INNOVATIONS IN GLOBAL CONNECTIONS PRIVATE EQUITY IN THE MIDDLE MARKET SUMMER 2015 CYBERSECURITY: ARE YOU AND YOUR STAKEHOLDERS BEING TARGETED? ALSO INSIDE! Top 11 tips to harden your cyber defenses How much it will cost to prevent cyber attacks Valuations rebound to near pre-crisis levels INNOVATIONS IN GLOBAL PRIVATE EQUITY www.duanemorris.com Duane Morris – Firm and Affiliate Offices | New York | London | Singapore | Los Angeles | Chicago | Houston | Hanoi | Philadelphia San Diego | San Francisco | Silicon Valley | Oman | Baltimore | Boston | Washington, D.C. | Las Vegas | Atlanta | Miami | Pittsburgh | Newark Boca Raton | Wilmington | Cherry Hill | Lake Tahoe | Myanmar | Ho Chi Minh City | Duane Morris LLP – A Delaware limited liability partnership Exclusive survey: Where are prices heading? How leading investment bankers view pricing . INNOVATIONS IN GLOBAL CONNECTIONS PRIVATE EQUITY IN THE MIDDLE MARKET SUPPLIERS SUPPLIERS VENDORS Contributor Profiles PORTFOLIO COMPANIES CUSTOMERS CUSTOMERS David Toll, executive editor, BENEFICIARIES LIMITED PARTNERS Fluent Partners Buyouts Insider DAVID TOLL is the executive editor of Buyouts Insider, where he oversees the editorial direction of Buyouts Magazine, Venture Capital Journal and the peHUB.com community website. David has been writing about the private equity markets since 1997, and publishes a biweekly column in Buyouts Magazine. He is the co-author of several survey-based studies on the private equity and venture capital markets, covering such topics as partnership terms and employee compensation. He is the chief cartoonist at privateequitycartoon.com. TRUSTEES Paul Centopani, research editor, Buyouts Insider YOUR FIRM Tom Stein, founder, TOM STEIN provides a range of editorial and marketing services to corporate clients, including Yahoo!, Facebook, Sony, Oracle, Saatchi & Saatchi, Marvell, Microsoft and PayPal. His services include contributed articles, newsletters, white papers, website copy, social media content, and speeches. He has contributed to leading business and general interest publications including Buyouts Magazine, Wired Magazine, Forbes, Tennis Magazine, and Venture Capital Journal. Previously, Tom was a senior editor at Red Herring, a magazine where he covered start-ups and venture capital.

He also worked as a staff writer at the San Francisco Chronicle, where he covered the tech industry. Additionally, Tom served as a senior editor at InformationWeek and Success Magazine. PAUL CENTOPANI is a writer and developer of media and editorial in print, online and presentation formats for Buyouts Insider. His work centers on plumbing the private equity industry for trends and ideas that can be turned into thoughtprovoking, high-quality content. His stories have been regularly featured in Buyouts Magazine, Venture Capital Journal and the peHUB. com community website.

Earlier in his career Paul was a pricing analyst and senior consultant for defense contractor Booz Allen Hamilton. There he managed more than 600 proposals representing nearly $900 million in value. . TABLE OF CONTENTS 2 A LETTER TO OUR READERS By David Toll, Richard Jaffe & Pierfrancesco Carbone 4 YOUR RISK OF CYBER ATTACK? GREATER THAN YOU THINK By Tom Stein and David Toll 6 7 8 12 13 Top 11 tips to harden your cyber defenses Cybersecurity by the numbers Estimate of cybersecurity costs for mid-cap firms At a glance: How sponsors are responding to cyber threats VALUATIONS REBOUND TO NEAR PRE-CRISIS LEVELS, PUTTING PRESSURE ON SPONSORS By David Toll 17 17 18 20 Prices rise in the middle market Lincoln International’s snapshot view on loan pricing & terms Exclusive Survey: Where are deal prices heading? How investment bankers view pricing 26 ABOUT DUANE MORRIS 28 ABOUT BUYOUTS INSIDER Executive Editor, David Toll (dtoll@buyoutsinsider.com/301-591-1838) Editorial Advisor, Richard P. Jaffe (RPJaffe@duanemorris.com/215-979-1935) Research Editor, Paul Centopani (pcentopani@buyoutsinsider.com/ 301-591-1822) Editor-in-Chief, Lawrence Aragon Contributor, Tom Stein Creative Director, Janet Yuen-Paldino Junior Graphic Designer, Allison Brown Sales Director: Robert Raidt (rraidt@buyoutsinsider.com/301-591-1834) Sales Associate: Kelley King (kking@buyoutsinsider.com/301-591-1827) Publisher: Jim Beecher (jbeecher@buyoutsinsider.com/ 301-591-1851) Connections in the Middle Market 1 . A LETTER TO OUR READERS W hen Buyouts Insider and Duane Morris embarked on this summer’s edition of Connections in the Middle Market, we wanted to provide actionable analysis to middle-market players on two of the burning issues of the day. • How to protect data from hackers and other malicious forces. • How to cope with a deal market that most described as fully priced, if not quite in bubble territory. We also entered the project hoping to address a nagging inconsistency. By way of background, it is a well-known trait of the deal market that bigger companies, all other things being equal, sell for higher multiples than smaller companies. There are a host of reasons why that is so. Among them, larger companies tend to employ deeper, more experienced management teams, to serve more diversified customer bases, and to boast longer, more consistent track records from which to derive projections about future performance. But that raises a question: What is the most meaningful way to break down the market by size when looking at deal pricing? Few middle-market players seemed to agree.

Richard Jaffe, partner and co-head of the private equity practice group at Duane Morris, thought going in that the best ranges might be up to $25 million in enterprise value, $25 million to $100 million, $100 million to $250 million and greater than $250 million. We hoped our research could produce the definitive answer. Several mid-market investment bankers that we spoke with, including Brian Lucas, a managing director at Harris Williams, did agree that generating $20 million to $25 million in EBITDA was an important break point for companies. Lucas pointed out that “at those levels you start to open yourself up to more sophisticated financial options.

