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Middle-MarketM&ASurveyBook:A Survey of Key M&A Deal Terms

First Half of 2013

Introduction

2August 2013

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As a leader in middle-market M&A transactions, Seyfarth ShawLLP is pleased to publish this edition of our Middle Market M&ASurveyBook of Key Deal Terms (the “Survey”).

This Survey summarizes selected terms in 81 publicly availableprivate acquisition agreements for the purchase of assets,equity or business units signed in the first half of 2013 with dealvalues up to $1 billion. The Survey does not include the reviewof transactions providing for contingent purchase pricepayments or that involved the payment of any considerationother than cash. For purposes of this Survey, “purchase price”means the total consideration paid by an acquirer in atransaction.

While each private target transaction is unique and termsgenerally will be driven by the specific facts and circumstancesunderlying the transaction, “what’s market?” is a questionoften faced by the parties engaged in a transaction.Understanding current trends and patterns in deal terms is avaluable tool for buyers, sellers and deal professionalsevaluating and negotiating private target transactions.

This Survey is intended to be a quick reference guide of currentmarket practice with respect to key M&A deal terms and aidparties negotiating private acquisition agreements.

KEY DEAL TERMS SURVEYED

• Indemnity Escrow Amount

• Indemnity Escrow Period

• Representation & Warranty

Survival Period

• Indemnity Basket Size & Type

• Indemnity Cap Size

M&A SurveyBook: Survey of Key M&A Deal Terms — First Half of 2013

Indemnity Escrow Amount

M&A SurveyBook: Survey of Key M&A Deal Terms — First Half of 2013 3August 2013

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Observations• 52% of all deals surveyed had an

indemnity escrow.

• The median indemnity escrow amountincluded in deals surveyed was 9%.

• Of the deals surveyed which providedfor indemnity escrow:

• nearly 60% had indemnity escrowamounts of 9% of the purchaseprice or greater.

• 28% had indemnity escrowamounts of 5% of the purchaseprice or less.

The indemnity escrow amount is the portion of the purchase price which is held inescrow to serve as a fund to satisfy indemnification claims against a seller.

Indemnity Escrow Period

M&A SurveyBook: Survey of Key M&A Deal Terms — First Half of 2013 4August 2013

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Observations• The median escrow period included in

deals surveyed was 15 months.

• Of the deals surveyed which had anindemnity escrow, 91% had indemnityescrow periods from 12 to 18 months.

The indemnity escrow period is the length of time after the transaction closing datethat the indemnity escrow amount is held before being released to the seller.

Representation & Warranty Survival Period

5August 2013

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Observations• Each deal surveyed included a survival

period.

• In general, survival periods mirroredindemnity escrow periods.

• The median survival period included indeals surveyed was 15 months.

• 84% of deals surveyed had survivalperiods from 12 to 18 months.

• 10% of deals surveyed had survivalperiods of less than 12 months.

The survival period is the length of time after the transaction closing date during which a party is permitted to make claimswith respect to breaches of representations and warranties. For purposes of this Survey, the survival periods referred tobelow apply to “general” representations and warranties, not “fundamental” representations and warranties. “Fundamental”representations and warranties generally have longer survival periods and typically include representations and warrantiesregarding: capitalization, due authority and organization, title, taxes, employee benefits, environmental, and brokers.


Indemnity Basket Size & Type

6August 2013

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Observations• 99% of deals surveyed had baskets.

• The median basket size included in deals surveyed was 0.76%.

• 80% of deals surveyed had baskets of less than orequal to 1% of the purchase price.

An indemnity basket requires a party to incur a certain amount of indemnifiable losses before it can seekindemnification from the other party. There are generally two types of baskets: true deductibles and tipping or dollar-one baskets. With a true deductible an indemnifying party is only responsible for damages exceeding the basketamount. With a tipping or dollar-one basket an indemnifying party is responsible for all damages once damagesreach the basket amount. Indemnity baskets typically only apply to breaches of “general” representation andwarranties.


Indemnity Cap Size

7August 2013

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The indemnity cap limits a party’s liability under the indemnification provisions to astated dollar amount. Indemnity caps typically only apply to breaches ofrepresentations and warranties (subject to carve-outs for “fundamental”representations).

