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Pepperdine UniversityPepperdine Digital Commons
Pepperdine Private Capital Markets Report
3-15-2016
2016 Private Capital Markets ReportCraig R. EverettPepperdine University
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Recommended CitationEverett, Craig R.,"2016 Private Capital Markets Report" (2016). Pepperdine University Graziadio School of Business andManagement. http://digitalcommons.pepperdine.edu/gsbm_pcm_pcmr/4
BY DR. CRAIG R. EVERETT Assistant Professor of FinanceDirector, Pepperdine Private Capital Markets Project
2016 Private Capital Markets Report
2016 PRIVATE CAPITAL MARKETS REPORT
Craig R. Everett, PhD
PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | PRIVATE CAPITAL MARKETS REPORT – 2016
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PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT
Director CRAIG R. EVERETT, PhD
Research Support
IRINA SHAYKHUTDINOVA, MBA
Director Marketing & Communications LISA PERRY
Public Relations KP PUBLIC AFFAIRS PATRICK GEORGE
PEPPERDINE UNIVERSITY
Dean David M. Smith, PhD Associate Dean John K. Paglia, PhD (Founding Director)
Melissa Mikolajczak, MA, MBA (Executive Director of Marketing & Communications)
Primary research funding for the 2016 Private Capital Markets Report was made possible through a generous gift from
ED & JEAN WEDBUSH
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FINANCIAL SPONSORS
Ed & Jean Wedbush
Dun & Bradstreet
RESEARCH PARTNERS
International Business Brokers Association (IBBA) M&A Source
RESEARCH SPONSORS
Alliance for Mergers and Acquisitions Advisors
Association for Corporate Growth (ACG) Best Community Banks Association Business Valuation Resources (BVR) California Bankers Association (CBA)
Commercial Finance Association (CFA) Community Bank (LinkedIn Group)
Corporate Banking (LinkedIn Group) Deal Flow Source (LinkedIn Group)
Exit Planning Institute Finance Club (LinkedIn Group)
Graziadio Alumni Network (GAN) International Business Valuation Assoc. (LinkedIn Group)
International Factoring Association (IFA) The Mankoff Company
Mezzanine & Junior Capital Deal Flow (LinkedIn Group) National Association for Small Business Investment Companies (NASBIC)
Risk Management Association (RMA) Valuation (LinkedIn Group)
Venture Capital (LinkedIn Group)
SURVEY DESIGN, DISTRIBUTION, AND OTHER SUPPORT
Robert T. Slee Letitia Green Brett Palmer Leonard Lanzi Nevena Orbach Gary LaBranche Gray DeFevere Brad Triebsch Dennis Gano
Jan Hanssen Gary W. Clark Linh Xavier Vuong Robert Zielinski M. Todd Stemler Michael Nall
Kevin D. Cantrell Patrick George Simon James, PhD Eric Nath Brian Cove Howard J. Lothrop, CFA
Jeri Harmon Rob Brougham
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TABLE OF CONTENTS
INVESTMENT BANKER SURVEY INFORMATION ...................................................................................................... 4
Operational and Assessment Characteristics .................................................................................................. 4
PRIVATE EQUITY SURVEY INFORMATION ............................................................................................................. 12
Operational and Assessment Characteristics ................................................................................................ 12
BANK AND ASSET-BASED LENDING SURVEY INFORMATION ................................................................................ 20
Operational and Assessment Characteristics ................................................................................................ 20
Asset-Based Lending Specific Characteristics ................................................................................................ 27
MEZZANINE SURVEY INFORMATION .................................................................................................................... 29
Operational and Assessment Characteristics ................................................................................................ 29
LIMITED PARTNER SURVEY INFORMATION .......................................................................................................... 37
Operational and Assessment Characteristics ................................................................................................ 37
VENTURE CAPITAL SURVEY INFORMATION .......................................................................................................... 43
Operational and Assessment Characteristics ................................................................................................ 43
ANGEL INVESTOR SURVEY INFORMATION ........................................................................................................... 49
Operational and Assessment Characteristics ................................................................................................ 49
BUSINESS APPRAISER SURVEY INFORMATION ..................................................................................................... 55
Operational and Assessment Characteristics ................................................................................................ 55
BROKER SURVEY INFORMATION .......................................................................................................................... 59
Operational and Assessment Characteristics ................................................................................................ 59
Business Transactions Valued Under $499 Thousand ................................................................................... 67
Business Transactions Valued Under from $500 to $999 Thousand ............................................................. 70
Business Transactions Valued Under from $1 to $1.99 Million .................................................................... 73
Business Transactions Valued Under from $2 to $4.99 Million .................................................................... 77
Business Transactions Valued Under from $5 to $50 Million ....................................................................... 80
FACTOR SURVEY INFORMATION .......................................................................................................................... 86
Operational and Assessment Characteristics ................................................................................................ 86
BUSINESS OWNER SURVEY INFORMATION .......................................................................................................... 92
Operational and Assessment Characteristics ................................................................................................ 92
ABOUT THE AUTHOR ......................................................................................................................................... 109
INDEX OF TABLES ............................................................................................................................................... 110
INDEX OF FIGURES ............................................................................................................................................. 113
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PEPPERDINE PRIVATE CAPITAL MARKETS SURVEY
The Pepperdine private cost of capital (PCOC) survey was originally launched in 2007 and is the first comprehensive and simultaneous investigation of the major private capital market segments. This year’s survey deployed in January 2016, specifically examined the behavior of senior lenders, asset-based lenders, mezzanine funds, private equity groups, venture capital firms, angel investors, privately-held businesses, investment bankers, business brokers, limited partners, and business appraisers. The Pepperdine PCOC survey investigated, for each private capital market segment, the important benchmarks that must be met in order to qualify for capital, how much capital is typically accessible, what the required returns are for extending capital in today’s economic environment, and outlooks on demand for various capital types, interest rates, and the economy in general. Our findings indicate that the cost of capital for privately-held businesses varies significantly by capital type, size, and risk assumed. This relationship is depicted in the Pepperdine Private Capital Market Line, which appears below.
Figure 1. Private Capital Market Required Rates of Return
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
1 quartile Median 3 quartile Median 2015
Banks (3.0% - 6.0%)
ABL (3.0% - 11.0%)
PEG (20.0% - 26.0%)
VC (23.0% - 38.0%)
Mezz (9.0% - 22.0%)
Angel (20.5% - 35.5%)
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The cost of capital data presented below identifies medians, 25th percentiles (1st quartile), and 75th percentiles (3rd quartile) of annualized gross financing costs for each major capital type and its segments. The data reveal that loans have the lowest average rates while capital obtained from angels has the highest average rates. As the size of loan or investment increases, the cost of borrowing or financing from any of the following sources decreases.
Table 1. Private Capital Market Required Rates of Return
1st quartile Median 3rd quartile
Bank ($1M CF loan) 5.5% 6.0% 9.3%
Bank ($5M CF loan) 4.8% 5.5% 6.5%
Bank ($10M CF loan) 4.8% 5.5% 6.0%
Bank ($25M CF loan) 4.5% 5.0% 6.0%
Bank ($50M CF loan) 3.0% 3.0% 3.0%
ABL ($1M loan) 8.8% 11.0% 15.5%
ABL ($5M loan) 4.4% 7.5% 15.3%
ABL ($10M loan) 3.5% 6.3% 14.0%
ABL ($25M loan) 2.8% 3.3% 4.1%
ABL ($50M loan) 2.8% 3.0% 4.0%
Mezz ($1M loan) 19.0% 22.0% 25.0%
Mezz ($5M loan) 15.0% 16.5% 21.0%
Mezz ($10M loan) 14.5% 16.0% 20.0%
Mezz ($25M loan) 14.5% 16.0% 19.3%
Mezz ($50M loan) 14.0% 15.0% 18.0%
Mezz ($100M loan) 9.0% 9.0% 9.0%
PEG ($1M EBITDA) 23.5% 26.0% 38.0%
PEG ($5M EBITDA) 21.0% 25.0% 30.0%
PEG ($10M EBITDA) 20.0% 24.0% 30.0%
PEG ($25M EBITDA) 20.0% 24.0% 29.0%
PEG ($50M EBITDA) 20.3% 22.0% 28.8%
PEG ($100M EBITDA) 17.5% 20.0% 24.5%
VC (Seed) 23.5% 38.0% 43.0%
VC (Startup) 23.0% 33.0% 38.0%
VC (Early Stage) 23.0% 28.0% 37.0%
VC (Expansion) 20.5% 28.0% 30.5%
VC (Later Stage) 18.0% 23.0% 28.0%
Angel (Seed) 25.5% 35.5% 68.0%
Angel (Startup) 25.5% 35.5% 60.5%
Angel (Early Stage) 25.5% 25.5% 55.5%
Angel (Expansion) 18.0% 25.5% 35.5%
Angel (Later Stage) 15.5% 20.5% 28.0%
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INVESTMENT BANKER SURVEY INFORMATION The majority of the 120 respondents to the investment banker survey indicated increasing margin pressure on companies over the last twelve months. They also reported increases in deal flow, presence of strategic buyers, leverage and deal multiples, and slightly worsened business conditions. Domestic economic uncertainty was identified as the most important current and emerging issue facing privately-held businesses, following by access to capital, and government regulations and taxes. Other key findings include:
• Approximately 35% of respondents expect to close six or more deals in the next 12 months.
• The top three reasons for deals not closing were valuation gap (40%), unreasonable seller or buyer demand (21%), and lack of capital to finance (9%).
• Respondents indicated a general imbalance between companies worthy of financing and capital available for
the same. There is a reported shortage of capital for those companies with less than $5 million in EBITDA, but a general surplus for companies with $5 million in EBITDA or more.
• The most popular valuation methods used by respondents when valuing privately-held businesses were discounted future earnings, guideline company transactions, and capitalization of earnings approaches.
• When using multiples to determine the value of a business, the most popular methods used by respondents
when valuing privately-held businesses were recast (adjusted) EBITDA multiple (59%), revenue multiple (13%), cash flow multiple (10%) and EBITDA (unadjusted) multiple (10%) approaches.
Operational and Assessment Characteristics
Approximately 8% of the respondents didn’t close any deals in the last twelve months; 64% closed between one and five deals, while 28% closed six deals or more.
Figure 2. Private Business Sales Transactions Closed in the Last 12 Months
8%
15%
22%
13%
8%6% 6%
3%1% 2%
4%
12%
0%
5%
10%
15%
20%
25%
0 1 2 3 4 5 6 7 8 9 10 Morethan 10
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INVESTMENT BANKER cont.
Figure 3. Business Types That Were Involved in the Transactions Closed in the Last 12 Months
The majority of deals (60%) took 6 to 12 months to close. 11% of closed deals take more than one year to close.
Figure 4. Average Number of Months to Close One Deal
Nearly 63% of respondents expect to close between one and five deals, while 35% expect to close 6 deals or more.
Figure 5. Private Business Transactions Expected to Close in the Next 12 Months
46%
36%
30%27%
25%
21%
21%
15% 11%7% 5%
Manufacturing
Business services
Health care & biotech
Consumer goods & services
Wholesale & distribution
Information technology
Financial services & real estate
Construction & engineering
Basic materials & energy
Media & entertainment
Other
1%
10%
19%24% 23%
13%8%
2% 1%0%5%
10%15%20%25%30%
2 monthsor less
3 - 4months
5 - 6months
7 - 8months
9 - 10months
11 - 12months
13 - 18months
19 - 24months
more than24 months
2%
5%
15%
18%
13% 13%
5%3%
7%
1%3%
17%
0%
5%
10%
15%
20%
0 1 2 3 4 5 6 7 8 9 10 Morethan 10
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INVESTMENT BANKER cont. Approximately 35% of deals terminated without transacting over the past year.
Figure 6. Percentage of Business Sales Engagements Terminated Without Transacting
Top three reasons for deals not closing: valuation gap in pricing (40%), unreasonable seller or buyer demand (22%) and lack of capital to finance (9%).
Figure 7. Reasons for Business Sales Engagements Not Transacting
Of those transactions that didn’t close due to a valuation gap in pricing, approximately 35% had a valuation gap in pricing between 21% and 30%.
Figure 8. Valuation Gap in Pricing for Transactions That Didn’t Close
65%
35%Transacted
Not transacted
40%
22%
9%
7%7%
6% 4% 5%Valuation gap in pricing
Unreasonable seller or buyer demand
Lack of capital to finance
Insufficient cash flow
Economic uncertainty
Seller misrepresentations
No market for business
Other
5%
34%
35%
15%
6% 6%1 - 10% 11 - 20%
21 - 30% 31 - 40%
41 - 50% Greater than 50%
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INVESTMENT BANKER cont. The weights of the various valuation methods used by respondents when valuing privately-held businesses included 32% for discounted future earnings method.
Figure 9. Usage of Valuation Methods
The weights of the various multiple methods used by respondents when valuing privately-held businesses included 59% for recast (adjusted) EBITDA multiple.
Figure 10. Usage of Multiple Methods
Average deal multiples on transactions from the prior twelve months as observed by respondents varied from 4.6 to 8.0.
Table 2. Median Deal Multiples by EBITDA Size of Company
EBITDA Manufacturing Construction
& engineering
Cons. goods & services
Wholesale &
distribution
Business services
Basic materials & energy
Health care & biotech
IT Financial services
Media & entertain. Avg.
$0K - $999K 4.5 3.0 4.0 5.0 5.0 3.0 3.0 8.0 4.5 5.5 4.6
$1M - $4.99M 5.5 4.5 5.5 5.0 5.0 3.0 6.0 8.0 5.0 5.8 5.3
$5M - $9.99M 5.8 5.0 7.0 6.0 5.5 4.0 7.0 8.0 5.5 6.8 6.1
$10M - $24.99M 6.0 5.3 7.0 7.0 6.5 4.0 7.5 8.8 5.5 7.0 6.5
$25M - $49.99M 6.5 5.5 7.5 8.0 7.3 5.3 7.8 9.3 6.0 7.3 7.1
$50M+ 10.0 6.0 10.0 7.3 6.0 8.0 9.5 6.5 8.5 8.0
32%
21% 21%
10%5% 4%
7%
0%5%
10%15%20%25%30%35%
Discountedfuture
earningsmethod
Guidelinecompany
transactionsmethod
Capitalizationof earnings
method
Guidelinepublic
companymethod
Adjusted netasset method
Gut feel Other
59%
13% 10% 10%3% 3% 3%
0%10%20%30%40%50%60%70%
Recast(Adjusted)
EBITDAmultiple
Revenuemultiple
Cash flowmultiple
EBITDA(unadjusted)
multiple
EBIT multiple Net incomemultiple
Other
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INVESTMENT BANKER cont. Average total leverage multiples observed by respondents varied from 2.8 to 5.4.
Table 3. Median Total Leverage Multiples by Size of Company
EBITDA Manufacturing Construction
& engineering
Cons. goods & services
Wholesale &
distribution
Business services
Basic materials & energy
Health care & biotech
IT Financial services
Media & entertain. Avg.
$0K - $999K 3.0 2.0 3.0 2.5 3.0 3.5 2.0 2.0 4.3 2.8
$1M - $4.99M 3.0 2.8 3.5 3.5 3.5 3.5 3.0 2.5 2.8 4.5 3.3
$5M - $9.99M 3.8 3.0 3.5 4.0 4.0 4.0 3.8 3.3 3.8 5.0 3.8
$10M - $24.99M 4.3 3.5 4.5 4.8 4.5 4.5 4.0 4.0 4.8 5.5 4.4
$25M - $49.99M 4.5 5.3 4.8 4.5 6.0 4.0 7.0 5.2
$50M+ 5.0 3.5 6.0 5.0 6.0 4.5 6.0 7.0 5.4
Average senior leverage multiples observed by respondents varied from 2.1 to 5.2.
Table 4. Median Senior Leverage Multiples by Size of Company
EBITDA Manufacturing Construction
& engineering
Cons. goods & services
Wholesale &
distribution
Business services
Basic materials & energy
Health care & biotech
IT Financial services
Media & entertain.
Median, all industries
$0K - $999K 2.3 1.0 2.0 2.0 2.0 2.0 2.0 3.0 3.0 2.1
$1M - $4.99M 3.0 2.0 3.0 2.5 2.5 2.5 2.8 2.5 3.0 3.3 2.7
$5M - $9.99M 3.0 2.0 3.5 3.0 3.0 3.3 3.5 4.0 3.3 3.5 3.2
$10M - $24.99M 3.5 2.8 3.5 4.0 3.0 4.0 4.0 4.0 4.3 4.0 3.7
$25M - $49.99M 4.5 3.0 4.5 4.0 3.0 4.5 4.0 5.0 5.0 4.2
$50M+ 6.0 3.0 7.3 4.5 5.0 4.5 5.0 6.3 5.2
Approximately 35% of business sales transactions closed in the last 12 months involved contingent earnout.
Figure 11. Components of Closed Deals
35%
27%24% 23%
16% 15%
0%
5%
10%
15%
20%
25%
30%
35%
40%
Contingentearnout
Seller Financing /Seller Note
Rollover Lowered multipleof EBITDA
Adjusted amountof equity sold
Other
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INVESTMENT BANKER cont. Approximately 57% of closed business sales transactions over the past 12 months involved strategic buyers.
Figure 12. Percent of Transactions Involved Strategic and Financial Buyers
Approximately 27% of respondents didn’t witness any premium paid by strategic buyers, while 50% saw premiums between 1% and 20%.
Figure 13. Premium Paid by Strategic Buyers Relative to Financial Buyers
Approximately 64% of closed business sales transactions that involved financial buyers over the past 12 months were platform investments.
Figure 14. Percent of Transactions Involved Strategic and Financial Buyers
57%
43%Strategic buyers
Financial buyers
27%
21%
30%
9%
2% 2%
10%
0%5%
10%15%20%25%30%35%
No premium Yes, 0-10%more
Yes, 11-20%more
Yes, 21-30%more
Yes, 31-40%more
Yes, 41-50%more
Yes, >50%more
64%
36%Platform investments
Follow-on investments
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INVESTMENT BANKER cont. Respondents indicated a general imbalance between companies worthy of financing and capital available for the same. There is a reported shortage of capital for those companies with less than $5 million in EBITDA but a general surplus for companies with $5 million in EBITDA or more.
Table 5. Balance of Available Capital with Quality Companies
EBITDA
Companies worthy of financing
GREATLY exceed capital available
Companies worthy of
financing exceed capital available
General balance
Capital available exceeds
companies worthy of financing
Capital available GREATLY exceeds
companies worthy of financing
Score (-2 to 2)
$0K - $999K 37% 29% 16% 14% 4% -0.8 $1M - $4.99M 11% 29% 31% 20% 10% -0.1 $5M - $9.99M 2% 13% 36% 34% 14% 0.4 $10M - $24.99M 0% 7% 28% 28% 38% 1.0 $25M - $49.99M 0% 5% 20% 30% 45% 1.2 $50M - $99.99M 0% 10% 10% 32% 48% 1.2 $100M+ 2% 7% 11% 23% 58% 1.3
Respondents indicated a general difficulty with arranging senior debt for businesses with less than $5 million in EBITDA.
Table 6. How Difficult to Arrange Senior Debt for Transactions over the Past 12 Months
EBITDA Extremely difficult Difficult Somewhat
difficult Neutral Somewhat easy Easy Extremely
easy Score
(-3 to 3) $0K - $999K 28% 30% 11% 17% 6% 6% 2% -1.3
$1M - $4.99M 7% 17% 21% 20% 23% 11% 1% -0.3
$5M - $9.99M 3% 7% 16% 23% 25% 21% 5% 0.4
$10M - $24.99M 2% 5% 14% 26% 16% 30% 7% 0.7
$25M - $49.99M 6% 3% 6% 25% 22% 28% 9% 0.8
$50M - $99.99M 8% 8% 4% 15% 15% 31% 19% 0.9
$100M+ 8% 8% 8% 16% 8% 24% 28% 0.9
Respondents indicated increasing margin pressure on companies over the last twelve months. They also reported increases in deal flow, increased presence of strategic buyers, leverage and deal multiples, and slightly worsened business conditions.
Table 7. General Business and Industry Assessment: Today versus 12 Months Ago
Decreased significantly
Decreased slightly
Stayed about the
same
Increased slightly
Increased significantly
% increase
% decrease
Net increase/ decrease
Deal flow 10% 13% 28% 40% 8% 48% 23% 25%
Leverage multiples 1% 20% 50% 26% 3% 29% 21% 8%
Deal multiples 3% 16% 48% 31% 3% 33% 19% 14%
Amount of time to sell business 0% 8% 56% 29% 7% 35% 8% 27%
Difficulty financing/selling business 1% 16% 48% 31% 5% 36% 17% 19%
General business conditions 6% 28% 40% 23% 3% 26% 34% -8%
Strategic buyers making deals 4% 12% 47% 35% 2% 37% 16% 21%
Margin pressure on companies 1% 6% 44% 38% 12% 50% 7% 43%
Buyer interest in minority transactions 10% 17% 52% 20% 2% 22% 26% -4%
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INVESTMENT BANKER cont. During the next twelve months, respondents expect further increases in deal flow, margin pressure on companies, strategic buyers making deals, decreasing leverage and deal multiples and worsening general business conditions.