There’s just more depth to the lending market when you get above $20 million to $25 million of EBITDA.” But beyond that we found little consensus. In fact, whereas several investment bankers pointed to EBITDA ranges as being the most telling, others, like Jim Bunn, head of investment banking at Raymond James, pointed to enterprise value ranges. Leading data providers also remain at odds on the question. In its monthly report produced with data from S&P Capital IQ, investment bank Robert W.

Baird & Co presents deal multiples by size for companies with enterprise values of less than $100 million, $100 million to $499 million and $500 million to $1 billion. By contrast, in presenting deal multiples by size on its own, S&P Capital IQ defines the middle market as companies that generate $50 million or less in EBITDA and big companies as generating more than that. Pitchbook in a recent quarterly deal multiple and trends report compared companies with enterprise values of up to $25 million, $25 million to $250 million and $250 million and up. We’ll advance two theories on why the middle market hasn’t settled on a single size range. • The first is that, while they move up especially rapidly at discrete break points, deal prices also rise on a continuum by size.

As a result, mid-market investment banks and 2 DUANE MORRIS Buyouts Insider . sponsors have been free to cherry-pick transaction size ranges that make the most sense for the size deal that they do. An investment bank that specializes in deals of up to $25 million in enterprise value, for example, might carve up the market far differently than one that specializes in deals of $100 million in enterprise or more. • A second theory is that the deal multiple-by-size curve changes over time. Robert W. Baird & Co found over a recent 12-month period that, as you’d expect, deals of $500 million to $1 billion command higher multiples than deals of $100 million to $499 million.

But in six different years since 2005, including as recently as 2013, the bigger deals actually brought lower multiples—a phenomenon that has Jay Jester, managing director at buy-and-build specialist Audax Group, calling the price difference between small and mid-sized deals the “last great arbitrage” in private equity. This summer’s edition of Connections in the Middle Market marks the first collaboration between Buyouts Insider, publisher of Buyouts Magazine, Venture Capital Journal and peHUB.com, and Duane Morris, a leading international law firm with a thriving practice serving middle market companies and financial sponsors. We hope you find our two feature articles on cybersecurity and deal pricing filled with valuable, actionable information. And we hope you have a fuller appreciation for why we found little consensus on how to break down the market by size when looking at deal prices. Let us know how well we’ve succeeded.

Please send any comments or suggestions on this edition to dtoll@buyoutsinsider.com or rpjaffe@duanemorris.com. David Toll Executive Editor Buyouts Insider Richard Jaffe Partner and Co-head of Private Equity – U.S. Duane Morris Pierfrancesco Carbone Partner and Co-head of Private Equity – UK / Europe Duane Morris Connections in the Middle Market 3 . ©iStock/aetb YOUR RISK OF CYBER ATTACK? GREATER THAN YOU THINK BY TOM STEIN AND DAVID TOLL Chances are you haven’t given cybersecurity as much attention as it deserves. But it is not too late to start catching up. Experts say some of the most important elements of a cybersecurity program include getting senior managers at your firm on board early, doing a thorough assessment of your systems and vulnerabilities, and making sure you run ample fire drills. D on’t think a cyber attack could impact your mid-market shop? That’s what The Riverside Company thought—until it happened to them. A few years ago, two of Riverside’s portfolio companies experienced breaches. In one instance, hackers gained access to sensitive customer information and threatened to expose that data if the portfolio company didn’t pay a hefty ransom.

In another case, hackers infiltrated a portfolio company’s computer systems to steal credit card information. Fortunately, in both instances, the companies resolved the issues before any serious damage occurred. 4 DUANE MORRIS Buyouts Insider . “Both these portfolio companies were less than • The vast majority of the firms examined—88 $20 million in revenue so it was pretty amazing percent of the broker-dealers and 74 percent they would get targeted,” said Ron Sansom, a of the investment advisers—said that they have managing partner at Riverside. “That’s what really been victims of cyber attacks either directly or woke us up to this problem—that even these through a vendor. Most attacks involved either companies could get hit.” malware or fraudulent emails. Cyber breaches are very likely to increase in • Those firms examined had by and large taken size and scope, and buyout firms and their steps to buttress their cyber defenses, with portfolios need to be more prepared than ever more than 90 percent of broker-dealers and before, warn experts. “I was at a conference a more than 80 percent of investment advisers few months ago where secret service and FBI agents were speaking about the risk to PE firms,” said Eric Feldman, chief information officer at Riverside.

“They said very soon cyber criminals will stop focusing on the JP Morgans and start concentrating on PE because there is a significant amount of money that moves around in this universe. And it would not take a huge effort to disrupt that and get access to those funds.” Prompted by warnings like these, and by headline- “Both these portfolio companies were less than $20 million in revenue so it was pretty amazing they would get targeted,” —Ron Sansom, managing partner, The Riverside Company making cyber breaches at companies such as Anthem Blue Cross, Sony and Target, the SEC having “adopted written information security last year began conducting exams to assess the policies,” the SEC said. Nearly 90 percent of cybersecurity preparedness of registered broker- the broker-dealers examined and well over half dealers and registered investment advisers.

