 Figure25.PrivateBusinessSalesTransactionsExpecttoCloseintheNext12Months....................................... 5 2 Figure26.AverageNumberofMonthstoCloseOneDeal.................................................................................. 5 2 Figure27.PercentageofBusinessSalesEngagementsTerminatedWithoutTransacting.................................... 5 2 Figure28.ReasonsforBusinessSalesEngagementsNotTransacting................................................................. 6 2 Figure29.ValuationGapinPricingforTransactionsThatDidntClose............................................................... 6 2 Figure30.UsageofValuationApproaches......................................................................................................... 6 2 Figure31.UsageofMultiples............................................................................................................................ 7 2 Figure32.ComponentsofClosedDeals............................................................................................................. 8 2 Figure33.HowDifficulttoArrangeSeniorDebtforTransactionsoverthePastSixMonths................................ 8 2 Figure34.WouldSeniorManagersandChiefExecutivesBenefitfromAdditionalLeadershipandSkillsTraining? ................................................................................................................................................................ 8 2 Figure35.SkillsThatAreImportantforSeniorManagementtoHave................................................................ 9 2 Figure36.IssuesFacingPrivatelyHeldBusinesses............................................................................................. 9 2 Figure37.AssetsunderManagementorInvestableFunds................................................................................. 2 3 Figure38.CurrentandTargetAssetAllocationsfor"AlternativeAssets"(%oftotalportfolio)........................... 2 3 Figure39.CurrentTargetAssetAllocation......................................................................................................... 3 3 Figure40.AnnualReturnExpectationsforNewInvestments............................................................................. 3 3 Figure41.AssetswiththeBestRisk/ReturnTradeoffCurrently........................................................................ 4 3 Figure42.IndustrywiththeBestRisk/Return.................................................................................................... 4 3 Figure43.GeographicRegionsoftheWorldOfferingtheBestRisk/ReturnTradeoffCurrently........................... 5 3 Figure44.GeographicRegionsoftheUSAwiththeBestRisk/ReturnCurrently................................................. 5 3 Figure45.WouldSeniorManagersandChiefExecutivesBenefitfromAdditionalLeadershipandSkillsTraining? ................................................................................................................................................................ 6 3
Figure46.SkillsThatAreImportantforSeniorManagementtoHave................................................................ 7 3 Figure47.IssuesFacingPrivatelyHeldBusinesses............................................................................................. 8 3 Figure48.TotalNumberofInvestmentsMadeintheLastSixMonths............................................................... 9 3 Figure49.NumberofFollowonInvestmentsMadeintheLastSixMonths........................................................ 9 3 Figure50.NumberofTotalInvestmentsPlannedoverNext12Months............................................................. 0 4 Figure51.NumberofFollowonInvestmentsPlannedoverNext12Months...................................................... 0 4 Figure52.TypeofBusinessforInvestmentsPlannedoverNext12Months ....................................................... 0 . 4 Figure53.GeographicLocationofPlannedInvestmentoverNext12Months.................................................... 2 4 Figure54.GeographicalLimitforInvestment.................................................................................................... 2 4 Figure55.UsageofValuationApproaches......................................................................................................... 2 4 Figure56.ItemsRequiredtoCloseOneDeal..................................................................................................... 3 4 Figure57.ExitPlansforPortfolioCompanies..................................................................................................... 3 4 Figure58.WouldSeniorManagersandChiefExecutivesBenefitfromAdditionalLeadershipandSkillsTraining? ................................................................................................................................................................ 3 4 Figure59.SkillsThatAreImportantforSeniorManagementtoHave................................................................ 4 4 Figure60.IssuesFacingPrivatelyHeldBusinesses............................................................................................. 5 4 Figure61.TotalNumberofInvestmentsMadeintheLastSixMonths............................................................... 6 4 Figure62.NumberofFollowonInvestmentsMadeintheLastSixMonths........................................................ 6 4 Figure63.NumberofTotalInvestmentsPlannedoverNext12Months............................................................. 7 4 Figure64.NumberofFollowonInvestmentsPlannedoverNext12Months...................................................... 7 4 Figure65.TypeofBusinessforInvestmentsPlannedoverNext12Months ....................................................... 7 . 4 Figure66.GeographicLocationofPlannedInvestmentoverNext12Months.................................................... 9 4 Figure67.UsageofValuationApproaches......................................................................................................... 9 4 Figure68.ItemsRequiredtoCloseOneDeal..................................................................................................... 9 4 Figure69.ExitPlansforPortfolioCompanies..................................................................................................... 0 5 Figure70.WouldSeniorManagersandChiefExecutivesBenefitfromAdditionalLeadershipandSkillsTraining? ................................................................................................................................................................ 0 5