Table 8. General Business and Industry Assessment Expectations over the Next 12 Months
Decrease significantly
Decrease slightly
Stay about the same
Increase slightly
Increase significantly % increase %
decrease
Net increase/ decrease
Deal flow 5% 19% 34% 36% 5% 42% 25% 17%
Leverage multiples 3% 29% 55% 10% 2% 12% 33% -21%
Deal multiples 3% 29% 55% 11% 1% 12% 33% -21%
Amount of time to sell business 1% 8% 65% 19% 8% 27% 9% 18%
Difficulty financing/selling business 0% 12% 49% 33% 6% 39% 12% 27%
General business conditions 7% 47% 29% 16% 1% 17% 54% -37%
Strategic buyers making deals 3% 11% 54% 27% 4% 31% 15% 17%
Margin pressure on companies 1% 6% 39% 43% 11% 54% 7% 47%
Buyer interest in minority transactions 10% 15% 63% 11% 2% 13% 25% -13% Respondents believe domestic economic uncertainty is the most important current and emerging issue facing privately-held businesses.
Figure 15. Issues Facing Privately-Held Businesses
30%
21%
18%
11%
8%
4%
2%
6%
28%
13%
14%
13%
15%
6%
9%
2%
0% 5% 10% 15% 20% 25% 30% 35%
Economic uncertainty (Domestic)
Access to capital
Government regulations and taxes
Economic uncertainty (International)
Political uncertainty / elections
Competition from foreign trade partners
Inflation
Other
Today's issue Emerging issue
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PRIVATE EQUITY SURVEY INFORMATION Approximately 45% of the 75 participants who responded to the private equity group survey indicated that they make investments in the $10 million to $25 million range. Nearly 42% of respondents said that demand for private equity is up from twelve months ago, this is down from 63% of respondents indicating increased demand in fall 2014. Other key findings include:
• Respondents indicated flat quality of companies seeking investment. They also reported decrease in expected returns on new investments, slightly worsened general business conditions and increase in expected investment holding period.
• Respondents expect further increases in demand for private equity, decreasing deal multiples, flat value of portfolio companies and worsening business conditions.
• The types of businesses respondents plan to invest in over next 12 months are very diverse with over 18%
targeting business services and another 17% planning to invest in manufacturing.
• Respondents believe domestic economic uncertainty is the most important current and emerging issue facing privately-held businesses.
• The most popular valuation methods used by respondents when valuing privately-held businesses were discounted future earnings, guideline company transactions, and capitalization of earnings approaches.
• When using multiples to determine the value of a business, the most popular methods used by respondents when valuing privately-held businesses were recast EBITDA multiple (38%) and EBITDA multiple (24%).
Operational and Assessment Characteristics
The largest concentration of checks written was in the $10 million - $25 million range (45%), followed by $1 - $5 million (35%), and $5 million - $10 million (35%).
Figure 16. Typical Investment Size
Respondents reported on business practices, and the results are reflected below.
Table 9. PEG Fund Data
1st Quartile Median 3rd Quartile
Vintage year (year in which first investment made) 2012 2013 2014
Size of fund ($ millions) 37.5 175 350
Targeted number of total investments 8 8 13
Target fund return (gross pretax cash on cash annual IRR %) 20% 25% 25%
Expected fund return (gross pretax cash on cash annual IRR%) 18% 23% 25%
8%
35%25%
45%
25%15% 13%
7%
0%10%20%30%40%50%
Less than$1M
$1M -$4.99M
$5M -$9.99M
$10M -$24.99M
$25M -$49.99M
$50M -$99.99M
$100M -$499.99M
$500M+
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PRIVATE EQUITY cont. The types of businesses respondents plan to invest in over next 12 months are very diverse with nearly 18% targeting business services and another 17% planning to invest in manufacturing.
Figure 17. Type of Business for Investments Planned over Next 12 Months
Approximately 69% of respondents made between one and three investments over the last twelve months.
Figure 18. Total Number of Investments Made in the Last 12 Months
Figure 19. Number of Follow-on Investments Made in the Last 12 Months
18%
17%
12%11%
9%
8%
7%6%
3%2%
7%
Business services
Manufacturing
Wholesale & distribution
Health care & biotech
Consumer goods & services
Information technology
Financial services & real estate
Basic materials & energy
Media & entertainment
Construction & engineering
Other
8%
24% 23% 22%
4% 4% 4%1%
4% 5%
0%5%
10%15%20%25%30%
0 1 2 3 4 5 6 7 8 Morethan 10
33%
18% 19%
7% 5% 4%7%
3% 4%
0%5%
10%15%20%25%30%35%
0 1 2 3 4 5 6 7 More than10
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PRIVATE EQUITY cont. The majority (66%) of respondents plan to make one to three investments over the next 12 months.
Figure 20. Number of Total Investments Planned over Next 12 Months
Figure 21. Number of Follow-on Investments Planned over Next 12 Months
Approximately 67% of buyout investments were in the range between $1 million and $10 million of EBITDA.
Figure 22. Size of Buyout Investments in the Last 12 Months
1%
11%
27% 28%
8% 9%7%
3% 1%4%
0%
5%
10%
15%
20%
25%
30%
0 1 2 3 4 5 6 7 10 More than10
21%23%
14%
19%
5%
10%
3%1%
4%
0%
5%
10%
15%
20%
25%
0 1 2 3 4 5 6 7 More than10
9%
28% 29%
18%
6% 5% 4%
0%5%
10%15%20%25%30%35%
$0K - $999KEBITDA
$1M - $4.99MEBITDA
$5M - $9.99MEBITDA
$10M -$24.99MEBITDA
$25M -$49.99MEBITDA
$50M -$99.99MEBITDA
$100M+EBITDA
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PRIVATE EQUITY cont. Average deal multiples for buyout deals for the prior twelve months vary from 5.0 to 8.5 times EBITDA depending on the size of the company. Expected returns vary from 20% to 27.5%.
Table 10. General Characteristics – Buyout Transactions (medians) EBITDA size $0K - $999K
$1M - $4.99M
$5M - $9.99M
$10M - $24.99M
$25M - $49.99M
Number of investments (total) 18 48 55 27 4
Average size of investment (in million USD) 2 3.5 15 25 70
Expected time to exit (years) (median) 3 5 5 5 5
Equity as % of new capital structure (median) 95% 45% 45% 35% 35%
% of total equity purchased (median) 85% 75% 70% 65% 60%
Average deal multiple (multiple of EBITDA) 5.0 6.5 7.0 7.5 8.5 Median total expected returns (gross cash on cash pre-tax IRR) 27.5% 25% 23% 21% 20%
Approximately 39% of non-buyout investments were in the range between $0 million and $1 million of EBITDA.
Figure 23. Size of Non-Buyout Investments in the Last 12 Months
Average expected returns on non-buyout deals vary from 15% to 30%.
Table 11. General Characteristics – Non-Buyout Transactions (medians)
$0K -
$999K $1M -
$4.99M $5M -
$9.99M $10M -
$24.99M $25M -
$49.99M $50M -
$99.99M Number of investments 60 32 9 8 7 14 Average size of investment in million USD 3 7.5 7.5 60 85 85 Expected time to exit (years) (medians) 4 4 3 4 4 4.5 Equity as % of new capital structure 80% 75% 35% 35% 35% 15% % of total equity purchased 55% 45% 35% 30% 15% 15% Average deal multiple (multiple of EBITDA) 5.5 6 6.5 7.5 8.5 n/a Total expected returns (gross cash on cash pre-tax IRR) 30% 25.0% 24% 21% 20% 15%
33%31%
10%13%
6% 6%
0%
5%
10%
15%
20%
25%
30%
35%
$0K - $999KEBITDA
$1M - $4.99MEBITDA
$5M - $9.99MEBITDA
$10M - $24.99MEBITDA
$25M - $49.99MEBITDA
$50M - $99.99MEBITDA
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PRIVATE EQUITY cont. When valuing a business, approximately 22% of the weight is placed on discounted future earnings method.
Figure 24. Usage of Valuation Approaches
The weights of the various multiple methods used by respondents when valuing privately-held businesses included 30% for recast (adjusted) EBITDA multiple and 30% for EBITDA multiple.
Figure 25. Usage of Multiple Methods
22%
19% 19%
11% 11%
8%
5%
0%
5%
10%
15%
20%
25%
Discountedfuture
earningsmethod
Guidelinecompany
transactionsmethod
Capitalizationof earnings
method
Other Guidelinepublic
companymethod
Gut feel Adjusted netasset method
38%
24%
18%
11%
4% 3%1%
0%
5%
10%
15%
20%
25%
30%
35%
40%
Recast EBITDAmultiple
EBITDAmultiple
Cash flowmultiple
Revenuemultiple
EBIT multiple Net incomemultiple
Other
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PRIVATE EQUITY cont. Respondents reported on items required to close one deal.
Figure 26. Items Required to Close One Deal
Respondents reported exit strategies that include selling to another private equity group (32%), selling to a private company (30%), and selling to a public company (25%).
Figure 27. Exit Plans for Portfolio Companies
2810 3 1
73
11 5 2
200
2510 4
0
50
100
150
200
250
Business plans ormemorandums reviewed
Meetings with principalsconducted
Proposal letters or termsheets issued
Letters of intent signed
1st Quartile Median 3rd Quartile
32%
30%
25%
7%4% 2%
Sell to another PEG
Sell to a private company
Sell to a public company
IPO
Management buyout
Other
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PRIVATE EQUITY cont. Most of the respondents believe the number of companies “worthy of financing” exceeds “capital available” for the companies with less than $1M in EBITDA. Whereas for the larger companies, “capital available” exceeds the number of companies “worthy of financing.”
Table 12. The Balance of Available Capital with Quality Companies for the Following EBITDA Size
Companies worthy of financing GREATLY
exceed capital available
Companies worthy of
financing exceed capital available
General balance
Capital available exceeds
companies worthy of financing
Capital available GREATLY exceeds
companies worthy of financing
Score (-2 to 2)
$0K - $999K 13% 30% 37% 12% 8% -0.3
$1M - $4.99M 8% 20% 43% 18% 11% 0.0
$5M - $9.99M 5% 12% 27% 37% 20% 0.6
$10M - $14.99M 8% 8% 22% 22% 39% 0.7
$15M - $24.99M 5% 15% 16% 24% 40% 0.8
$25M - $49.99M 6% 9% 20% 20% 44% 0.9
$50M - $99.99M 7% 6% 20% 20% 46% 0.9
$100M+ 7% 4% 20% 20% 48% 1.1 Relative to twelve months ago, respondents indicated increases in demand for private equity, quality of companies seeking investment, amount of non-control investments and deal multiples. They also reported a decrease in expected returns on new investments, increase in expected investment holding period and slightly worsened general business conditions.
Table 13. General Business and Industry Assessment: Today versus 12 Months Ago
Decreased significantly
Decreased slightly
Stayed about the
same
Increased slightly
Increased significantly
% increase
% decrease
Net increase/ decrease
Demand for private equity 1% 7% 50% 26% 16% 42% 8% 34%
Quality of companies seeking investment 5% 23% 43% 24% 4% 28% 28% 0%
Average investment size 1% 10% 60% 25% 4% 29% 11% 18%
Non-control investments 3% 5% 63% 18% 11% 29% 8% 21%
Expected investment holding period 0% 9% 49% 34% 8% 42% 9% 32%
Deal multiples 0% 16% 31% 36% 16% 53% 16% 36%
Exit opportunities 4% 25% 36% 23% 12% 36% 29% 7%
Expected returns on new investments 4% 41% 38% 14% 4% 18% 45% -27%
Value of portfolio companies 4% 18% 28% 30% 20% 50% 22% 28%
General business conditions 5% 31% 32% 30% 1% 31% 36% -5%
Size of private equity industry 0% 8% 32% 54% 6% 60% 8% 51%
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PRIVATE EQUITY cont. Respondents expect further increases in demand for private equity, decreasing deal multiples, and worsening general business conditions.
Table 14. General Business and Industry Assessment Expectations over the Next 12 Months
Decrease significantly
Decrease slightly
Stay about the same
Increase slightly
Increase significantly
% increase
% decrease
Net increase/ decrease
Demand for private equity 0% 11% 42% 33% 14% 47% 11% 36%
Quality of companies seeking investment 1% 22% 50% 15% 11% 26% 24% 3%
Average investment size 0% 11% 60% 26% 3% 29% 11% 18%
Non-control investments 2% 15% 52% 22% 9% 31% 17% 14%
Expected investment holding period 0% 10% 44% 35% 11% 46% 10% 36%
Deal multiples 1% 38% 43% 14% 4% 18% 39% -21%
Exit opportunities 6% 36% 47% 8% 3% 11% 42% -31%
Expected returns on new investments 0% 32% 47% 18% 3% 21% 32% -11%
Value of portfolio companies 0% 31% 36% 28% 6% 33% 31% 3%
General business conditions 7% 43% 33% 14% 3% 17% 50% -33%
Size of private equity industry 0% 15% 50% 31% 4% 35% 15% 19%
Respondents believe government regulations and taxes is the most important issue facing privately-held businesses today.
Figure 28. Issues Facing Privately-Held Businesses
34%
22%
14%
12%
8%
5%
4%
1%
28%
18%
16%
4%
15%
3%
7%
8%
Economic uncertainty (domestic)
Government regulations and taxes
Economic uncertainty (international)
Access to capital
Political uncertainty / elections
Other
Competition from foreign trade partners
Inflation
0% 5% 10% 15% 20% 25% 30% 35% 40%
Current issue Emerging issue
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BANK AND ASSET-BASED LENDING SURVEY INFORMATION There were 53 responses to the bank and asset-based lending surveys with community banks making up 44% in terms of individual lending function. Over 38% of respondents believe that general business conditions will improve over the next 12 months and over 43% said demand for loans will increase. Other key findings include:
• Over the last twelve months respondents were seeing increased credit quality of borrowers applying for credit, with increase in demand for business loans and improved general business conditions
• Respondents also expect increases in demand for business loans, lending capacity of banks, improving general business conditions, average loan size and loan maturity, and further increase in interest rates.
• Currently, 25% lenders see government regulations and taxes as the top issue facing privately-held businesses,
followed by domestic economic uncertainty (25%) and access to capital (16%).
Operational and Assessment Characteristics
Respondents reported on the type of entity that best describes their lending function.
Figure 28. Description of Lending Entity
The majority (70%) report participating in government loan programs.
Figure 30. Participation in Government Loan Programs
44%
33%
11%11% Community bank
Commercial bank
Corporate bank
Commercial finance company
70%
30%Yes
No
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BANKS cont. The largest concentration of loan sizes was between $1 million and $5 million (21%).
Figure 31. Typical Investment Size
Respondents reported on all-in rates for various industries and loan types.
Table 15. All-in Rates by Loan Size and Industry
Loan size Less than $1M $1M - $4.99M $5M - $9.99M $10M - $24.99M $25M+
Manufacturing 5.5% 5.5% 5.0% 4.5% 3.0%
Consumer goods and services 6.3% 5.5% 5.0% 5.0% 3.0%
Wholesale & distribution 5.5% 5.5% 4.8% 4.5% 3.0%
Business services 6.0% 5.5% 5.0% 4.8% 3.0%
Basic materials & energy 6.0% 5.5% 5.0% 4.0% 3.0%
Health care & biotech 5.5% 5.3% 5.0% 5.0% 3.0%
Information technology 6.0% 6.0% 5.5% 5.3% 3.0%
Financial services 5.5% 5.5% 5.5% 4.5% 3.0%
Typical Fixed-Rate Loan Term (months) 45 60 48 60 54
Table 16. All-in Rates by Loan Type
Less than $1M $1M - $4.99M $5M - $9.99M $10M - $24.99M $25M+
Cash flow loan 6.0% 5.5% 5.5% 5.0% 3.0%
Working capital loan 6.0% 6.0% 5.0% 4.3% 3.0%
Equipment loan 6.0% 5.5% 5.3% 5.0% 3.0%
Real estate loan 5.3% 5.3% 4.5% 4.3% 3.0%
21% 21%
15% 15%
11%9%
7%
2%
0%
5%
10%
15%
20%
25%
Less than $1million
$1-$5million
$6-$10million
$11-$25million
$25-$50million
$50-$100million
$100-$500million
Greater than$500 million
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BANKS cont. Senior leverage multiples are reported below for the various industries and EBITDA sizes.
Table 17. Senior Leverage Multiple by EBITDA Size
EBITDA size $0K - $999K $1M - $4.99M $5M - $9.99M $10M - $24.99M $25M - $49.99M $50M+
Manufacturing 1.1 1.6 1.8 1.8 1.8 1.9
Construction & engineering 1.0 1.3 1.3 1.4 1.5 1.6
Consumer goods & services 1.0 1.5 1.5 1.8 1.8 2.0
Wholesale & distribution 1.1 1.6 1.8 1.8 2.0 2.0
Business services 0.9 1.3 1.3 1.6 1.6 2.0
Basic materials & energy 0.9 1.3 1.3 1.5 1.6 1.8
Healthcare & biotech 0.9 1.3 1.3 1.3 1.6 2.0
Information technology 0.9 1.3 1.4 1.5 1.6 2.0
Financial services 0.9 1.3 1.3 1.4 1.4 1.6
Media & entertainment 1.0 1.4 1.5 1.6 1.6 1.8
Total median 1.0 1.3 1.5 1.5 1.8 2.0
Various fees as reported by lenders are as follows.
Table 18. Fees Charged
1st Quartile Median 3rd Quartile % Reporting
Closing fee 0.5% 0.5% 1.0% 16%
Modification fee 0.0% 0.2% 0.5% 11%
Commitment fee 0.0% 0.5% 0.5% 10%
Underwriting fee 0.0% 0.1% 0.5% 11%
Arrangement fee 0.0% 0.0% 0.4% 10%
Prepayment penalty (yr 1) 1.0% 2.0% 3.3% 16%
Prepayment penalty (yr 2) 0.3% 2.0% 3.0% 14%
Unused line fee 0.0% 0.1% 0.4% 12%
Refinancing was the most commonly described financing by buyers at 34%, followed by expansion at 22%.
Figure 29. Borrower Motivation to Secure Financing (past 12 months)
34%
22%17%
10% 7%10%
0%5%
10%15%20%25%30%35%40%
Refinancingexisting loans or
equity
Expansion Working capitalfluctuations
Financeworseningoperatingconditions
Managementbuyout
Other
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BANKS cont. Total debt-service coverage ratio was the most important factor when deciding whether to invest or not.
Table 19. Importance of Financial Evaluation Metrics
Unimportant Of little importance
Moderately important Important Very
important Score
(1 to 5)
Current ratio 31% 7% 29% 26% 7% 2.7
Senior DSCR or FCC ratio 12% 5% 19% 17% 48% 3.8
Total DSCR or FCC ratio 10% 3% 18% 20% 50% 4.0
Senior debt-to-cash flow 8% 11% 18% 34% 29% 3.7
Total debt-to-cash flow 10% 12% 24% 22% 32% 3.5
Debt-to-net worth 11% 14% 27% 32% 16% 3.3
Table 20. Financial Evaluation Metrics Average Data
Average borrower data Limit not to be exceeded
Current ratio 1.2 1.1
Senior DSCR or FCC ratio 1.3 1.2
Total DSCR or FCC ratio 1.3 1.1
Senior debt to cash flow 1.5 2.0
Total debt to cash flow 1.5 2.0
Debt to net worth 2.3 3.5
Respondents reported on the percentage of loans (by size) that require personal guarantee and collateral.
Table 21. Personal Guarantee and Collateral Percentage of Occurrence by Size of Loan (%)
Loan size Less than $1M $1M - $4.99M $5M - $9.99M $10M - $24.99M $50M - $99.99M $100M+ Personal guarantee 95% 95% 70% 38% 38% 30%
Collateral 95% 93% 90% 88% 73% 25%
Approximately 59% of cash flow applications were declined.
Table 22. Applications Data
Reviewed Offered Booked Declined
Cash flow based 554 78% 74% 59%
Collateral based 284 98% 50% 47%
Real estate 312 81% 59% 21%
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BANKS cont. Approximately 30% of applications were declined due to poor quality of earnings and/or cash flow followed by 22% that were declined due to insufficient collateral.
Figure 33. Reason for Declined Loans
Respondents believe government regulations and taxes and domestic economic uncertainty are the most important issues facing privately-held businesses today.
Figure 34. Issues Facing Privately-Held Businesses
30%
22%
13%
5%
4%
4%
4%
4%
3%
2%
2%
7%
Quality of earnings and/or cash flow
Insufficient collateral
Debt load
Insufficient credit
Size or availability of personal guarantees
Size of company
Weakening industry
Insufficient operating history
Customer concentrations
Economic concerns
Insufficient management team
Other
25%
25%
16%
14%
6%
6%
4%
3%
16%
18%
13%
10%
9%
22%
8%
4%
Government regulations and taxes
Economic uncertainty (domestic)
Access to capital
Economic uncertainty (international)
Competition from foreign trade partners
Political uncertainty / elections
Inflation
Other
Current issue Emerging issue
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BANKS cont. Respondents indicated increases in demand for business loans, percent of loans with personal guarantees, improved general business conditions, credit quality of borrowers applying for credit, decreased loan fees, and number/ tightness of financial covenants.