It of the investment advisers (57 percent) audit particularly zeroed in on such questions as how their compliance and cybersecurity policies and well firms identified and assessed risks; how well procedures on a regular basis; and more than 90 they protected their information; how quickly percent of broker-dealers and nearly 80 percent they could detect intrusions; and whether they of investment advisers also conduct periodic had been hacked before. Among the findings cyber-risk assessments. from the 57 broker-dealers and 49 investment advisers examined: • Still, many firms examined don’t have strong Connections in the Middle Market 5 . Top 11 tips to harden your cyber defenses Don’t be a victim. Follow these 11 recommendations from cybersecurity experts. 1 Get buy-in for a cybersecurity program from senior managers at your firm. 2 Perform a self-assessment to identify any gaps in your defenses. 3 Ensure you have an incident response plan in the event of a breach and practice it in advance 4 5 6 7 8 Make sure your liaisons at key consultants, IT vendors have excellent communications skills. Develop an enterprise-wide plan of action based on the NIST’s cybersecurity framework and ISO standards. Tap your marketing department to help communicate your action plan to employees. Evaluate portfolio companies for cyber risk and ensure they have cybersecurity plans in place. Hire an attorney skilled in cyber security to take advantage of attorneyclient privilege in discussing security deficiencies. 9 Back up all key files to avoid lock-out attacks where hackers blackmail you for system access. 10 Make sure suppliers and vendors have adequate defenses, and ensure contracts with third parties spell out your requirements 11 6 Consider buying a cybersecurity insurance policy. DUANE MORRIS Buyouts Insider controls in place related to vendors and business partners, according to the SEC. While 72 percent of broker-dealers include requirements in their contracts related to data security, just 24 percent of investment advisers include such requirements. Just 51 percent of broker-dealers have policies and procedures related to training vendors and business partners on data security, and just 13 percent of investment advisers have such policies and procedures. The SEC appears set to dramatically expand its sweep of such firms and their security practices. And that has sponsors, both large and small, taking a close look at their internal security systems and processes—and those of their portfolio companies. It is also causing limited partners to ask serious questions about cybersecurity practices as part of their due diligence efforts when evaluating funds. “I recently filled out a due diligence questionnaire from a potential new investor and it was exclusively focused on cybersecurity,” said Riverside’s Feldman. “It was 20 questions and it was very specific in nature,” such as does the firm follow the NIST (National Institute of Standards and Technology) security framework. That said, it appears that, while many buyout firms are aware of the issue, only a very small percentage are taking action on cybersecurity, said Daimon Geopfert, national leader of security and privacy services at McGladrey LLP, an assurance, tax and consulting firm focused on the middle .

market. Private equity firms are getting breached, he said, but they don’t necessarily know it. And even when they do, they are not necessarily obligated to tell anyone—giving a “false sense of security” to others in private equity who never find out. “Most PE firms think cybersecurity isn’t a big issue for them,” he said. The most common breach Geopfert has seen Cybersecurity by the numbers Top industries where cybersecurity vendor Mandiant investigated attacks last year 17% Business/professional services 14% Retail 10% involves hackers breaking into the bank account Financial services of a buyout firm and trying to wire-transfer 8% Const./Engineering 8% Gov’t/International 7% Legal services 7% High-tech/IT 7% Healthcare 6% Transportation 5% Aerospace/defense 3% Other 8% money out of the account.

He has also seen cases where hackers have tried to get information about portfolio companies from the buyout firm, or to gain access to the systems of the portfolio companies via the buyout firm. He said buyout groups in the technology and healthcare sectors have to be especially wary since their portfolio companies deal with a lot of intellectual property, source codes and medical records, which can fetch a premium on the so-called “Dark Web”—an online marketplace for stolen corporate property. Geopfert said that some buyout shops even suspect that hackers have obtained and leaked Media/entertainment Source: Mandiant How are corporations being breached? information about transactions prior to close. He called such breaches “commonly discussed but impossible to prove.” SQL injection 27% 26% Targeted attack from hackers CYBERSECURITY STEERING COMMITTEE All it takes is one breach to ruin a firm’s reputation and lose LP commitments, said Riverside’s Feldman. That’s why his firm is investing significant time, money and effort in bolstering its cyber defenses. 44% Malware Source: Ponemon Institute, Post Breach Report, February 2013 Connections in the Middle Market 7 .

One of the first steps it took was to create an Riverside also established an employee education internal steering committee, led by Feldman, to program. This included the creation of an end-user better understand the firm’s risk posture. acceptance document outlining how everyone in the firm should be handling data and explaining It began by classifying its data into categories of the various security procedures the firm is taking, high, medium and low risk. Marketing content such as the archiving of all email and instant designed for public consumption is considered low messaging communications. The program also risk, while the personally identifiable information features personalized training for each employee. corresponding to investors qualifies as high risk. Riverside has even planned to put up posters in The firm then set about understanding where its offices informing employees what they should each piece of data resides and who has access do if they receive suspicious email. to it.

It put a series of checks in place to ensure that only approved personnel have access to For portfolio companies, the firm created an sensitive data. incidence response initiative called the Riverside Information Security Office (RISO). “When you ESTIMATE OF CYBERSECURITY COSTS FOR MID-CAP FIRMS CYBER REQUIREMENT CYBER REQUIREMENT DESCRIPTION DURATION COST Cyber Readiness Assessment Vulnerability assessment, compromise assessment and review of the governance and risk framework.  Interviews, policy/ configuration reviews with technical testing. 15 Days $50K Assess both what security controls are in place and their operational effectiveness with a gap analysis and a roadmap for improvement based on the specific risk profile. Cyber Security Framework Development Development of a cyber security framework with policies based on ISO or NIST standards. 10 Days $20K Cyber Threat Identification & Incident Response Implementation of third party 24/7 security monitoring (approximately 50 systems) for cyber threats that may impact the corporation. Retain incident response services in the event of malicious activity on the network. 5 Days $7K monthly Vulnerability Management Program Development of program to identify, minimize and manage risk to corporate information from cyber threats.  Provide patch management and testing of systems to be secured. 10 Days $20K Secure the Supply Chain & Acquisitions Development of policy/process for securing information/data maintained, stored or managed by suppliers or vendors.

