BoyarMiller Breakfast Forum Current State of the Capital Markets - 2014

The Current State of the Capital Markets

Breakfast Forum September 2014

For Presentation Purposes Only.

BoyarMiller Breakfast Forum The Current State of Capital Markets September 4, 2014


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Disclaimers The information contained in this presentation reflects thoughts and opinions of Salient Capital Advisors, LLC ("Salient") employees only, and the firm is not soliciting any transaction based upon such information. Research and Advisory Services provided by Salient Capital Advisors, LLC, a wholly owned affiliate of Salient Partners, L.P. Salient Capital Advisors, LLC is an investment advisor registered with the U.S. Securities and Exchange Commission. Registration as an investment advisor does not imply any level of skill or training. Salient Partners, L.P. and affiliates do not provide tax or legal advice. Please consult your tax and or legal professional to determine how the information contained in the publication may apply to your situation.

The contents of this presentation are for informational purposes only and may not reflect current financial developments or market conditions. This information is being provided solely for educational purposes and is not an offer to sell or solicitation of an offer to buy an interest in any investment fund. Any such offer or solicitation may only be made by means of a confidential private offering memorandum or prospectus relating to a particular fund and only in a manner consistent with federal and applicable state securities laws. You should not act or refrain from acting on the basis of any content included in this presentation without seeking financial or professional advice on the particular facts and circumstances at issue. Salient reserves the right to change any information contained herein without prior notice.

Some information contained herein has been obtained from third party sources and has not been independently verified by Salient. Salient makes no representations as to the accuracy or the completeness of any of the information herein. The information in this material is only as current as the date indicated, and may be superseded by subsequent market events or for other reasons. Any statements of opinion constitute only current opinions of Salient, which are subject to change and which Salient does not undertake to update. Some information in this presentation is based on unaudited information and is subject to change.

Some statements in this communication are forward-looking statements. The forward-looking statements and other views expressed herein are as of the date of this publication. Actual future results or occurrences may differ significantly from those anticipated in any forward-looking statements, and there is no guarantee that any predictions will come to pass. The views expressed herein are subject to change at any time, due to numerous market and other factors. Salient disclaims any obligation to update publicly or revise any forward-looking statements or views expressed herein.

Salient research has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. Salient recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or strategy will depend on an investor's individual circumstances and objectives.

Salient research or any portion thereof may not be reprinted, sold or redistributed without the written consent of Salient. Salient research is disseminated and available primarily electronically, and, in some cases, in printed form.

Salient is the trade name for Salient Partners, L.P., which together with its subsidiaries provides asset management and advisory services.

© 2014 Salient. All Rights Reserved.


4

-3

-1

1

3

5

7

9

-3.50

-3.00

-2.50

-2.00

-1.50

-1.00

-0.50

0.00

0.50

1.00

Fede

ral F

unds

Rat

e (%

)

Curv

e Sl

ope

5-30 Curve

10-30 Curve

FDTR Index

Yield Curves show signs of tighter

monetary policy

The Current State of Interest Rate Markets

Source: Bloomberg, Federal Reserve, May 2014. FDTR represents the Federal Funds Target Rate. For illustrative purposes only. Past performance does not guarantee future results. An investor cannot invest directly in an index. The index reflects the reinvestment of dividends and income and does not reflect deductions for fees, expenses or taxes. The index is unmanaged and is not available for direct investment.

Tightening Isn’t Coming…Tightening is Here


5


Source: Bloomberg, Hang Seng China Enterprises, Standard & Poors, National Bureau of Statistics of China, May 2014. CNY represents the Chinese Yuan Renminbi currency. HSCEI represents the Hong Kong Stock Exchange: Hang Seng China Enterprises Index. SPX represents the S&P 500 Index. PBOC stands for the People's Bank of China. For Illustrative purposes only. Past performance does not guarantee future results. An investor cannot invest directly in an index. The index reflects the reinvestment of dividends and income and does not reflect deductions for fees, expenses or taxes. The index is unmanaged and is not available for direct investment.

…Except in China


6


Source: Bloomberg, Federal Reserve, May 2014. For illustrative purposes only. Past performance does not guarantee future results. The return on US 10-Year Bonds shown reflects the reinvestment of income and does not reflect deductions for taxes. U.S. treasury bonds are guaranteed by the U.S. government and, if held to maturity, offer a fixed rate of return and guaranteed principal value. U.S. treasury bonds are issued and guaranteed as to the timely payment of principal and interest.