Table 23. General Business and Industry Assessment: Today versus 12 Months Ago
Decreased
significantly Decreased
slightly
Stayed about the
same
Increased slightly
Increased significantly % increase %
decrease
Net increase/ decrease
Demand for business loans (applications) 10% 14% 36% 34% 6% 40% 24% 16%
Credit quality of borrowers applying for credit 0% 22% 46% 24% 8% 32% 22% 10%
Due diligence efforts 4% 29% 39% 25% 2% 27% 33% -6%
Average loan size 0% 0% 70% 20% 10% 30% 0% 30%
Average loan maturity (months) 0% 12% 45% 33% 10% 43% 12% 31%
Percent of loans with personal guarantees 0% 10% 72% 14% 4% 18% 10% 8%
Percent of loans requiring collateral 0% 13% 77% 9% 2% 11% 13% -2%
Size of interest rate spreads (pricing) 0% 4% 84% 4% 8% 12% 4% 8%
Loan fees 2% 39% 41% 14% 4% 18% 41% -24%
Senior leverage multiples 0% 31% 61% 8% 0% 8% 31% -24%
Total leverage multiples 4% 0% 88% 8% 0% 8% 4% 4%
Focus on collateral as backup means of payment 4% 8% 83% 4% 0% 4% 13% -8%
SBA lending 0% 6% 69% 25% 0% 25% 6% 19%
Lending capacity of bank 0% 26% 53% 16% 5% 21% 26% -5%
General business conditions 0% 4% 52% 36% 8% 44% 4% 40%
Appetite for risk 2% 28% 42% 26% 2% 28% 30% -2%
Loans outstanding 2% 18% 53% 25% 2% 27% 20% 8%
Nonaccrual loans 0% 4% 40% 40% 16% 56% 4% 52%
Number/ tightness of financial covenants 5% 14% 67% 14% 0% 14% 19% -5%
Standard advance rates 0% 8% 72% 20% 0% 20% 8% 12%
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BANKS cont. Respondents expect further increases in demand for business loans, percent of loans with personal guarantees, lending capacity of bank, improving general business conditions, focus on collateral as backup means of payment and number/ tightness of financial covenants, flat leverage multiples, decreasing due diligence efforts and appetite for risk.
Table 24. General Business and Industry Assessment Expectations over the Next 12 Months
Decrease significantly
Decrease slightly
Stay about the same
Increase slightly
Increase significantly
% increase
% decrease
Net increase/ decrease
Demand for business loans (applications) 2% 18% 37% 37% 6% 43% 20% 22%
Credit quality of borrowers applying for credit 0% 14% 55% 29% 2% 31% 14% 16%
Due diligence efforts 2% 31% 55% 12% 0% 12% 33% -20%
Average loan size 0% 2% 67% 29% 2% 31% 2% 29%
Average loan maturity (months) 0% 6% 59% 33% 2% 35% 6% 29%
Percent of loans with personal guarantees 0% 8% 81% 8% 2% 10% 8% 2%
Percent of loans requiring collateral 0% 6% 87% 6% 0% 6% 6% 0%
Size of interest rate spreads (pricing) 0% 4% 87% 4% 4% 9% 4% 4%
Loan fees 0% 14% 55% 31% 0% 31% 14% 16%
Senior leverage multiples 2% 10% 78% 10% 0% 10% 12% -2%
Total leverage multiples 0% 0% 91% 9% 0% 9% 0% 9%
Focus on collateral as backup means of payment 0% 4% 78% 17% 0% 17% 4% 13%
SBA lending 2% 0% 77% 20% 0% 20% 2% 18%
Lending capacity of bank 0% 11% 67% 17% 6% 22% 11% 11%
General business conditions 0% 0% 63% 38% 0% 38% 0% 38%
Appetite for risk 2% 39% 49% 8% 2% 10% 41% -31%
Loans outstanding 2% 18% 65% 14% 0% 14% 20% -6%
Nonaccrual loans 0% 4% 36% 44% 16% 60% 4% 56%
Number/ tightness of financial covenants 0% 9% 64% 27% 0% 27% 9% 18%
Standard advance rates 0% 0% 75% 25% 0% 25% 0% 25%
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BANKS cont.
Asset-Based Lending Specific Characteristics
According to respondents approximately 19% of asset-based loans were issued for manufacturing companies.
Figure 35. Industries Served by Asset-Based Lenders
Approximately 68% of the companies that booked asset-based loans in the last twelve months had EBITDA size less than $5 million.
Figure 30. Typical EBITDA Sizes for Companies Booked
Respondents reported on all-in rates by type and size of current booked loans and the results are reported below.
Table 25. All-in Rates on Current Asset-Based Loans (medians)
Marketable Securities
Accounts Receivable Inventory Equipment Real estate Working
capital
Typical Fixed-Rate Loan
Term (months)
Less than $1 million 7.0% 11.0% 12.0% 12.0% 12.0% 10.0% 12
$1-5 million 5.8% 6.5% 11.5% 8.5% 5.5% 5.5% 22
$5-$10 million n/a 6.3% 11.0% 7.5% 5.0% 4.0% 22
$10-25 million 2.0% 4.0% 4.5% 3.5% 3.5% 2.9% 48
$25-50 million n/a 3.5% 3.5% 3.5% 3.3% 2.9% 36
$50-100 million n/a 3.0% 3.0% 2.9% 2.9% 2.5% 36
19%
17%
16%15%
8%
8%7%
4% 4%
1%1%
Manufacturing
Financial services & real estate
Wholesale & distribution
Consumer goods & services
Construction & engineering
Information technology
Business services
Basic materials & energy
Health care & biotech
Media & entertainment
Other
9%
59%
17%8% 8%
0%20%40%60%80%
Negative EBITDA $0 - $4.99 million inEBITDA
$5 - $9.99 million inEBITDA
$10 - $49.99 millionin EBITDA
$50+ million inEBITDA
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BANKS cont. Respondents reported on standard advance rates and the results are reflected below.
Table 26. Standard Advance Rate (or LTV ratio) for Assets (%)
Typical Loan Upper Limit
1st quartile Median 3rd quartile 1st quartile Median 3rd quartile
Marketable securities 9% 68% 94% 5% 70% 78%
Accounts receivable 84% 85% 85% 85% 90% 90%
Inventory - low quality 15% 25% 30% 16% 30% 50%
Inventory - intermediate quality 31% 40% 50% 40% 50% 65%
Inventory - high quality 50% 65% 70% 60% 65% 75%
Equipment 55% 70% 80% 58% 75% 80%
Real estate 39% 60% 70% 35% 70% 73%
Land 5% 20% 45% 5% 23% 50%
Respondents reported on valuation standards used to estimate LTV ratios.
Figure 37. Valuation Standards Used to Estimate LTV Ratio
According to respondents receivables, inventory and equipment based loans had the smallest decline rate (13%) over the last twelve months.
Figure 31. Asset-Based Loans Decline Rate
Purchase price DepreciatedValue (Book) Face value Fair Market
ValueForced
liquidationOrderly
liquidation Other
Equipment 5% 0% 0% 0% 37% 47% 0%
Real estate 4% 0% 0% 58% 8% 8% 0%
Accounts Receivable 5% 5% 40% 5% 0% 35% 10%
Inventory 10% 5% 5% 0% 5% 70% 5%
0%10%20%30%40%50%60%70%80%
13% 13% 13%
63%
20%
0%10%20%30%40%50%60%70%
Receivables based Inventory based Equipment based Real estate based(only)
A/R + Inventory +Term Financing
Combined
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MEZZANINE SURVEY INFORMATION The majority of the 20 participants that responded to the mezzanine survey typically book deals in the $1 million to $25 million range. Over 20% plan on investing in business services companies over the next 12 months, followed by 18% in manufacturing. Other key findings include:
• Relative to 12 months ago, respondents indicated increases in demand for mezzanine capital, general underwriting standards, and flat leverage multiple. They also reported decreases in credit quality of borrowers, warrant coverage, general business conditions and appetite for risk.
• Respondents expect further increase in demand for mezzanine capital, general underwriting standards, warrant coverage, PIK features, loan fees and expected returns on new investments; and decrease in credit quality of borrowers, leverage multiples, appetite for risk, and general business conditions.
• Approximately 35% of respondents believe access to capital is the most important issue facing privately-held
businesses today.
Operational and Assessment Characteristics
Approximately 40% of respondents are SBIC Firms.
Figure 32. SBIC (small business investment) Firms
The largest concentration of typical loan sizes is between $10 million and $25 million.
Figure 40. Typical Investment Size
40%
60%
Yes
No
20%
30%
45%
65%
15% 15% 15%
5%
0%
10%
20%
30%
40%
50%
60%
70%
Less than$1M
$1M -$4.99M
$5M -$9.99M
$10M -$24.99M
$25M -$49.99M
$50M -$99.99M
$100M -$499.99M
$500+million
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MEZZANINE cont. Respondents reported on business practices and the results are reflected below.
Table 27. Mezzanine Fund Data
1st quartile Median 3rd quartile
Vintage year (year in which first investment made) 2012 2013 2014
Size of fund ($ millions) 75 250 625
Targeted number of total investments 15 18 28
Target fund return (gross pretax cash on cash annual IRR %) 14.5% 16% 20%
Expected fund return (gross pretax cash on cash annual IRR %) 12% 15% 19%
The types of businesses respondents plan to invest in over next 12 months are very diverse with over 20% targeting business services, followed by 18% who plan to invest in manufacturing.
Figure 33. Type of Business for Investments Planned over Next 12 Months
Approximately 50% of respondents made 6 investments or more over the last 12 months.
Figure 34. Total Number of Investments Made in the Last 12 Months
20%
18%
12%12%
9%
7%7%
7%
2% 1% Business services
Manufacturing
Consumer goods & services
Health care & biotech
Information technology
Wholesale & distribution
Financial services & real estate
Basic materials & energy
Media & entertainment
Construction & engineering
5% 5% 5%
15%
5%
15%
5% 5% 5%
10%
25%
0%
5%
10%
15%
20%
25%
30%
0 1 2 3 4 5 6 7 8 10 Morethan 10
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MEZZANINE cont. Figure 35. Number of Follow-on Investments Made in the Last 12 Months
Approximately 47% of respondents plan to make 6 investments or more over the next 12 months.
Figure 36. Number of Total Investments Planned over Next 12 Months
Figure 37. Number of Follow-on Investments Planned over Next 12 Months
15%
10%
20%
25%
5% 5% 5%
15%
0%
5%
10%
15%
20%
25%
30%
0 1 2 3 4 5 6 More than10
5% 5%
26%
16%
5% 5%
11%
26%
0%
5%
10%
15%
20%
25%
30%
2 3 4 5 6 8 10 More than10
11%
6%
33%
22%
6% 6% 6%
11%
0%
5%
10%
15%
20%
25%
30%
35%
0 1 2 3 4 5 7 More than10
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MEZZANINE cont. Approximately 29% of sponsored deals were in the range between $10 million and $25 million of EBITDA.
Figure 38. Size of Sponsored Deals in the Last 12 Months
Results of responses to sponsored deals based on size of investee EBITDA are reported below.
Table 28. Sponsored Deals by EBITDA Size (medians)
EBITDA size $0K - $999K
$1M - $4.99M
$5M - $9.99M
$10M - $24.99M
$25M - $49.99M $50M+
% of deals with warrants 67% 38% 8% 32% 48% 0%
Average loan terms (years) 1.5 5.5 5.5 5.8 6 5 Senior leverage ratio (multiple of EBITDA) 3 2.5 3.0 3.5 3.5 4
Total leverage ratio (multiple of EBITDA) 3 3.5 4.0 4.5 4.8 6
Average loan size ($ millions) 0.5 7.5 15 15 25 95
Cash interest rate 12% 12% 11% 11% 10% 6%
PIK 1% 1% 2% 2% 2.0% 0% Warrants expected return (IRR contribution) 15% 3.0% n/a n/a n/a n/a
Total expected returns (gross cash on pre-tax IRR) 17% 16.5% 15% 15% 15% 9%
Table 29. Investment Type by Size of Investee Company, Sponsored Deals
Sub debt only Blended Sr. / Jr. Other
$0K - $999K EBITDA 0% 100% 0%
$1M - $4.99M EBITDA 29% 43% 29%
$5M - $9.99M EBITDA 29% 29% 43%
$10M - $24.99M EBITDA 40% 20% 40%
$25M - $49.99M EBITDA 50% 17% 33%
6%
21%24%
29%
18%
3%
0%
5%
10%
15%
20%
25%
30%
35%
$0K - $999KEBITDA
$1M - $4.99MEBITDA
$5M - $9.99MEBITDA
$10M - $24.99MEBITDA
$25M - $49.99MEBITDA
$50M+ EBITDA
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MEZZANINE cont. Approximately 56% of sponsored deals were in the range between $1 million and $10 million of EBITDA.
Figure 39. Size of Non-Sponsored Deals in the Last 12 Months
Results of responses to non-sponsored deals based on size of investee EBITDA are reported below.
Table 30. Non-Sponsored Deals by EBITDA Size (medians)
EBITDA size $0K - $999K $1M -
$4.99M $5M - $9.99M $10M - $24.99M
$25M - $49.99M
% of deals with warrants 7% 9% 14% 12% 92% Average loan terms (years) 4.0 5 5 6 6.3 Senior leverage ratio (multiple of EBITDA) 2.0 2.3 2.5 2.5 2.5 Total leverage ratio (multiple of EBITDA) 3 3.5 3.5 3.5 3.5 Average loan size ($ millions) 3 5 7.5 20 60 Cash interest rate 11% 11% 11% 11% 9% PIK 1% 2% 0% 1.5% 2% Warrants expected return (IRR contribution) 10% 4% 5.5% 8% 8% Total expected returns (gross cash on pre-tax IRR) 23% 22% 18% 18.5% 16%
Table 31. Investment Type by Size of Investee Company, Sponsored Deals
Senior debt only Sub debt only Blended Sr. / Jr. Other
$0K - $999K EBITDA 33% 33% 33% 0%
$1M - $4.99M EBITDA 40% 20% 20% 20%
$5M - $9.99M EBITDA 20% 20% 40% 20%
$10M - $24.99M EBITDA 0% 25% 50% 25%
$25M - $49.99M EBITDA 0% 50% 50% 0%
20%
32%
24%
16%
8%
0%
5%
10%
15%
20%
25%
30%
35%
$0K - $999K EBITDA $1M - $4.99MEBITDA
$5M - $9.99MEBITDA
$10M - $24.99MEBITDA
$25M - $49.99MEBITDA
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MEZZANINE cont. Management or owner buyout was reported by 22% of respondents as a motivation to secure mezzanine funding, followed by acquisition loan at 21%.
Figure 40. Borrower Motivation to Secure Mezzanine Funding (past 12 months)
Figure 41. Items Required to Close One Deal
Total debt service coverage ratio was the most important factor when deciding whether to invest or not, followed by total debt-to-cash flow ratio.
Table 32. Importance of Financial Evaluation Metrics
Unimportant Of little importance
Moderately important Important Very
important Score
(1 to 5) Senior DSCR or FCC ratio 12% 6% 35% 29% 18% 3.35 Total DSCR or FCC ratio 0% 0% 12% 29% 59% 4.47 Senior debt-to-cash flow ratio 0% 6% 39% 39% 17% 3.67 Total debt-to-cash flow ratio 0% 6% 11% 22% 61% 4.39
22%
21%
21%
13%
6%5% 8%
Management or owner buyout
Acquisition loan
Financing growth or construction
Refinancing
Finance worsening operations conditions or distress
Working capital fluctuations
Other
239 3.5 1
48
157 3
148
2011 5
0
20
40
60
80
100
120
140
160
Business plans ormemorandums reviewed
Meetings with principalsconducted
Proposal letters or termsheets issued
Letters of intent signed
1st Quartile Median 3rd Quartile
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MEZZANINE cont.
Table 33. Financial Evaluation Metrics Average Data
Average borrower data Limit not to be exceeded
Senior DSCR or FCC ratio 1.5 1.2
Total DSCR or FCC ratio 1.4 1.1
Senior debt to cash flow ratio 3 3.6
Total debt to cash flow ratio 4.2 4.9
Respondents believe access to capital is the most important issue facing privately-held businesses today.
Figure 50. Issues Facing Privately-Held Businesses
35%
35%
12%
8%
8%
4%
0%
0%
4%
36%
14%
18%
7%
7%
7%
7%
0% 5% 10% 15% 20% 25% 30% 35% 40%
Access to capital
Economic uncertainty (Domestic)
Economic uncertainty (International)
Government regulations and taxes
Political uncertainty / elections
Competition from foreign trade partners
Inflation
Other
Current issue Emerging issue
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MEZZANINE cont. Relative to 12 months ago, respondents indicated increases in demand for mezzanine capital, general underwriting standards and flat expected returns on new investments. They also reported decreases in credit quality of borrowers, warrant coverage, general business conditions, and appetite for risk.
Table 34. General Business and Industry Assessment: Today versus 12 Months Ago
Decreased
significantly Decreased
slightly
Stayed about the
same
Increased slightly
Increased significantly % increase %
decrease
Net increase/ decrease
Demand for mezzanine capital 0% 17% 39% 39% 6% 44% 17% 28%
Credit quality of borrowers seeking investment 6% 50% 33% 6% 6% 11% 56% -44%
Average investment size 0% 11% 56% 28% 6% 33% 11% 22%
Average investment maturity (months) 0% 0% 94% 6% 0% 6% 0% 6%
General underwriting standards 0% 6% 44% 50% 0% 50% 6% 44%
Warrant coverage 0% 7% 93% 0% 0% 0% 7% -7%
PIK features 0% 0% 94% 6% 0% 6% 0% 6%
Loan fees 0% 0% 100% 0% 0% 0% 0% 0%
Leverage multiples 0% 28% 44% 28% 0% 28% 28% 0%
Expected returns on new investments 0% 17% 61% 22% 0% 22% 17% 6%
General business conditions 6% 56% 28% 11% 0% 11% 61% -50%
Appetite for risk 0% 44% 39% 17% 0% 17% 44% -28%
Respondents expect further increases in all business characteristics except general underwriting standards, warrant coverage, loan fees and expected returns on new investments.
Table 35. General Business and Industry Assessment Expectations over the Next 12 Months
Decrease
significantly Decrease slightly
Stay about the same
Increase slightly
Increase significantly % increase %
decrease
Net increase/ decrease
Demand for mezzanine capital 0% 0% 17% 61% 22% 83% 0% 83%
Credit quality of borrowers seeking investment 11% 22% 50% 17% 0% 17% 33% -17%
Average investment size 0% 0% 67% 33% 0% 33% 0% 33%
Average investment maturity (months) 0% 0% 94% 6% 0% 6% 0% 6%
General underwriting standards 0% 0% 44% 50% 6% 56% 0% 56%
Warrant coverage 0% 0% 85% 15% 0% 15% 0% 15%
PIK features 0% 0% 71% 29% 0% 29% 0% 29%
Loan fees 0% 0% 88% 12% 0% 12% 0% 12%
Leverage multiples 0% 44% 50% 6% 0% 6% 44% -39%
Expected returns on new investments 0% 6% 50% 39% 6% 44% 6% 39%
General business conditions 0% 59% 24% 18% 0% 18% 59% -41%
Appetite for risk 6% 18% 29% 41% 6% 47% 24% 24%
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LIMITED PARTNER SURVEY INFORMATION Approximately 26% of the 39 respondents in the limited partner survey reported direct investments as being the best risk/return trade-off investment class and another 23% reported real estate funds as being the best risk/return trade-off investment class. When asked about which industry currently offers the best risk/return trade-off, 25% of respondents reported information technology, followed by 22% reporting business services, and another 9% reporting basic materials and energy. Other key findings include:
• On average respondents target to allocate 21% of their assets to buyout private equity, 20% to real estate funds and 13% to direct investments. Respondents expect the highest returns of 12% from venture capital, 12% from growth private equity, 11% from investments in buyout private equity, and 9% from direct investments.
• Respondents indicated increased allocation to real estate funds, and direct investments, and decreased
allocation to all other alternative assets in the last twelve months. They also reported worsened business conditions and expected returns on new investments.
• Respondents also expect further increases in allocation to direct investments, and real estate funds, slightly
improving business conditions and increasing expected returns. Operational and Assessment Characteristics
Approximately 26% of respondents indicated being family office followed by fund of funds (26%).
Figure 42. Entity Type
Approximately 23% of respondents reported their asset category being less than $50 million, while 28% were between $50 million and $500 million.
Figure 43. Assets under Management or Investable Funds
26%
26%18%
8%8%
3%11%
Family office
Fund of funds
Private investor
Public pension fund
Investment company
Bank or investment bank
Other
23% 28%5%
18%5%
21%
0%20%40%60%80%
100%
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LP cont. Respondents reported on their % of total asset allocations for “Alternative Assets”.
Figure 44. Current Asset Allocation for "Alternative Assets" (% of total portfolio)
Figure 45. Target Asset Allocation for "Alternative Assets" (% of total portfolio)
On average, respondents target to allocate 21% of their assets to buyout private equity, 20% to real estate funds, and 13% to direct investments.
Figure 46. Target Asset Allocation by Assets
23%8% 10% 5% 5% 5% 5% 3% 3%
33%
0%20%40%60%80%
100%
1% - 10% 11%- 20% 21% -30%
31% -40%
41% -50%
51% -60%
61% -70%
71% -80%
81% -90%
91% -100%
3%15% 10% 10% 5% 13%
3% 3% 3% 3%
33%
0%20%40%60%80%
100%
0% 1% - 10% 11%-20%
21% -30%
31% -40%
41% -50%
51% -60%
61% -70%
71% -80%
81% -90%
91% -100%
21%
20%
13%
10%
9%
8%
6%
4%
3%
2%
0% 5% 10% 15% 20% 25%
Private equity - buyout
Real estate fund
Direct investments
Hedge fund
Venture capital
Private equity - growth
Private equity - distressed
Mezzanine
Secondary funds
Fund of funds
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LP cont. On average, respondents expect the highest returns from investments in venture capital, growth private equity, buyout private equity and direct investments.
Figure 47. Annual Return Expectations for New Investments
Approximately 26% of the 39 respondents in the limited partner survey reported direct investments as being the best risk/return trade-off investment class and another 23% reported real estate funds as being the best risk/return trade-off investment class.
