2015 STATE OF THE INDUSTRY

Capital Markets

To Our Readers, As part of our commitment to knowing our financial clients’ business, we collect insights

on the capital markets from some of the best minds in the industry. This understanding

contributes to how we deliver counsel that exceeds our clients’ expectations and our

ability to help them make strategic decisions about their business.

The information in this ebook has been invaluable to us and to our clients, and we hope

that it will benefit you as well.

Read some of the trends and best practices gathered from industry-leading clients and

our own capital markets team. If you find value in it and would like to hear more, join us

for our next BoyarMiller Breakfast Forum.

Sincerely,

CHRIS HANSLIK

Firm Chairman

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TABLE OF CONTENTS

03 : State of the Industry

04 : Expert Insights

Equity and the Public Markets

Private Equity and M&A

Commercial Banking and Real Estate Lending

07 : Attorney Insights

Current State of the Capital Markets –

Middle Market M&A and Private Equity

10 : Practice Leaders

LEARN MORE ABOUT THE FORUM

Energy showed promise for people

who believed this downturn would

be a good entry point into the indus-

try. Many of them still see the time

for significant investment as 6-9

months in the future.

CAPITAL AVAILABILITY, ESPECIALLY ON THE DEBT SIDE

+EARNINGS GROWTH AMONG PRIVATE COMPANIES

ENERGY, HEALTHCARE AND TECHNOLOGY

ARE THE MOST ACTIVE SECTORS FOR M&A

MACROECONOMIC

OUTLOOK

M&A ACTIVITY IS STRONG

PAGE 03

State of the Capital Markets

6th year of a strong, active M&A market

A year ago, the consensus among

Wall Street analysts was that S&P 500

earnings would experience 10% growth

in 2015. Today, there is no growth.

Private companies are seeing growth

that outpaces that of the larger, public

companies in the S&P 500.

EARNINGS : PUBLIC VS. PRIVATE

Public

Private

Technology remains an active

sector because it is growing and

influencing people’s daily lives in

more and more ways.

Healthcare markets have changed

so much as a result of recent legisla-

tion that many believed there would

be opportunity in the dislocation

and change.

U.S. dollar is

gaining strength

Domestic unemployment

is at 5.1%, its lowest since

the Great Recession

U.S. domestic

companies are very

healthy right now

U.S. GDP growth rates

have slowed

Pullback in Chinese

consumer and manufac-

turing sector, resulting

in yuan devaluation

Concerns in the

Eurozone, particularly

with regards to Greek

economic turmoil

WHAT ARE WE SEEING?

• FIRST SIGNIFICANT DECLINE OF 10% IN MORE THAN

46 MONTHS

This is a natural occurrence in the marketplace, a cor-

rection that occurs cyclically. In fact, the only anoma-

lous part of this decline is that it has been a much

longer interval than normal since the last correction.

• PAY ATTENTION TO VOLATILITY PREDICTIONS

The VIX – a measure of expected volatility looking 30

days out – is showing a spike in expected volatility into a

part of the chart that indicates “flat-out panic.” While

these spikes are quite common, they do say something

significant about expectations looking forward.

• THE S&P 500 IS EXPENSIVE

Stock valuations are well above the median 30-year

average of stock prices measured by the price-earnings

ratio. Fundamental stock pickers looking at the S&P 500

today would say that stocks are expensive.

• CREDIT SPREADS ARE WIDENING

Credit spreads are widening, and the markets are

paying attention. Historically, this has been a warning

signal: widening credit spreads have meant bad news

for stocks.

Equity and the Public Market

“ This is a time for caution.” DREW KANALY, Chairman – Kanaly Trust

PAGE 04

As Chairman of Kanaly Trust, Drew Kanaly manages the ongoing investment strate-

gies and personal wealth management programs of several family relationships.

He specializes in investment management, charitable trusts and family limited

partnerships. Since earning his BBA in Finance from the University of Houston, Drew

has attended the American Bankers Association’s National Graduate Trust School

at Northwestern University, the Texas Bankers Association Regional Trust School at

Southern Methodist University and earned a CFTA designation.

Expert Insights

WHAT ARE WE SEEING?

• TURNING TO FOREIGN ACQUISITIONS

Private equity buyers are focusing more on foreign

acquisitions. The three most common countries for

geographic expansion are Canada, the United

Kingdom and China.