Rates Can Only Go Up From Here…Right?

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

18.00%1/

31/1

970

11/3

0/19

709/

30/1

971

7/31

/197

25/

31/1

973

3/31

/197

41/

31/1

975

11/3

0/19

759/

30/1

976

7/31

/197

75/

31/1

978

3/31

/197

91/

31/1

980

11/3

0/19

809/

30/1

981

7/31

/198

25/

31/1

983

3/31

/198

41/

31/1

985

11/3

0/19

859/

30/1

986

7/31

/198

75/

31/1

988

3/31

/198

91/

31/1

990

11/3

0/19

909/

30/1

991

7/31

/199

25/

31/1

993

3/31

/199

41/

31/1

995

11/3

0/19

959/

30/1

996

7/31

/199

75/

31/1

998

3/31

/199

91/

31/2

000

11/3

0/20

009/

30/2

001

7/31

/200

25/

31/2

003

3/31

/200

41/

31/2

005

11/3

0/20

059/

30/2

006

7/31

/200

75/

31/2

008

3/31

/200

91/

31/2

010

11/3

0/20

109/

30/2

011

7/31

/201

25/

31/2

013

3/31

/201

4

US

10-Y

ear B

ond

Yiel

d

Month-End

Return on US Treasuries After Selling “At the Bottom”

87%

54%

62% 24%


7


Source: Bloomberg, Federal Reserve, May 2014. For illustrative purposes only. Past performance does not guarantee future results. The return on US 10-Year Bonds shown reflects the reinvestment of income and does not reflect deductions for taxes. U.S. treasury bonds are guaranteed by the U.S. government and, if held to maturity, offer a fixed rate of return and guaranteed principal value. U.S. treasury bonds are issued and guaranteed as to the timely payment of principal and interest.

Tell That to the Germans

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

8/31

/199

01/

31/1

991

6/30

/199

111

/30/

1991

4/30

/199

29/

30/1

992

2/28

/199

37/

31/1

993

12/3

1/19

935/

31/1

994

10/3

1/19

943/

31/1

995

8/31

/199

51/

31/1

996

6/30

/199

611

/30/

1996

4/30

/199

79/

30/1

997

2/28

/199

87/

31/1

998

12/3

1/19

985/

31/1

999

10/3

1/19

993/

31/2

000

8/31

/200

01/

31/2

001

6/30

/200

111

/30/

2001

4/30

/200

29/

30/2

002

2/28

/200

37/

31/2

003

12/3

1/20

035/

31/2

004

10/3

1/20

043/

31/2

005

8/31

/200

51/

31/2

006

6/30

/200

611

/30/

2006

4/30

/200

79/

30/2

007

2/29

/200

87/

31/2

008

12/3

1/20

085/

31/2

009

10/3

1/20

093/

31/2

010

8/31

/201

01/

31/2

011

6/30

/201

111

/30/

2011

4/30

/201

29/

30/2

012

2/28

/201

37/

31/2

013

12/3

1/20

135/

30/2

014

10-Y

ear B

ond

Yiel

d

Date

US Treasurys

German Bunds

US 10-Year Yield at Historic

Highs vs. Bunds


8

The Current State of Equity Markets

Source: FactSet, Bloomberg, Salient Partners, L.P., August 2014. For illustrative purposes only. Past performance does not guarantee future results.

A Matter of Perspective

4.48

8.19

5.29

3.52

0123456789

All World Emerging Markets US World ex US

Perc

enta

ge (%

)

Region

Global Equity

4.83

6.44 5.53

4.68

- 1 2 3 4 5 6 7

Core Value Large Growth

Perc

enta

ge (%

)

Style

US Equity Style

9.66 9.54 8.37 7.86 5.33 4.36

2.42 0.20

(1.34) (1.49)-4-202468

1012

Perc

enta

ge (%

)

Sector

US Equity Sectors

vs. Retu

rn (%

)

Retu

rn (%

) Re

turn

(%)


9

The Current State of Equity Markets

Source: FactSet, Salient Partners, L.P., August 2014. For illustrative purposes only. Past performance does not guarantee future results. Index performance does not reflect the deduction of fees or expenses. Note that an investor cannot invest directly in the index. Each quintile is based on a 20% holding. The Top Quintile represents the top 20%, the Bottom Quintile represents the bottom 20%, based on 1-Year Beta in the S&P 500. The S&P 500 Index is an unmanaged, capitalization weighted index comprising publicly traded stocks issued by companies in various industries.