Observations• 95% of deals surveyed had an

indemnity cap.

• The median indemnity cap sizeincluded in deals surveyed was 11%.


About Seyfarth’s M&A Practice

8August 2013

www.seyfarth.comM&A SurveyBook: Survey of Key M&A Deal Terms — First Half of 2013

For More Information

9

Andrew LucanoPractice Group [email protected]: (212) 218-6492

Learn more about our work at: www.seyfarth.com/Mergers-and-Acquisitions

Don [email protected]: (212) 218-5285

August 2013www.seyfarth.com

Disclaimer: The acquisition agreement provisions that form the basis of this Survey are drafted in many different ways and do not always fit preciselyinto particular “data point” categories. Therefore, Seyfarth Shaw has had to make various judgment calls regarding how to categorize certainprovisions. As a result, the conclusions presented in this Survey may be subject to important qualifications that are not expressly articulated in thisSurvey. The findings presented in this Survey do not necessarily reflect the views of Seyfarth Shaw. In addition, while Seyfarth Shaw gathers its datafrom sources it considers reliable, it does not guarantee the accuracy or completeness of the information provided within this Survey. Seyfarth Shawmakes no representations or warranties, expressed or implied, regarding the accuracy of this material.

Attorney Advertising. This is a general communication from Seyfarth Shaw LLP and should not be construed as legal advice or a legal opinion withrespect to any specific facts or circumstances. The contents are intended for general information purposes only, and you are urged to consult a lawyerconcerning your own situation and any specific legal questions you may have. Copyright © 2013 Seyfarth Shaw LLP. All rights reserved. Noreproductions.

Authors of this publication also included Evan Michalovsky and Ilya Bubel.


“ The State of Private Equity Today”

John Hatherly

“I expect that this excess liquidity, leading to huge amounts of cheap financing will continue for the next 12‐24 months … I know this liquidity cannot go on forever … I know the longer this liquidity lasts the worse it will be when it ends.”

‐Bill Conway, Carlyle Group

“It is almost biblical, there is a time to reap and a time to sow, we are harvesting now!”

‐Leon Black, Apollo

PE Today

Are These Quotes from 2006 or 2013?Are These Quotes from 2006 or 2013?

“History doesn’t repeat itself but it often rhymes”

‐Mark Twain

PE Today

Source: Bloomberg News, February 12, 2013; http://www.bloomberg.com/news/2013‐02‐12/buyout‐boom‐shakeout‐seen‐leaving‐one‐in‐four‐to‐starve.html

$702 billion raised in 2006‐2008

Over $100 billion, or 14%, of the $702 billion must be used or

returned by the end of

2013

708 firms face ending investment periods through 2015

Since 2007, average LBO returns at 6% per year, below 7.5% needed by pension funds and below 13% historical average

Many firms suffering

from below‐average profits on boom

period funds

LPs gravitating towards best

performing managers

10‐25% of funds at risk

“Zombie Funds”

Private Equity in Turmoil – “The Shakeup”

M&A Activity

“Improving Outlook Due to Fading Fiscal Drag”

Consumption

Labor

Inflation

Monetary and Fiscal Policy

Employment Gains, Rebounding Home Prices, Declining Household Debt

Growing Private Payrolls, Unemployment Headed to 7% in 2014

In Check at 2% (Fed Target), Syria Presents Risk to Energy Prices and Affordable Care Act to Health Care Costs

Shrinking Federal Deficit to 3.8% of GDP (Peak of 10% in 2009) Due to Increasing Tax Revenues and Modest Spending Cuts. Fed Tapering Likely to Have Some Impact on Interest Rates ( ) and Housing Recovery

Improving Economic Outlook But…Improving Economic Outlook But…

Economic Outlook – Glass Half Full

Labor

Underfunded Pensions

GeopoliticalConcerns

Monetary & Fiscal Policy

Lowest Labor Participation Rate @ 63% since Late 70’s

Significant Off Balance Sheet Liabilities at all Levels of Government

Middle East Energy Prices

Impact of Expected Fed Tapering. Federal Deficit Declining but $17 Trillion in Debt, Debt Ceiling Fight Looming and Limited Appetite to Reform Entitlements

Only Certainty Appears to be Economic UncertaintyOnly Certainty Appears to be Economic Uncertainty

Economic Outlook – Glass Half Empty

“Headwinds Looming”

Review of 1H 2013 M&A Activity

• Global M&A Volume ended the first half down 13% vs. the first half of 2012. 2Q 2013 M&A volume was up quarter over quarter, but down 24% vs. 2Q 2012.

