u.s. pe middle market report - madison capital … · 2017-12-18 · pitchbook’s timely and...

AC T IV I T Y DROP S BY 22% F ROM 4 Q A S L OWER MIDDL E M ARKE T SURGE S

U.S. PE Middle-Market Company InventoryPAGE 14»

MIDDLEMARKETREPORT

1Q 2016

U.S. PE

S P O N S O R E D B Y

ACG Q&A: Middle-Market Public Policy UpdatePAGE 13»

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COPYRIGHT © 2016 by PitchBook Data, Inc. All rights reserved. No part of this publication may be reproduced in any form or by any means—graphic, electronic, or mechanical, including photocopying, recording, taping, and information storage and retrieval systems—without the express written permission of PitchBook Data, Inc. Contents are based on information from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. Nothing herein should be construed as any past, current or future recommendation to buy or sell any security or an offer to sell, or a solicitation of an offer to buy any security. This material does not purport to contain all of the information that a prospective investor may wish to consider and is not to be relied upon as such or used in substitution for the exercise of independent judgment.

Note from ACG 4

Introduction 5

Overview 6-7

U.S. Labor Market Commentary 8

Lower Middle Market 9

Core Middle Market 10

Upper Middle Market 11

Middle-Market Public Policy Update 13

Company Inventory 14

Q&A: Madison Capital Funding 15

Exits 16

Fundraising 17

League Tables 18

Methodology 19

CONTENTS

Cover photo credit: Thomas Moskal

3 PITCHBOOK 1Q 2016 U.S . PE MIDDLE MARKET REPORT


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PARTNERSHIP FOR MIDDLE-MARKET GROWTHACG’s Premiere Report with PitchBook

ACG and PitchBook Data have been working together to serve middle-market

dealmakers since 2009, not long after PitchBook’s founding just two years earlier.

PitchBook’s timely and relevant data provide a valuable tool for ACG members looking

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This Middle Market Quarterly Report represents ACG’s latest collaboration with

PitchBook. It provides a comprehensive look at the relevant trends impacting midsize

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PitchBook breakdowns on sectors, deal counts, investments by region and size, debt

and multiple levels, IPOs and more. You’ll also find relevant content provided by ACG.

ACG’s relationship with PitchBook is one of several collaborations the association has

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Please enjoy the first of what will become regular quarterly reports on the middle

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DEALMAKERS FACE HEADWINDSIntroduction

In a private equity world that has seen activity slow, the middle market has

followed suit. Deal activity during the first quarter of the year declined while exits

absolutely plummeted. One exception to the trend, however, occurred in the

lower middle market, where we saw both deal value and volume leg significantly

higher. Also of interesting note, we’ve continued to see a shift in the fundraising

environment with less capital being raised, yet more funds closing, and quickly.

As we’ve made our way through a powerful and impressive investment cycle over

the past five to seven years, the trepidation we’ve seen simply speaks to the cycle

taking its natural course. With ample stores of capital and limited partners betting

the PE asset class remains poised to outperform, managers have their work cut out

for them to find attractive opportunities. The shift to raise smaller vehicles and the

jump in LMM activity speaks to a class of GPs not fully accepting a new normal in

terms of the market climate, but adapting to continue generating the returns their

investors trust them to earn. To avoid costly auctions, they’ve moved to acquire

much smaller businesses where they will be forced to formulate feasible growth

strategies and optimize internal processes, while also exercising prudent, yet

creative financial and operational levers to help unlock value from these smaller

enterprises.

We hope this report helps inform your future decision-making process and as

always, feel free to reach out with any questions at [email protected].

NIZAR TARHUNI

Senior Analyst

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THE PE DYNAMIC IS RUNNING ITS COURSEOverview

Middle-market PE activity

remained subdued through

the first quarter of 2016, with PE

shops contending with a wide array

of headwinds that have contributed

to a slowing deal environment.