Figure 48. Assets with the Best Risk/Return Trade-off Currently
12% 12% 11%9%
8%6%
4% 4% 4% 3%
0%2%4%6%8%
10%12%14%
26%
23%15%
13%
8%5%
5%3% 3%
Direct investments
Real estate funds
Private equity - distressed
Private equity - buyouts
Private equity - growth
Venture capital
Hedge fund
Mezzanine investment
Secondary funds
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LP cont. When asked about which industry currently offers the best risk/return trade-off, 25% of respondents reported information technology, followed by 22% reporting business services, and another 9% reporting basic materials and energy.
Figure 49. Industry with the Best Risk/Return
In regard to the geographic regions with the best risk/return trade-offs, 84% of respondents reported North America.
Figure 50. Geographic Regions of the World Offering the Best Risk/Return Tradeoff Currently
In regard to the geographic regions with the best risk/return trade-offs in the US, 35% of respondents reported West Coast, and 13% reported Southeast.
Figure 60. Geographic Regions in the US Offering the Best Risk/Return Tradeoff Currently
25%
22%9%
9%
6%3%
3%3% 19%
Information technologyBusiness servicesBasic materials & energyHealth care & biotechManufacturingConstruction & engineeringConsumer goods & servicesFinancial servicesOther
84%
3% 3%3%8%
North America
Western Europe
Emerging Asia
Latin America
Other
35%
13%13%
13%
13%9% 4%
West Coast
Southeast
South
Mountain
Midwest
New England
Mid-Atlantic
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LP cont. According to respondents, general partner and specific strategy are the most important factors when evaluating investment followed by historical fund performance on all funds.
Table 36. Importance of Factors When Evaluating
Unimportant Of little importance
Moderately important Important Very important Score
(1 to 5)
Historical fund performance on all funds 3% 3% 23% 41% 31% 4.0
Returned capital from most recent fund (Distribution to Paid-in or DPI) 3% 3% 37% 42% 16% 3.7
Residual value of most recent fund (Residual Value to Paid-in or RVPI) 8% 0% 47% 37% 8% 3.4
General partner 0% 3% 11% 11% 76% 4.6
Specific strategy 3% 3% 13% 33% 49% 4.2
Specific location 3% 21% 45% 18% 13% 3.2
Gut feel/instinct 3% 15% 31% 36% 15% 3.5
Respondents believe international economic uncertainty is the most important current and emerging issue facing privately-held businesses.
Figure 51. Issues Facing Privately-Held Businesses
27%
25%
17%
12%
8%
5%
3%
2%
18%
18%
15%
6%
17%
5%
9%
12%
0% 5% 10% 15% 20% 25% 30%
Economic uncertainty (International)
Economic uncertainty (Domestic)
Government regulations and taxes
Access to capital
Competition from foreign trade partners
Other
Political uncertainty / elections
Inflation
Current issue Emerging Issue
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LP cont. Respondents indicated increased allocation to direct investments and real estate funds, and decreased allocation to all other alternative assets in the last twelve months. They also reported decreased general business conditions and expected returns on new investments.
Table 37. General Business and Industry Assessment: Today versus 12 Months Ago
Characteristics Decreased significantly
Decreased slightly
Stayed about the
same
Increased slightly
Increased significantly
% increase
% decrease
Net increase/ decrease
Allocation to venture capital 3% 19% 69% 8% 0% 8% 22% -14%
Allocation to private equity 0% 11% 78% 11% 0% 11% 11% 0%
Allocation to mezzanine 0% 10% 90% 0% 0% 0% 10% -10%
Allocation to hedge funds 10% 17% 70% 3% 0% 3% 27% -23%
Allocation to secondary funds 6% 9% 81% 3% 0% 3% 16% -13%
Allocation to real estate funds 0% 9% 65% 18% 9% 26% 9% 18%
Direct investments 0% 6% 51% 37% 6% 43% 6% 37%
General business conditions 3% 24% 59% 14% 0% 14% 27% -14%
Expected returns on new capital deployed 0% 30% 49% 19% 3% 22% 30% -8%
Respondents also expect further increases in allocation to direct investments, and real estate funds, improving business conditions and increasing expected returns.
Table 38. General Business and Industry Assessment Expectations over the Next 12 Months
Characteristics Decrease significantly
Decrease slightly
Stay about the same
Increase slightly
Increase significantly % increase % decrease
Net increase/ decrease
Allocation to venture capital 3% 19% 72% 6% 0% 6% 22% -17%
Allocation to private equity 0% 21% 64% 10% 5% 15% 21% -5%
Allocation to mezzanine 0% 16% 77% 6% 0% 6% 16% -10%
Allocation to hedge funds 9% 22% 63% 6% 0% 6% 31% -25%
Allocation to secondary funds 6% 15% 76% 3% 0% 3% 21% -18%
Allocation to real estate funds 0% 9% 62% 21% 9% 29% 9% 21%
Direct investments 0% 0% 69% 23% 9% 31% 0% 31%
General business conditions 3% 19% 47% 31% 0% 31% 22% 8%
Expected returns on new capital deployed 0% 14% 54% 29% 3% 31% 14% 17%
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VENTURE CAPITAL SURVEY INFORMATION Of the 65 participants who responded to the venture capital survey, approximately 66% of respondents expect an increasing size of the venture capital industry. The majority (69%) of respondents plan to make four investments or more over the next 12 months. Other key findings include:
• The types of businesses respondents plan to invest in the next 12 months are very diverse with over 38% targeting information technology and another 22% planning to invest in health care and biotech.
• Respondents’ exit strategies include selling to a public company (35%) followed by selling to a private company (30%).
• Respondents believe access to capital is the most important issue facing privately-held businesses today. Operational and Assessment Characteristics
Approximately 50% of respondents made five investments or more over the last twelve months.
Figure 52. Total Number of Investments Made in the Last 12 Months
Figure 53. Number of Follow-on Investments Made in the Last 12 Months
11%9%
6%9%
14%
8%5% 5%
11%
2%
20%
0%
5%
10%
15%
20%
25%
0 1 2 3 4 5 6 7 8 10 Morethan 10
8%
13%15%
11%
18%
10%8%
2%
5%
11%
0%
5%
10%
15%
20%
0 1 2 3 4 5 6 8 10 Morethan 10
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VENTURE CAPITAL cont. The majority (69%) of respondents plan to make four investments or more over the next 12 months.
Figure 54. Number of Total Investments Planned over Next 12 Months
Figure 55. Number of Follow-on Investments Planned over Next 12 Months
Respondents reported on business practices and the results are reflected below.
Table 39. VC Fund Data
1st quartile Median 3rd quartile
Vintage year (year in which first investment made) 2008 2013 2014
Size of fund ($ millions) $10 $38 $125
Targeted number of total investments 13 18 28
Target fund return (gross pretax cash on cash annual IRR %) 25% 25% 35%
Expected fund return (gross pretax cash on cash annual IRR %) 15% 25% 35%
The types of businesses respondents plan to invest in over next 12 months are very diverse with over 39% targeting Information technology, and another 22% planning to invest in health care and biotech.
Figure 56. Type of Business for Investments Planned over Next 12 Months
6% 5%9% 11%
16%11%
6%2%
13%
6%
16%
0%5%
10%15%20%
0 1 2 3 4 5 6 7 8 10 Morethan 10
10% 10% 11% 13% 15% 13%
8%
2%5% 5%
10%
0%
5%
10%
15%
20%
0 1 2 3 4 5 6 7 8 10 Morethan 10
38%
22%
8% 8% 6% 6% 3% 2% 1%5%
0%
10%
20%
30%
40%
Informationtechnology
Health care &biotech
Consumer goods& services
Businessservices
Basic materials& energy
Financialservices
Media &entertainment
Manufacturing Wholesale &distribution
Other
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VENTURE CAPITAL cont. Respondents reported on a variety of stats pertaining to their investments.
Table 40. General Information on Investments by Company Stages
Seed Startup Early Stage Expansion Later Stage
Number of Investments Made in Last twelve months
146 102 154 64 29
Average Size of Investment ($ million)
1st Quartile 0.5 0.5 0.5 0.5 1.75
Median 0.5 0.5 1.5 1.5 2.5
3rd Quartile 0.5 1.5 1.5 3.25 8.5
Average % of Total Equity Purchased (fully diluted basis)
1st Quartile 5% 5% 5% 5% 5%
Median 5% 10% 15% 5% 5%
3rd Quartile 15% 15% 15% 15% 5%
Total expected Returns (gross cash on cash pretax IRR) on new investments 1st Quartile 23% 24% 23% 18% 18%
Median 38% 33% 28% 28% 23%
3rd Quartile 43% 36% 38% 30% 28%
Expected Time to Exit (years)
1st Quartile 4.3 4 3 3 3
Median 5 5 4 4 3
3rd Quartile 5 6 6 5 3
Average company 'pre-money' value ($ million)
1st Quartile 1.8 3.3 7.5 15.0 52.5
Median 4 5 7.5 25 100
3rd Quartile 7.5 15 25 55 100
Average Company Value at Time of Investment (post-money $ millions) 1st Quartile 1.0 1.3 7.0 20.0 25.0
Median 3.0 8.0 15.0 40.0 70.0
3rd Quartile 8.0 10.0 15.0 72.5 100.0
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VENTURE CAPITAL cont. Respondents reported on where they plan to invest over the next 12 months. The results reflect investment throughout the U.S.
Figure 57. Geographic Location of Planned Investment over Next 12 Months
When valuing the company, approximately 22% of respondents use gut feel when valuing privately-held businesses.
Figure 58. Usage of Valuation Methods
The weights of the various multiple methods used by respondents when valuing privately-held businesses included 50% for revenue multiple and 12% for recast (adjusted) EBITDA multiple methods.
Figure 59. Usage of Multiple Methods
31%
15%11% 10% 8% 6% 6%
2% 1%0%
10%
20%
30%
40%
West Coast NewEngland
Mid-Atlantic Midwest Southeast Mountain Outside ofUS
Great Lakes South
22%18% 18% 16%
9%5%
11%
0%
5%
10%
15%
20%
25%
Gut feel Guidelinepublic
companymethod
Guidelinecompany
transactionsmethod
Discountedfuture
earningsmethod
Capitalizationof earnings
method
Adjusted netasset method
Other
50%
12% 12% 11%5% 5% 6%
0%10%20%30%40%50%60%
Revenuemultiple
Recast(Adjusted)
EBITDAmultiple
EBITDA(unadjusted)
multiple
Cash flowmultiple
EBIT multiple Net incomemultiple
Other
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VENTURE CAPITAL cont. Respondents reported on items required to close one deal.
Figure 70. Items Required to Close One Deal
Respondents’ exit strategies include selling to a public company (35%) followed by selling to a private company (30%).
Figure 60. Exit Plans for Portfolio Companies
Respondents believe access to capital is the most important issue facing privately-held businesses today.
Figure 61. Current Issues Facing Privately-Held Businesses
15 5 2 1
4810 2 1
150
20 4 2.50
50
100
150
200
Business plans ormemorandums reviewed
Meetings with principalsconducted
Proposal letters or termsheets issued
Letters of intent signed
1st Quartile Median 3rd Quartile
35%30%
13%7% 5% 3% 2% 1%
6%
0%
10%
20%
30%
40%
Sell to a publiccompany
Sell to aprivate
company
IPO Sell to privateequity group
Liquidate orbankrupt
Managementbuyout
Sell to anotherVC
Sell to a hedgefund
Other
33%
24%
14%
11%
7%
4%
4%
5%
22%
22%
11%
13%
13%
7%
6%
5%
0% 5% 10% 15% 20% 25% 30% 35%
Access to capital
Economic uncertainty (Domestic)
Government regulations and taxes
Political uncertainty / elections
Economic uncertainty (International)
Competition from foreign trade partners
Inflation
Other
Today issue Emerging issue
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VENTURE CAPITAL cont. Respondents indicated increases in demand for venture capital, follow-on investments, value of portfolio companies, presence of super angels in space formerly occupied by VCs, and worsened general business conditions.
Table 41. General Business and Industry Assessment: Today versus 12 Months Ago
Decreased significantly
Decreased slightly
Stayed about the
same
Increased slightly
Increased significantly
% increase
% decrease
Net increase/ decrease
Demand for venture capital 0% 8% 37% 29% 27% 56% 8% 48%
Quality of companies seeking investment 3% 10% 49% 24% 14% 38% 13% 25%
Follow-on investments 0% 9% 36% 41% 14% 55% 9% 45%
Average investment size 2% 11% 55% 19% 14% 33% 13% 20%
Exit opportunities 6% 33% 34% 20% 6% 27% 39% -13%
Time to exit deals 2% 11% 39% 36% 13% 48% 13% 36%
Expected returns on new investments 2% 15% 50% 26% 8% 34% 16% 18%
Value of portfolio companies 0% 17% 24% 38% 21% 59% 17% 41%
General business conditions 6% 36% 34% 19% 5% 23% 42% -19%
Presence of super angels in space formerly occupied by VCs 5% 19% 29% 34% 13% 47% 24% 23%
Size of venture capital industry 3% 16% 38% 33% 10% 43% 19% 24%
Appetite for risk 13% 32% 35% 11% 8% 19% 45% -26%
Respondents expect further worsening general business conditions.
Table 42. General Business and Industry Assessment Expectations over the Next 12 Months
Decrease significantly
Decrease slightly
Stay about the same
Increase slightly
Increase significantly
% increase
% decrease
Net increase/ decrease
Demand for venture capital 0% 2% 33% 48% 18% 66% 2% 64%
Quality of companies seeking investment 3% 7% 61% 23% 7% 30% 10% 20%
Follow-on investments 0% 11% 38% 41% 10% 51% 11% 39%
Average investment size 2% 23% 49% 25% 2% 26% 25% 2%
Exit opportunities 2% 39% 39% 20% 0% 20% 41% -21%
Time to exit deals 3% 2% 45% 40% 10% 50% 5% 45%
Expected returns on new investments 0% 13% 56% 20% 11% 31% 13% 18%
Value of portfolio companies 0% 30% 30% 31% 10% 41% 30% 11%
General business conditions 5% 39% 36% 18% 2% 20% 44% -25%
Presence of super angels in space formerly occupied by VCs 13% 27% 35% 18% 7% 25% 40% -15%
Size of venture capital industry 3% 48% 34% 10% 5% 15% 51% -36%
Appetite for risk 22% 38% 27% 13% 0% 13% 60% -47%
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ANGEL INVESTOR SURVEY INFORMATION Of the 54 participants who responded to the angel investor survey, the majority (56%) of respondents plan to make between one and four investments. Other key findings include:
• Approximately 30% of respondents base valuations on gut feel when valuing privately-held businesses.
• When using multiples to determine the value of a business, the most popular methods used by respondents were revenue multiple (37%), EBITDA multiple (20%) and net income multiple (12%).
• The types of businesses respondents plan to invest in over next 12 months are very diverse with 36% targeting information technology and another 20% planning to invest in health care or biotech.
• Respondents indicated a sharp increase in demand for angel capital, increases in size of angel industry, follow-on investments, and quality of companies seeking investment. They also reported worsened and decreased expected returns on new investments.
• Respondents’ exit strategies include selling to a public company (38%) and selling to a private company (30%).
Operational and Assessment Characteristics
Approximately 44% of respondents made either five investments or more over the last twelve months.
Figure 62. Total Number of Investments Made in the Last 12 Months
Figure 63. Number of Follow-on Investments Made in the Last 12 Months
11%9%
17%
11%
7%
13%
6% 6%4%
6%
11%
0%2%4%6%8%
10%12%14%16%18%
0 1 2 3 4 5 6 7 8 9 Morethan 10
25% 25%23%
4% 4%6%
4% 4%2%
4%
0%
5%
10%
15%
20%
25%
30%
0 1 2 3 4 5 6 7 8 9
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ANGEL cont. The majority (44%) of respondents plan to make between two and four investments over the next 12 months.
Figure 64. Number of Total Investments Planned over Next 12 Months
Figure 65. Number of Follow-on Investments Planned over Next 12 Months
The types of businesses respondents plan to invest in over next 12 months are very diverse with over 36% targeting information technology and another 20% planning to invest in health care & biotech.
Figure 66. Type of Business for Investments Planned over Next 12 Months
2%
11%
28%
11%
6%
11%
17%
4% 2% 2%
7%
0%5%
10%15%20%25%30%
0 1 2 3 4 5 6 7 8 10 Morethan 10
22%
27%
14% 14%
6%8%
4%2% 2% 2%
0%
5%
10%
15%
20%
25%
30%
0 1 2 3 4 5 7 8 10 Morethan 10
36%
20%10%
8%
8%5% 4%
4% 2% 1% 2% Information technologyHealth care & biotechManufacturingMedia & entertainmentBusiness servicesConsumer goods & servicesBasic materials & energyFinancial services & real estateWholesale & distributionConstruction & engineeringOther
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ANGEL cont. Respondents reported on a variety of stats pertaining to their investments.
Table 43. General Information on Investments by Company Stages Seed Startup Early Stage Expansion Later Stage
Number of Investments Made in Last twelve months
1st Quartile 144 77 40 12 3
Average Size of Investment (in thousands)
1st Quartile $25 $25 $25 $25 $62.5 Median $25 $75 $75 $150 $250 3rd Quartile $150 $250 $250 $275 $500 Average % of Total Equity Purchased (fully diluted basis)
1st Quartile 3% 2% 2% 1.8% 1.5%
Median 5% 5% 2.5% 3.5% 2%
3rd Quartile 11% 11% 8.5% 5.5% 3.5% Total EXPECTED Returns (gross cash on cash pretax IRR) on New Investments (%)
1st Quartile 25% 25% 25% 17.5% 15%
Median 35% 35% 25% 25% 20%
3rd Quartile 67.5% 60% 55% 35% 27.5%
Expected Time to Exit (years)
1st Quartile 4,5 4 3 4 5
Median 5 5 4 5 5
3rd Quartile 6 5 5 6.5 5
Average company 'pre-money' value (in thousands)
1st Quartile $750 $750 $1,000 $1,500 $4,500 Median $750 $1,500 $2,500 $7,500 $10,000 3rd Quartile $750 $2,750 $3,500 $7,500 $10,000 Average Company Value at Time of Investment (post-money $ thousands)
1st Quartile $1,000 $1,500 $4,000 $7,500 $7,500 Median $2,000 $3,000 $6,000 $20,000 $20,000 3rd Quartile $4,000 $4,250 $8,000 $20,000 $20,000
Respondents reported on where they plan to invest over the next 12 months. The results reflect investment throughout the U.S.
Figure 67. Geographic Location of Planned Investment over Next 12 Months
40%
12%10%
10%
9%
7% 6% 5%
1%
West Coast Mid-Atlantic
Midwest Southeast
Outside of US Mountain
New England Great Lakes
South
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ANGEL cont. Respondents reported on their geographical limits for investments.
Figure 68. Geographical Limit for Investment
Approximately 30% of respondents base valuations on gut feel when valuing privately-held businesses followed by discounted future earnings method (12%).
Figure 80. Usage of Valuation Methods
The weights of the various multiple methods used by respondents when valuing privately-held businesses included 37% for revenue multiple and 20% for EBITDA multiple methods.
Figure 69. Usage of Multiple Methods
11% 7%
11%
19%
52%
2-hour drive
4-hour drive
State/province
Region
No restriction
30%
12%12%9%
5%4%
28%Gut feel
Discounted future earnings method
Guideline company transactions method
Capitalization of earnings method
Guideline public company method
Adjusted net asset method
Other
37%
20%12%
11%
9%
1%10% Revenue multiple
EBITDA multiple
Net income multiple
Cash flow multiple
Recast EBITDA multiple
EBIT multiple
Other
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ANGEL cont. Respondents reported on items required to close one deal.
Figure 70. Items Required to Close One Deal
Respondents’ exit strategies include selling to a public company (38%) and selling to a private company (30%).
Figure 71. Exit Plans for Portfolio Companies
Respondents believe access to capital is the most important current issue facing privately-held businesses.
Figure 84. Issues Facing Privately-Held Businesses
5 4 1 120
5 2 1
47.5
123 2
0
20
40
60
Business plans ormemorandums reviewed
Meetings with principalsconducted
Proposal letters or termsheets issued
Letters of intent signed
1st Quartile Median 3rd Quartile
38%
30%
10%6%
6%3% 3%
4% Sell to a public company
Sell to a private company
Sell to private equity group
IPO
Liquidate or bankrupt
Sell to a venture capital fund
Management buyout
Other
39%
22%
20%
8%
6%
2%
0%
3%
18%
18%
27%
15%
9%
3%
4%
6%
Access to capital
Government regulations and taxes
Economic uncertainty (Domestic)
Economic uncertainty (International)
Political uncertainty / elections
Competition from foreign trade partners
Inflation
Other
0% 5% 10% 15% 20% 25% 30% 35% 40% 45%
Current issue Emerging issue
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ANGEL cont. Respondents indicated a sharp increase in demand for angel capital, increases in size of angel industry, follow-on investments and time to exit deals. They also reported decreased expected returns on new investments and worsened general business conditions.
Table 44. General Business and Industry Assessment: Today versus 12 Months Ago
Decreased significantly
Decreased slightly
Stayed about the
same
Increased slightly
Increased significantly
% increase
% decrease
Net increase/ decrease
Demand for angel capital 4% 4% 28% 30% 34% 64% 8% 57%
Size of angel finance industry 4% 10% 31% 39% 16% 55% 14% 41%
Quality of companies seeking investment 6% 17% 42% 29% 6% 35% 23% 12%
Follow-on investments 2% 12% 50% 35% 2% 37% 13% 23%
Average investment size 4% 4% 60% 25% 8% 33% 8% 25%
Exit opportunities 9% 32% 45% 8% 6% 13% 42% -28%
Time to exit deals 8% 8% 42% 31% 12% 42% 15% 27%
Expected returns on new investments 2% 20% 67% 10% 2% 12% 22% -10%
Value of portfolio companies 2% 21% 42% 19% 17% 36% 23% 13%
General business conditions 6% 35% 31% 29% 0% 29% 40% -12%
Appetite for risk 4% 40% 40% 13% 2% 15% 44% -29%
Respondents expect further increases in business characteristics except exit opportunities, general business conditions and appetite for risk.