0

2

4

6

8

10

12

Top Beta Quintile(Riskiest)

2nd Quintile 3rd Quintile 4th Quintile Bottom BetaQuintile (Lowest

Risk)

YTD

Ret

urn

thro

ugh

7/30

/201

4

Quintiles

Profile of a Manic/Depressive Market

S&P

500

YTD

Retu

rn T

hrou

gh 7

/30/

2014


10

The Current State of Labor Markets

Source: Bloomberg, Bureau of Labor Statistics. For illustrative purposes only. 1Unemployment rate reflects those not in the labor force, but actively seeking employment over 16 years of age. 2By combining the labor non-participation rate with the unemployment rate we derive the percent of the working age population that are currently not working, which is represented by the orange line.

1

2

3

4

5

6

7

8

9

30

32

34

36

38

40

42

44

46

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

Une

mpl

oym

ent E

xpre

ssed

as

Perc

ent o

f Wor

king

Age

Pop

ulat

ion1

Perc

ent o

f Wor

king

Age

Pop

ulat

ion

Labor Non-ParticipationPeople not Working as a % of Working Age Pop."Unemployed" as % of Working Age Pop.

At north of 41%, the percent of the working age population who are not working is as high as it was in 1983 and has barely come down since the financial crisis.2

Better Employment is Still a Myth


11

Takeaways

Source: Salient Capital Advisors, LLC, September 2014.

The Current State of Capital Markets

Treasury yields are low historically, but, in our opinion, believing they can “only go up from here” is a mistake

Investors in equities are set up in multiple camps with divergent views on risk

Risks we see from here…

Populist policies stemming from perceptions of income inequality may pose a material risk to markets over the coming years

European banking does not appear to be fixed yet

Corrections from geopolitical shocks thus far have been very small relative to the potential risk – a large enough event could tip the tide away from focus on central banks

Commercial Banking and Real Estate Lending

Banking Regulation Update

Increased regulation will continue to drive financial sector M&A Smaller banks hit hardest

33% of Dodd Frank

Reform still not implemented

C&I Lending Perspective

Shale plays continue to be the major driver for middle market C&I companies and their lenders Companies benefiting from increased capital expenditure along Gulf

Coast in the next 10 years. In the Houston Ship Channel, 125 projects have been announced with investments estimated at $84Bn Purchase multiples for growing companies continuing to climb;

Reaching 6x EBITDA

Commercial Real Estate Lending Overview

Houston recovered quickly from recession Fierce competition amongst banks

Focus on Sponsorship, Equity, Real Estate

Developers and equity sponsors have been more careful with

leverage, offering more equity in projects Great time to borrow money

Commercial Real Estate Perspective - Houston Multifamily Market 24,000 units under construction at end of 2Q 2014; 18,000 additional

units proposed

15,000 units absorbed in the last 12 months 7.4% rent growth in last

12 months Average occupancy of

91% in all asset classes

Commercial Real Estate Perspective – Houston Office Market 17.0MM SF of space under

construction at end of 2Q 2014; Overall 67% pre-leased 5.7% rental rate increase in first

half of 2014 Vacancy trending downward,

overall 9.8% at end of 2Q 2014

Commercial Real Estate Perspective – Houston Industrial Market 4.6 million SF of positive absorption in first 6 months of 2014 Currently 4.5MM SF of space under construction, down from 5.6MM

SF in 1Q 2014

High demand keeping up with high volume of deliveries Market well positioned for

future rent growth

The Current State of the Capital Markets

Middle Market M&A and Private Equity Update

Cliff Atherton Managing Director

September 2014

21

U.S. Private Equity Deal Flow

Source: PitchBook U.S. Private Equity Breakdown

# of Deals Billions

In 2014, we’ve had the strongest first half since 2007

$102 $109 $151 $158 $223 $190 $120 $96 $80 $91 $165 $220 $184 $215 $183 $276 $192 $273 $244

632 656

815 875

1,072

987

780

649

771 812

1,052

1,218 1,221 1,223 1,208

1,408

1,187

1,415

1,272

0

200

400

600

800

1,000

1,200

1,400

1,600

$0

$50

$100

$150

$200

$250

$300

1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Total Capital Invested ($B) Deals Closed