Just $71 billion was invested last

quarter across 388 completed deals,

representing QoQ declines of 21% and

22%, respectively. Those numbers

also represent the lowest deal value

and volume figures we’ve recorded

since 2Q 2013. While we expected the

declining macro experienced in the

back half of 2015 to trickle over into

2016, we view the slowing environment

as an indication of the typical PE cycle

and dynamic running its course, rather

than an overarching, fundamental

deterioration. As PE funds sold assets

U.S. PE middle-market activity

Source: PitchBook

A distinct slowdown

U.S. PE middle-market activity

$274

$349

$202

$92

$241

$271

$295

$300

$420

$374

$71

1,450

1,828

1,223

701

1,274 1,430

1,734 1,597

2,025 2,023

388

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

Deal value ($B) # of deals closed

$49

$54

$52

$86

$64

$66

$66

$75

$63

$64

$67

$101

$69

$59

$83

$89

$108

$96

$107

$109

$89

$98

$97

$90

$71

250 270 288

466

318

374

354

384

370

384392

588

340294

484479

554

483

524

463 467

507552

498

388

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

2010 2011 2012 2013 2014 2015 2016


Source: PitchBook

*As of 3/31/2016



LMM and CMM deal value remained healthy, while

UMM value plummeted

U.S. PE MM deals ($B) by segment

UMM deals shrank considerably by count, outstripping

the decline in the CMM

U.S. PE MM deals (#) by segment

Source: PitchBook Source: PitchBook

at a hefty clip over the past couple of

years, the capital they’ve redistributed

to LPs has found its way back to

them, yet the window of opportunity

to deploy that money has narrowed.

While PE firms currently hold an

impressive amount of inventory,

which could be thought of as near-

future acquisition targets, much of

that inventory is actually relatively

new, or aging and distressed assets

they’ve had difficulty offloading or

resuscitating. Consequently, we don’t

anticipate a considerable change from

the current deal flow trends.

Over time, the best managers in the

asset class must learn to adapt. The

ability to walk from certain deals is

vital, yet the skill to find value in new

areas also becomes important, which

doesn’t only entail changing sector

focuses. With this in mind, we saw the

lower middle market actually finish

1Q in quite impressive fashion. Close

to $12 billion was invested across

189 completed transactions ranging

between $25 million and $100 million

in total deal size. On a quarterly basis,

that deal value number was up over

81%, while volume grew 14%. Even

comparing those figures to the same

period last year, 1Q’s 2016 performance

accounts to a whopping 60% hike in

capital invested, and a jump of 22% in

volume.

The middle market represents the

bulk of the American economy,

and with deals outside of the LMM

receiving ample attention from both

strategic and financial buyers, many

managers have seen the lower end as

an underrepresented population still in

need of ample capital. Many of these

businesses can utilize PE money, staff

and experience to help solidify growth

strategies, optimize internal processes,

gain access to key management

personnel, and ultimately increase

their level of professionalization. These

key initiatives do force PE firms to roll

up their sleeves in order to realize the

performance needed to meet their

IRR expectations, yet they also allow

for interesting exit opportunities once

these companies are ready to exit into

the core middle market or beyond.

Further, many of these businesses also

serve as coveted add-on opportunities

for managers looking to supplement

their existing portfolio companies.

As mentioned in our previous PE

Breakdown Report, nearly 70% of all

PE-backed transactions last quarter

were bolt-on deals, a rather impressive

figure. In an earnings environment that

has experienced low growth across

the board, PE has sought to find

multiple expansion via an acquisitive

growth strategy, not much unlike

what we’ve seen larger corporations

do. Transactions in the LMM may be

able to prove easier to integrate due

to their size, but also allow for quick

geographic expansion, on top of the

synergies PE-backed platforms can

realize out of vertical integration. An

example of this could be seen in the

automotive aftermarket space with

many portfolio companies looking

for distribution and manufacturing

synergies. As we move through the

reminder of the year, expect deal

flow to move in a similar fashion,

with overall transactions low, but a

continued focus on vertical integration

and add-ons.

