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Middle market definitions
Definition of middle market
Barry Volpert, Co-founder/CEO Crestview
Partners Enterprise value: $200MM – $2.4B
Lawrence Golub, CEO Golub Capital EBITDA $10MM – 50MM
Rick Miller, Group Managing Director, TCW Low End: > $15MM EBITDA High End: < $250MM Loan Size
James Moglia, Managing Director and Head,
U.S. Debt Capital Markets, BMO Capital Markets EBITDA less than $50MM
Adam Sokoloff, Managing Director, Jefferies Enterprise value: $200MM – $2.5B
Source: Panelists.
Middle market spreads to large corporates remain near peak
levels
Source: S&P LCD.
9 18
-6
80
48 36 33
23 20
-15
33 43
110
64
174
110
-50
0
50
100
150
200
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 1Q14
Middle Market Loan Spread to Large Corporates
Large/upper middle market companies have meaningful choice
of capital providers and product offerings…
Source: Thompson Reuters LPC, Wells Fargo Securities, LLC.
The Broad Lending Spectrum
Bank Senior Debt Non-Bank Senior Debt Mezzanine/HY Equity
Smaller middle market firms often do not have the same choices
Source: Thompson Reuters LPC, Wells Fargo Securities, LLC.
The Broad Lending Spectrum
Bank Senior Debt
Non-Bank Senior Debt
Mezzanine/HY
Equity
Middle market loans – higher spreads, lower leverage
4%
6%
8%
10%
12%
14%
16%
4Q10 4Q11 4Q12 4Q13
LC 1st lien LC 2nd lien
MM 1st lien MM 2nd lien
MM/LC Yields 1st/2nd Lien Loans
Source: Thompson Reuters LPC.
3.5x
4.0x
4.5x
5.0x
5.5x
6.0x
6.5x
7.0x
7.5x
2003 2005 2007 2009 2011 2013
Middle market (MM)Large Corporate (LC)
MM/LC LBO Leverage
Yield LBO debt to EBITDA (x)
Private vs. institutional middle market risk and return
Source: Thompson Reuters, LPC.
5.0%
5.5%
6.0%
6.5%
7.0%
7.5%
8.0%
8.5%
9.0%
9.5%
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.02
00
9
1Q10
2Q
10
3Q10
4Q
10
1Q11
2Q
11
3Q11
4Q
11
1Q12
2Q
12
3Q12
4Q
12
1Q13
2Q
13
3Q13
4Q
13
1Q14
Yie
ld (
3-y
ea
r)
To
tal l
eve
rag
e (
x:1
)
*Leverage on Institutional MM Deals Leverage on Private MM Deals*Institutional MM TL Yield Private MM Deals TL A&B Yield
*Based on a cohort of middle market deals with both leverage and yields
Lower middle market credits produce more enticing yields and
less leverage
Source: Thompson Reuters, LPC.
4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0%
< $5M
$5-$15M
$15-$25M
$25-$40M
$40-$50M
> $50M
1st Lien TL Yield
0.0x 1.0x 2.0x 3.0x 4.0x 5.0x 6.0x
< $5M
$5-$15M
$15-$25M
$25-$40M
$40-$50M
> $50M
Debt to EBITDA
Average Yield by EBITDA Range Average Leverage by EBITDA Range
The resilience of middle market firms throughout the cycle
Private Net Job Creation/Loss Rate by Firm Size – 2007 to 2011
2007 2008 2009 2010 2011 Total Period Net Job Creation/Loss Rate
Small firms 0.6% -0.7% -7.0% -2.7% 0.6% -1.8%
Middle market firms
2.2% 2.2% -4.7% -1.0% 3.4% 0.5%
Large firms 0.7% 0.8% -3.8% -1.3% 3.1% -0.1%
Sources: McGee, Tom., U.S. Census Bureau’s Longitudinal Business Database, 1977 – 2013, U.S. Census Bureau’s Longitudinal Business Database, 1977 -
2011.
• U.S. middle market firms create aggregate revenues equivalent to approximately 40% of U.S. GDP1
• U.S. middle market firms are steady employers, accounting for 41% of private net job creations between 1977 and 20112
• During the most recent financial crisis, U.S. middle market firms generated a higher level of net job creation relative to either small or large firms3
“Froth” dipping into the middle market US BSL / middle market credit stats
Source: Thompson Reuters LPC
MM volumes / refis / dividend recaps approaching or exceeding their 2007 peaks
“Froth” dipping into the middle market
Source: Thompson Reuters LPC.
0.0
40.0
80.0
120.0
160.0
Jan…
Fe…
Ma…
Ap…
Ma… Ju…
Jul…
Au…
Se…
Oc…
No…
De…
($
B.)