Figure71.SkillsThatAreImportantforSeniorManagementtoHave................................................................ 0 5 Figure72.IssuesFacingPrivatelyHeldBusinesses............................................................................................. 2 5 Figure73.TypicalInvestmentSize..................................................................................................................... 4 5 Figure74.TypeofBusinessforInvestmentsPlannedoverNext12Months ....................................................... 5 . 5 Figure75.TotalNumberofInvestmentsMadeintheLastSixMonths............................................................... 5 5 Figure76.NumberofFollowonInvestmentsMadeintheLastSixMonths........................................................ 5 5 Figure77.NumberofTotalInvestmentsPlannedoverNext12Months............................................................. 5 5 Figure78.NumberofFollowonInvestmentsPlannedoverNext12Months...................................................... 6 5 Figure79.UsageofValuationApproaches......................................................................................................... 7 5 Figure80.UsageofMultiples............................................................................................................................ 7 5 Figure81.ItemsRequiredtoCloseOneDeal..................................................................................................... 8 5 Figure82.ExitPlansforPortfolioCompanies..................................................................................................... 8 5 Figure83.WouldSeniorManagersandChiefExecutivesBenefitfromAdditionalLeadershipandSkillsTraining? ................................................................................................................................................................ 9 5 Figure84.SkillsThatAreImportantforSeniorManagementtoHave................................................................ 0 6 Figure85.IssuesFacingPrivatelyHeldBusinesses............................................................................................. 1 6 Figure86.SBIC(smallbusinessinvestment)Firms............................................................................................. 3 6 Figure87.TypicalInvestmentSize..................................................................................................................... 3 6 Figure88.TypeofBusinessforInvestmentsPlannedoverNext12Months ....................................................... 4 . 6 Figure89.TotalNumberofInvestmentsMadeintheLastSixMonths............................................................... 4 6 Figure90.NumberofFollowonInvestmentsMadeintheLastSixMonths........................................................ 5 6 Figure91.NumberofTotalInvestmentsPlannedoverNext12Months............................................................. 5 6 Figure92.NumberofFollowonInvestmentsPlannedoverNext12Months...................................................... 5 6 Figure93.BorrowerMotivationtoSecureMezzanineFunding(pastsixmonths)............................................... 7 6 Figure94.ItemsRequiredtoCloseOneDeal..................................................................................................... 7 6 Figure95.WouldSeniorManagersandChiefExecutivesBenefitfromAdditionalLeadershipandSkillsTraining? ................................................................................................................................................................ 8 6
Figure96.SkillsThatAreImportantforSeniorManagementtoHave................................................................ 8 6 Figure97.IssuesFacingPrivatelyHeldBusinesses............................................................................................. 0 7 Figure98.DescriptionofLendingEntity............................................................................................................. 1 7 Figure99.ParticipationinGovernmentLoanPrograms..................................................................................... 1 7 Figure100.TypicalInvestmentSize................................................................................................................... 2 7 Figure101.BorrowerMotivationtoSecureFinancing(pastsixmonths)............................................................ 3 7 Figure102.ReasonforDeclinedLoans .............................................................................................................. 5 . 7 Figure105.FeelingIncreasedPressurefromRegulatorstoAvoidMakingRiskyLoans........................................ 5 7 Figure103.WouldSeniorManagersandChiefExecutivesBenefitfromAdditionalLeadershipandSkillsTraining? ................................................................................................................................................................ 5 7 Figure104.SkillsThatAreImportantforSeniorManagementtoHave .............................................................. 6 . 7 Figure106.IssuesFacingPrivatelyHeldBusinesses........................................................................................... 6 7 Figure107.IndustriesServedbyAssetBasedLenders....................................................................................... 9 7 Figure108.TypicalEBITDASizesforCompaniesBooked.................................................................................... 9 7 Figure109.ValuationStandardsUsedtoEstimateLTVRatio............................................................................. 0 8 Figure110.AssetBasedLoansDeclineRate...................................................................................................... 0 8
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EARN A CERTIFICATE IN PRIVATE CAPITAL MARKETS