$0

$20

$40

$60

$80

$100

$120

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

2013 2014 2015 2016

LMM CMM UMM

0

100

200

300

400

500

600

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

2013 2014 2015 2016

LMM CMM UMM



SLOW AND STEADY WINS THE RACE FOR U.S. LABOR MARKETby Joe Brusuelas, Chief Economist, RSM

Steady if unspectacular is an apt way to describe the tempo of the U.S. labor market late in this business cycle. The economy should continue to generate

175,000 to 200,000 new jobs per month and the unemployment rate should dip to 4.9% by the end of the year. Wages increased 2.5% in 2015, well above the cyclical

average of 1.7%, and are poised to accelerate above 3 % this year due to a tight labor market. With only 1.4 individuals available in the labor force for every job opening, the labor market will continue to tighten, setting the stage for further wage gains going forward. Moreover, there are seasonal influences that typically occur in the first quarter which are then corrected in subsequent months. As a result, top-line hiring data and wages are likely to improve, which bodes well for a rebound in spending after a soggy first quarter.While the economy slowed during

the past six months, private sector hiring has increased by an average of 246,000 jobs over that time. The fact that individuals are streaming back into the workforce, thus causing the unemployment rate to increase slightly to 5% in March from 4.9% in February, is actually a good sign in light of the recent asset price volatility across global markets. Over the past year, the number of people marginally attached or working part time for economic reasons has declined noticeably, which should bolster the case for continued Federal Reserve policy normalization going forward.



Activity in the LMM boomed in terms of value

U.S. PE LMM deal flow

U.S. PE LMM deal flow

U.S. PE LMM deals (#) by sector in 1Q 2016

Source: PitchBook

A CLEAR SURGELower-middle-market activity

In contrast to what unfolded across the entire MM, LMM activity was fairly impressive. In fact, 1Q saw the most capital invested since the first quarter of 2008.

Close to $12B was invested across 189 transactions—QoQ hikes of 81.5% and 14%, respectively.

On a yearly basis, deal value was up 60%, with volume up 22%. Thus far, 2016 has recorded the most volume since 1Q 2014.

$10

$9 $6 $8 $7 $5 $8 $6 $10

$7

$6

$5 $7 $7 $6 $7 $12

188 187

162

219

135

104

193

160

204

173 175

126

156 183 184

166

189

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

2012 2013 2014 2015 2016


$34

$37

$36

$19

$23

$26

$33

$27

$28

$27

$12

647

769

639

419

498 544

756

591

678 688

189

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


Source: PitchBook

*As of 3/31/2016

42%

21%

5%

11%

21% B2B B2C

Energy Financial Services

Healthcare IT

Materials & Resources

Source: PitchBook



Value jumped even as activity fell to the lowest level in years

U.S. PE CMM deal flow

U.S. PE CMM deal flow

U.S. PE CMM deals (#) by sector in 1Q 2016

VOLUME SLIDESCore-middle-market activity

Source: PitchBook

Source: PitchBook

Quality opportunities are experiencing aggressive bidding wars, prolonging closing periods.

Total 1Q deal value was up 29% QoQ, but volume fell nearly 25%. The distinct split between multiples is still apparent.

At $47B, overall CMM deal value was strong, but volume fell to the lowest level since the start of 2013.

$39

$34

$25

$46

$25

$35

$38

$51

$54

$49 $4

5

$55

$54

$40

$42

$37

$47

159163

162

273

140

163226

259283

244250 260 266

224

265239

179


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

$138

$168

$114

$44

$105

$133

$145

$149

$202

$173

$47

653

825

504

232

572 693

757 788

1,036 994

179

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


Source: PitchBook

*As of 3/31/2016

33%

17%17%

28%

5%B2B B2C

Energy Financial Services

Healthcare IT

Materials & Resources



One quarter in, things aren’t looking good for UMM activity

U.S. PE UMM deal flow by quarter

U.S. PE UMM deal flow by year

U.S. PE UMM deals (#) by sector in 1Q 2016

Source: PitchBook

STEEP DECLINEUpper-middle-market activity

Source: PitchBook

UMM activity cratered, with the lowest tally of completed deals in years. $12B was invested across 20 transactions—a 74% QoQ drop in value and 79% in volume.