CLO issuance
Loan fund flows
0.0
100.0
200.0
300.0
400.0
500.0
600.0
Jan…
Feb
…
Ma…
Apr…
Ma…
Jun…
Jul-…
Au…
Se…
Oct…
No…
De…
($
B.)
Repricings ($130B)
Dividend recaps ($50B)
M&A ($221B)
Refinancings ($626B)
Other new money ($108B)
Substantial loan market liquidity + limited new deal supply = refi, refi, refi
CLO & Loan Fund Issuance 2013 MM Cumulative Monthly Loan Issuance by Purpose
“Froth” dipping into the middle market
*** 1Q14 Thompson Reuters LPC MM Lender Survey Source: Thompson Reuters LPC.
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.02
00
12
00
22
00
32
00
42
00
52
00
62
00
72
00
82
00
92
010
20
112
012
20
131Q
142
014
E
MM
div
ide
nd
re
cap
issu
an
ce ($
B.)
0%
5%
10%
15%
20%
25%
30%
35%
40%
< $8.0B $8-10B $10-12B > $12B
% o
f re
spo
nd
en
ts
MM Dividend Recap 2014 Dividend Recap Expectation***
Middle market investments PE investments ($) by deal size
Source: Pitchbook.
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014*
$2.5B+ $1B-$2.5B $500M-$1B $100M-$500M $25M-$250M Under $25M
Transactions with Deal Sizes less than $500mm now account for over 55% of total deal value.
Transactions with Deal Sizes less than $1 Billion now account for over 88% of total deal value. The highest % ever.
Middle market PE fundraising – MM funds attract more interest
today than at any point in recent history
Source: Probitas Partners.
Top 5 Sectors of Interest PE Sectors of Interest
Commercial banking regulation
Source: Federal reserve.
Tighter banking regulation and higher capital requirements may limit commercial bank involvement in the middle market / levered lending category
Leverage lending guidance impact on commercial banks
Source: Thompson Reuters LPC.
0%
10%
20%
30%
40%
50%
60%
70%
< 3x 3x - 3.5x 3.5 - 4x > 4x
% o
f b
an
k r
esp
on
de
nts
1st lien debt to EBITDA
4Q13 Survey 1Q14 Survey
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
< 4x 4x - 4.5x 4.5 - 5x 5 - 5.5x > 5.5x
% o
f b
an
k r
esp
on
de
nts
Total debt to EBITDA
4Q13 Survey 1Q14 Survey
Sponsored: Total to ebitda Sponsored: senior debt to ebitda
Banks lower their leverage tolerance for middle market deals citing levered lending guidance as a primary driver
The changing middle market lending landscape
Source: S&P LCD, Wells Fargo LLC.
37%
7%1%
7%
13%
7%
25%
7%
4%
25%
67%87%
5% 6%1%
1997 2007 2014
Domestic Banks
Finance Co
Foreign Bank
InstitutionalInvestors
Securities Firms
Primary Market for Highly Levered Transactions in the Upper Middle Market (as of 3/31/14)
Institutional loan investors (CLOs/BDCs/Loan Funds) now account for 87% of the purchase of highly levered transactions in the upper middle market.
Middle market lending fundraising – BDC growth highlights
demand for middle market paper and above average yields
Source: Thompson Reuters LPC
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
2000 2002 2004 2006 2008 2010 2012 2014
$ in
mil
lio
ns
IPOFollow OnRights Offerings
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
2Q…
1Q 2
00
5
4Q…
3Q…
2Q
20
07
1Q 2
00
8
4Q…
3Q…
2Q
20
10
1Q 2
011
4Q
20
11
3Q 2
012
2Q
20
13
$ in
mil
lio
ns
BDC Loan Balances BDC Capital Issuance
Direct Origination and Credit-Driven Focus Drive
Below-Market Golub Capital Default Rates
1. Source: Standard & Poor’s Leveraged Commentary & Data (The S&P/LCD is a market value-weighted index designed to measure the performance of the U.S. broadly syndicated leveraged loan market. The S&P/LSTA Index typically encompasses anywhere from 90%-95% of the entire broadly syndicated leveraged loan market). Trailing 12-month leveraged loan default rate by principal amount.
2. Data calculated as the aggregate principal amount of leveraged loans on a cost basis that experienced an uncured payment default during the year, expressed as a percentage of aggregate outstanding leveraged loans at the end of the period. Data is a composite of Golub Capital loans and not specifically loans that are held by any Golub Capital managed entity.
Note: There is no guarantee that future investments will maintain historical default levels. All indices designed, calculated and published by third parties and presented herein are the property of their respective owners. Golub Capital makes no representations about the accuracy or appropriateness of the data reported by such third party data sources and such companies have not endorsed the contents of this presentation.