Provide a cyber risk assessment strategy for secure acquisition of new companies. 10 Days $20K Security Awareness Program Cyber security awareness program for employees and contractors to include new hires and annual training requirement. 10 Days $20K ESTIMATED COSTS Source: Reprinted with permission of Alvarez & Marsal 8 DUANE MORRIS Buyouts Insider $140K+ . get hacked, you are in shock and don’t know what to do or who to turn to,” said Sansom. “So the RISO has an 800 number for companies to call and get immediate help.” The program provides portfolio companies with a variety of IT and third-party resources to mitigate hacking What information is targeted by hackers? 1 Executive communications, such as e-mail and voice mail 2 Trade secrets and IP 3 Corporate acquisition strategy 4 Employee data, such as social security numbers, dates of birth 5 Information about customers, vendors, partners issues. It also helps companies understand their legal and regulatory obligations in the event of a breach. April Evans, partner, CFO and chief compliance officer at Monitor Clipper Partners, a mid-market buyout shop with about 20 portfolio companies, said her firm has “always been concerned with cybersecurity in terms of building systems that Source: Alvarez & Marsal were difficult to hack into.” However, she said • It started a search for an online portal service to the firm has made cybersecurity a “particular securely handle confidential communications with focus at present out of an acknowledgment” LPs, such as the sending of distribution notices. that the SEC has done the same. The firm recently completed a four-month-long evaluation • It started the application process for cybersecurity of IT system risks with the help of its vendors, insurance to cover the costs of re-building or Coretelligent (which handles email for Monitor repairing hacked computer systems as well as Clipper) and Integra (which handles data back-up paying any damages awarded in lawsuits filed and related services). That evaluation led Monitor by those whose information was compromised. Clipper to take several actions: (One of the side benefits of that process is a thorough analysis of security risks conducted by • It began manually checking, once a week, in- the underwriter during the due diligence process.) bound attempts to breach its firewall. • Finally, it began evaluating the kinds of data • It plans to put in place a system that requires it has stored about portfolio companies and the employees to change their computer password risk of having that data leaked to competitors. every 90 days or so. “It takes some time and patience” to get your • It plans to encrypt emails. arms around cybersecurity, said Evans.

But she Connections in the Middle Market 9 . 1 2 4 3 5 24 days decrease How long did it take companies to discover attacks in 2014? 6 205 days (median) said the effort is worth it “because at the end of the day what my job is about is minimizing the risk from cybersecurity attacks to the firm as a whole in as cost-effective manner as I can.” from 2013 70-PAGE RISK ANALYSIS New Mountain Capital is another mid-market buyout shop that is not taking the cyber threats Source: Mandiant lightly. “The SEC is concerned about cybersecurity, so anyone who’s registered with the SEC should How breaches were detected in 2014 be concerned about it, too,” said Paula Bosco, managing director and chief compliance officer at New Mountain. 31% 69% To understand its own exposure, the firm last year hired security vendor (and portfolio company) Stroz Friedberg to perform a risk assessment. Victims internally discovered Stroz Friedberg was onsite for several months. It Victims notified by someone outside company conducted interviews with employees at all levels, from the CEO to the receptionist, to determine Source: Mandiant the types of information people were touching SMALL BUSINESSES ACCOUNTED FOR 30% OF SPEAR-PHISHING ATTACKS IN 2013 Companies with 2,501+ employees 39% and whether they had access to data a hacker would want. “Stroz Friedberg logged onto our systems and did penetration testing to see if we could be hacked,” said Bosco. “They looked at it from a people Companies with 251-2,500 employees 31% Companies with 1-250 employees 30% perspective, a system perspective and from a physical perspective.” In one instance, Stroz Friedberg even conducted a phishing exercise.

It created a fake New Mountain Note: Spear phishing is a phony email that appears to be from a trusted source and seeks access to confidential data. Source: Symantec 10 DUANE MORRIS Buyouts Insider website and emailed a link to various recipients asking them to enter certain sensitive information . into the site. Have you ever experienced a cyber attack directly or through a vendor? registered investment advisers Stroz Friedberg recently presented New Mountain with a 70-page report of its findings and recommendations. Bosco said she is going through the report to determine which recommendations 74% yes to implement. The goal, she said, is to improve registered brokerdealers the firm’s security posture while best complying with the SEC’s expectations. 88% yes Besides the risk assessment, New Mountain is working with its vendors and portfolio companies Do you have cybersecurity insurance? to ensure that they are also mitigating their cyber registered investment advisers exposure. “We incorporated into our third-party vendor contracts certain clauses that require them to acknowledge that they have data protection 21% yes policies,” said Bosco.

“And, to the extent certain key vendors are dealing with sensitive info, we registered brokerdealers do due diligence on them around the types of network security controls they have internally.” New Mountain also is assessing cyber risk for its portfolio companies. This involves understanding the types of business those companies are in, 58% yes Do you conduct regular risk assessments of cybersecurity threats and vulnerabilities? registered investment advisers whether they are at higher risk for cyber attack, and the types of security measures they have in place. For instance, a healthcare company that has regulatory requirements is at greater risk than 79% yes a company that manufactures cement. registered brokerdealers “Going forward, if we deem a company to be high risk, we plan to conduct enhanced due diligence on it prior to acquisition, and where appropriate, would require the company to conduct additional 93% yes Source: SEC, based on examinations of 57 registered broker-dealers and 49 registered investment advisers Connections in the Middle Market 11 .

AT A GLANCE: HOW SPONSORS ARE RESPONDING TO CYBER THREATS SPONSOR WHO’S IN CHARGE OF CYBERSECURITY? ANNUAL BUDGET PROGRAM HIGHLIGHT HAS FIRM OR PORTFOLIO COMPANIES EXPERIENCED A BREACH? Monitor Clipper Partners CFO/COO An estimated 35 percent to 40 percent of IT budget is devoted cybersecurity Recently completed risk assessment that led to the manual monitoring of computer logs for breaches every week. Also planned several IT initiatives, including encrypting email and requiring employees to change computer passwords on a regular basis. No New Mountain Capital Chief Compliance Officer To be determined Last year hired cybersecurity consultant Stroz Friedberg to perform a risk assessment and recommend ways to improve IT security and ensure compliance with SEC expectations. No The Riverside Company Chief Information Officer Agrees that cybersecurity cost estimate of $140K+ shown on p.8 is in the ballpark for mid-cap firms Created the Riverside Information Security Office (RISO), which portfolio companies can call for advice and resources in the event their systems are compromised. Yes. 2 portfolio companies. In one instance, hackers gained access to sensitive customer information and threatened to expose that data if the portfolio company didn’t pay a ransom.