Looking back to 1Q 2015, overall value of investments was down by 58%,while activity declined by 56%.

Investors are clearly still moving lower to avoid intense competition, and concerns around financing at the high end remain.

$13

$20

$36

$47

$37

$18

$37

$32

$45

$41

$55

$49

$28

$51

$49

$47

$12

23

34

69

96

65

27

66

60

68 66

100

77

45

100 10393

20


2012 2013 2014 2015 2016


$102

$144

$52

$28

$113

$112

$117

$124

$190

$175

$12

151

234

80 50

204

193

221 218

311 341

20

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

Deal value ($B)

# of deals closedSource: PitchBook

*As of 3/31/2016

50%50%

B2C

IT



S A V E T H E D A T E

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

# E U R O G R O W T H

http://www.eurogrowth.org/

AMBER LANDIS

Vice President of Public Policy

ACG Global

For more information about ACG’s public policy efforts or to get involved, contact

Amber Landis at [email protected].

How has the regulatory climate

changed for middle-market private

equity funds?

Prior to the financial crisis, most

advisers to private equity funds did not

have to register under the Investment

Advisers Act of 1940. The 2010 Dodd-

Frank Act changed that, and by 2012

advisers with $150 million in assets

had to register with the Securities

and Exchange Commission. They’ve

since been subject to a number of new

regulations, reporting obligations and

SEC examination.

Two years ago, Andrew Bowden,

the former director of the SEC

Office of Compliance Inspections

and Examinations, suggested

regulatory priorities in his so-called

“Spreading Sunshine in Private

Equity” speech, citing what he sees

as inherent conflicts of interest in

the PE business model, ambiguity in

limited partnership agreements, and

insufficient documentation around

compliance efforts.

What are some other areas of

regulatory focus?

There’s been much focus on fees

and expenses, including “broken

deal” expenses; operating partner

compensation; shifting fees and

expenses in the middle of a fund’s life-

span; and hidden fees.

Another area is valuations and conflicts

of interest that might occur during

portfolio valuation. Regulators want

to ensure the timing of valuations are

appropriate and consistent, and that

the proper processes and procedures

are documented and in place. Most PE

firms should use their limited partner

advisory committee to review and

approve these valuation processes.

The Financial Crimes Enforcement

Network has issued a proposed rule

around anti-money laundering, which

it estimated would take three hours

for a registered investment adviser to

implement. ACG expects it will take

much longer, creating a burden for

middle-market PE firms in particular;

moreover, advisers are subject to a

number of other federal statutes that

monitor corrupt or illegal behavior.

What are some key SEC enforcement

cases fund managers should be aware

of?

Last September, the SEC issued

enforcement action against a

registered investment adviser—not

a PE firm—for violations related to

cybersecurity. The adviser did not

have proper cybersecurity policies and

procedures documented and in place

with a third-party vendor. The adviser

hadn’t necessarily done anything

wrong or been compromised, but the

SEC found the adviser lacked written

documentation about how it was

preventing cyberattacks.

Last June, a large PE firm was charged

by the SEC for misallocating more than

$338 million in broken-deal expenses.

The investigation found that the firm

did not allocate a portion of these

expenses to co-investors and there

was no express disclosure of the lack

of allocation. The SEC deemed the

fund unfairly shouldered the costs for

nearly all of the expenses incurred for

potential deals, a breach of fiduciary

duty to its partners.

Another recent case involved a conflict

of interest violation related to fees and

expenses. The SEC found the firm had

arranged for fees to be allocated to an

outside consulting group managed by

key principles of its firm. The firm did

not disclose that payments were to

“related” persons nor that there was

a conflict of interest. The SEC noted

in the case the breach of the fiduciary

duty, along with a compounded

effect from the omission of material

information about the arrangement

with key firm principals.