Table 45. General Business and Industry Assessment Expectations over the Next 12 Months
Decrease significantly
Decrease slightly
Stay about the same
Increase slightly
Increase significantly
% increase
% decrease
Net increase/ decrease
Demand for angel capital 2% 8% 39% 31% 20% 51% 10% 41%
Size of angel finance industry 2% 20% 36% 32% 10% 42% 22% 20%
Quality of companies seeking investment 2% 20% 53% 24% 2% 25% 22% 4%
Follow-on investments 0% 14% 51% 29% 6% 35% 14% 22%
Average investment size 2% 12% 55% 31% 0% 31% 14% 18%
Exit opportunities 4% 37% 33% 25% 0% 25% 41% -16%
Time to exit deals 0% 6% 51% 29% 14% 43% 6% 37%
Expected returns on new investments 0% 18% 57% 22% 4% 25% 18% 8%
Value of portfolio companies 0% 18% 45% 31% 6% 37% 18% 20%
General business conditions 12% 27% 31% 29% 0% 29% 39% -10%
Appetite for risk 8% 33% 51% 8% 0% 8% 41% -33%
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BUSINESS APPRAISER SURVEY INFORMATION
According to the 168 business appraiser survey respondents domestic economic uncertainty is the most important issue facing privately-held business today. Respondents indicated increases in number of engagements, fees for services, competition, and improved general business conditions over the last twelve months. They also expect decreases in all general business characteristics over the next year except cost of capital and discounts for lack of marketability. Other key findings include:
• When using valuation methods to determine the value of a business, the most popular methods used by respondents were discounted future earnings method (33%), capitalization of earnings method (27%) and guideline company transactions method (16%).
• Recast (adjusted) EBITDA multiple is the most popular when using multiple valuation method • Respondents use an average risk-free rate of 2.99% and a market (equity) risk premium of 6.35% • Average long-term terminal growth is estimated at 3.11%
Operational and Assessment Characteristics
Most of the companies valued by respondents have annual revenues from $1 million to $50 million.
Figure 72. Annual Revenues of Companies Valued
Appraisers, on average, apply a 33% weight to discounted future earnings method when valuing a privately-held business.
Figure 73. Usage of Valuation Methods
28%38%
60% 63% 69%
45%30%
15%
0%
20%
40%
60%
80%
Less than$500K inrevenues
$500K -$999K inrevenues
$1M -$4.99M inrevenues
$5M -$9.99M inrevenues
$10M -$49.99M inrevenues
$50M -$99.99M inrevenues
$100M -$499.99M in
revenues
$500M+ inrevenues
33%
27%
16%
12%8%
3% 1% Discounted future earnings method
Capitalization of earnings method
Guideline company transactions method
Guideline public company method
Adjusted net asset method
Other
Gut feel
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APPRAISERS cont. Respondents using multiples-based approaches indicate a preference for using recast (adjusted) EBITDA multiples (40%), followed by revenue multiples (22%).
Figure 74. Usage of Multiple Methods
Respondents indicated using an average risk-free rate of 2.99%, average market (equity) risk premium of 6.35% and average long-term growth rate of 3.11%.
Figure 75. Average Risk-Free Rat and Market (equity) Risk Premium and Long-Term Growth Rate
Figure below indicates considerable differences in DLOMs across sizes of companies and subject interests.
Figure 76. Discount for Lack of Marketability (DLOM) by Revenue Sizes
40%
22%
16%
8%6%
5% 3% Recast (Adjusted) EBITDA multiple
Revenue multiple
Cash flow multiple
EBITDA (unadjusted) multiple
EBIT multiple
Net income multiple
Other
2.99%
6.35%
3.11%
0% 1% 2% 3% 4% 5% 6% 7%
Risk-free rate
Market (equity) risk premium
Average Long-term terminal growth rate (%)
9.3%
12.2%
14.9%
17.0%
21.4%
25.0%
28.8%
32.9%
0% 5% 10% 15% 20% 25% 30% 35%
$250M in revenues
$25M in revenues
$1M in revenues
$100,000 in revenues
Control interest Minority interest
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APPRAISERS cont. Only 25% of respondents are comfort applying public cost of capital to privately-held companies with annual revenues less than $1 million.
Figure 77. Overall Comfort Level with Applying Public Cost of Capital to Privately-held Companies of Various Sizes
Figure 78. Explicit Forecast Period for High-Growth Companies by Revenue Sizes (years)
Respondents indicated increases in number of engagements, fees for services, competition, and improved general business conditions over the last twelve months.
Table 46. General Business and Industry Assessment: Today versus 12 Months Ago
Characteristics Decreased significantly
Decreased slightly
Stayed about the
same
Increased slightly
Increased significantly
% increase
% decrease
Net increase/decrease
Number of engagements 2% 13% 32% 35% 18% 52% 16% 36%
Time to complete a typical appraisal 0% 10% 72% 12% 6% 18% 10% 8%
Fees for services 1% 8% 52% 35% 5% 40% 9% 31%
Competition 0% 4% 61% 28% 7% 35% 4% 31%
Cost of capital 0% 14% 65% 20% 1% 22% 14% 8%
Market (equity) risk premiums 0% 9% 73% 16% 2% 18% 9% 9%
Discounts for lack of marketability (DLOM) 0% 10% 81% 7% 2% 9% 10% -1%
Company specific risk premiums 1% 8% 70% 18% 3% 21% 9% 12%
General business conditions 2% 11% 49% 33% 6% 38% 13% 26%
Appetite for risk 1% 17% 52% 27% 3% 30% 18% 13%
25% 32%41%
57%
77% 83% 83%
0%
20%
40%
60%
80%
100%
< $1M $1M - $5M $5M - $25M $25M -$100M
$100M -$500M
$500M - $1B >$1B
5.8
5.8
5.7
0 1 2 3 4 5 6 7 8
Private operating company with $1M in EBITDA
Private operating company with $25M in EBITDA
Private operating company with $250M in EBITDA
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APPRAISERS cont. Respondents expect decreases in all general business characteristics over the next year except DLOMs and cost of capital.
Table 47. General Business and Industry Assessment Expectations over the Next 12 Months
Characteristics Decrease significantly
Decrease slightly
Stay about the same
Increase slightly
Increase significantly
% increase
% decrease
Net increase/decrease
Number of engagements 2% 8% 37% 42% 8% 2% 10% -8%
Time to complete a typical appraisal 1% 12% 73% 10% 3% 1% 13% -13%
Fees for services 1% 5% 50% 41% 1% 2% 6% -4%
Competition 1% 4% 66% 25% 2% 2% 4% -2%
Cost of capital 1% 4% 54% 35% 2% 5% 4% 1%
Market (equity) risk premiums 1% 5% 60% 29% 2% 4% 5% -2%
Discounts for lack of marketability (DLOM) 1% 2% 79% 12% 1% 5% 3% 2%
Company specific risk premiums 1% 5% 62% 24% 3% 4% 6% -2%
General business conditions 2% 21% 42% 29% 2% 4% 23% -18%
Appetite for risk 4% 20% 51% 18% 3% 4% 24% -20%
Respondents believe domestic economic uncertainty is the most important issue facing privately-held businesses today.
Figure 79. Issues Facing Privately-Held Businesses
33%
23%
14%
13%
9%
4%
3%
1%
26%
11%
10%
19%
15%
7%
4%
8%
0% 5% 10% 15% 20% 25% 30% 35%
Economic uncertainty (Domestic)
Government regulations and taxes
Access to capital
Political uncertainty / elections
Economic uncertainty (International)
Competition from foreign trade partners
Other
Inflation
Today's issue Emerging issue
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BROKER SURVEY INFORMATION Approximately 36% of the 378 participants for the broker survey said they expect to close six deals or more in the next 12 months. Other key findings include:
• Approximately 16% of business listings/ engagements terminated without closing in the last 12 months.
• Respondents indicated increases in deal flow, ratio of businesses sold to total listings, business exit opportunities and difficulty selling business.
• Top three reasons for sellers to go to market: retirement, burn out, and new opportunity.
Operational and Assessment Characteristics
Approximately 20% of the respondents didn’t close any deal in the last twelve months; 62% closed between one to five deals, while 19% closed six or more transactions.
Figure 80. Private Business Sales Transactions Closed in the Last Twelve Months
Approximately 62% of respondents are planning to close between one and five business sales transactions in the next 12 months.
Figure 81. Private Business Sales Transactions Expected to Close in the Next Twelve Months
20%
16%14%
13%10%
8% 8%
2% 1% 1%2%
5%
0%
5%
10%
15%
20%
25%
0 1 2 3 4 5 6 7 8 9 10 Morethan 10
1%3%
12%15%
17%15%
14%
2%5%
1%
5%
10%
0%
5%
10%
15%
20%
0 1 2 3 4 5 6 7 8 9 10 Morethan 10
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BROKER cont. Respondents indicated typical sizes of transactions they are currently working on.
Figure 82. Typical Size of Business Transactions
Respondents indicate out of all business transactions they worked on in the last 12 months 33% were closed, 44% are continued marketing, 6% are in escrow and 16% were terminated without closing.
Figure 83. Business Transactions in the Last 12 Months
Nearly 45% of respondents closed more transactions in 2015 than in 2014, 14% of respondents closed equal amount.
Figure 84. Did Respondents Close More Transactions in 2015 than in Previous Years
Deals valuedunder $499,999
Deals valuedfrom $500,000
to $999,999
Deals valuedfrom $1 millionto $1.99 million
Deals valuedfrom $2 millionto $4.99 million
Deals valuedfrom $5 millionto $50 million
Whole sample 56% 48% 44% 36% 26%
0%20%40%60%80%
100%
44%
6%33%
16% continued marketing
in escrow
closed
terminated without closing
0%20%40%60%80%
100%
Yes No Equal amount2014 45% 41% 14%
2013 45% 44% 11%
2012 42% 47% 10%
2011 43% 46% 10%
2010 45% 41% 14%
2009 43% 45% 11%
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BROKER cont. Approximately 29% of business transactions valued under $2 million contain SBA components.
Figure 85. Percentage of Closed Business Transactions Valued under $2 million Utilized SBA Components
Respondents indicate difficulty to arrange senior debt for transactions with annual revenues under $100 thousands.
Table 48. How Difficult to Arrange Senior Debt for Transactions over the Past 12 Months
Revenue size Extremely
difficult Difficult Somewhat difficult Neutral Somewhat
easy Easy Extremely easy
Score (-2 to 2)
$100K 32% 19% 11% 12% 11% 7% 8% -1.0
$500K 8% 14% 17% 18% 17% 15% 10% 0.1
$1M 3% 11% 21% 17% 24% 12% 12% 0.3
$5M 2% 7% 20% 16% 24% 18% 13% 0.6
$10M 4% 4% 11% 27% 31% 14% 8% 0.5
$15M 4% 4% 17% 23% 21% 21% 11% 0.6
$25M+ 9% 11% 9% 22% 17% 17% 15% 0.4
Approximately 61% of respondents indicate best clients arrived by referrals.
Figure 86. In 2015, Best Client Arrived By:
71%
29% Business transactions valued under $2million without SBA components
Business transactions valued under $2million with SBA components
61%7%
7%
6%4%
4%3% 6%
Referral
Target mailer
Networking
Cold calling
General mailer
Company branding
Publication/media source
Other
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BROKER cont. Nearly 43% of referrals were past clients.
Figure 87. Types of Referrals
Figure 88. Types of Publication/ Media Source
Approximately 72% of respondents indicated it was ‘buyer’s market’ for deals valued under $500 thousands, whereas only 18% of respondents indicated it was ‘buyer’s market’ for deals valued between $5 million and $50 million.
Figure 89. Was It Buyer's or Seller’s Market in the Last 3 Months
42%
16%
14%
6%3%
18% Past client
Accountant
Attorney
Financial advisor
Lender
Other
67%
22%
11% Web
Media
Article
0%20%40%60%80%
100%
Deals valuedunder
$499,999
Deals valuedfrom
$500,000 to$999,999
Deals valuedfrom $1
million to$1.99
million
Deals valuedfrom $2
million to$4.99
million
Deals valuedfrom $5
million to$50 million
Buyer's market 72% 56% 45% 33% 18%Seller's market 28% 44% 55% 67% 82%
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BROKER cont. Median number of months from listing/ engagement to close varies from 6 to 11 months.
Figure 90. Median Number of Months from Listing/ Engagement to Close by Deal Size
Median number of months from LOI/ Offer to close varies from 2 to 3 months.
Figure 91. Median Number of Months from LOI/ Offer to Close by Deal Size
Median SDE multiple paid varies between 2 and 4.5.
Figure 92. Median SDE Multiple Paid by Deal Size
6
8
1110
8
0
5
10
15
< 500K 500K - 1M 1M - 2M 2M - 5M 5M - 50M
23 3 3 3
0
5
10
< 500K 500K - 1M 1M - 2M 2M - 5M 5M - 50M
2.02.5
3.3 3.5
4.5
0.0
1.0
2.0
3.0
4.0
5.0
< 500K 500K - 1M 1M - 2M 2M - 5M 5M - 50M
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BROKER cont. Median EBITDA multiple paid varies between 1.5 and 5.1.
Figure 93. Median EBITDA Multiple Paid by Deal Size
SDE not including working capital was the most popular multiple type used for deals valued under $2 million, while EBITDA including working capital was the most popular type for deals valued between $2 million and $50 million.
Figure 94. Multiple Types by Deal Size
1.5
3.34.0 4.0
5.1
0.0
5.0
10.0
< 500K 500K - 1M 1M - 2M 2M - 5M 5M - 50M
< 500K 500K - 1M 1M - 2M 2M - 5M 5M - 50M
SDE including working capital 24.8% 19.7% 20.0% 28.6% 0.0%
SDE not including working capital 68.8% 62.3% 56.7% 9.5% 3.7%
EBITDA including working capital 0.5% 9.8% 3.3% 38.1% 55.6%
EBITDA not including working capital 5.0% 4.9% 13.3% 9.5% 18.5%
TTM EBITDA including working capital 0.0% 1.6% 3.3% 14.3% 11.1%
TTM EBITDA not including working capital 0.9% 1.6% 3.3% 0.0% 11.1%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
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BROKER cont. For deals valued under $1 million first time individual was the most popular buyer type, existing company/ strategic buyer was the most popular buyer type for deals valued between $1 million and $5 million, while PE firm – platform was the most popular buyer type for deals valued between $5 million and $50 million.
Figure 95. Buyer Type by Deal Size
Reason number one for sellers to go to market was retirement.
Figure 96. Reason for Seller to Go to Market by deal Size
0%10%20%30%40%50%60%70%80%90%
100%
< 500K 500K - 1M 1M - 2M 2M - 5M 5M - 50M1st time individual 53% 37% 27% 24% 7%individual who owned a business 28% 35% 20% 33% 7%existing company/strategic buyer 17% 28% 40% 33% 33%PE firm - Platform 0% 0% 7% 10% 37%PE firm - Add-on 0% 0% 7% 0% 11%Other 2% 0% 0% 0% 4%
< 500K 500K - 1M 1M - 2M 2M - 5M 5M - 50M
Recapitalization 0% 5% 3% 5% 15%Burnt out 19% 15% 0% 24% 11%Family issues 14% 7% 3% 0% 0%Health 7% 8% 7% 0% 0%New opportunity 12% 10% 3% 5% 4%Potential taxes increases 0% 0% 0% 5% 0%Relocation/moving 11% 3% 10% 5% 0%Retirement 30% 50% 57% 52% 52%Unsolicited offer 0% 0% 0% 0% 7%Other 7% 2% 17% 5% 11%
0%20%40%60%80%
100%
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BROKER cont. Buying a job was the number one motivation for buyer for deals valued under $1 million, while horizontal add-on was the number one motivation for buyer for deals valued between $1 million and $50 million.
Figure 97. Number One Motivation for Buyer by Deal Size
Average percentage of final/ selling price realized to asking/ benchmark price was 92%.
Figure 98. Median Percentage of Final/ Selling Price Realized to Asking/ Benchmark Price by Deal Size
< 500K 500K - 1M 1M - 2M 2M - 5M 5M - 50M
Buying a job 51% 38% 10% 19% 11%Better ROI than other investment 7% 13% 17% 24% 11%Vertical add-on 9% 15% 13% 10% 15%Horizontal add-on 21% 30% 50% 38% 37%Other 11% 3% 10% 10% 26%
0%10%20%30%40%50%60%70%80%90%
100%
90% 93% 90%99% 100%
92%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
< 500K 500K - 1M 1M - 2M 2M - 5M 5M - 50M All
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BROKER cont.
Business Transactions Valued Under $499 Thousand
Figure 99. Number of Months from Engagement/ Listing to Close
Figure 100. Number of Months from LOI/ Offer to Close
Figure 101. Industry Type
< 1month 1 month 2 months 3 months 4 months 5 months 6 months 7 months 8 months 9 months 10
months11
months12
months1.1 - 1.5
years1.6 - 2years > 2 years
Deals under 500K 3% 4% 10% 11% 10% 6% 15% 5% 6% 7% 6% 5% 4% 6% 2% 1%
0%
10%
20%
30%
40%
50%
< 1month 1 month 2 months 3 months 4 months 5 months 6 months 7 months 8 months 9 months 12
months
Deals under 500K 18% 16% 28% 17% 6% 4% 5% 2% 1% 1% 1%
0%
10%
20%
30%
40%
50%
Restaurants Services -personal
Businessservices
Consumergoods &
Retail
Health care &biotech Manufact.