In another case, hackers wormed their way into a portfolio company’s IT systems and went after credit card information. In both instances, Riverside was able resolve the issue before any serious damage occurred. Source: Interviews with the firms risk assessments and monitoring on a post-close But the cost of doing nothing is potentially basis,” said Bosco. far greater. “You are going to see something absolutely ridiculous happen, where hackers take Of course, cybersecurity comes at a price. over the core system of a buyout firm, resulting Companies can expect to spend well into six in a major theft or highly compromised data,” figures to get started on an initiative, say those predicted Geopfert of McGladrey LLP. who have gone through the process.

More specifically, a mid-cap company with, say, 50 Bosco, for one, intends to make sure that doesn’t servers and computers to protect, can expect to happen at New Mountain. “Even if you perceive spend at least $130,000 on cybersecurity upfront, yourself to be low risk, you still need to invest and perhaps another $7,000 in ongoing costs per in security and demonstrate a commitment to month for 24/7 security monitoring, according to protecting confidential information,” she said. consulting firm Alvarez & Marsal. Evans of Monitor “That’s good for LPs, good for regulators and Clipper Partners estimated that her firm devotes good for business.” ❖ 35 to 40 percent of its IT budget to cybersecurity. 12 DUANE MORRIS Buyouts Insider .

©iStock/erwo1 VALUATIONS REBOUND TO NEAR PRE-CRISIS LEVELS, PUTTING PRESSURE ON SPONSORS BY DAVID TOLL Deal prices for companies are approaching nose-bleed levels, thanks in part to a slowly strengthening economy and ample depth in the credit markets. Sponsors always have the option of moving to the sidelines. But that never goes over well with limited partners who signed on for a five or six-year investment period. And so sponsors are cautiously buying up companies, deploying every strategy in the book for ensuring they can still multiply invested capital by two or three times over their holding periods. B rooks Zug, senior managing director and co-founder of funds-of-funds manager HarbourVest Partners, this spring told an audience of deal-makers about a buyout opportunity some of his associates had recently pitched with a price tag of 23.5x of trailing EBITDA. Factoring in expected cost-savings, the deal pro forma would be priced at a more reasonable 13x EBITDA. Still, Zug called valuation inflation the biggest change in the Connections in the Middle Market 13 .

buyout market he’s witnessed over the last five to equity returns. These include: 10 years. Very few of the direct buyout deals the firm considered last year, outside of a few located • paying up for platform companies but then in Brazil, Russia and other “remote places,” had averaging down their multiples through cheaper price tags under 10x EBITDA, he said. add-ons (among proponents: Audax Group; Hammond, Kennedy, Whitney & Co; Huron “It’s unlikely we should expect the kind of returns Capital Partners and The Riverside Company) we saw a decade ago,” Zug said at the March Buyouts East conference, as reported by Buyouts • employing full-time deal originators in an effort Insider, producer, along with law firm Duane to keep rival bidders at bay (Hammond, Kennedy, A survey of 54 investment bankers, sponsors, lenders and institutional investors by Buyouts Insider and Duane Morris this spring found that close to twothirds (63 percent) believe M&A prices will hold firm over the next 18 months. Whitney; Huron Capital; Riverside) • generating ideas early in the bidding process for cutting costs and super-charging revenue to justify higher bids (Riverside) • teaming up with C-level executives well in advance of finding target companies (The Edgewater Funds; Frontenac Co; GTCR; Gryphon Investors; Huron Capital) • and taking regular dividends to generate early returns and reduce equity risk (H.I.G. Capital; Sun Capital Partners) Morris, of this summer’s edition of Connections in the Middle Market.

“We’ll be lucky if the top- For now, no relief on pricing is in sight. quartile funds have a 15 percent (net) IRR.” “There is substantial liquidity available both from Indeed, bargains in today’s M&A market are rare, dry powder held by financial sponsors as well as according to interviews with mid-market investment cash on the balance sheets of strategic buyers bankers, sponsors and other industry players. that’s been accumulating for the last half a dozen years,” said Paul Smolevitz, managing director and To cope, sponsors have been pursuing a variety a founding partner at investment bank TM Capital of tactics to reach their objective of beating public Corp, which advises mainly on transactions with 14 DUANE MORRIS Buyouts Insider . enterprise values of $20 million to $300 million. “Debt is readily available at interest rates that continue to be at historic lows, and the debt Estimated dry powder, U.S. buyout and mezzanine shops $336 multiples at which lenders are willing to finance are back to the kind of historic highs we were billion seeing in 2007 before the Great Recession.” Source: Buyouts Insider It has all added up to prices that many investment bankers say also have rebounded to pre-Great Recession levels. Rob Brown, managing director and co-president-North America for Lincoln Estimated cash on books of U.S. public companies International, an adviser working mainly with $1.64 companies generating $10 million to $50 million trillion in EBITDA, said that most of the firm’s clients are selling for between 8x and 10x EBITDA. Source: Moody’s Investors Service, year-end 2013, excluding financial companies That is easily one to 1.5 points higher than five years ago, he said. Size naturally matters in “We are at or pretty close to top market values,” determining price.

Companies generating more said Brown, adding that prices have flattened out than $25 million, because they’re attractive to a since the third quarter of 2014, a function of a broader base of bidders, garner higher valuations, similar leveling off in the debt markets. “There’s although the difference has grown less in a hot much more downside risk than there is upside market, Brown said. opportunity to values right now.” Still, Brown predicted that, due to substantial dry powder Brown emphasized that in some industries, such left to be deployed, and barring an unforeseen as healthcare, technology and tech-enabled “geopolitical event,” high prices could last a while. services, companies are selling for multiples above even the lofty range cited above. And, needless Others agree.

A survey of 54 investment bankers, to say, countless factors go into determining the sponsors, lenders and institutional investors by value of any one company, including quality of Buyouts Insider and Duane Morris this spring the management team, growth opportunities, the found that close to two-thirds (63 percent) percentage of revenue that is recurring, free cash believe M&A prices will hold firm over the next flow generation, and earnings history, especially if 18 months (see charts, p. 18). Just 24 percent the earnings demonstrated resilience during the say they will go higher or much higher, while 13 last downturn. percent say they will go lower. Connections in the Middle Market 15 .