– U.S. Middle Market M&A Activity, which was down in 1H 2013 vs. 1H 2012

• Shareholder activism has continued to be a significant dynamic in larger deals– Activist shareholders have provoked changes including governance changes,

alternative capital structures and sales and spin‐offs of businesses – Activists have more than $200 billion of leveraged fund capacity, which has grown

at a 20%+ CAGR over the last four years

• Divestiture volume including spin‐offs accounts for 44% of M%A volume, up from 34% in 2009, but down from 49% in 2012

– Driven by a combination of pressure from shareholder activists plus proactive “self help” by corporations looking to generate stock price growth as well as sponsor exits and government privatizations

• Cross‐border transaction volume dropped in the first quarter from almost one‐third to approximately 25% of global M&A volume

M&A Markets

U.S.Middle‐MarketM&AActivity

NumberofDeals <$50M $50‐250M $250‐750M DealValue DealValue($inbillions)

7,000

6,000

5,000

4,000

3,000

2,000

1,000

4,012 4,239

4,527 4,453

4,548

4,537

4,766

4,144

6,224

5,360 5,155

2,569

1,786

$600 $500 $400 $300 $200 $100

0 $0

NumberofDeals

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2012

YTD

2013YTD

$250‐750M 286 314 402 424 536 627 417 269 457 475 467 219 184

$50‐250M 886 1,065 1,218 1,265 1,294 1,333 1,195 791 1,138 1,148 1,151 560 456

<$50M 2,840 2,860 2,907 2,764 2,718 2,577 3,154 3,084 4,629 3,737 3,537 1,790 1,146

DealValue $256 $292 $351 $364 $421 $466 $355 $239 $370 $383 $380 $180 $148

Note:Middlemarketisdefinedasdealvalueunder$750millionSources:DealogicandWilliamBlair&Company,L.L.C.MergersandAcquisitionsmarketanalysis

U.S. Middle Market M&A

Source: PitchBook, 3Q2013 Private Equity Breakdown Report

Although number of deals closed was up only 8% in June, capital invested increased materially

Number of deals closed in 1H13, is down 56% from 2H12 and down 28%over 1H12!

Recent PE M&A Activity

PE Investments by Region

Valuation Multiples

DistressedU.S.M&AActivity

NumberofDeals Undisclosed MiddleMarket >$750M DealValue DealValue

($inbillions)5004003002001000

163

323 332

197

47 51 76 125

399 272 187 158

80 60

$100$80$60$40$20$0

NumberofDeals

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2012YTD

2013YTD

>$750M 10 10 13 13 2 2 5 13 22 11 11 8 3 4

MiddleMarket 102 230 246 132 27 23 33 50 181 123 71 74 33 29

Undisclosed 51 83 73 52 18 26 38 62 196 138 105 76 44 27

DealValue $31.7 $49.0 $46.0 $30.0 $8.7 $6.0 $18.2 $59.3 $85.4 $89.9 $35.4 $18.6 $8.1 $28.4


Distressed M&A

U.S.Middle‐MarketCross‐BorderM&AbyNumberofDeals

NumberofDeals Outbound Inbound InboundDealValue OutboundDealValue

2,5002,222

DealValue($inbillions)

$120

2,000

1,645

2,078 2,128

1,433

1,949

1,799 1,457

1,608

$100

$80

1,500

1,000

1,432

1,011

1,090

836

993

1,280

783

1,376

1,046

1,267

1,467 1,437

1,057 1,2571,428

1,265 $60

$40

500

617 $20

0 $0

NumberofDeals

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 LTM

Inbound MiddleMarket 565 431 359 424 529 516 623 751 557 644 732 623 550

Undisclosed 446 405 258 359 517 751 844 682 500 613 725 805 715

Value $38.1 $29.4 $23.3 $37.5 $42.5 $56.6 $64.7 $51.8 $36.0 $50.4 $54.4 $52.6 $50.6