Construction&
engineering
Services -financial
Wholesale &distribution
Informationtechnology Other
Deals under 500K 27% 19% 14% 10% 7% 5% 3% 2% 1% 1% 10%
0%
10%
20%
30%
40%
50%
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BROKER cont. Figure 102. SDE Multiple Paid
Figure 103. EBITDA Multiple Paid
Figure 104. Multiple Paid
0.25 0.5 1 1.25 1.5 1.75 2 2.25 2.5 2.75 3 3.25 5 8.25
Deals under 500K 3% 2% 12% 6% 12% 9% 17% 9% 10% 4% 7% 2% 2% 1%
0%
10%
20%
30%
40%
50%
1 1.25 1.5 2 2.75
Deals under 500K 33% 11% 22% 11% 22%
0%5%
10%15%20%25%30%35%40%45%50%
SDE includingworking capital
SDE notincluding
working capital
EBITDAincluding
working capital
EBITDA notincluding
working capital
TTM EBITDAnot including
working capital
Deals under 500K 24.8% 68.8% 0.5% 5.0% 0.9%
0%
20%
40%
60%
80%
100%
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BROKER cont. Figure 105. Buyer Type
Figure 106. Reason for Seller to Go to Market
Figure 107. Buyer Location
53.3%27.6%
17.3%
1.9%
1st time individual
individual who owned a business
existing company/strategic buyer
Other
Retirement Burnt out Family issues New/betteropportunity
Relocation/moving Health Other
Deals under 500K 30% 19% 14% 12% 11% 7% 7%
0%5%
10%15%20%25%30%35%40%45%50%
within 20 miles within 50 miles within 100 miles more than 100miles
Deals under 500K 66% 14% 5% 15%
0%
20%
40%
60%
80%
100%
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BROKER cont. Figure 108. Number One Motivation for Buyer
Business Transactions Valued from $500 to $999 Thousand
Figure 109. Number of Months from Engagement/ Listing to Close
Figure 110. Number of Months from LOI/ Offer to Close
Buying a job Horizontal add-on Vertical add-on
Better ROI thanother
investmentOther
Deals under 500K 51% 21% 9% 7% 11%
0%20%40%60%80%
100%
1 month 2months
3months
4months
5months
6months
7months
8months
9months
10months
11months
12months
1.1 - 1.5years
1.6 - 2years
Deals from $500K to $1M 2% 5% 11% 5% 8% 8% 7% 5% 10% 3% 5% 10% 16% 5%
0%
10%
20%
30%
40%
50%
< 1month 1 month 2
months3
months4
months5
months6
months7
months8
months10
months
Deals from $500K to $1M 5% 8% 33% 25% 15% 2% 7% 3% 2% 2%
0%
10%
20%
30%
40%
50%
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BROKER cont. Figure 111. Industry Type
Figure 112. SDE Multiple Paid
Figure 113. EBITDA Multiple Paid
Businessservices Manufact. Services -
personalHealth care& biotech
Construction &
engineering
Consumergoods &
Retail
Services -financial
Wholesale&
distribution
Informationtechnology Restaurants
Basicmaterials &
energyOther
Deals under 500K 18% 13% 11% 11% 10% 10% 8% 7% 3% 3% 2% 3%
0%
10%
20%
30%
40%
50%
1.5 1.75 2 2.25 2.5 2.75 3 3.25 3.5 4 8.25
Deals from $500K to $1M 2% 10% 24% 6% 14% 14% 12% 8% 4% 2% 4%
0%5%
10%15%20%25%30%35%40%45%50%
0.5 2.75 3 3.25 3.5 4 4.25 6
Deals from $500K to $1M 9% 9% 27% 9% 9% 9% 18% 9%
0%5%
10%15%20%25%30%35%40%45%50%
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BROKER cont. Figure 114. Multiple Paid
Figure 115. Buyer Type
Figure 116. Reason for Seller to Go to Market
SDEincludingworkingcapital
SDE notincludingworkingcapital
EBITDAincludingworkingcapital
EBITDA notincludingworkingcapital
TTMEBITDA
includingworkingcapital
TTMEBITDA notincludingworkingcapital
Deals from $500K to $1M 19.7% 62.3% 9.8% 4.9% 2% 1.6%
0%20%40%60%80%
100%
36.7%
35.0%
28.3% 1st time individual
individual who owned a business
existing company/strategic buyer
Retirement Burnt out New/betteropportunity Health Family issues Recapitalization Relocation/movin
g Other
Deals from $500K to $1M 50% 15% 10% 8% 7% 5% 3% 2%
0%5%
10%15%20%25%30%35%40%45%50%
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BROKER cont. Figure 117. Buyer Location
Figure 118. Number One Motivation for Buyer
Business Transactions Valued from $1 to $1.99 Million
Figure 119. Number of Months from Engagement/ Listing to Close
within 20 miles within 50 miles within 100 miles more than 100miles
Deals from $500K to $1M 47% 22% 12% 20%
0%5%
10%15%20%25%30%35%40%45%50%
Buying a job Horizontaladd-on
Vertical add-on
Better ROIthan otherinvestment
Other
Deals from $500K to $1M 38% 30% 15% 13% 3%
0%5%
10%15%20%25%30%35%40%45%50%
< 1month
1month
3months
4months
5months
6months
8months
9months
10months
12months
1.1 - 1.5years
Deals from $1M to $2M 3% 3% 3% 3% 10% 7% 7% 7% 7% 27% 23%
0%
10%
20%
30%
40%
50%
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BROKER cont. Figure 120. Number of Months from LOI/ Offer to Close
Figure 121. Industry Type
Figure 122. SDE Multiple Paid
1 month 2 months 3 months 4 months 5 months 7 months 8 months 1.1 - 1.5years
1.6 - 2years
Deals from $1M to $2M 3% 23% 33% 17% 10% 3% 3% 3% 3%
0%
10%
20%
30%
40%
50%
Businessservices
Consumergoods &
Retail
Health care& biotech
Services -personal Restaurants
Construction&
engineering
Wholesale &distribution Manufact. Services -
financial
Basicmaterials &
energyOther
Deals from $1M to $2M 17% 13% 13% 10% 10% 7% 7% 7% 7% 3% 7%
0%5%
10%15%20%25%30%35%40%45%50%
1.75 2.25 2.5 2.75 3 3.25 3.5 4 4.25 5 7.5 8 8.25
Deals from $1M to $2M 4% 4% 9% 13% 17% 9% 9% 13% 4% 4% 4% 4% 4%
0%
10%
20%
30%
40%
50%
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BROKER cont. Figure 123. EBITDA Multiple Paid
Figure 124. Multiple Paid
Figure 125. Buyer Type
1 3.75 4 5 5.5
Deals from $1M to $2M 14% 14% 29% 29% 14%
0%5%
10%15%20%25%30%35%40%45%50%
0%20%40%60%80%
100%
SDEincludingworkingcapital
SDE notincludingworkingcapital
EBITDAincludingworkingcapital
EBITDAnot
includingworkingcapital
TTMEBITDA
includingworkingcapital
TTMEBITDA
notincludingworkingcapital
Deals from $1M to $2M 20% 57% 3% 13% 3% 3.3%
27%
20%40%
7%7% 1st time individual
individual who owned a business
existing company/strategic buyer
PE firm - Platform
PE firm - Add-on
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BROKER cont. Figure 126. Reason for Seller to Go to Market
Figure 127. Buyer Location
Figure 128. Number One Motivation for Buyer
Retirement Relocation/moving Health New/better
opportunity Family issues Recapitalization Other
Deals from $1M to $2M 57% 10% 7% 3% 3% 3% 17%
0%10%20%30%40%50%60%70%80%90%
100%
within 20 miles within 50 miles within 100 miles more than 100miles
Deals from $1M to $2M 53% 7% 7% 33%
0%10%20%30%40%50%60%70%80%90%
100%
Horizontal add-on Better ROI thanother investment Vertical add-on Buying a job Other
Deals from $1M to $2M 50% 17% 13% 10% 10%
0%10%20%30%40%50%60%70%80%90%
100%
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BROKER cont.
Business Transactions Valued from $2 to $4.99 Million
Figure 129. Number of Months from Engagement/ Listing to Close
Figure 130. Number of Months from LOI/ Offer to Close
Figure 131. Industry Type
BROKER cont.
< 1month 1 month 6
months7
months8
months9
months10
months11
months12
months1.1 - 1.5
years1.6 - 2years
> 2years
Deals from $2M to $5M 5% 5% 5% 19% 5% 10% 5% 5% 5% 19% 5% 14%
0%
10%
20%
30%
40%
50%
< 1 month 2 months 3 months 4 months 5 months 6 months 7 months 1.1 - 1.5years
Deals from $2M to $5M 5% 19% 33% 14% 10% 5% 5% 10%
0%
10%
20%
30%
40%
50%
Manufact. Businessservices
Wholesale&
distribution
Construction &
engineering
Healthcare &biotech
Services -personal
Information
technology
Restaurants
Services -financial
Deals from $2M to $5M 33% 19% 14% 10% 5% 5% 5% 5% 5%
0%10%20%30%40%50%
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Figure 132. SDE Multiple Paid
Figure 133. EBITDA Multiple Paid
Figure 134. Multiple Paid
BROKER cont.
2.25 2.5 2.75 3.5 4 4.25 5
Deals from $2M to $5M 13% 13% 13% 25% 13% 13% 13%
0%
10%
20%
30%
40%
50%
2.25 2.5 3 4 4.5 5 5.5
Deals from $2M to $5M 8% 8% 23% 31% 8% 15% 8%
0%5%
10%15%20%25%30%35%40%45%50%
SDE includingworkingcapital
SDE notincludingworkingcapital
EBITDAincludingworkingcapital
EBITDA notincludingworkingcapital
TTM EBITDAincludingworkingcapital
Deals from $2M to $5M 28.6% 9.5% 38.1% 9.5% 14%
0%10%20%30%40%50%60%70%80%90%
100%
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Figure 135. Buyer Type
Figure 136. Reason for Seller to Go to Market
Figure 137. Buyer Location
BROKER cont.
23.8%
33.3%
33.3%
9.5% 1st time individual
individual who owned a business
existing company/strategic buyer
PE firm - Platform
Retirement Burnt out New/betteropportunity Relocation/moving Recapitalization Potential taxes
increases Other
Deals from $2M to $5M 52% 24% 5% 5% 5% 5% 5%
0%5%
10%15%20%25%30%35%40%45%50%
within 20 miles within 50 miles within 100 miles more than 100miles
Deals from $2M to $5M 19% 14% 24% 43%
0%5%
10%15%20%25%30%35%40%45%50%
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Figure 138. Number One Motivation for Buyer
Business Transactions Valued from $5 to $50 Million
Figure 139. Number of Months from Engagement/ Listing to Close
Figure 140. Number of Months from LOI/ Offer to Close
BROKER cont.
Horizontaladd-on
Better ROIthan otherinvestment
Buying a job Vertical add-on Other
Deals from $2M to $5M 38% 24% 19% 10% 10%
0%
10%
20%
30%
40%
50%
3months
4months
6months
7months
8months
9months
10months
12months
1.1 - 1.5years
1.6 - 2years
> 2years
Deals from $5M to $50M 7% 4% 4% 19% 19% 4% 4% 11% 22% 4% 4%
0%
10%
20%
30%
40%
50%
2 months 3 months 4 months 5 months 6 months 7 months 9 months 1.1 - 1.5years
Deals from $5M to $50M 15% 37% 11% 4% 19% 4% 7% 4%
0%
10%
20%
30%
40%
50%
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Figure 141. Industry Type
Figure 142. SDE Multiple Paid
Figure 143. EBITDA Multiple Paid
BROKER cont.
Manufact. Businessservices
Construction&
engineering
Informationtechnology
Health care &biotech
Wholesale &distribution
Consumergoods &
Retail
Services -personal
Basicmaterials &
energyOther
Deals from $5M to $50M 30% 15% 15% 11% 7% 4% 4% 4% 4% 7%
0%5%
10%15%20%25%30%35%40%45%50%
1.5 4.5 5.5
Deals from $5M to $50M 33% 33% 33%
0%
10%
20%
30%
40%
50%
2.5 3 3.5 3.75 4 4.25 4.5 5 5.25 5.5 5.75 6 6.5 7.25 7.5 7.75 >10
Deals from $5M to $50M 4% 8% 8% 4% 4% 8% 8% 4% 4% 4% 8% 13% 4% 4% 4% 4% 4%
0%
10%
20%
30%
40%
50%
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Figure 144. Multiple Paid
Figure 145. Buyer Type
Figure 146. Reason for Seller to Go to Market
BROKER cont.
SDE notincludingworkingcapital
EBITDAincludingworkingcapital
EBITDA notincludingworkingcapital
TTM EBITDAincludingworkingcapital
TTM EBITDAnot including
workingcapital
Deals from $5M to $50M 4% 56% 19% 11% 11%
0%10%20%30%40%50%60%70%80%90%
100%
7.4%7.4%
33%37.0%
11% 4%1st time individual
individual who owned a business
existing company/strategic buyer
PE firm - Platform
PE firm - Add-on
Other
Retirement Recapitalization Burnt out Unsolicited offer New/betteropportunity Other
Deals from $5M to $50M 52% 15% 11% 7% 4% 11%
0%
10%
20%
30%
40%
50%
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Figure 147. Buyer Location
Figure 148. Number One Motivation for Buyer
within 20 miles within 50 miles within 100 miles more than 100miles
Deals from $5M to $50M 22% 15% 4% 59%
0%5%
10%15%20%25%30%35%40%45%50%
Horizontaladd-on
Vertical add-on
Better ROIthan otherinvestment
Buying a job Other
Deals from $5M to $50M 37% 15% 11% 11% 26%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
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BROKER cont.
Table 49. Expectations of Business Listings/ Engagements from New Clients in the Next 3 Months
Deal size Greatly decrease Decrease Stay the same Increase Greatly
increase Score
(1 to 5)
Deals valued under $499,999 1.8% 6.7% 38.1% 45.7% 7.6% 3.5
Deals valued from $500,000 to $999,999 1.0% 6.4% 34.0% 53.2% 5.4% 3.6
Deals valued from $1 million to $1.99 million 0.6% 2.2% 34.8% 58.6% 3.9% 3.6
Deals valued from $2 million to $4.99 million 0.0% 7.2% 34.6% 54.2% 3.9% 3.6
Deals over $5 million 0.8% 7.3% 46.3% 43.1% 2.4% 3.4
Table 50. Expectations for Business Valuation Multiples in the Next 3 Months
Deal size Greatly
decrease Decrease Stay the same Increase Greatly increase
Score (1 to 5)
Deals valued under $499,999 1.8% 6.7% 38.1% 45.7% 7.6% 3.5
Deals valued from $500,000 to $999,999 1.0% 6.4% 34.0% 53.2% 5.4% 3.6
Deals valued from $1 million to $1.99 million 0.6% 2.2% 34.8% 58.6% 3.9% 3.6
Deals valued from $2 million to $4.99 million 0.0% 7.2% 34.6% 54.2% 3.9% 3.6
Deals over $5 million 0.8% 7.3% 46.3% 43.1% 2.4% 3.4
Compared to twelve months ago, respondents indicated increases in deal flow, ratio of businesses sold to total listings, business exit opportunities and improved general business conditions. During the next twelve months, respondents expect further increases in deal flow, margin pressure on companies, and improving general business conditions.
Table 51. General Business and Industry Assessment: Today versus 12 Months Ago
Decreased significantly
Decreased slightly
Stayed about the
same
Increased slightly
Increased significantly
% increase
% decrease
Net increase
Deal flow 6% 14% 35% 32% 14% 46% 20% 26%
Ratio of businesses sold / total listings 6% 15% 42% 28% 9% 37% 21% 16%
Deal multiples 1% 9% 64% 23% 3% 25% 10% 15%
Business exit opportunities 1% 8% 56% 30% 5% 35% 9% 26%
Amount of time to sell business 2% 11% 48% 30% 9% 39% 13% 26%
Difficulty selling business 2% 12% 51% 27% 8% 35% 14% 21%
Business opportunities for growth 1% 8% 51% 37% 3% 40% 9% 31%
General business conditions 3% 13% 44% 38% 2% 40% 16% 24%
Margin pressure on companies 1% 6% 61% 28% 3% 31% 8% 23%
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BROKER cont.
Table 52. General Business and Industry Assessment: Expectations over the Next 12 Months
Decrease
significantly Decrease
slightly Stay about the same
Increase slightly
Increase significantly % increase %
decrease Net
increase
Deal flow 1% 5% 30% 48% 17% 65% 6% 59%
Ratio of businesses sold / total listings 1% 4% 42% 42% 12% 53% 5% 49%
Deal multiples 0% 10% 68% 21% 1% 22% 10% 12%
Business exit opportunities 0% 3% 57% 34% 5% 39% 4% 36%
Amount of time to sell business 1% 12% 63% 21% 4% 25% 13% 12%
Difficulty selling business 0% 13% 64% 20% 2% 22% 13% 9%
Business opportunities for growth 1% 8% 57% 31% 3% 35% 9% 26%
General business conditions 2% 18% 46% 31% 2% 34% 20% 13%
Margin pressure on companies 0% 6% 64% 26% 3% 29% 7% 22%
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FACTOR SURVEY INFORMATION Approximately 58% of 18 respondents to the factor survey said the primary uses of factoring facilities are financing working capital fluctuations, followed by expansion (23%), and finance worsening operations conditions (11%). Factoring facilities are relatively short-term compared to other investments with respondents reporting approximately 50% of factoring facilities have less than or equal to 12 months term. Other key findings include:
• Respondents reported approximately 23% of their company’s gross invoices over the last twelve months were originated from business services. Wholesale and distribution were responsible for 17% of invoices followed by manufacturing at 15%.
• When asked about conditions compared to twelve months ago nearly 50% of respondents said they saw an increased demand for business factoring lines in the last 12 months. Approximately 53% of lenders indicated worsened general business conditions in the last twelve months.
• Nearly 37% of respondents believe economic uncertainty is the most important issue facing privately-held
businesses today, followed by access to capital (26%) and government regulations and taxes (11%). Operational and Assessment Characteristics
Approximately 58% of respondents indicated working capital fluctuations as the primary uses of factoring facilities.
Figure 149. Primary Use of the Factoring Facilities Over the Last 12 Months
Respondents reported approximately 23% of their company’s gross invoices over the last twelve months were originated from business services.
Figure 150. Industries for Gross Invoices for the Last 12 Months
58%23%
11% 6% 2%Finance working capital fluctuations
Expansion
Finance worsening operationsconditionsProject Financing
23%
17%
15%10%
8%
7%4%
2%2%12% Business services
Wholesale & distributionManufacturingConstruction & engineeringBasic materials & energyHealth care & biotechInformation technologyRetail & consumer servicesMedia & entertainmentOther
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FACTOR cont. Factoring facilities are relatively short-term compared to other investments with respondents reporting approximately 50% of factoring facilities have less than or equal to 12 months term.
Figure 151. Term of Current Typical Factoring Facility
Respondents reported average advance rates charged for various-sized facilities range from 23% to 70% on a monthly basis.
Figure 152. Current Average Advance Rates for Various-Sized Facilities
Nearly 100% of respondents charge wire transfer / ACH fee, while 59% of respondents charge due diligence fee.
Table 53. Fees Charged
6%
44%22%
11%
17%1 - 6 months
7 - 12 months
13 - 18 months
19 - 24 months
More than 24 months
70% 65% 66%52%
28% 23%
0%
20%
40%
60%
80%
100%
$100,000 $500,000 $1,000,000 $5,000,000 $10,000,000 Greater than$10,000,000
100%
59%
31% 25% 19% 19% 17% 13% 13% 6%0%
20%40%60%80%
100%
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FACTOR cont. Table 54. Median Percentage or Amount Charged
Percentage or Amount
Application fees n/a $1,500 Due diligence fees 1% $500 Invoice processing 1.5% n/a Wire transfer / ACH fees 1% $50 Filing fees n/a $10 UCC Search n/a $25 Line fee 1% n/a Same day funding fee 1% $100
Approximately 53% of respondents are using prime rate to price items.
Figure 153. Usage of Reference Rates
Table 55. Spread (%)
1st quartile Median 3rd quartile Tied to prime 2 1.25 1.25 Tied to three-month LIBOR 2.5 2.5 2.5 Tied to six-month LIBOR 3.25 3.75 3.75
Figure 154. Percentage of Factoring Business - Recourse vs Non-recourse
53%
8% 8%
0%
20%
40%
60%
80%
100%
Tied to Prime Tied to 3 Month LIBOR Tied to 6 Month LIBOR
61%34%
5% Recourse
Non-recourse
Other
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FACTOR cont. Respondents reported 91% of their current purchases were on a notification basis.
Figure 155. Percentage of Purchases on a Non-notification Basis
Nearly 100% of respondents require a lien on A/R assets and 94.4% require a background check.
Table 56. Typical Current Requirements
Requirement % Lien on A/R assets 100.0% Background check 94.4% Personal guarantee 88.9% Financial statements 77.8% Lien on all assets 55.6% Performance guarantee 37.5% Audit 31.3%
Table 57. Discount fee (%) on Outstanding Invoices for Notification Basis
First 30 days invoice outstanding
31 - 45 days invoice outstanding
46 - 60 days invoice outstanding
1st quartile Median 3rd
quartile 1st
quartile Median 3rd quartile
1st quartile Median 3rd
quartile
$0K - $24.99K 2.3% 2.8% 3.0% 1.0% 1.3% 1.8% 1.0% 1.3% 1.8%
$25K - $49.99K 2.2% 2.8% 3.0% 1.0% 1.4% 1.8% 1.0% 1.4% 1.8%
$50K - $99.99K 2.0% 2.6% 3.0% 0.8% 1.4% 1.8% 0.8% 1.4% 1.8%
$100K - $249.99K 1.9% 2.1% 2.6% 0.8% 1.1% 1.9% 0.8% 1.1% 1.9%
$250K - $999.99K 1.8% 2.0% 2.5% 0.8% 1.3% 1.8% 0.8% 1.3% 1.8%
$1M - $4.99M 1.3% 1.5% 2.0% 0.5% 0.9% 1.4% 0.5% 0.9% 1.4%
$5M - $9.99M 1.3% 1.3% 1.5% 0.7% 1.0% 1.4% 0.6% 1.0% 1.5%
$10M - $24.99M 0.9% 1.0% 1.9% 1.9% 1.3% 1.3% 0.9% 1.3% 1.5%
$25M - $49.99M 1.1% 1.6% 2.2% 0.5% 0.8% 1.0% 0.5% 0.8% 1.0%
$50M - $99.99M 0.6% 0.8% 1.6% 0.5% 0.8% 1.0% 0.5% 0.8% 1.0%
$100M+ 0.6% 1.0% 1.8% 0.3% 0.3% 0.8% 0.3% 0.3% 0.8%
9%
91%
Non-notifcation
Notification
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FACTOR cont.
Table 58. Expected Total Write-off – Percentage of Receivables Purchased on New Arrangements (%)
1st quartile Median 3rd quartile
Expected total write-off 1% 1% 2%
Table 59. Average Number of Days Outstanding Receivables
1st quartile Median 3rd quartile During Last 12 Months 40 45 54 Expected for Next 12 Months 40 45 54
According to the 43% of respondents, the most significant concern to factoring business is lack of quality businesses or poor financial health.
Figure 156. Most Significant Concern to Factoring Business
Respondents believe domestic economic uncertainty is the most important current and emerging issue facing privately-held businesses.
Figure 157. Current Issues Facing Privately-Held Businesses
43%
17%
6%
6%
28%
Lack of quality businesses / poorfinancial health
Businesses lack of understanding offactoring as a financing source
Lack of capital to deploy
Return of traditional business lending
Other
37%
26%
11%
11%
5%
5%
5%
0%
36%
18%
23%
9%
0%
0%
0%
14%
Economic uncertainty (Domestic)
Access to capital
Government regulations and taxes
Political uncertainty / elections
Competition from foreign trade partners
Inflation
Other
Economic uncertainty (International)
0% 5% 10% 15% 20% 25% 30% 35% 40%
Current issue Emerging issue
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FACTOR cont. Respondents indicated increases in demand for business factoring lines and standard advance rates on receivables, decreases in credit quality of borrowers, interest rate spreads, fees and worsened general business conditions.
Table 60. General Business and Industry Assessment: Today versus 12 Months Ago
Decreased significantly
Decreased slightly
Stayed about the
same
Increased slightly
Increased significantly
% increase
% decrease
Net increase/ decrease
Demand for business factoring lines (applications) 17% 11% 22% 44% 6% 50% 28% 22%
Credit quality of borrowers applying for credit 6% 33% 44% 11% 6% 17% 39% -22%
Time to process Facility 0% 17% 56% 17% 11% 28% 17% 11%
Average facility size 6% 0% 44% 39% 11% 50% 6% 44%
Average facility term (months) 0% 12% 71% 12% 6% 18% 12% 6%
Size of interest rate spreads (pricing) 6% 56% 31% 6% 0% 6% 63% -56%
Fees 17% 33% 50% 0% 0% 0% 50% -50%
Standard advance rates on receivables 0% 0% 76% 24% 0% 24% 0% 24%
General business conditions 18% 35% 29% 12% 6% 18% 53% -35%
Respondents expect further decreases in interest rate spreads, fees and worsening general business conditions.