he Certificate in Private Capital Markets (CIPCM) is a 3-day curriculum-

noveMBer 14-16, 2011 and aPril 18-20, 2012

PePPerdine University Graziadio school of BUsiness and ManaGeMent

CPA, MCLE, CFP Continuing Education Credit Available

Master the leader in you.

Growth Capital Fixated on Large Companies

PEPPERDIN NEPRIVATECAP PITALMARKETSPROJECT|CAPIT TALMARKETSR REPORT20112012

Angel (38% 45 5%)

2011|PEPPERDINEUNIVERSITY YGRAZIADIOSCHO OOLOFBUSINESS SANDMANAGEME ENT.AllRightsRes served.|7

Table 1. Private Capital Market Required Rates of Return

EARN YOUR EDGE

The Certified Merger & Acquisition Advisor Certificate Program

DEC. 9-11, 2011 FEB. 13-17, 2012 or DEC 3-7, 2012

CM&AA sElF stUDY MAtERiAls

Encourage ethical conduct and continued professional growth and development.

regiSter for clASSeS todAy by cAlling 1.877.844.2535

PEPPERDIN NEPRIVATECAP PITALMARKETSPROJECT|CAPIT TALMARKETSR REPORT20112012

BU USINESSA APPRAISE ERSURVE EYINFORMATION

Operatio onalandAss sessmentCh haracteristics s

Appraisers, ,onaverage,ap pplya50%weig ghttoincomea approacheswhe envaluingapri vatelyheldbus siness.

Figu 3. Usage of Valuation Approaches ure s

17% 12% 21% 50% %

Inco omemethod(D DCF,NPV,IRR) Tran nsactionmetho od Publiccompanym method Othe er

2011|PEPPER RDINEUNIVERSITY YGRAZIADIOSCHO OOLOFBUSINESS ANDMANAGEME ENT.AllRightsReserved.|10

PEPPERDIN NEPRIVATECAP PITALMARKETSPROJECT|CAPIT TALMARKETSR REPORT20112012

Responden ntsusingmultiplesbasedapproachesindicate eapreferencef forusingrecast t(adjusted)EBIT TDAmultiples( (34%), followedby yrevenuemultiples(22%).

2011|PEPPER RDINEUNIVERSITY YGRAZIADIOSCHO OOLOFBUSINESS ANDMANAGEME ENT.AllRightsReserved.|11

20% 19.0% 17.0% 14 4.6% 11.1% Minor rityinterest 2 23.2%

30% 34.0% 31.4% 27.8% %

PEPPERDIN NEPRIVATECAP PITALMARKETSPROJECT|CAPIT TALMARKETSR REPORT20112012

$1million $25million $250million 5.5

Responden ntsexpectincreasingcostofca apital,riskprem miums,andsligh htlyimprovingg generalbusines ssconditionsov verthe nextyear.

Dec crease signif ficantly 1% 1% 0% 0% 0% 0% 0% 1% 3%

PEPPERDIN NEPRIVATECAP PITALMARKETSPROJECT|CAPIT TALMARKETSR REPORT20112012

6 65% 15% 13% 1

2011|PEPPER RDINEUNIVERSITY YGRAZIADIOSCHO OOLOFBUSINESS ANDMANAGEME ENT.AllRightsReserved.|13

PEPPERDIN NEPRIVATECAP PITALMARKETSPROJECT|CAPIT TALMARKETSR REPORT20112012

INV VESTMEN NTBANKE ERSURVE EYINFOR RMATION N

Operatio onalandAss sessmentCh haracteristics s

PEPPERDIN NEPRIVATECAP PITALMARKETSPROJECT|CAPIT TALMARKETSR REPORT20112012

46m months 810months 1218 8months

2011|PEPPER RDINEUNIVERSITY YGRAZIADIOSCHO OOLOFBUSINESS ANDMANAGEME ENT.AllRightsReserved.|15

PEPPERDIN NEPRIVATECAP PITALMARKETSPROJECT|CAPIT TALMARKETSR REPORT20112012

Approximately42.7%ofdealsterminated dwithouttrans sactingoverthe epastyear.

Topthreer reasonsfordealsnotclosing:v valuationgapin npricing(29%), economicunce ertainty(18%),andunreasona able Seller/buye erdemands(17%).

2011|PEPPER RDINEUNIVERSITY YGRAZIADIOSCHO OOLOFBUSINESS ANDMANAGEME ENT.AllRightsReserved.|16

PEPPERDIN NEPRIVATECAP PITALMARKETSPROJECT|CAPIT TALMARKETSR REPORT20112012

Figur 16. Usage of Valuation Approache re n es

Incomeappr roach(DCF,NP PV,IRR) Transactiona approach Publiccompa anyapproach

Assetbased approach Other

Figure 17. Usage of Mu ultiples

Table 4. Media Deal Mult Ta an tiples by EBI ITDA Size of Company f

EBITDA $1M $5M $10M $25M $50M $100M

Manufacturing g 4 4.5 5.25 6 6.5 6.5

2011|PEPPER RDINEUNIVERSITY YGRAZIADIOSCHO OOLOFBUSINESS ANDMANAGEME ENT.AllRightsReserved.|17

PEPPERDIN NEPRIVATECAP PITALMARKETSPROJECT|CAPIT TALMARKETSR REPORT20112012

Averagetot talleveragemu ultiplesobserve edbyresponden ntsvariedfrom m1.5to6.

Table 5. Median Total Leve erage Multipl by Size o Company les of

Averagetot talleveragemu ultiplesobserve edbyresponden ntsvariedfrom m1.5to6.