Outbound MiddleMarket 668 539 512 674 729 831 1,064 1,089 729 923 918 683 631

Undisclosed 764 551 481 606 647 814 1,014 1,039 708 1,026 1,304 1,116 977

Value $48.2 $34.2 $37.5 $55.9 $58.0 $72.0 $102.8 $88.8 $46.7 $71.9 $74.8 $60.9 $59.9


X‐Border M&A

Second Half 2013 M&A Outlook

• A number factors, including the fact that M&A activity remains below relative historical averages, indicate a positive bias for M&A activity in 2013

• If a positive equity market continues and investors look for more growth, it is likely that a portion of the significant amount of cash going to share repurchase and dividends will shift toward M&A

• Private equity activity has been growing in frequency and size– One quarter of M&A volume has involved financial sponsors– “Secondary” LBOs have been active, but sponsors have also looked to IPO markets

for exits– Financial sponsors have close to $330 billion to invest, and many funds are aged– Availability and low cost of credit key source of fuel driving activity

• Shareholder activists will continue to press for change – attracted to cash on balance sheets

• Corporate restructuring activity in the post‐crisis period has generated more than 80 spin‐offs and 220 LBOs of subsidiaries, culminating in the creation of over 300 new corporate entities– May be attractive acquisitions targets, which previously have not been available

M&A Outlook

PE Fund Environment

Tough Fundraising Environment

2013 Fundraising Activity• 59 funds raised, first half 2013• $48 billion raised (up 88%) • Funds having success raising larger

vehicles (“flight to quality”)• Fewer first‐time funds able to reach a

final close (just 10 in 2012 vs. 72 in 2007)

LP considerations• Higher scrutiny of the PE industry‐

LPs asking for more reporting • LPs reducing # of GPs• Focus on GPs generating top quartile

returns and articulating a clear and viable investment strategy

• First time funds and funds less than $100MM few and far between

• ESG considerations

Fewer funds, but more capital in 2013

PE Fundraising

PE Fundraising

PE Overhang

Widening PE Portfolio Inventory

PE Inventory by Region

PE Hold Periods

Debt funds have been standout performers over the last decade.

PE Returns

PE fund performance takes a noticeable plunge beginning with 2004 vintage vehicles. Funds raised from 2004 to 2007 were making many of their investments during the height of the investing bubble when multiples were at their highest, which predictably has dampened returns. Performance is looking up for more recent vintages and should continue to improve as firms realize investments that were purchased at a discount following the financial downturn.

PE Returns

1980’s 1990’s 2000’s 2010’s

“Leverage Era”

“Multiple Expansion Era”

“Earnings Growth Era”

“Operational Improvement Era”

Evolution of PE Model

PE Model

PE Model

New Oversight Challenges

• Dodd Frank Legislation Removed SEC Exemption for Private Investment Managers– > $150 MM in Assets

• Registration Required as of March 30, 2012• Registered Firms File Form ADV

– Provides SEC with Detailed Information on Funds, Managers and Beneficial Holders

– Disclose Procedures and Compliance Policies to Address Money Laundering, Fraud and Insider Trading

SEC Registration Placing Significant Burden on PE FirmsSEC Registration Placing Significant Burden on PE Firms

SEC Registration

• Compliance Time and Cost

• Field Examinations Preparation

• Broker Dealer Registration Transaction Fees at Risk

• Portfolio Company Valuations Fundraising Issue

• Expense and Fee Calculations Who Bears Expense ?

• Allocation of Investments Amongst Funds Cherry Picking

• Selective Disclosure of Portfolio Investments Truth in Advertising (Website Review)

SEC Regulation and Compliance Resulting in Significant Costs and Likely Changes in How PE Firms Operate

SEC Regulation and Compliance Resulting in Significant Costs and Likely Changes in How PE Firms Operate

SEC Registration

“The Pension Problem”

The U.S. Court of Appeals for the First Circuit recently held that a private equity limited partnership was potentially liable for the multiple employer pension fund

withdrawal liability of one of its bankrupt portfolio companies!

Sun Capital Partners III LP v. New England Teamsters & Trucking Industry Pension Fund

• Two separate Sun Capital private equity funds acquired 100% of Scott Brass Holding Corp through a newly formed LLC and soon after acquisition the operating company filed for bankruptcy with an underfunded pension plan.