• CORPORATE BUYERS OUTBID BY FINANCIAL BUYERS

Although the perception is that a strategic buyer is

likely to pay more than a private equity group, in the

last 8 years, corporate buyers have actually been out-

bid by the financial buyers about 60% of the time.

• LEVERAGE MULTIPLES HAVE EDGED UP

In the first half of 2015, leverage multiples in aggregate

for deals in the $10-250 million range have edged up.

With deals funded 50/50 with debt and equity,

increased leverage multiples increase buying power.

• A DOWNTURN IS COMING

Historically, the market has tended to improve over

4-6 year periods, followed by 18-24 months of downtime.

We are in the sixth year of a strong M&A market – and

at some point, the market will correct.

Private Equity and M&A

“ If you look in the first half of 2015, what you see is, other than 2014, it’s the strongest start to the year that we’ve had since the recovery.” COLT LUEDDE, Managing Director – GulfStar Group

Colt Luedde has more than 25 years of investment banking and corporate finance

experience. He has completed more than 100 M&A transactions and has deep

transactional experience advising the owners of manufacturing, distribution, ser-

vice and software businesses in the industrial and energy sectors. He serves on the

board and is past-President of the Association for Corporate Growth and is a board

member of the Hicks, Muse, Tate & Furst Center for Private Equity Research at the

University of Texas. He holds a BBA in Finance from The University of Texas at Austin.

EXPERT INSIGHTS : PAGE 05

Commercial Banking and Real Estate Lending

“ In general, I would say that banks are very positive, looking for growth, and looking to put on assets for quality companies.” BRANDON ANNETT, Managing Director and

Head of Capital Markets & Syndicated Finance –

Texas Capital Bank

EXPERT INSIGHTS : PAGE 06

Brandon Annett has more than 20 years’ experience in the credit and capital

markets, and has served as Managing Director and Head of Texas Capital Bank’s

Syndicated Finance group since May 2012. With previous posts at BBVA Compass,

Concerto Asset Management in Charlotte, North Carolina, and the Leveraged

Finance group at Wachovia Securities, he has considerable knowledge of com-

mercial lending. Brandon holds a BBA in Finance from Texas Tech University.

WHAT ARE WE SEEING?

• REAL ESTATE LENDING ACTIVITY IS HIGH

Low vacancy rates and an expanding economy have

driven real estate activity. Over the last three years, 22%

of national banks have experienced over 50% growth in

their commercial real estate assets. This robust pipeline

of new supply is tempering lender activity toward

new projects, as many banks have reached or nearly

reached exposure levels on construction-related loans.

• FOR E&P COMPANIES, BANKRUPTCY IS THE THEME FOR 2016

With no forecast in material price improvement for

oil, E&P companies are seeing revenue and margin

declines. As hedges roll off, they are looking to tap

the $50 billion in capital on the sideline targeted for

the energy sector. But if asset sales cannot solve their

complex capital structure issues, bankruptcy may be

a more realistic option.

• BANK REGULATORY OVERSIGHT OPENS SPACE FOR NON-

BANK LENDERS

Oversight has dampened the risk appetite for more

leveraged transactions, and despite the liquidity and

heightened competition, middle market leverage multi-

ples are down from 2014. As a result, equity is a higher

percentage of the capital for leveraged transactions,

and the non-bank lending universe is growing to fill the

void as banks pull back.

2015 marks the sixth consecutive year of strong

middle market M&A and private equity activity.

However, current events over the last six months

have people wondering what, if any, impact

such events will have on the M&A market.

Should we be concerned about the sustained

dramatic drop in oil prices, the economic slow

down in China, the substantial recent corrections

in the Chinese and US public equity markets

or the inevitable interest rate hike by the US

Federal Reserve? Because of the substantial

amount of private equity overhang dollars

available for investment, and lending appears

to have little impact, middle market M&A deal

flow and multiples continue to be strong.

So while robust now, markets are understand-

ably more cautious – change could be just

on the horizon.