What is ACG focused on in the

legislative arena?

ACG continues to work with House

and Senate members in the 114th

Congress on the issues included in

our public policy agenda: preserving

interest deductibility, reducing

onerous compliance and regulatory

burdens, preserving the joint employer

standard, and maintaining capital

gains treatment for carried interest.

ACG is also taking a leadership role to

modernize the Investment Advisers

Act of 1940 to better tailor it to fit

today’s PE investment model.

What are some of the other policy

initiatives ACG has undertaken?

ACG formed its Private Equity

Regulatory Task Force, or PERT,

in 2014 to bring together CFOs,

CCOs and in-house legal counsel of

middle-market PE firms to engage

internally with peers and externally

with policymakers on the policy

issues facing the industry. The group

is developing a set of best practices,

PERT Principles, which it plans to

release later this year. Its members are

meeting in June in Washington, D.C.,

for their second-annual fly-in. ACG has

also developed the “Guide to Private

Equity Regulatory Compliance,”

which aims to help funds navigate the

complicated regulatory landscape.



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

SLOW PROGRESS MADEU.S. PE middle-market company inventory

The percentage of inventory that was acquired in 2010 or earlier has declined by 3% since the last edition of this report

U.S. PE middle-market company inventory by count and year

U.S. PE MM median hold period (years) by exit type and year

PE GPs are still whittling down their portfolios, with some success in exiting aging holdings. But a considerable percentage remains from 2010 or earlier.

2,0722,459

2,950

3,5714,050

4,2724,589

4,8585,142

5,3605,612

5,894 5,940

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

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

2011-2016*

2006-2010

2000-2005

Pre-2000

Year of Investment

Source: PitchBook

*As of 3/31/2016

6.5

5.3

7.4

4.7

5.7

0.5

1.5

2.5

3.5

4.5

5.5

6.5

7.5

8.5

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

IPOs Corporate SBO

Source: PitchBook

*As of 3/31/2016



CHRIS TAYLOR

Managing Director,

Madison Capital

Deal flow has slowed, and pricing

has ostensibly become a growing

concern for middle-market lenders

in such a competitive environment.

How does Madison Capital Funding

LLC (“Madison Capital”) interpret the

current PE market state and what do

you forecast unfolding through the

rest of 2016?

Debt markets have gotten fairly

aggressive and frothy, yet we

continued to see a strong pipeline

in early 1Q, before slowing a bit

into March, which can partially be

attributed to choppy public markets

forcing dealmakers to reassess the

landscape. In early April, however,

volume rebounded, and we began to

see an increase in the quality of deals

entering the pipeline. Looking forward,

the vast majority of MM arrangers is

supported by ample sources of capital,

willing to deploy funds to support their

sponsor relationships on a consistent

basis. Most have shown a commitment

to the asset class over a long period

of time and are less likely to shift their

core focus in order to chase yield.

How do you change your sourcing

and selection approach in a more

uncertain deal environment?

The patience, flexibility and long-term

stability provided to us by our parent,

New York Life, enables Madison

Capital to be selective in terms of

deploying new capital, particularly

in an aggressive and unpredictable

economic environment. We don’t have

any pressure to push capital out the

door and we don’t have the budgetary

requirements, mandates or limited

timelines that could force us to lend if

we’re not comfortable.

What are some of the key items you

look for in a sponsor-backed business

before deploying capital to help

support an LBO?

We evaluate credit fundamentals like

free cash flow generation, market

share, diversification, cyclicality and

industry trends, and also seek to

understand the ideas and expertise

that our sponsor relationships bring to

the table to create value. We have also

pursued a more targeted approach

around our expertise in certain

sectors, which include businesses in

the healthcare, insurance and financial

services spaces, as well as software

and technology services. We’ve had

much historical success on an ad

hoc basis with technology-related

deals, so we recently formalized a

strategy and team around this sector

as we see this as a natural and timely

opportunity for further growth. This

overall industry-focused approach has

worked in our favor as it has allowed

us to differentiate ourselves from other

lenders while also allowing us to better

understand the opportunities and cash

flow characteristics of the specific

sectors we support.