U.S. BUYOUT AND MEZZANINE FUNDRAISING ($B) $300.8B $300B $263.6B $250B $229.8B Mezzanine Funds Buyout Funds $200B $190.8B $165.8B $203.1B $160.7B $150B $71.9B 141 $50B 106 91 89 114 $69.3B 140 126 110 119 109 20 182 171 139 132 $32.5B 111 $65.8B 190 $98.7B 185 $100B 105 180 147 160 $49.7B 140 114 113 0 120 100 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 YTD 80 Source: Buyouts Insider. Data is as of Q1 60 40 4.85 1Q '10 13.70 14.22 24.90 10.17 2Q '10 3Q '10 4Q '10 1Q '11 40.00 $40.00B $27.65B $24.94B $11.30B $15.40B $15.85B $21.47B $37.66B $8.40B $10.36B $21.08B $23.74B $22.38B $28.97B $24.95B $35.16B $33.32B BUYOUT M&A EXITS BY QUARTER 2Q '11 3Q '11 4Q '11 185 1Q '12 2Q '12 3Q '12 4Q '12 1Q '13 Value ($B) No. of Deals 35.00 $35.00B 141 139 30.00 132 $30.00B 114 110 126 $25.00B 25.00 109 $20.00B 20.00 111 89 106 105 140 119 111 114 113 110 147 132 20 0 2Q '13 3Q '13 4Q '13 1Q '14 2Q '14 3Q '14 4Q '14 1Q '15 190 200 185 182 171 180 160 139 140 126 109 91 114 120 105 140 119 147 113 100 80 $15.00B 15.00 60 $10.00B 10.00 40 $5.00B 5.00 20 10.17 $27.65B $24.94B $11.30B $15.40B $15.85B $21.47B $37.66B 24.90 $10.36B $27.65B $24.94B $11.30B $15.40B $15.85B $21.47B $37.66B $8.40B $10.36B $21.08B $23.74B $22.3 4.85 13.70 14.22 $8.40B 10.17 $21.08B $23.74B $22.38B $28.97B $24.95B $35.16B $33.32B 0 0 0.00 2Q '11 3Q '12 4Q '12 1Q '13 2Q '13 3Q '13 4Q '13 1Q '11 2Q '14 3Q '14 4Q '14 1Q '12 1Q '11 2Q '11 3Q '11 4Q '11 1Q '12 1Q '10 2Q '10 3Q '10 4Q '10 1Q '11 2Q '11 3Q '11 4Q '14 1Q '12 2Q '12 3Q '12 4Q '15 1Q '13 2Q '13 3Q '13 4Q '13 1Q '1 2Q '12 Source: Thomson Reuters.

Data is as of Q1 Value ($B) No. of Deals 16 DUANE MORRIS Buyouts Insider Value ($B) No. of Deals .

Prices rise in the middle market U.S. MIDDLE-MARKET ENTERPRISE VALUE TO MEDIAN EBITDA EUROPE MIDDLE-MARKET ENTERPRISE VALUE TO MEDIAN EBITDA EV/ EBITDA 2010 2011 2012 2013 2014 LTM 2015 EV/ EBITDA 2010 2011 2012 2013 2014 LTM 2015 <$100M 7.0x 8.3x 7.1x 6.8x 8.1x 8.0x <$100M 6.6x 7.3x 6.8x 6.7x 7.8x 7.9x $100M$499M 10.1x 9.3x 9.1x 9.5x 9.9x 9.2x $100M$499M 8.1x 8.7x 9.2x 8.3x 9.3x 8.8x $500M$1B 9.0x 9.9x 8.7x 8.4x 9.9x 10.4x $500M$1B 8.9x 9.5x 8.1x 9.4x 9.6x 9.6x MiddleMarket 8.6x 9.2x 8.1x 8.4x 9.2x 9.0x Middle Market 7.5x 8.0x 7.7x 7.5x 8.2x 8.3x Source: S&P Capital IQ and Robert W. Baird & Co., as published in Global M&A Monthly Report; LTM data is through March 31, 2015; republished with permission of Robert W. Baird & Co. S&P Capital IQ and Robert W.

Baird & Co., as published in Global M&A Monthly Report; LTM data is through March 31, 2015; republished with permission of Robert W. Baird & Co. LINCOLN INTERNATIONAL’S SNAPSHOT VIEW ON LOAN PRICING AND TERMS BORROWERS WITH LESS THAN $15MM EBITDA SECURITY TYPE Asset Based Senior Cash Flow Senior Senior Stretch PRICING BORROWERS WITH AT LEAST $15MM EBITDA MULTIPLES L + 175 – 275 LIBOR Floor: none N/A L + 475 – 575 LIBOR Floor: 100 2.75x – 3.25x EBITDA Unlikely N/A PRICING L + 150 – 250 MULTIPLES N/A LIBOR Floor: none L + 425 – 525 3.00x – 4.00x EBITDA LIBOR Floor: 100 L + 500 – 600 3.75x – 4.75x EBITDA LIBOR Floor: 100 Unitranche L + 750 – 850 LIBOR Floor: 100 4.0x – 5.0x EBITDA 2nd Lien Loans Unlikely 4.0x – 5.0x EBITDA Sub Debt Cash of 11.0% – 13.0% PIK of 1.0% – 2.0% All-in of 12.0% – 14.0% 4.0x – 5.0x EBITDA N/A Approximately 35% L + 700 – 800 4.00x – 6.00x EBITDA LIBOR Floor: 100 L + 850 – 1000 4.00x – 6.00x EBITDA LIBOR Floor: 100 Equity Cash of 10.0% – 11.0% 4.00x – 6.00x EBITDA PIK of 1.0% – 2.0% All-in of 11.0% – 13.0% N/A Approximately 30% - 35% Note: The values presented above are based on prevailing metrics observed by Lincoln International in recent months; however, leverage multiples and pricing are highly dependent on a borrower’s credit profile and may be higher or lower than those shown above for certain companies. Connections in the Middle Market 17 . Where are deal prices heading? Please pick the term that best describes your firm: How would you describe deal pricing in the North American middle market right now? 0.0% 1.9% Buyout firm/sponsor 20.4% 0.0% 7.4% 57.4% High Mezzanine lender Investment bank Law firm 5.6% Low Where do you see prices heading in the North American middle market over the next 18 months? 1.9% 1.9% Managing GP/CEO 1% 11. % 9.3 Partner/senior executive 27.8% About average 68.5% 0.0% Pick the title that most closely describes your role there: 31.5% 29.6% Senior lender 14.8% 1.9% Bubble territory Institutional investor/advisor Vice president/junior executive Much higher 22.2% Higher About the same Senior associate 24.1% Lower 63.0% Associate Much lower Analyst Seeking investments in out-of-favor industries Strong credit markets Waiting for prices to settle down 13.0% 25.9% 54.3% Lowering return expectations 20% 0% 50% 40% 30% 65.7% Finding ways to add value, such as through add-ons, to justify prices 20% 51.4% Stepping up efforts to find proprietary/limited auction deals 44.4% 10% Sponsors with dry powder to deploy Looking for more complicated deals at lower prices 11.1% 0% Competition from strategic buyers 17.1% 70% Public equity valuations 22.9% 50% 3.7% 11.4% 20% Supply of companies on the market Targeting under-performing companies 60.% 1.9% 5.7% 30% 0.0% Prevalence of auctions/lack of proprietary deals Moving into more regulated industries 10% Strong performance by target companies If you work for a sponsor, in what ways is your firm dealing with high prices? (check all that apply) 40% What is the biggest factor sustaining prices right now? Source: Buyouts Insider/Duane Morris survey of 54 professionals 18 DUANE MORRIS Buyouts Insider . “At least for the next 12 (to 18) months I think All told U.S. buyout and mezzanine firms have we’re going to be in a good market,” said Brown. raised $601 billion from the beginning of 2012 ”Until the Fed gets serious about raising rates I through the first quarter of 2015, and, according to think that the liquidity we have in the market is Buyouts Insider, at least $336 billion of that is still going to be there.” waiting to be deployed. Add in leverage and you get some $1 trillion in buying power. Meantime, PUSHING PRICES HIGHER U.S.