M&A / PRIVATE EQUITY MARKETS

Despite concerns related to the drop in oil prices, the

first half of 2015 has been another strong period for M&A

activity, including private equity deals. If the current

pace holds true through the end of the year, 2015 will be

the sixth consecutive year of a strong M&A market. Both

strategic and financial buyers have shown an increased

focus on international acquisitions, with a majority of

those transactions expected to involve companies based

in China, Canada or the UK. The three major industries in

which M&A transactions have been, and are expected

to continue to be, focused in 2015 are energy, healthcare

and technology.

PAGE 07

Attorney Insights

Current State of the Capital Markets – Middle Market M&A and Private Equity

STEVE KESTEN, Shareholder and Chair, Business Group

PHILIP DUNLAP, Senior Associate, Business Group

Due in large part to the improved credit markets, on

average, for M&A deals in 2014, senior debt accounted

for 38.4% of the total enterprise value (“TEV”), mezzanine

and other subordinated debt accounted for 14.7% of the

TEV and equity accounted for 46.5% of the TEV. For deals

in the lower middle market (TEV between $10 and $25

million), debt (senior combined with subordinated debt)

accounted for 58.3% of the TEV and equity accounted for

41.7% of the TEV. While there is more debt being placed

on M&A transactions, it is not all coming from traditional

banks. A significant number of “non-bank” lenders are

financing these highly leveraged transactions. The com-

bination of bank lenders plus non-bank lenders has

allowed the debt availability to rise.

The increased availability of debt has led to higher

EBITDA multiples which have served to increase the valu-

ations for middle market M&A deals. EBITDA multiples

are as high as they have been since before 2007. In 2014,

the average middle market transaction was valued at

slightly less than 6.5 times EBITDA. The multiples change

when looking at different deal sizes. Smaller middle mar-

ket deals (those between $10 million and $25 million) saw

an average EBITDA multiple of 5.5x in 2014, while larger

middle market deals (those between $100 million and

$250 million) saw an average EBITDA multiple over 7.5x.

The average EBITDA multiple for all deals in the first half

of 2015 has been 6.6x.

The strong current market means that companies are

being valued between 1.0x and 1.5x higher (as a multiple

of EBITDA) than in a “normal” market. This premium has

caused (and will continue to cause) many sellers to choose

a private equity buyer that can close on a recapitaliza-

tion rather than a strategic buyer that would purchase

the entire company. Thanks to the premium being paid,

recapitalizations can result in the seller achieving the

same amount (or more) of cash proceeds as they would

receive in a more normal market, while still retaining a

minority stake in their company.

Buyers who have not had a high concentration of ener-

gy-related portfolio companies have shown a desire

for energy targets because they believe 2015 is a good

“entry point” for the energy space. However, with uncer-

tainty regarding exactly when the price of oil has or will

reach its bottom, it is expected that many private equity

buyers will continue to hold off on energy targets for

another six to nine months. Buyers have focused on

healthcare because of changes, and opportunities,

in the industry resulting from Obamacare. Technology

has been another attractive industry for PE buyers

because they realize that technology is affecting lives

in an increasing amount.

The primary reason for the continued robust M&A market

in 2015, despite the ongoing uncertainty surrounding the

price of oil and volatility in the public equity markets,

is the amount of capital that is available to buyers.

M&A activity has benefited from buyers’ access to

capital resulting from private equity capital overhang

and an improved credit market. Primarily for strategic

buyers, improved public equity markets have provided

the ammunition for these transactions.

Thanks to the new funds raised in 2014, US-based private

equity funds currently have approximately $535 billion

of “dry powder” committed that has not yet been drawn

upon. This overhang, which should serve the markets well

through at least 2018, should continue to drive substantial

activity in the private equity market.

ATTORNEY INSIGHTS : PAGE 08

Overall, unless another significant adverse economic

event occurs, generally speaking, the near term lending

environment appears healthy but cautious for M&A activ-

ity. However, with depressed oil prices being economic

disaster for some and a significant windfall for others,

what will almost assuredly be different are the types of

deals that will get funded.

CONCLUSION

2015 marks the sixth consecutive year of a strong

M&A market. History shows, however, that following an

extended strong period (typically no more than 6 years),

the M&A market experiences a pull back. Further, the

sustained drop in oil prices, the slow down of the Chinese

economy and significant Chinese and US public equity

markets corrections, as well as the uncertainty surround-

ing the US Federal Reserve’s interest rate policy, could

have a material effect on the future of the M&A market.