Table 61. General Business and Industry Assessment Expectations over the Next 12 Months
Decrease significantly
Decrease slightly
Stay about the same
Increase slightly
Increase significantly
% increase
% decrease
Net increase/ decrease
Demand for business factoring lines (applications) 6% 6% 28% 44% 17% 61% 11% 50%
Credit quality of borrowers applying for credit 0% 33% 33% 22% 11% 33% 33% 0%
Time to process Facility 0% 22% 50% 22% 6% 28% 22% 6%
Average facility size 0% 0% 50% 44% 6% 50% 0% 50%
Average facility term (months) 0% 0% 76% 24% 0% 24% 0% 24%
Size of interest rate spreads (pricing) 0% 38% 38% 25% 0% 25% 38% -13%
Fees 0% 22% 67% 11% 0% 11% 22% -11%
Standard advance rates on receivables 0% 0% 94% 6% 0% 6% 0% 6%
General business conditions 11% 22% 44% 17% 6% 22% 33% -11%
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BUSINESS OWNER SURVEY INFORMATION
Of the 1,372 privately-held businesses that responded to the survey, 12% had businesses that involved manufacturing, 11% were in professional, scientific or technical services, another 9% were in business service, followed by construction and engineering (9%). Approximately 52% of businesses have annual revenues less than $1 million. Nearly 88% of business owners report having the enthusiasm to execute growth strategies, yet just 50% report having the necessary financial resources to successfully execute growth strategies. Of the respondents who were seeking financing in the last 12 months, approximately 51% anticipated to raise less than $100,000 in capital. Approximately 45% of respondents reported that they were seeking bank business loans or business credit card financing as a source of funding, followed by friends and family (13%). Of all financing options, bank loans emerged as the financing source with the highest “willingness” for small business to use, followed by grants and lease. Results also showed that 74% of privately-held businesses that sought bank loans over the past 12 months were successful. Survey results indicated that business owners who raised capital on average contacted 2.08 banks. Nearly three quarters of businesses (72%) are planning to hire additional workers. Approximately 25% of respondents believe government regulations and taxes are the number one issue small businesses face today, another 18% believe domestic economic uncertainty is the most important current issue, followed by access to capital (17%). According to small businesses, of those policies most likely to lead to job creation in 2016, increased access to capital emerged as number one (23%) followed by regulatory reform (21%), and tax incentives (18%). The study showed that of those that do plan to hire, sales and marketing skills are in greatest demand (51%) followed by skilled labor (45%) and service/customer service (37%). Also, 83% of companies planning to hire indicate they’d need to train those they hire. 49% of respondents believe that general business conditions improved in the twelve months compared to 37% surveyed year ago. Operational and Assessment Characteristics
The privately-held business survey results were generated from 1,372 participants. The locations of businesses are distributed over all regions of the United States.
Figure 158. Respondents Distribution by State
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BUSINESS OWNER cont. Businesses involved in manufacturing accounted for 12% of respondents followed by professional, scientific or technical services (11%) and business services (9%).
Figure 159. Description of Entity
Approximately 49% of businesses have less than or equal to five employees.
Figure 160. Number of Employees
12%11%
9%
9%8%
7%6%
6%
5%5%
2%
2%2%
2%1%
10%
2%ManufacturingProfessional, scientific or technical servicesBusiness servicesConstruction & engineeringFinance & real estateRetail tradeInformation technology or servicesHealth care & biotechWholesale & distributionConsumer goods & servicesEducational servicesArts, entertainment or recreationForestry, fishing, hunting or agricultureTransportation and warehousingBasic materials & energyOther servicesOther
6%23%
22%12%
12%
10%
6%6%
2%
0
1 - 2
3 - 5
6 - 10
11 - 20
21 - 50
51 - 100
101 - 500
more than 500
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BUSINESS OWNER cont. Approximately 64% of the respondents are active control owners of their businesses.
Figure 161. Ownership Role
Approximately 50% of respondents have less than or equal to $1M in annual revenues, followed by 24% reporting between $1M and $5M.
Figure 162. Annual Revenues
66%
2%
8%
12%
1% 9%
2%
Control owner (>50%) who actively operates thebusinessControl owner (>50%) who passively manages thebusinessShared-control owner (exactly 50%) who activelyoperates the businessShared-control owner (exactly 50%) who passivelymanages the business)Non-control owner (<50%) who actively operates thebusinessNon-control owner (< 50%) who passively manages thebusinessManager or executive with no ownership interest in thebusinessOther
2%
16%
22%
11%24%
7%7%
3%
6%
$0
$1 - $99K
$100K - $499K
$500K - $999K
$1M - $4.99M
$5M - $9.99M
$10M - $24.99M
$25M - $49.99M
Greater than $50 million
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BUSINESS OWNER cont. Average change in annual revenues in the last 12 months was 1.9%.
Figure 163. Annual Revenues Change in the Last 12 Months
On average respondents expect their annual revenues to grow by 8.4% in the next 12 months.
Figure 164. Annual Revenues Change Expectations in the Next 12 Months
Approximately 76% of businesses have net income less than or equal to $500,000, 8% of those have negative net income.
Figure 165. Net Income
3% 2% 2% 4% 3% 4% 5% 3% 3%
25%
9% 7% 8%5% 4% 5%
2% 2%5%
1.9%
-4%1%6%
11%16%21%26%31%
Decline Increase
2% 1% 2% 3% 2% 2%
20%
13% 11%14%
6% 5% 4% 2% 3%8% 8.4%
-4%1%6%
11%16%21%26%
Decline Increase
8%
36%
31%
8%10%
2% 4%Negative
$0 - $99K
$100K - $499K
$500K - $999K
$1M - $4.99M
$5M - $9.99M
Greater than 10 million
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BUSINESS OWNER cont.
Approximately 36% of respondents are currently not financed by any external capital sources. Nearly 32% and 24% of respondents’ businesses are financed by bank business loans and business credit card financing, respectively.
Figure 166. Current Sources of Financing
Among the businesses that tried to raise capital in the last 12 months 30% applied for bank business loan and 74% were successful, whereas 38% of respondents didn’t try to raise capital from any source.
Figure 167. Capital Sources Contacted To Raise Capital in the Last 12 Months
19%
4%1%
11%15% 15%
24%
10%
32%
1%5%
1% 2% 2% 3% 2% 3% 2% 3%
36%
0%5%
10%15%20%25%30%35%40%
13%
5%2%
7% 9% 9%15%
6%
30%
3%7%
3% 2% 2%5% 5% 5%
2% 4%
38%
0%5%
10%15%20%25%30%35%40%
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BUSINESS OWNER cont.
Figure 168. Success Rates
Among respondents who successfully raised capital the average number of capital providers contacted was 2.02.
Figure 169. Average Number of Capital Providers Contacted
82%
36% 41%
86% 89%
73%84%
91%
74%
32%
56%
38%
67%74% 77%
51%
23%32%
50%
33%
48%
0%10%20%30%40%50%60%70%80%90%
100%
3.522.71
4.58
5.64
1.92.33
1.93 1.932.08 2
3.18 2.86
1.52.18
3.75
6.075.28
4.81
3.81 3.5
5.75
0
1
2
3
4
5
6
7
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BUSINESS OWNER cont.
Approximately 77% of respondents attempted to raise less than $1 million in the last 12 months.
Figure 170. Amount of Capital Attempted to Raise in the last 12 Months
Approximately 35% of respondents took less than 7 days to complete financing process.
Figure 171. Average Time to Complete Financing Process in Days
34% of respondents spent less than one day during the process to successfully obtain financing (time spent by all employees and hired outsiders making inquiries, submitting proposals, meeting with capital providers, furnishing documents).
Figure 172. Days Spent During the Process to Successfully Obtain Financing
51%
20%
6%8%
5% 4% 3% 1% 1% 2%less than $100K$100K - $499K$500K - $999K$1M - $1.99M$2M - $4.99M$5M - $9.99M$10M - $24.99M$25M - $49.99M$50M - $99.99M$100M+
35%
15% 18%12%
7%3% 2% 3% 2% 1% 2%
0%
10%
20%
30%
40%
Less than7 days
7 days -15 days
15 days -1 month
1 - 2months
2 - 3months
3 - 4months
4 - 5months
5 - 6months
6 - 8months
10 - 12months
Morethan 12months
34%
14% 13%8%
3% 5% 3% 1% 4% 3% 2% 2%9%
0%
10%
20%
30%
40%
Lessthan 1
day
1 day 2 days 3 days 4 days 5 days 7 days 8 days 10 days 11 - 15days
16 - 20days
21 - 30days
Morethan 30
days
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BUSINESS OWNER cont. Among those respondents who were not able to obtain external financing in the last 12 months 41% are planning to improve the financial health of their businesses before attempting to raise capital in the future.
Figure 173. Next Steps to Satisfy Financial Needs
Among those respondents who didn’t attempt to obtain any external financing in the last 12 months, 26% said their businesses would be rejected for funding, followed by 21% of respondents who have sufficient financing already in place, and 16% of respondents whose businesses are generating enough cash flows to fund operations (including growth and expansion).
Figure 174. Reasons for Not Trying to Obtain Capital in the Last 12 Months
41%
14%
13%
12%
5%
4%
2%
10%
0% 5% 10% 15% 20% 25% 30% 35% 40% 45%
Improve financial 'health' of the company to obtain…
Look for alternative sources of financing
Continue looking for traditional capital providers
Look for a partner/equity investor
Sell part of a business
Sell a whole business
Cease operations/liquidate
Other
26%21%
16%10%
9%5%5%
2%1%
6%
0% 5% 10% 15% 20% 25% 30%
My business would be rejected for funding
Sufficient financing already in place
My business is generating enough cash flow to fund operations
I do not have the knowledge / expertise to pursue external…
Unfavorable economic conditions or low demand for…
Loss of control / flexibility
Cost of financing / waiting for cheaper financing
I do not have the time to pursue external financing
Ceasing operations / liquidating
Other
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BUSINESS OWNER cont. According to the respondents, “bank loans” as a category is the most appealing option to obtain financing.
Figure 175. Willingness to Obtain Financing
Approximately 49% of respondents indicated increasing revenues from current products or services as the area their businesses are most focused on today.
Figure 176. The Most Important Area to Focus On
2.61
3.713.56
2.812.63
2.96
3.533.7
4.13
3.613.33
2.79
2.192.392.31
3 2.983.092.84
2.59
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
Frie
nds a
nd fa
mily
Gra
nts (
SBIR
, STT
R,…
Crow
d fu
ndin
g
Trad
e cr
edit
Cred
it ca
rd -
pers
.
Loan
- pe
rs.
Cred
it ca
rd -
biz.
Leas
e
Bank
loan
- bi
z.
CDFI
/Cre
dit u
nion
Asse
t bas
ed le
nder
Busin
ess o
nlin
e…
Tax
prep
arat
ion…
Fact
or
Mer
chan
t cas
h ad
vanc
e
Ange
l cap
ital
Vent
. cap
ital
Priv
ate
equi
ty g
roup
Mez
z. le
nder
Hedg
e fu
nd
Not willing
Somewhat unwilling
Neutral
Somewhat willing
Willing to use
49%
21%
9% 8% 8% 5%
0%
10%
20%
30%
40%
50%
60%
Increasing revenuesfrom current
products/services
Expandingproduct/service lines
Reducing expenses Finding talentedpeople
Raisingfinancing/securing
capital
Other
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BUSINESS OWNER cont.
Approximately 28% of respondents are not planning to hire additional employees in the next 12 months, while 32% of respondents are planning to hire one or two additional employees in the next twelve months.
Figure 177. Amount of Employees Planned to be Hired
Approximately 37% of respondents believe economic uncertainty in the U.S. market is the number one reason preventing them from hiring, followed by government regulations and taxes (25%).
Figure 178. Reasons Preventing Privately-Held Businesses from Hiring
28%32%
17%
8%4% 4%
1% 1%4%
0%5%
10%15%20%25%30%35%
0 1 - 2 3 - 5 6 - 10 11 - 20 21-50 51-100 More than100
Unknown
37%
25%
21%
15%
14%
7%
3%
2%
34%
0% 5% 10% 15% 20% 25% 30% 35% 40%
Economic uncertainty/confidence (domestic)
Government regulations and taxes
Consumer/business demand (spending)
Ability to find qualified employees
Access to capital
International economic uncertainty
Competitiveness with foreign trade partners
Inflation
Other
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BUSINESS OWNER cont. For those businesses which do plan to hire, sales and marketing skills are in greatest demand (51%) followed by skilled labor (45%) and service/customer service (37%).
Figure 179. The Skills in Demand for New Hires
83% of businesses planning to hire indicate need to train those they hire.
Figure 180. Need for Training of New Hires
51%45%
37%27%
23%22%
19%13%
11%9%
8%
0% 10% 20% 30% 40% 50% 60%
Sales & marketingSkilled labor
Service/customer serviceInformation technology
ManagementFinance/financial management
EntrepreneurshipUnskilled labor
OtherGlobal business
Human resources
83%
17%
Yes
No
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BUSINESS OWNER cont. According to respondents, of those policies most likely to lead to job creation in 2016, increased access to capital emerged as number one (23%) followed by regulatory reform (21%).
Figure 181. Government Policies to Lead to Job Creation
Approximately 16% of respondents indicated their business cost of equity capital is in the range of 9% - 10%.
Figure 182. Cost of Equity Capital
23%
21%
18%
18%
6%5% 9%
Increased access to capital
Regulatory reform
Tax incentives
Repeal or modify Affordable Care Act
Education reform
Increased competitiveness with foreign tradepartnersOther
6% 6%
10% 10%
16%
7%
2%
9%
2%
9%
1% 1%
5%
2%1% 1% 1% 1% 1%
0%2%4%6%8%
10%12%14%16%18%
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BUSINESS OWNER cont. Privately-held businesses with revenues less than $5 million on average have almost the same desire to execute growth strategies (86%) as privately-held businesses with revenues greater than $5 million (94%). However, privately-held businesses with smaller revenues report lower levels of necessary resources (people, money, etc.) to grow (46%) as compared to privately-held businesses with higher revenues (64%).
Figure 183. Usage of Financial Analysis by Revenue Sizes
Respondents reported on their level of knowledge financing components (scale 0-4: none, some, moderate, very, completely).
Figure 184. Level of Knowledge of Financing Components
60%
45%
65%
73%
12%
60%
61%
46%
86%
77%
72%
74%
79%
27%
80%
78%
64%
94%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Prepare an annual budget
Have financial statements audited or reviewed (not…
Have a mission and vision statement made known
Engage in planning beyond the current year
Have an outside board of directors
Have key performance indicators reviewed
Have a solid growth strategy
Have necessary resources (people, money, etc.) to…
Have the desire, drive, and enthusiasm to grow and…
Revenues less than $5 million Revenues more than $5 million
Types offinancing
Process toobtain
financing
"Costs ofcapital"
Advantages/disadvantages
of various typesof financing
Specificbenchmarks to
qualify forfinancing
Specific firms tocontact to seekvarious types of
financing
Financingacceptance
rates
Whole sample 2.2 2.1 2.1 2.1 2.0 1.9 1.7
< $5 million 2.1 2.0 1.9 1.9 1.8 1.7 1.6
$5 - $100 million 2.6 2.5 2.5 2.5 2.4 2.3 2.1
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
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BUSINESS OWNER cont. Most of the respondents are planning to transfer their ownership interest in more than five years from now while only 3% plan to transfer their ownership at the first available opportunity.
Figure 185. Anticipation of the Ownership Transfer
Assuming respondents businesses were eligible to raise financing from both private equity and a public stock offering (IPO), 59% of them would choose private equity.
Figure 186. Private Equity vs Initial Public Offering
When asked about general view, 54% of respondents indicated private equity as favorable financing source.
Figure 187. General Views on Initial Public Offering and Private Equity
3% 3%7% 9%
3%
14%
25%
13%
7%
17%
0%5%
10%15%20%25%30%
In lessthan one
year
1 year 2 years 3 years 4 years 5 years Between5 and 10
years
Between10 and 15
years
Between15 and 20
years
After 20years
Private equity Initial public offering (IPO) Unsure
Whole sample 59% 14% 27%< $5 million 57% 13% 30%$5 - $100 million 63% 13% 24%
0%20%40%60%80%
100%
Favorable Neither favorable norunfavorable Unfavorable
IPO 35% 30% 35%PE 54% 25% 21%
35% 30% 35%54%
25% 21%
0%20%40%60%80%
100%
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BUSINESS OWNER cont. Privately-held businesses with annual revenues less than $5 million are more concerned about access to capital than those with revenues greater than $5 million. Larger privately-held businesses are more concerned about government regulations and taxes.
Figure 188. The Number One Issue Facing Privately-Held Businesses Today by Revenue Sizes
Figure 189. The Number One Emerging Issue Facing Privately-Held Businesses by Revenue Sizes
24%
18%
18%
13%
9%
7%
5%
4%
3%
33%
19%
13%
12%
9%
7%
2%
4%
2%
0% 5% 10% 15% 20% 25% 30% 35%
Government regulations and taxes
Economic uncertainty (Domestic)
Access to capital
Health care costs
Political uncertainty / elections
Economic uncertainty (International)
Inflation
Competition from foreign trade partners
Other
Revenues less than $5 million Revenues more than $5 million
18%
15%
15%
13%
12%
9%
9%
8%
2%
22%
18%
12%
13%
12%
7%
8%
6%
2%
0% 5% 10% 15% 20% 25%
Economic uncertainty (Domestic)
Government regulations and taxes
Political uncertainty / elections
Economic uncertainty (International)
Health care costs
Access to capital
Inflation
Competition from foreign trade partners
Other
Revenues less than $5 million Revenues more than $5 million
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BUSINESS OWNER cont. Most of respondents indicated increased unit sales and prices of labor and materials, flat access to capital, and slightly improved general business conditions.
Table 62. General Business and Industry Assessment: Today Versus Twelve Months Ago
Characteristics Decreased significantly
Decreased slightly
Stayed about
the same
Increased slightly
Increased significantly % increase %
decrease
Net increase/ decrease
Unit sales 9% 15% 26% 29% 20% 49% 24% 25%
Prices of labor and materials 1% 6% 37% 46% 10% 56% 7% 49%
Net income 10% 18% 24% 32% 16% 48% 28% 21%
Inventory levels 4% 18% 49% 22% 7% 29% 22% 7%
Capital expenditures 6% 11% 46% 25% 11% 37% 17% 19%
Opportunities for growth 5% 10% 28% 35% 23% 57% 15% 43%
Access to bank loans 9% 10% 57% 16% 8% 24% 19% 6%
Access to equity capital 10% 11% 59% 13% 7% 20% 21% -1%
Prices of your products or services 2% 8% 46% 39% 6% 45% 10% 35%
Time to collect receivables 2% 8% 63% 20% 7% 27% 10% 18%
Number of employees 2% 9% 60% 24% 4% 28% 12% 16%
Competition 2% 9% 55% 25% 9% 34% 11% 24%
General business conditions 8% 20% 40% 27% 6% 33% 28% 5%
Appetite for risk 5% 15% 52% 23% 5% 29% 20% 9%
Probability of business closure 19% 17% 48% 12% 4% 16% 36% -20%
Time worrying about economy 6% 11% 44% 23% 17% 39% 17% 22%
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BUSINESS OWNER cont. Participants of the survey believe almost all general business characteristics will increase in the next 12 months.
Table 63. General Business and Industry Assessment Expectations Over the Next 12 Months
Characteristics Decreased significantly
Decreased slightly
Stayed about
the same
Increased slightly
Increased significantly % increase % decrease
Net increase/ decrease
Unit sales 2% 6% 22% 46% 24% 69% 8% 61%
Prices of labor and materials 1% 4% 41% 49% 6% 54% 5% 50%
Net income 2% 9% 22% 45% 22% 68% 11% 57%
Inventory levels 3% 8% 55% 26% 8% 34% 11% 23%
Capital expenditures 4% 8% 50% 29% 10% 39% 11% 27%
Opportunities for growth 2% 6% 26% 41% 25% 66% 8% 58%
Access to bank loans 4% 6% 62% 20% 7% 28% 10% 17%
Access to equity capital 5% 7% 59% 19% 11% 30% 11% 19%
Prices of your products or services 1% 5% 43% 46% 4% 51% 6% 44%
Time to collect receivables 1% 6% 73% 16% 4% 20% 7% 14%
Number of employees 1% 3% 45% 44% 7% 51% 4% 48%
Competition 1% 7% 59% 26% 7% 33% 8% 25%
General business conditions 4% 17% 45% 28% 6% 34% 21% 14%
Appetite for risk 5% 12% 54% 24% 6% 30% 16% 14%
Probability of business closure 19% 19% 50% 8% 4% 12% 38% -26%
Time worrying about economy 7% 11% 51% 18% 13% 31% 18% 14%
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ABOUT THE AUTHOR Craig R. Everett, PhD Director, Pepperdine Private Capital Markets Project Craig R. Everett is an assistant professor of finance at Pepperdine University Graziadio School of Business and Management and Director of the Pepperdine Private Capital Markets Project. His teaching and research interests include entrepreneurial finance, private capital markets, business valuation and behavioral corporate finance. He holds a PhD in finance from Purdue University, an MBA from George Mason University, and a BA in quantitative economics from Tufts University. Dr. Everett is the author of the best-selling children's fantasy novel, Toby Gold and the Secret Fortune, which incorporates such financial literacy topics as saving, investing, banking, entrepreneurship, interest rates, return on investment, and net worth. His research has appeared in the Wall Street Journal, CNBC, USA Today, and the New York Times, been published in a number of journals and been presented at domestic and international conferences. Craig Everett is member of the Beta Gamma Sigma Honor Society, Financial Executives International, and the Los Angeles World Affairs Council. Dr. Everett is a certified mergers & acquisitions advisor (CM&AA), and a registered investment advisor (RIA) with the state of California. Contact: [email protected]
ABOUT THE PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT
A leader in cultivating entrepreneurship and digital innovation, the Pepperdine University Graziadio School of Business and Management focuses on the real-world application of MBA-level business concepts. The Graziadio School provides student-focused, globally-oriented education through part-time, full-time, and executive MBA programs at our five Southern California locations and Silicon Valley, Santa Barbara and Dallas campuses, as well as through online and hybrid formats. In addition, the Graziadio School offers a variety of master of science programs, a bachelor of science in management degree-completion program, and the Presidents and Key Executives MBA, as well as executive education certificate programs. Follow the Graziadio School on Facebook (https://www.facebook.com/pepperdine.graziadio), Twitter at @GraziadioSchool (https://twitter.com/graziadioschool) , and LinkedIn (https://www.linkedin.com/edu).