22

$192 $244

1,187

1,272

1,100

1,150

1,200

1,250

1,300

$0

$100

$200

$300

1H 2013 1H 2014Capital Invested ($B) # of Deals Closed

On an annual basis, the market has been stable since 2010 and it appears that 2014 will be above trend

Billions # of Deals

# of Deals Billions

Source: PitchBook U.S. Private Equity Breakdown

$210 $309 $413 $216 $171 $385 $399 $459 $465

1,288

1,690

2,059

1,429 1,583

2,270 2,444

2,616 2,602

0

500

1,000

1,500

2,000

2,500

3,000

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

2005 2006 2007 2008 2009 2010 2011 2012 2013

Capital Invested ($B) # of Deals Closed


23

6.0x 6.0x 6.0x 5.9x

6.2x 6.2x 6.5x

6.4x

202

165

91

197 203

239

145

0

50

100

150

200

250

300

5.6x

5.7x

5.8x

5.9x

6.0x

6.1x

6.2x

6.3x

6.4x

6.5x

6.6x

2007 2008 2009 2010 2011 2012 2013 1H 2014

Average multiple in middle market was 6.4 times in first half of 2014

Average Multiples and Deal Volume

Source: GF Data M&A Report; Transactions from $10 Million to $250 Million

Multiple Deal Count

TEV/EBITDA 1H 2014 TEV/EBITDA Deals/Year

75

24

Buyout Multiples within the Middle Market by Deal Size Multiple

Source: GF Data M&A Report; Transactions from $10 Million to $250 Million

5.5 5.3 5.3

5.6 5.9

5.3

7.2

6.5

7.5 7.4 7.1

8.3

4.0x

4.5x

5.0x

5.5x

6.0x

6.5x

7.0x

7.5x

8.0x

8.5x

9.0x

2003-2009 2010 2011 2012 2013 1H 2014

$10-25 MM $100-250 MM

In the middle market, there has been a flight to quality as multiples have moved up for larger companies while they have fallen for smaller companies

25

Middle Market ($30-75 million EBITDA)

“There are a lot of deals to choose from that will result in higher prices and a lot of people getting nervous. That’s primarily driven around the true mid-market companies – businesses with $30 to $75 million in EBITDA. That market is insanely competitive.”

– Jay Jester, Audax Group, Mergers & Acquisitions, August 2014

Lower Middle Market ($5-15 million EBITDA)

“So for small platforms and add-on acquisitions, I think this is a terrific market. As I look at our numbers for deal flow, what I’m seeing are private sellers coming to market, those family owned businesses in the EBITDA range of $5 million to $15 million. There are a ton of those companies coming to market right now and people will be spending a lot of time on them in the next half of the year.”

– Jay Jester, Audax Group, Mergers & Acquisitions, September 2014

Buyers acknowledge that the market for all middle market companies is active and very competitive

26

2.8x 2.3x

1.8x

3.0x

2.4x 2.4x 2.6x 2.7x

0.9x

1.0x

1.1x

0.9x

1.0x 1.0x 0.8x 1.1x

3.7x

3.3x

2.9x

3.9x

3.4x 3.4x 3.4x

3.8x

0.0x

1.0x

2.0x

3.0x

4.0x

2007 2008 2009 2010 2011 2012 2013 1H 2014

Total Debt Multiples

Senior Debt / EBITDA Sub Debt / EBITDA

Private equity buyers are actively using sub debt to increase total debt and EBITDA multiples in transactions

Multiple

Source: GF Data August 2014 Leverage Report; Transactions from $10 Million to $250 Million

27

Equity and Debt as a % of Total Enterprise Value (TEV) % of TEV

42.4% 46.9% 54.0% 50.7% 48.0% 46.8% 49.3%

42.7%

13.7%

16.5%

16.2% 13.9% 15.0% 16.1% 12.3%

16.9%

44.0% 36.6%

29.7% 35.5% 37.0% 37.0% 38.4% 40.3%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

2007 2008 2009 2010 2011 2012 2013 1H 2014

Equity Sub Debt Senior Debt

Source: GF Data August 2014 Leverage Report; Transactions from $10 Million to $250 Million