Sun Capital acquired this company splitting its investment 70/30 between two separate funds. The court held that a private equity limited partnership was engaged in a “trader business” for

purposes of the multiemployer plan liability provisions of the Employee Retirement Income Security Act (ERISA). The court explained that the partnership “was not merely a ‘passive’ investor, but [was] . . . operated, managed, and . . . advantaged by its relationship with its [now bankrupt] portfolio company.”

Implications of this Ruling:1. Ownership Structure may no longer provide adequate protection.2. Active Vs. Passive Portfolio Company Management must now also be considered.

Sun Capital is appealing the First Circuit Ruling … Stay Tuned!

Underfunded Pensions

ESG and SRI ??Environmental, Social and Governance / Socially Responsible Investing

Recently, many large non‐U.S. based Limited Partners have been becoming more concerned about their investment manager’s policies with respect to ESG/SRI.

ESG/SRI – is a set of policies and procedures that focuses on long‐term value creation and the generation of financial and sustainable value. Value not only refers to economic value, but to the broader values of fairness, justice, and long‐term sustainability. SRI integrates environmental, social and governance (ESG) and ethical issues into financial analysis and decision‐making. It goes beyond the simplicity and narrow view of the “negative screening” that is often associated with Socially Responsible Investing (SRI). It includes more proactive practices such as impact investing, shareholder advocacy/activism and community investing.

The United Nations has been pushing for the adoption of these policies since 2005 and have condensed their recommendations into 6 Principles for Responsible Investment. Those principles can be found here: http://www.unpri.org/about‐pri/the‐six‐principles/.

PEGCC – The Private Equity Growth Capital Council has also adopted a comprehensive set of 9 standards to cover environmental, health, safety, labor, governance and social issues. Those standards can be found here: http://www.pegcc.org/issues/guidelines‐for‐responsible‐investment/#sthash.AwYywpjA.dpuf

U.S. based PE Managers must now begin to design & implement their own policies and procedures in order to adhere to these standards if they wish to continue managing investments from internationally based investors.

ESG

Wynnchurch Capital

Background and Focus

• Founded in 1999, Wynnchurch Capital is a private equity firm that invests in leading middle‐market companies headquartered in the United States and Canada

Team

• 22 ExperiencedProfessionals

• Value Oriented• Operationally

Focused

Portfolio• 22 Active Investment

Platforms• Total sales of over

$3 billion

Capital

• $1 billion+ under management

• $300 million Available Capital

• Blue Chip Investors

Deal Size

• $50-$500 million revenue

• $Neg-$50 million EBITDA

• $10-$100 million equity check

Special Situations Investing

Management Led Buyouts (MBOs)•Management teams seeking liquidity and to position their businesses for profitable growth

Carve‐Outs•Non‐core assets and underperforming units of corporations

Bankruptcies, Restructurings, Turnarounds•Underperforming and cyclical businesses facing operational or market challenges

Focus on unique, overlooked, or underperforming companies involved in negotiated private sales, limited auctions, or fatigued/failed auctions

Industries of Recent Investments

Aerospace & Defense•Northstar•Burtek•R. Cushman•Fabco

Building Products•U.S. Pipe•Guildcrest•Expandet

Energy Services & Equipment•Loadmaster•Moreau

Other•NSC Minerals (chemicals)•Foss Manufacturing (fabrics)•Detroit Tool (agricultural equipment)

2012

Timeline of Recent Investments

Wynnchurch has invested in 13 companies in the last two years. Sellers included private owners (62%), public companies (23%), and distressed lenders (15%)

2012 20132011

Recent Investment Activity

The main reason why transactions fail is because of the disconnect between the owner’s valuation expectations and the buyer’s view of the Company’s competitive position and future cash flow potential

• Weak competitive position

• Customer concentration• Environmental issues• Accounting irregularities• Need for major CapEx reinvestment

Market and Company

• Disagreement among shareholders

• Discord between shareholders and employees

• Poor information flow

Stakeholders

• Unrealistic expectations• Missed budget forecast during due diligence

• Rejection of structural tools such as earn‐outs, roll‐overs, or seller notes

Valuation

• Sometimes, advisors can do more harm than good

• At times, best for advisor to step aside and let seller and buyer negotiate directly

• Advisor should spend more time qualifying buyers

Advisors

Lessons ‐ Top Deal Breakers and How to Avoid Them

Consistently Superior Returns

Summary

“PE Tougher Place to Make a Buck”

‐Many Challenges (Fundraising, Deal Flow, Regulatory, LP Base, Portfolio Growth)

‐Many Opportunities

‐ Industry Shakeout to Continue – “Flight to Quality”

ELEVATE Your Experience.