On the other hand, so long as the availability of credit

remains strong, an M&A market correction should not be

as significant in 2016 and 2017 as compared to past M&A

market corrections. Additionally, any correction will likely

get the M&A markets back to a “normal” pricing environ-

ment as opposed to the “premium” environment that

we have enjoyed in recent years. Finally, the near term

(through the end of 2015) should be a great time for sell-

ers to achieve a liquidity event as valuations and EBITDA

multiples remain high.

DEBT MARKETS

While US companies, for the most part remain financially

healthy, banks continue to have an appetite for leveraged

M&A transactions; but due to recent events, with an

eye toward caution. With US GDP slowing, no forecasted

improvement in the price of oil and the continuing effects

of greater regulation, banks continue to prop up the M&A

markets with lending but with slightly dampened terms.

Expect to see M&A transactions in the foreseeable future

to be completed with a little less debt and more equity,

as, generally speaking, middle market debt multiples

hover at around 3 times EBITDA for senior and 4 times

EBITDA for total debt.

In the E&P market segment, banks are expecting more

pain for US upstream and energy service companies

leading to a number of possible bankruptcies. Continuing

depressed revenues and margins due to low oil prices,

and extremely complicated E&P company capital struc-

tures are going to make it more and more difficult for

work out solutions to be reached following inevitable

technical and payment defaults; so expect more bank-

ruptcies starting late this year and next year.

On the other hand, in the real estate markets, banks have

experienced big increases in their total commercial real

estate portfolios. But once again, banks are expecting

the recent fevered pace of real estate lending to soften.

Sizable pipelines of projects that have already been

approved are going to temper activity for new projects

and banks are also anticipating less refinancing activity,

not necessarily because banks are not willing, but rather

because most US companies have already taken advan-

tage of the sustained period of low interest rates and

have already completed significant refinancings.

ATTORNEY INSIGHTS : PAGE 09

BILL BOYAR

Founding Shareholder, Bus iness Group

Bill’s practice focuses on representing parties involved in

the acquisition, disposition, capitalization and financing

of assets and businesses on a national and international

level. He has served as lead counsel on numerous com-

plex, multi-party acquisitions and project financings,

with significant experience in corporate finance, private

equity, mergers & acquisitions, real estate and hospitality.

STEVE KESTEN

Shareholder and Chair, Bus iness Group

Steve’s practice includes private placements and other

sales and purchases of debt or equity securities; mergers,

asset acquisitions and sales; formation and representa-

tion of private equity funds, venture capital funds and

hedge funds; entity selection and formation; and general

contract review. He represents both lenders and borrow-

ers in asset-based lending transactions involving senior

lenders, mezzanine lenders and factoring companies.

PAGE 10

Practice Leaders

GARY MILLER

Founding Shareholder, Bus iness Group

Gary has extensive experience in mergers and acquisitions,

capital formation, contract negotiations/documentation,

lending, factoring and day-to-day representation of corpo-

rations and other business entities. He participates in the

organization and financing of business entities, as well as

the negotiation and documentation of complex transac-

tions. Gary is often called upon to represent insurance

agencies in their capital transactions.

PRACTICE LEADERS : PAGE 11

GUS BOURGEOIS

Shareholder, Bus iness Group

Gus’ practice involves a wide variety of corporate transac-

tions, including the acquisition, financing and disposition

of business entities through asset and stock purchase

transactions; entity selection and formation; sales of debt

and equity securities; negotiation and drafting purchase

agreements; employment agreements, licensing agree-

ments and other contracts; and general corporate matters.

BLAKE ROYAL

Shareholder, Bus iness Group

Blake’s practice includes acquisitions and dispositions of

equity and assets, including recapitalization transactions

with venture capital and private equity funds; entity and

capital formation, including private placements, in domes-

tic and international jurisdictions; and general contractual

drafting and negotiation.

PHILIP DUNLAP

Senior Associate, Bus iness Group

Philip’s practice consists of corporate and private securities

transactions, as well as serving as outside general counsel

in M&A, financing, employment agreements and raising

capital through private offerings. Philip has represented

hedge funds, private equity funds, venture capital funds

and real estate funds in their formation, operation and

compliance in multiple jurisdictions.