In an uncertain environment, how

does Madison Capital like to structure

its debt packages to minimize risk,

while still remaining an important

source of capital to the sponsor and

their respective target?

With a 15-year track record as a

leading lender to MM sponsor-backed

companies, one of our competitive

advantages is our ability to leverage

our past experiences from lending to

over 900 platform business and 250

PE clients to make smart decisions in

any economic environment. Moreover,

we can leverage this experience into

creating thoughtful and flexible debt

structures that maintain appropriate

financial performance governors and

other lender protections, while still

accomplishing the objectives of our

clients.

Madison Capital Funding is a division of NYL Investors LLC, a wholly owned subsidiary of New York Life Insurance Company. NYLIM-35050

What do you view as some of the

major characteristics a PE sponsor

looks for in a lender?

The biggest characteristic is being

able to find a lending partner that

gives them flexibility. One example of

this can come in the form of offering

appropriate covenant cushions so

that a sponsor can feel comfortable

executing the capital expenditures

that might eat into earnings and

cash flow during the early stages of

their investment period. Whether

their growth strategy is driven

by acquisition or organic growth,

they need the flexibility to layer in

those costs, potentially upgrade

management or build key operating

systems and continue to scale the

portfolio company. They are also

looking for a partner that will offer

them ample liquidity, whether that

comes in the size of a revolver

facility offered, or maybe in a capital

expenditure or acquisition line that can

be extended to them, among other

examples.

If you’d like, please elaborate on any

other topics or concerns that Madison

Capital views as significant to the

current market landscape.

Over the last few years, the MM

lending landscape has continued to

get more aggressive and crowded.

In many conversations with our

clients, we advise them to be highly

selective in choosing lending partners

and to fully understand the funding

mechanics of the various lenders in the

market. Madison Capital’s long-term

partnership with New York Life and

lack of reliance on the capital markets

to fund transactions provides our

clients with patient and flexible capital

to weather the ups and downs of any

economic environment. This staying

power and longevity significantly

differentiates Madison Capital from

competitors and new entrants and

solidifies our firm as a leading lender in

the LMM.

DANIEL BRAZIER Director,

Madison Capital



EXITS PLUNGEU.S. PE-backed middle-market exits

With deal flow lagging considerably last quarter, the

prospect of a declining exit market makes sense. With that, just under $13 billion was exited across 170 PE-backed sales, representing massive QoQ declines of 54% and 33%, respectively. On a yearly basis, exit value was down approximately 40%, with volume down 29.3%. Over the past couple of years, we’ve all witnessed the run-up in valuations and the willingness of PE funds to take advantage and exit companies at attractive prices. As sales have consequently crept higher during that period, the quantity of quality inventory that can command heightened interest from buyers has shrunk, and 1Q saw exit activity decline to its lowest level since early 2013.

While volume remained subdued, the trends around exit strategies remained the same and are unlikely to change considerably as the year plays on. $10.3 billion was exited to strategic acquirers across 132 completed corporate acquisitions, accounting for roughly 80% of all exit value. The remainder of MM exit value was realized via secondary buyouts, which saw $2.5 billion exited via 38 SBOs. No PE-backed IPOs were completed during the period.

Moving from 2014 to 2015, the median hold period prior to exit moved from a peak of 5.7 years to 5.2 years. That drop came from a competitive market allowing owners to exit companies rather quickly and at attractive multiples. Yet the assets that remain in funds simply aren’t able to attract the demand those top-tier assets merited, and if we look at the median time to exit for deals closed in 1Q 2016, that hold period moved noticeably higher.