Today’s M&A Market: Good but not Great

Jeffrey Golman

Vice Chairman

September 10, 2013

STRICTLY CONFIDENTIAL

90%

95%

100%

105%

110%

115%

120%

125%

Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13

S&P 500

Aug 2, 2013

52 Week High

Aug 2, 2013

52 Week High

The Market has Climbed to 52 Week Highs Over the Past Year

1

Sources: S&P Capital IQ.

Borrowing Rates Remain Low

2

Sources: S&P Capital IQ.

0.0%

0.1%

0.2%

0.3%

0.4%

0.5%

0.6%

0.7%

0%

1%

2%

3%

4%

5%

Sep-10 Sep-11 Sep-12 Sep-13

3 M

onth

Lib

or

10 Y

ear

Tre

asury

10 Year Treasury 3 Month Libor

Global M&A Update

The Good

– Equity markets near all-time highs

– Credit markets remain receptive

– Non-financial firms’ cash balances are at record levels

– Significant levels of committed equity at private equity funds

– Modest GDP growth

– Improving housing markets

– The return of mega deals

• Omnicom / Publicis ($35 billion)

• Verizon / Vodafone ($130 billion)

• Microsoft / Nokia Mobile Handset ($7 billion)

The Not So Good

– Impending changes in Federal Reserve policy

• Anticipated tapering to the Federal Reserve buyback program

• Expected rise in interest rates (1.1% YTD increase in 10 year treasuries)

– Uncertainty regarding global growth

– Instability in the Middle East

– Lackluster U.S. jobs market

– Renewed U.S. congressional battles over the country’s debt limits

3

Sources: Wall Street Journal, Bloomberg, Financial Times.

U.S. M&A Activity Update

M&A activity has slowed down amid new macroeconomic concerns and tax law changes

– Nearly 6,500 deals completed in H1 2013, a sharp decline from the more than 9,000 deals completed in H2 2012

– Tax law changes expedited deal closings to H2 2012

Middle market M&A remains the primary source of deal flow

– Middle market M&A activity is less susceptible to macroeconomic issues

– Deal values under $250 million account for more than 80% of M&A activity

The return of the mega-deal

– Two majors deals recently announced

• Verizon acquiring Vodafone’s U.S. mobile interest for $130 billion and Microsoft acquiring Nokia’s mobile handset business

• Potentially portends increased business confidence

– Large deal activity shows that companies are now willing to shed cash from balance sheet

• U.S. non-financial firms currently hold a record of $1.45 trillion in cash

• As companies become more inclined to spend cash, strategic M&A activity should pick up in the middle market

4

Sources: S&P Capital IQ, Financial Times, Bloomberg, PitchBook.

TOTAL U.S M&A DEAL VOLUME AND TRANSACTION VALUE PERCENTAGE BREAKDOWN OF EV / EBITDA MULTIPLES

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

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

<0x 0x-2.5x 2.5x-5x 5x-7.5x >7.5x

2012 2013

-

200

400

600

800

1,000

1,200

1,400

1,600

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

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

Va

lue

($

in

bil

lio

ns

)

Nu

mb

er

of

Tra

ns

ac

tio

ns

TTM Volume TTM Value

2009 2010 2011 2012 2013

State of the Financing Markets

Financing environment remains favorable

– $814 billion of loans were provided to below-investment-grade U.S. companies through the first 8 months of 2013

• More than any full year since the recession

• Mostly used to refinance existing loans with only $67 billion used to fund buyouts

Rates have risen but borrowing is still relatively cheap

– Increases in treasury rates

• U.S. government bonds have reached multiyear highs of 2.98% but are still well below pre-recession levels

– Increases in corporate credit risk

• Risk premium on Markit CDX North American High Yield Index has climbed over 400 basis points

Companies have taken advantage of financing environment

– Corporate bond issuance skyrockets in H1 2013

• New corporate bonds sold from January 1 through July 31 totaled $547.4 billion, which is on pace to eclipse last year’s record.