companies outside of the financial services A number of factors contribute to today’s frothy industry had accumulated $1.64 trillion in cash on prices. their balance sheets by year-end 2013, according to Moody’s Investor Service. The strengthening U.S. economy gives bidders confidence their targets will continue to perform Competition for companies with a recent history well post-acquisition. Foreign buyers such as of earnings growth is particularly intense.

Jim Miraca Holdings in Japan and environmental Bunn, head of investment banking at Raymond services company ERM in the United Kingdom James, said that once they get past a certain size have grown more acquisitive in the United States. many corporations bump into the “law of large And, especially for financial buyers, the strong numbers,” which makes it harder for them to M&A and IPO markets provide the prospect of achieve the kind of growth expected of them lucrative exits down the road. by shareholders without doing bigger and bigger deals. “So when they can find companies with But the single biggest reason for price inflation strong organic growth they’ll pay handsomely,” boils down to supply and demand—the limited Bunn said. Strategic bidders can also adjust supply of companies for sale and the seemingly earnings of the target higher in anticipation of bottomless demand for them by both financial and cutting costs out of the merged companies—a big strategic buyers. reason financial sponsors have been thought to have been at a disadvantage when bidding against Forty-four percent of respondents to the Buyouts them in auctions. Insider-Duane Morris survey pointed to sponsors with dry powder as the biggest factor sustaining But Bunn said that any gap between what sponsors high prices right now.

Another 11 percent pointed and strategics can pay has narrowed substantially to competition for deals from strategic buyers. over time. Sponsors themselves often combine their Strong credit markets, in second place, was the purchases with other portfolio companies, allowing choice of 26 percent. them to capture the same cost-cutting benefits that strategic bidders achieve. And sponsors also know Connections in the Middle Market 19 .

How investment bankers view pricing As a general rule big companies command higher multiples than small companies. The latest statistics from S&P Capital IQ and Robert W. Baird & Co found that in the last 12 months up to March 31 of this year, U.S. companies with enterprise values of less than $100 million sold for a median of 8.0x EBITDA; those with enterprise values between $100 million and $499 million sold for a median of 9.2x EBITDA; and those with enterprise values of $500 million to $1 billion sold for a median of 10.4x EBITDA. Interviews with investment bankers suggest that multiples rise by size on a continuum, and that the valuation of any one company depends on a host of factors besides size. That said, many see a bump-up in multiples for companies generating $20 million to $25 million in EBITDA, with companies larger than that having demonstrated greater long-term viability while also appealing to a broader array of buyers.

The table below outlines how eight investment bankers view pricing by size. HOW I-BANKERS VIEW DEAL PRICING BY DEAL SIZE INVESTMENT BANK INVESTMENT BANKER FOCUS WHERE IS PRICING? HOW DOES PRICING SHIFT BY DEAL SIZE? Carl Marks Chuck Boguslasky, managing director Provides sell-side advisory work for middle-market and lower-middle-market companies generating $5 million to $20 million in EBITDA; often represents owners and entrepreneurs selling companies to financial sponsors or strategic buyers Has seen slow, steady climb to an average of more than 7x EBITDA Boguslasky sees a break point for companies generating $10 million in EBITDA, with those larger than that selling for a turn to one and a half turns more than smaller companies Duff & Phelps Bob Bartell, head of global investment banking Takes both buy-side and sell-side assignments involving companies valued at $50 million to $250 million Sees pricing in the 5x to 10x EBITDA multiple range for 80 percent to 90 percent of deals, and in the 7x to 9x multiple range for two-thirds of deals. However, technology companies can go for 5x to 10x revenue in some cases Bartell sees differences in multiples for companies with enterprise values of more than $1 billion, $250 million to $1 billion, and below $100 million. He also observes a one to two turn discount for companies generating less than $15 million in EBITDA versus those generating more than $25 million Harris Williams Brian Lucas, managing director Provides sell-side M&A services in the middle market, primarily to companies with enterprise values of $100 million to $2 billion but isn’t bound by that range; sponsors are clients on two-thirds of the firm’s assignments Sees pricing back to pre-financial crisis levels of 8x to 12x EBITDA or so on average but prices could be higher or lower depending on sector and individual company dynamics Lucas sees breakpoints at $20 million to $25 million in EBITDA and $50 million in EBITDA, as buyers gain access to more sophisticated financing options at those points 20 DUANE MORRIS Buyouts Insider 20 DUANE MORRIS Buyouts Insider .