Corporate acquisitions continue to play a key role

U.S. PE-backed exits (#) by type

U.S. PE-backed middle-market exits

$67

$82

$40

$23

$70

$72

$84

$73

$115

$102

$13

550

666

430

241

589648

834

747

979 962

170

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

Exit value ($B) # of exits

Source: PitchBook

*As of 3/31/2016

0

200

400

600

800

1,000

1,200

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

Corporate Acquisition IPO Secondary Buyout

Source: PitchBook

*As of 3/31/2016

The median time to exit for deals completed last quarter came in at 6.1 years. PE-backed strategic sales, which in 2015 had a pre-exit hold

period of just 5.3 years, moved to a rather shocking 7.4 years with SBOs jumping from 4.7 years in 2015 to 5.7 years through 1Q.



FUNDRAISING

On the whole, 2015 marked another strong year for fundraising

U.S. PE middle-market fundraising by year

Re-enforcing a trend of managers pitching smaller and

more focused investing strategies, 1Q 2016 saw an increase in the total amount of funds holding final closes amid a decline in the total amount of capital raised. PE funds collected $27 billion in newly committed capital across 48 vehicles during the period, representing a 13% QoQ decline

U.S. PE MM fund count by size

in terms of aggregate fundraising, yet an increase of 50% in terms of total closings. As we highlighted earlier, the LMM has experienced a significant increase in activity, reflecting a growing interest in that size bucket. Hence, we’re seeing smaller funds looking to invest less capital closing at an increasing clip. 68% of vehicles last quarter

closed with between $100 million and $500 million in commitments, a rather interesting figure, given all of 2015 saw closed funds in that range represent just 59% of all vehicles— 52% in 2014. Coming to market asking for rather large LP checks is becoming fairly difficult, as many LPs have already shrunk the number of investors to whom they’re willing to commit large sums. Yet in an environment of slow global growth, success can be found by experienced managers approaching investors with a unique value-creation strategy. In many instances, this direct approach can require less capital and also attract LPs during a point in the cycle where we may see some narrowing between the level of PE outperformance over other asset classes. The average buyout fund size last quarter came in at $620 million, the lowest we’ve seen since 2010’s $562 million. With the amount of fresh capital dealmakers are already working to burn off, along with an expected slowing of distributions, it’s difficult to forecast seeing that figure move much higher for the remainder of the year. As we’ve entered a period where both PE managers and LPs will need to be more selective and creative in generating alpha, there seems to be a mutual understanding between both parties, evidenced by the ability of fund managers to hold 1Q final closes more quickly than in prior periods. The average time to close for all MM funds last quarter came in at 13.7 months, much shorter than the 14.5 and 15.9 months it took to close in 2015 and 2014, respectively. The ability of GPs to recognize a changing LP environment will continue to help new managers, and while it’s difficult to see total fundraising efforts match recent numbers, the vehicles that do close should still enjoy a swift process.