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INDEX OF TABLES Table 1. Private Capital Market Required Rates of Return ............................................................................................................ 3
Table 2. Median Deal Multiples by EBITDA Size of Company ........................................................................................................ 7
Table 3. Median Total Leverage Multiples by Size of Company ..................................................................................................... 8
Table 4. Median Senior Leverage Multiples by Size of Company ................................................................................................... 8
Table 5. Balance of Available Capital with Quality Companies..................................................................................................... 10
Table 6. How Difficult to Arrange Senior Debt for Transactions over the Past 12 Months .......................................................... 10
Table 7. General Business and Industry Assessment: Today versus 12 Months Ago ................................................................... 10
Table 8. General Business and Industry Assessment Expectations over the Next 12 Months ..................................................... 11
Table 9. PEG Fund Data .................................................................................................................................................................. 12
Table 10. General Characteristics – Buyout Transactions (medians) ............................................................................................ 15
Table 11. General Characteristics – Non-Buyout Transactions (medians) .................................................................................... 15
Table 12. The Balance of Available Capital with Quality Companies for the Following EBITDA Size........................................... 18
Table 13. General Business and Industry Assessment: Today versus 12 Months Ago ................................................................. 18
Table 14. General Business and Industry Assessment Expectations over the Next 12 Months ................................................... 19
Table 15. All-in Rates by Loan Size and Industry ........................................................................................................................... 21
Table 16. All-in Rates by Loan Type ............................................................................................................................................... 21
Table 17. Senior Leverage Multiple by EBITDA Size ...................................................................................................................... 22
Table 18. Fees Charged .................................................................................................................................................................. 22
Table 19. Importance of Financial Evaluation Metrics .................................................................................................................. 23
Table 20. Financial Evaluation Metrics Average Data ................................................................................................................... 23
Table 21. Personal Guarantee and Collateral Percentage of Occurrence by Size of Loan (%) ..................................................... 23
Table 22. Applications Data ........................................................................................................................................................... 23
Table 23. General Business and Industry Assessment: Today versus 12 Months Ago ................................................................. 25
Table 24. General Business and Industry Assessment Expectations over the Next 12 Months ................................................... 26
Table 25. All-in Rates on Current Asset-Based Loans (medians)................................................................................................... 27
Table 26. Standard Advance Rate (or LTV ratio) for Assets (%) .................................................................................................... 28
Table 27. Mezzanine Fund Data ..................................................................................................................................................... 30
Table 28. Sponsored Deals by EBITDA Size (medians) .................................................................................................................. 32
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Table 29. Investment Type by Size of Investee Company, Sponsored Deals ................................................................................ 32
Table 30. Non-Sponsored Deals by EBITDA Size (medians) .......................................................................................................... 33
Table 31. Investment Type by Size of Investee Company, Sponsored Deals ................................................................................ 33
Table 32. Importance of Financial Evaluation Metrics .................................................................................................................. 34
Table 33. Financial Evaluation Metrics Average Data ................................................................................................................... 35
Table 34. General Business and Industry Assessment: Today versus 12 Months Ago ................................................................. 36
Table 35. General Business and Industry Assessment Expectations over the Next 12 Months ................................................... 36
Table 36. Importance of Factors When Evaluating ....................................................................................................................... 41
Table 37. General Business and Industry Assessment: Today versus 12 Months Ago ................................................................. 42
Table 38. General Business and Industry Assessment Expectations over the Next 12 Months ................................................... 42
Table 39. VC Fund Data .................................................................................................................................................................. 44
Table 40. General Information on Investments by Company Stages ............................................................................................ 45
Table 41. General Business and Industry Assessment: Today versus 12 Months Ago ................................................................. 48
Table 42. General Business and Industry Assessment Expectations over the Next 12 Months ................................................... 48
Table 43. General Information on Investments by Company Stages ............................................................................................ 51
Table 44. General Business and Industry Assessment: Today versus 12 Months Ago ................................................................. 54
Table 45. General Business and Industry Assessment Expectations over the Next 12 Months ................................................... 54
Table 46. General Business and Industry Assessment: Today versus 12 Months Ago ................................................................. 57
Table 47. General Business and Industry Assessment Expectations over the Next 12 Months ................................................... 58
Table 48. How Difficult to Arrange Senior Debt for Transactions over the Past 12 Months ........................................................ 61
Table 49. Expectations of Business Listings/ Engagements from New Clients in the Next 3 Months ......................................... 84
Table 50. Expectations for Business Valuation Multiples in the Next 3 Months .......................................................................... 84
Table 51. General Business and Industry Assessment: Today versus 12 Months Ago ................................................................. 84
Table 52. General Business and Industry Assessment: Expectations over the Next 12 Months.................................................. 85
Table 53. Fees Charged .................................................................................................................................................................. 87
Table 54. Median Percentage or Amount Charged ....................................................................................................................... 88
Table 55. Spread (%) ...................................................................................................................................................................... 88
Table 56. Typical Current Requirements ....................................................................................................................................... 89
Table 57. Discount fee (%) on Outstanding Invoices for Notification Basis .................................................................................. 89
Table 58. Expected Total Write-off – Percentage of Receivables Purchased on New Arrangements (%) ................................... 90
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Table 59. Average Number of Days Outstanding Receivables ...................................................................................................... 90
Table 60. General Business and Industry Assessment: Today versus 12 Months Ago ................................................................. 91
Table 61. General Business and Industry Assessment Expectations over the Next 12 Months ................................................... 91
Table 62. General Business and Industry Assessment: Today Versus Twelve Months Ago ....................................................... 107
Table 63. General Business and Industry Assessment Expectations Over the Next 12 Months ................................................ 108
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INDEX OF FIGURES Figure 1. Private Capital Market Required Rates of Return ...................................................................................................... 2
Figure 2. Private Business Sales Transactions Closed in the Last 12 Months ............................................................................. 4
Figure 3. Business Types That Were Involved in the Transactions Closed in the Last 12 Months .............................................. 5
Figure 4. Average Number of Months to Close One Deal ......................................................................................................... 5
Figure 5. Private Business Transactions Expected to Close in the Next 12 Months ................................................................... 5
Figure 6. Percentage of Business Sales Engagements Terminated Without Transacting ........................................................... 6
Figure 7. Reasons for Business Sales Engagements Not Transacting ......................................................................................... 6
Figure 8. Valuation Gap in Pricing for Transactions That Didn’t Close....................................................................................... 6
Figure 9. Usage of Valuation Methods ..................................................................................................................................... 7
Figure 10. Usage of Multiple Methods ..................................................................................................................................... 7
Figure 11. Components of Closed Deals ................................................................................................................................... 8
Figure 12. Percent of Transactions Involved Strategic and Financial Buyers ............................................................................ 9
Figure 13. Premium Paid by Strategic Buyers Relative to Financial Buyers .............................................................................. 9
Figure 14. Percent of Transactions Involved Strategic and Financial Buyers ............................................................................ 9
Figure 15. Issues Facing Privately-Held Businesses ..................................................................................................................11
Figure 16. Typical Investment Size ..........................................................................................................................................12
Figure 17. Type of Business for Investments Planned over Next 12 Months ............................................................................13
Figure 18. Total Number of Investments Made in the Last 12 Months ....................................................................................13
Figure 19. Number of Follow-on Investments Made in the Last 12 Months .............................................................................13
Figure 20. Number of Total Investments Planned over Next 12 Months .................................................................................14
Figure 21. Number of Follow-on Investments Planned over Next 12 Months ..........................................................................14
Figure 22. Size of Buyout Investments in the Last 12 Months ..................................................................................................14
Figure 23. Size of Non-Buyout Investments in the Last 12 Months ..........................................................................................15
Figure 24. Usage of Valuation Approaches ..............................................................................................................................16
Figure 25. Usage of Multiple Methods ....................................................................................................................................16
Figure 26. Items Required to Close One Deal ..........................................................................................................................17
Figure 27. Exit Plans for Portfolio Companies .........................................................................................................................17
Figure 28. Description of Lending Entity .................................................................................................................................20
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Figure 29. Borrower Motivation to Secure Financing (past 12 months) ...................................................................................22
Figure 30. Typical EBITDA Sizes for Companies Booked ...........................................................................................................27
Figure 31. Asset-Based Loans Decline Rate .............................................................................................................................28
Figure 32. SBIC (small business investment) Firms ..................................................................................................................29
Figure 33. Type of Business for Investments Planned over Next 12 Months ............................................................................30
Figure 34. Total Number of Investments Made in the Last 12 Months ....................................................................................30
Figure 35. Number of Follow-on Investments Made in the Last 12 Months .............................................................................31
Figure 36. Number of Total Investments Planned over Next 12 Months .................................................................................31
Figure 37. Number of Follow-on Investments Planned over Next 12 Months ..........................................................................31
Figure 38. Size of Sponsored Deals in the Last 12 Months .......................................................................................................32
Figure 39. Size of Non-Sponsored Deals in the Last 12 Months ...............................................................................................33
Figure 40. Borrower Motivation to Secure Mezzanine Funding (past 12 months) ....................................................................34
Figure 41. Items Required to Close One Deal ..........................................................................................................................34
Figure 42. Entity Type .............................................................................................................................................................37
Figure 43. Assets under Management or Investable Funds .....................................................................................................37
Figure 44. Current Asset Allocation for "Alternative Assets" (% of total portfolio) ..................................................................38
Figure 45. Target Asset Allocation for "Alternative Assets" (% of total portfolio) ....................................................................38
Figure 46. Target Asset Allocation by Assets ...........................................................................................................................38
Figure 47. Annual Return Expectations for New Investments ..................................................................................................39
Figure 48. Assets with the Best Risk/Return Trade-off Currently .............................................................................................39
Figure 49. Industry with the Best Risk/Return ........................................................................................................................40
Figure 50. Geographic Regions of the World Offering the Best Risk/Return Tradeoff Currently ..............................................40
Figure 51. Issues Facing Privately-Held Businesses ..................................................................................................................41
Figure 52. Total Number of Investments Made in the Last 12 Months ....................................................................................43
Figure 53. Number of Follow-on Investments Made in the Last 12 Months .............................................................................43
Figure 54. Number of Total Investments Planned over Next 12 Months .................................................................................44
Figure 55. Number of Follow-on Investments Planned over Next 12 Months ..........................................................................44
Figure 56. Type of Business for Investments Planned over Next 12 Months ............................................................................44
Figure 57. Geographic Location of Planned Investment over Next 12 Months .........................................................................46
Figure 58. Usage of Valuation Methods ..................................................................................................................................46
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Figure 59. Usage of Multiple Methods ....................................................................................................................................46
Figure 60. Exit Plans for Portfolio Companies .........................................................................................................................47
Figure 61. Current Issues Facing Privately-Held Businesses .....................................................................................................47
Figure 62. Total Number of Investments Made in the Last 12 Months ....................................................................................49
Figure 63. Number of Follow-on Investments Made in the Last 12 Months .............................................................................49
Figure 64. Number of Total Investments Planned over Next 12 Months .................................................................................50
Figure 65. Number of Follow-on Investments Planned over Next 12 Months ..........................................................................50
Figure 66. Type of Business for Investments Planned over Next 12 Months ............................................................................50
Figure 67. Geographic Location of Planned Investment over Next 12 Months .........................................................................51
Figure 68. Geographical Limit for Investment .........................................................................................................................52
Figure 69. Usage of Multiple Methods ....................................................................................................................................52
Figure 70. Items Required to Close One Deal ..........................................................................................................................53
Figure 71. Exit Plans for Portfolio Companies .........................................................................................................................53
Figure 72. Annual Revenues of Companies Valued .................................................................................................................55
Figure 73. Usage of Valuation Methods ..................................................................................................................................55
Figure 74. Usage of Multiple Methods ....................................................................................................................................56
Figure 75. Average Risk-Free Rat and Market (equity) Risk Premium and Long-Term Growth Rate .........................................56
Figure 76. Discount for Lack of Marketability (DLOM) by Revenue Sizes .................................................................................56
Figure 77. Overall Comfort Level with Applying Public Cost of Capital to Privately-held Companies of Various Sizes ..............57
Figure 78. Explicit Forecast Period for High-Growth Companies by Revenue Sizes (years) .......................................................57
Figure 79. Issues Facing Privately-Held Businesses ..................................................................................................................58
Figure 80. Private Business Sales Transactions Closed in the Last Twelve Months ...................................................................59
Figure 81. Private Business Sales Transactions Expected to Close in the Next Twelve Months ................................................59
Figure 82. Typical Size of Business Transactions ......................................................................................................................60
Figure 83. Business Transactions in the Last 12 Months .........................................................................................................60
Figure 84. Did Respondents Close More Transactions in 2015 than in Previous Years .............................................................60
Figure 85. Percentage of Closed Business Transactions Valued under $2 million Utilized SBA Components ............................61
Figure 86. In 2015, Best Client Arrived By: ..............................................................................................................................61
Figure 87. Types of Referrals ..................................................................................................................................................62
Figure 88. Types of Publication/ Media Source .......................................................................................................................62
PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | PRIVATE CAPITAL MARKETS REPORT – 2016
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Figure 89. Was It Buyer's or Seller’s Market in the Last 3 Months ...........................................................................................62
Figure 90. Median Number of Months from Listing/ Engagement to Close by Deal Size ..........................................................63
Figure 91. Median Number of Months from LOI/ Offer to Close by Deal Size ..........................................................................63
Figure 92. Median SDE Multiple Paid by Deal Size ..................................................................................................................63
Figure 93. Median EBITDA Multiple Paid by Deal Size .............................................................................................................64
Figure 94. Multiple Types by Deal Size ....................................................................................................................................64
Figure 95. Buyer Type by Deal Size .........................................................................................................................................65
Figure 96. Reason for Seller to Go to Market by deal Size .......................................................................................................65
Figure 97. Number One Motivation for Buyer by Deal Size .....................................................................................................66
Figure 98. Median Percentage of Final/ Selling Price Realized to Asking/ Benchmark Price by Deal Size .................................66
Figure 99. Number of Months from Engagement/ Listing to Close ..........................................................................................67
Figure 100. Number of Months from LOI/ Offer to Close ........................................................................................................67
Figure 101. Industry Type .......................................................................................................................................................67
Figure 102. SDE Multiple Paid .................................................................................................................................................68
Figure 103. EBITDA Multiple Paid ...........................................................................................................................................68
Figure 104. Multiple Paid ........................................................................................................................................................68
Figure 105. Buyer Type ...........................................................................................................................................................69
Figure 106. Reason for Seller to Go to Market ........................................................................................................................69
Figure 107. Buyer Location .....................................................................................................................................................69
Figure 108. Number One Motivation for Buyer .......................................................................................................................70
Figure 109. Number of Months from Engagement/ Listing to Close ........................................................................................70
Figure 110. Number of Months from LOI/ Offer to Close ........................................................................................................70
Figure 111. Industry Type .......................................................................................................................................................71
Figure 112. SDE Multiple Paid .................................................................................................................................................71
Figure 113. EBITDA Multiple Paid ...........................................................................................................................................71
Figure 114. Multiple Paid ........................................................................................................................................................72
Figure 115. Buyer Type ...........................................................................................................................................................72
Figure 116. Reason for Seller to Go to Market ........................................................................................................................72
Figure 117. Buyer Location .....................................................................................................................................................73
Figure 118. Number One Motivation for Buyer .......................................................................................................................73
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Figure 119. Number of Months from Engagement/ Listing to Close ........................................................................................73
Figure 120. Number of Months from LOI/ Offer to Close ........................................................................................................74
Figure 121. Industry Type .......................................................................................................................................................74
Figure 122. SDE Multiple Paid .................................................................................................................................................74
Figure 123. EBITDA Multiple Paid ...........................................................................................................................................75
Figure 124. Multiple Paid ........................................................................................................................................................75
Figure 125. Buyer Type ...........................................................................................................................................................75
Figure 126. Reason for Seller to Go to Market ........................................................................................................................76
Figure 127. Buyer Location .....................................................................................................................................................76
Figure 128. Number One Motivation for Buyer .......................................................................................................................76
Figure 129. Number of Months from Engagement/ Listing to Close ........................................................................................77
Figure 130. Number of Months from LOI/ Offer to Close ........................................................................................................77
Figure 131. Industry Type .......................................................................................................................................................77
Figure 132. SDE Multiple Paid .................................................................................................................................................78
Figure 133. EBITDA Multiple Paid ...........................................................................................................................................78
Figure 134. Multiple Paid ........................................................................................................................................................78
Figure 135. Buyer Type ...........................................................................................................................................................79
Figure 136. Reason for Seller to Go to Market ........................................................................................................................79
Figure 137. Buyer Location .....................................................................................................................................................79
Figure 138. Number One Motivation for Buyer .......................................................................................................................80
Figure 139. Number of Months from Engagement/ Listing to Close ........................................................................................80
Figure 140. Number of Months from LOI/ Offer to Close ........................................................................................................80
Figure 141. Industry Type .......................................................................................................................................................81
Figure 142. SDE Multiple Paid .................................................................................................................................................81
Figure 143. EBITDA Multiple Paid ...........................................................................................................................................81
Figure 144. Multiple Paid ........................................................................................................................................................82
Figure 145. Buyer Type ...........................................................................................................................................................82
Figure 146. Reason for Seller to Go to Market ........................................................................................................................82
Figure 147. Buyer Location .....................................................................................................................................................83
Figure 148. Number One Motivation for Buyer .......................................................................................................................83
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Figure 149. Primary Use of the Factoring Facilities Over the Last 12 Months ...........................................................................86
Figure 150. Industries for Gross Invoices for the Last 12 Months ............................................................................................86
Figure 151. Term of Current Typical Factoring Facility .............................................................................................................87
Figure 152. Current Average Advance Rates for Various-Sized Facilities ..................................................................................87
Figure 153. Usage of Reference Rates .....................................................................................................................................88
Figure 154. Percentage of Factoring Business - Recourse vs Non-recourse ..............................................................................88
Figure 155. Percentage of Purchases on a Non-notification Basis ............................................................................................89
Figure 156. Most Significant Concern to Factoring Business ....................................................................................................90
Figure 157. Current Issues Facing Privately-Held Businesses ...................................................................................................90
Figure 158. Respondents Distribution by State .......................................................................................................................92
Figure 159. Description of Entity .............................................................................................................................................93
Figure 160. Number of Employees ..........................................................................................................................................93
Figure 161. Ownership Role ....................................................................................................................................................94
Figure 162. Annual Revenues .................................................................................................................................................94
Figure 163. Annual Revenues Change in the Last 12 Months ...................................................................................................95
Figure 164. Annual Revenues Change Expectations in the Next 12 Months .............................................................................95
Figure 165. Net Income ..........................................................................................................................................................95
Figure 166. Current Sources of Financing ................................................................................................................................96
Figure 167. Capital Sources Contacted To Raise Capital in the Last 12 Months ........................................................................96
Figure 168. Success Rates .......................................................................................................................................................97
Figure 169. Average Number of Capital Providers Contacted ..................................................................................................97
Figure 170. Amount of Capital Attempted to Raise in the last 12 Months ...............................................................................98
Figure 171. Average Time to Complete Financing Process in Days ...........................................................................................98
Figure 172. Days Spent During the Process to Successfully Obtain Financing ..........................................................................98
Figure 173. Next Steps to Satisfy Financial Needs ...................................................................................................................99
Figure 174. Reasons for Not Trying to Obtain Capital in the Last 12 Months ...........................................................................99
Figure 175. Willingness to Obtain Financing ......................................................................................................................... 100
Figure 176. The Most Important Area to Focus On ................................................................................................................ 100
Figure 177. Amount of Employees Planned to be Hired ........................................................................................................ 101
Figure 178. Reasons Preventing Privately-Held Businesses from Hiring ................................................................................. 101
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Figure 179. The Skills in Demand for New Hires .................................................................................................................... 102
Figure 180. Need for Training of New Hires .......................................................................................................................... 102
Figure 181. Government Policies to Lead to Job Creation ..................................................................................................... 103
Figure 182. Cost of Equity Capital ......................................................................................................................................... 103
Figure 183. Usage of Financial Analysis by Revenue Sizes ..................................................................................................... 104
Figure 184. Level of Knowledge of Financing Components .................................................................................................... 104
Figure 185. Anticipation of the Ownership Transfer .............................................................................................................. 105
Figure 186. Private Equity vs Initial Public Offering ............................................................................................................... 105
Figure 187. General Views on Initial Public Offering and Private Equity ................................................................................ 105
Figure 188. The Number One Issue Facing Privately-Held Businesses Today by Revenue Sizes .............................................. 106
Figure 189. The Number One Emerging Issue Facing Privately-Held Businesses by Revenue Sizes ......................................... 106