5

Note: *Through August 31, 2013.

Sources: Financial Times, Bloomberg, Wall Street Journal.

LOANS ISSUED TO BELOW U.S. INVESTMENT GRADE COMPANIES

0

100

200

300

400

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

Refinancings New Money

2008 2009 2010 2011 2012 2013

Private Equity Outlook

Many private equity firms are having trouble deploying new capital

– “Prices for traditional buyouts have risen so much that it’s a good time to sell” – Leon Black, CEO of Apollo Global Management LLC

– “We’re having trouble deploying capital at these price levels” – Jonathan Sokoloff, Managing Partner at Leonard Green & Partners LP

Committed capital levels (dry powder) remain high as PE firms have trouble sourcing new investment opportunities

Zombie funds (ones that will not be able to raise another fund) are postponing sales

– Zombie funds are inactive funds kept open for management to collect fees from investors

– Despite drawing attention from regulators, these funds have stayed open

– Disrupt M&A activity by tying up capital that investors could reinvest in active private equity funds

• Nearly 1,200 funds can be classified as “zombie funds”

• Currently occupy $116 billion in assets

6

Sources: Reuters, Bloomberg, PitchBook, PEGCC.

COMMITTED CAPITAL

0

100

200

300

400

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

($ in

billio

ns)

2012 2013

Dividend Recapitalizations

Private equity firms use dividend recapitalizations to return capital to investors while maintaining ownership

– Private equity firms are using dividend recapitalizations at a record pace in 2013

– Use of dividend recapitalizations acts as a substitute for a sale

More than $45 billion of new loans and bonds sold this year by private equity-backed companies

– 62% increase over the same time period last year

– 60% of these bonds sold were used to fund dividend payouts

7

Note: *Through August 5, 2013.

Sources: Wall Street Journal.

DEBT SALES FOR PRIVATE EQUITY DIVIDEND PAYOUTS

0

15

30

45

60

75

2008 2009 2010 2011 2012 2013 YTD*

($ in

billio

ns)

Wausau Paper Corp. – Case Study

TRANSACTION BACKGROUND

Mesirow Financial was engaged by Wausau Paper Corp. (“Wausau”) to advise its Board of Directors on a range of strategic alternatives involving its

Specialty Paper Business

The ultimate divestiture of the Specialty Paper Business was predicated upon the rationale that pure-play tissue businesses are valued at higher

revenue and EBITDA multiples relative to pure-play specialty paper businesses

TRANSACTION PARTICIPANT ROLE BUSINESS DESCRIPTION

Target n Manufactures specialty papers for food, industrial & tape and coated & liner market segments

n Products and applications in:

m Baking, microwave popcorn and food packaging products

m Interleaving, saturating, coating, unsaturated crepe base

m Siliconized release papers for pressure sensitive tapes

Target n Manufactures a broad range of specialty papers

n Products and applications include:

m Bleached & unbleached lightweight papers for food & non-food packaging

m Industrial & technical papers

m Pressure sensitive release base papers

Financial Sponsorn New York-based manager of the KPS Special Situations Funds, a family of private equity limited

partnerships with over $6.0 billion of assets under management

n Focused restructurings, turnarounds and other special situations

NewCo n Newly formed company resulting from the acquisition of Wausau's Specialty Paper Business and Thilmany

n Expera Specialty Solutions employs approximately 2,000 people and operates manufacturing facilities in

Rhinelander, Mosinee, Kaukauna and De Pere, Wisconsin

Specialty Paper Business

8

Key Takeaways

Merger market remains tepid in 2013

Tax law changes expedited M&A and dividend recapitalization processes, resulting in a busy Q4 2012 and a slower H1 2013

Private equity firms are finding it more difficult to source transactions and are employing dividend recapitalizations to return money to investors

Increasing number of zombie funds with little motivation to exit portfolio companies

Potential for M&A activity still exists because companies have sufficient cash balances

Business leaders’ confidence remains suppressed by economic, fiscal and monetary uncertainty

9

Sources: Reuters.

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