$124

$146

$141

$85

$67

$108

$112

$122

$146

$126

$27

177

219196

113 108

137 141

183 186163

48

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

Capital raised ($B) # of funds closed

Source: PitchBook

*As of 3/31/2016

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

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

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

*As of 3/31/2016



MM LEAGUE TABLES1Q 2016

Audax Group 17

ABRY Partners 13

The Carlyle Group 10

Apax Partners 9

HarbourVest Partners 8

Summit Partners 8

AEA Investors 7

GTCR Golder Rauner 7

Hellman & Friedman 7

Kohlberg Kravis Roberts 7

The Blackstone Group 6

Arsenal Capital Partners 5

CI Capital Partners 5

H.I.G. Capital 5

TA Associates Management 5

AlpInvest Partners 4

Charlesbank Capital Partners 4

Clearview Capital 4

Goldman Sachs Capital Partners

4

Great Point Partners 4

Kelso & Co. 4

LaSalle Capital 4

Maranon Capital 4

Nautic Partners 4

Oaktree Capital Management 4

RFE Investment Partners 4

Tailwind Capital 4

Tenex Capital Management 4

The Riverside Company 4

Thompson Street Capital Partners

4

Kirkland & Ellis 35

DLA Piper 18

Jones Day 14

Goodwin Procter 13

Latham & Watkins 10

Paul, Weiss, Rifkind, Wharton & Garrison

10

Morgan, Lewis & Bockius 8

Paul Hastings 7

Weil, Gotshal & Manges 7

McDermott Will & Emery 7

Most active investors by deal count Most active law firms by deal count

Antares Holdings 22

BMO Harris Bank 9

Madison Capital Funding 8

Twin Brook Capital Partners 5

NXT Capital 4

Cadence Bank 4

Wells Fargo 3

PNC Financial Services Group 3

Abacus Finance Group 3

Fifth Third Bank 3

BBVA 2

Comerica Bank 2

MUFG Union Bank 2

Northstar Capital 2

PrivateBancorp 2

Patriot Capital 2

SunTrust Banks 2

Texas Capital Bank 2

Most active lenders by deal count

Robert W. Baird & Co. 9

TM Capital 8

Cain Brothers 7

Piper Jaffray 7

William Blair & Company 6

Moelis & Company 5

KeyBanc Capital Markets 5

Lincoln International 5

Cascadia Capital 4

Greene Holcomb & Fisher 4

Harris Williams & Co. 4

Marlin & Associates 4

PricewaterhouseCoopers 4

The Goldman Sachs Group 4

Raymond James Financial 3

Peter J. Solomon 3

KPMG 3

Stephens 3

The Braff Group 3

Most active advisors by deal count

Source: PitchBook

Source: PitchBook

Source: PitchBook



METHODOLOGY



MIDDLE MARKET DEFINITIONFor this report, the middle market (MM) is defined as U.S.-based companies acquired through buyout transactions between $25 million and $1 billion. Note that minority deals are not included. The middle market is further broken down into the lower middle market (LMM; $25 million to $100 million), the core middle market (CMM; $100 million to $500 million) and the upper middle market (UMM; $500 million to $1 billion). This report covers only U.S.-based middle-market companies that have received some type of private equity investment.

TOTAL CAPITAL INVESTED/DEAL VALUETotal amount of equity and debt used in the private equity investment

Ex. $10 million of equity and $20 million of debt = $30 million of total capital investment

PitchBook’s total capital invested figures include deal amounts that were not collected by PitchBook but have been estimated using a multidimensional estimation matrix, which takes into account year of investment, deal type, platform v. add-on, industry and sector. Some data sets will include these extrapolated numbers while others will be compiled using only data collected directly by PitchBook; this explains any potential discrepancies that may be noticed.

FUNDRAISINGPitchBook defines middle-market funds as PE investment vehicles with between $100 million and $5 billion in capital commitments. The report only includes private equity funds that have held their final close. Funds-of-funds and LP secondary funds are not included.

EXITSThe report includes both full and partial exits of middle-market companies via corporate acquisition, secondary private equity buyout and initial public offering (IPO). PitchBook has utilized its multi-dimensional substitution and estimation matrix to estimate transaction sizes where the deal amount is unknown. For the MM company inventory, we included companies that are expected to exit between $25 million and $1 billion.

LEAGUE TABLESAll League Tables are compiled using deal counts for middle-market leveraged buyouts. For example, the Most Active Advisors League Table shows the number of U.S.-based middle-market deals that a firm advised on during the first quarter of 2016. Deals on which a firm advised multiple parties will only be counted once for that firm.

Madison Capital, founded in 2001, and headquartered in Chicago, Illinois, is a premier finance company focused exclusively on the corporate financing needs of middle market private equity firms. Madison Capital has closed transactions with over 255 different private equity firms and provides enterprise-value

leveraged financing for leveraged buyouts, management buyouts, add-on acquisitions and recapitalizations. Madison Capital Funding LLC is a subsidiary of New York Life Insurance Company. Additional information may be found at: www.mcfllc.com

http://www.mcfllc.com

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