2.35%
1.09%
0%
1%
2%
3%
2004–2013 (Annual Average)
Default Rate
S&P/LCD Leveraged LoanDefault Rate
Golub Capital Senior Debt& One-Stop Middle MarketDefault Rate
126 bps
1
2
Historical Default Rates of Market Leveraged Loans vs. Golub Capital Senior & One-Stop Loans
Golub Capital’s Focus on Solutions Yields Repeat Business
Completed multiple financings with over 100 private equity sponsors
75% of lending in 2013 and 2012 has been with repeat sponsors
Median returns for public pension funds
Sources: Bain & Company Global Private Equity Report 2013, Preqin. Note: Data based on review of public pension funds in North America and Europe.
6.4% 6.4%
12.5%
7.1% 6.7%
0%
2%
4%
6%
8%
10%
12%
14%
Listed Equity Fixed Income Private Equity Real Estate Total InvestmentPortfolio
Median returns for public pension funds
Middle market funds have outperformed over the long term
Source: Pregin. Note: Middle Market Funds defined as fund size between $0.5 billion and $3.0 billion. Large Cap funds defined as fund size greater than $3.0 billion
1.52x
1.44x
1.35x
1.40x
1.45x
1.50x
1.55x
Average multiple
Middle Market Funds
Large Cap Funds
Average Fund Net Multiple
13.0%
11.4%
10.5%
11.0%
11.5%
12.0%
12.5%
13.0%
13.5%
Average Net IRR
Middle Market Funds
Large Cap Funds
Average Fund Net IRR
Middle market funds have outperformed over the long term
Source: Cambridge Associates; Note: Pooled end-to-end return, net of fees, expenses, and carried interest
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
10-Year 15-Year 20-Year 25-Year
U.S. Buyout Funds <$350 million U.S. Buyout Funds between $350 million - $1 billion
U.S. Buyout Funds $1 billion - $3.5 billion U.S. Buyout Funds > $3.5 billion
S&P 500
U.S. Buyout Funds End-to-End Pooled Return (Net to Limited Partners)
Fund capitalization groupings for vintage years are as follows (figures in millions): 1986 - 92: Sm Cap is < or = $100, Mid Cap is > $100, < or = $300, Lg Cap is > $300. 1993 - 94: Sm Cap is < or = $100, Mid Cap is > $100, < or = $500, Lg Cap is > $500. 1995 - 96: Sm Cap is < or = $200, Mid Cap is > $200, < or = $500, Lg Cap is > $500, < or = $1000, Mega Cap is > $1000. 1997 - 99: Sm Cap is < or = $250, Mid Cap is > $250, < or = $750, Lg Cap is > $750, < or = $1000, Mega Cap is > $1000. 2000 - 13: Sm Cap is < or = $350, Mid Cap is > $350, < or = $1000, Lg Cap is > $1000, < or = $3500, Mega Cap is > $3500.
Purchase price multiples
Source: Capital IQ Note: Mid Cap LBOs defined as Enterprise Value between $500 million and $2 billion. Large Cap LBOs defined as Enterprise Value greater than $2 billion
10.4x
11.5x
9.5x
10.0x
10.5x
11.0x
11.5x
Mid Cap LBOs Large Cap LBOs
Average EBITDA Purchase Multiple
Leverage multiples
Source: Capital IQ Note: Mid Cap LBOs defined as Enterprise Value between $500 million and $2 billion. Large Cap LBOs defined as Enterprise Value greater than $2 billion
3.3x
4.2x
0.0x
0.5x
1.0x
1.5x
2.0x
2.5x
3.0x
3.5x
4.0x
4.5x
Mid Cap LBOs Large Cap LBOs
Total Debt / LTM EBITDA at Acqusition
Top performing funds generate fewer losing deals and more big
winners
Notes: Includes US, European and Asian buyout funds of vintage years 1995-2006; percent of funds based on >$100M funds Source: Bain analysis
Worse performing funds Better performing funds
Sponsor-to-sponsor deals perform well compared with other
deal types and are significantly less risky
Source: Bain & Company Global Private Equity Report 2013, data from HEC Paris; analysis by PERACS PE Analysis and Track Record Certification analysis includes 101 sponsor-to-sponsor deals and 660 other deals, all fully realized.
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
Pre-2004 Since 2004
Sponsor-to-sponsor Other
Deal rate of return (PERACS rate if return)
0%
5%
10%
15%
20%
25%
30%
35%
Pre-2004 Since 2004
Sponsor-to-sponsor Other
Deal alpha (PERACS alpha)