…resulting in a smaller percentage of equity in closing capital structures

28


PE capital invested and deal count have grown substantially since 1995

Billions # of Deals

Source: PitchBook; Transactions between $25 Million and $1 Billion

$7 $8 $9 $11 $14 $16 $35

$49 $70 $124 $106 $78 $80 $147 $227 $210 $309 $413 $216 $171 $385 $399 $459 $465 $244 83 83 131 146 157

227 333

474

660

894

1,049

751

935

1,316

1,801

1,288

1,690

2,059

1,429

1,583

2,270

2,444

2,616 2,602

0

500

1,000

1,500

2,000

2,500

3,000

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 1H2014

Total Capital Invested ($B) Deals Closed

1,272

29

PE firm growth since 1980 – The inflection in PE industry growth occurred in 1996 and 1997

No. of Firms

Source: Preqin

New funds continue to shrink as a percentage of the pie

Number of Active Private Equity Firms over Time (By Vintage of First Fund Raised)

30

With portfolio companies and dry powder combined, PE firms control more than $3.7 trillion today

418 374 360 465 554 675 898

1,265 1,204 1,413

1,783 2,029

2,332 2,546

298 377 407 402

409 563

806

1,011 1,075 1,067

993

1,007

941

1,174

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Asse

sts u

nder

Man

agem

ent (

$bn)

Unrealized Portfolio Value ($bn) Dry Powder ($bn)

Source: Preqin

All Private Equity – Assets Under Management, 2000-2013

31

$541 $526 $504 $484

$497 $509 $486

$0

$100

$200

$300

$400

$500

$600

2007 2008 2009 2010 2011 2012 2013*

2013*

2012

2011

2010

2009

2008

2007

2006

Cumulative dry powder

Dry powder by Vintage

Source: PitchBook U.S. PE & VC Fundraising & Capital Overhang

Most of today’s $486 billion of dry powder is in funds closed in 2012 & 2013

Billions

*Through 12/31/2013

2006 - 2009

U.S. Private Equity Capital Overhang

32

The typical middle market investor manages a fund of $1 billion or less; they have 26% of the $486 billion of dry powder

26%

38%

36%

Percentage of dry powder

Under $1B

$1B -$5B

$5B +

Source: PitchBook U.S. PE & VC Fundraising & Capital Overhang

33

The Bottom Line

Underlying real economy in Houston and Texas is strong - slow recovery elsewhere

Sellers see valuations at or above those achievable in 2007 and 1H 2008, and they are now 7 years older and wiser

Private equity is deploying and raising capital at a pace consistent with pre-crash levels

Strategics are under pressure to grow earnings, and their balance sheets are flush with cash and unused debt capacity

34

What will stop the music?

Credit Markets

What could spook them? Inflation? Drop in oil price (deflation)? Macroprudential Policy?

Geopolitical Risk

35

US Treasury Securities $479,206

52%

Repurchase Agreements

$123,250 14%

Other Assets $316,090

34%

The wild card in the credit markets is the Federal Reserve and its policy changes

$4,406,637

$918,546

$0 $500,000 $1,000,000 $1,500,000 $2,000,000 $2,500,000 $3,000,000 $3,500,000 $4,000,000 $4,500,000 $5,000,000

Jul-14

Jul-08

Total Assets (Millions)

July 2008 July 2014

Source: Federal Reserve Banks and the U.S. Department of the Treasury

US Treasury Securities

$2,240,285 55%

MBS $1,674,363

38%

Other Assets $311,989

7%

36

Buffet is correct; the Fed is the world’s largest hedge fund

$4,406,637

$918,546

$0 $500,000 $1,000,000 $1,500,000 $2,000,000 $2,500,000 $3,000,000 $3,500,000 $4,000,000 $4,500,000 $5,000,000

Jul-14

Jul-08

Total Liabilities and Capital (Millions)


Federal Reserve Notes

$795,563 87%

Deposits $33,417

4%

Other Liabilities $49,183

5%

Total Capital $40,383

4%

Federal Reserve

Notes $1,241,974

28%

Deposits $2,785,798

63%

Other Liabilities $322,539

8%

Capital $56,326

1%

July 2008 July 2014

37

…and the banks have become its primary source of funding

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

Jan-04 May-08 Sep-12

Mill

ions

of D

olla

rs

Excess Reserves of Depository Institutions


Business

BoyarMiller Breakfast Forum Current State of the Capital Markets - 2014