HOW I-BANKERS VIEW DEAL PRICING BY DEAL SIZE INVESTMENT BANK INVESTMENT BANKER FOCUS WHERE IS PRICING? HOW DOES PRICING SHIFT BY DEAL SIZE? Lincoln International Robert Brown, managing director and co-presidentNorth America Provides sell-side M&A services to companies generating $10 million to $50 million of EBITDA; sponsors are often clients Says most of the companies the firm is selling have been going in the 8x-10x range, but many go for more than that Brown sees a demarcation point for companies that generate $25 million; above that they get higher multiples, but the difference is less than a turn Petsky Prunier Sanjay Chadda, partner and managing director Concentrates on M&A advisory work in media, digital advertising, marketing technology, commerce, information technology, health care and services; usually works with companies under $1 billion in enterprise value Says traditional media companies are selling for around 10x EBITDA, 3x revenue; software companies 3x to 5x revenue, though up to 8x in some cases; digital advertising firms less than 3x revenue; ad agencies and marketing services companies 7x to 10x EBITDA Chadda sees a rise in multiples achieved as companies grow above $5 million in EBITDA generated, as well as $10 million, mid-teens and $20 million; competition is more intense for the bigger companies, Chadda explained, and debt less expensive Raymond James Jim Bunn, head, investment banking practice Focuses mainly on sell-side work for companies in the $75 million to $500 million enterprise value range with a sweet spot of $100 million to $300 million Sees companies that a couple of years ago sold for 8x now selling for 10x EBITDA; companies that sold for 10x are now at 12x-15x Bunn sees companies in the middle market, with enterprise valuations of $75 million to $750 million selling for higher multiples than companies in the lower middle market of $75 million and below; north of $750 million multiples tend to drop some as the universe of potential bidders shrinks Stifel Investment Banking David Lazar, managing director Advises companies generating EBITDA of $5 million to $20 million Sees healthy companies go for high-singledigit multiples, up 2 to 2.5 turns from two years ago, but in some industries, such as software-asa-service, companies can easily go for 4x revenue Lazar says multiples jump at the $5 million EBITDA level, $10 million level, and $20 to $25 million level, in part because bigger companies can better withstand setbacks; also sees a breakpoint at $40 million to $50 million in EBITDA, as companies gain access to public equity and debt markets TM Capital Corp Paul Smolevitz, managing director and a founding partner Advises on transactions of $20 million to $25 million in enterprise value up to $250 million to $300 million and sometimes higher; half of the firm’s work involves financial sponsors Sees strong companies with values of $100 million in enterprise value garnering double-digit multiples, up from upper-singledigit multiples two to three years ago Smolevitz sees the main demarcation at $10 million in EBITDA, with companies above that trading for 1 to 2 turns higher Connections in the Middle Market 21 . that, all else being equal, fast-growing companies CLOs, private debt funds, and both traded and deliver higher returns than slow-growing companies. non-traded That is due both to EBITDA expansion and, in some (BDCs), many of them backed by yield-hungry cases, multiple arbitrage opportunities stemming institutional investors eager to take on a modest from the typically higher prices commanded by level of risk to achieve high single-digit rates of bigger companies. “You have a perfect storm return or higher. business development companies for companies with really strong organic growth prospects,” said Bunn. And how much leverage is available? According to Lincoln International, which does a booming Of course, strong credit markets have also played business a big role in valuation inflation. At the top end of generating more than $15 million in EBITDA can the market, banks face pressure from regulators to borrow 3x to 4x EBITDA in senior cash flow limit leverage on deals to no more than 6x EBITDA. loans, or 4x to 6x EBITDA in a combination of But in the middle market, non-bank sources of unitranche, second-lien loans and sub debt. The financing dominate.

These include hedge funds, comparable figures for borrowers generating less 22 DUANE MORRIS Buyouts Insider in debt advisory work, borrowers . than $15 million in EBITDA are 2.75x to 3.25x market transactions since 2000 found a prominent for senior cash flow loans and 4x to 5x for the association between purchase price and return on combination (see charts, p. 17). In the first quarter, invested capital. Depending on the industry, you sponsors buying companies generating less than can roughly expect to generate a 2x ROIC instead $50 million in EBITDA put in about 43 percent of a 1.8x ROIC if you pay 6x EBITDA instead of 7x. All told U.S.

buyout and mezzanine firms raised $601 billion from the beginning of 2012 through the first quarter of 2015 and, according to Buyouts Insider, at least $336 billion of that is still waiting to be deployed. Add in leverage and you get nearly $1 trillion in buying power. SPONSORS DIG DEEP Sponsors, ever mindful of the return expectations of LPs, have battled high prices in a variety of ways. As buyers, two-thirds of sponsors that responded to the Buyouts Insider-Duane Morris survey said they have stepped up efforts to find proprietary deals or limited auctions (see chart, p. 18). Other popular tactics (respondents could pick more than one strategy) included finding ways to add value, such as through add-on deals (54 percent), looking for more complex transactions (51 percent), and pursuing investments in out-of-favor industries (23 percent). Huron Capital, a specialist in buying fundamentally of the purchase price in equity, according to S&P sound businesses not operating to their full Capital IQ Leveraged Commentary & Data, with potential in one more areas, pursues a number the remaining 57 percent shouldered by creditors. of these strategies, according to Senior Partner Michael Beauregard.

The firm has a three-person “Everyone wants to be a middle-market lender,” team dedicated exclusively to deal origination. Two observed Ron Kahn, managing director, Lincoln of them call mainly on deal intermediaries, said International, at the late March Buyouts East Beauregard, while a third is responsible for calling conference. directly on business owners. The firm also hosts breakfast roundtables four times a year, rotating Entry price always matters.

A recent study by RCP them among nine different cities. It invites some Advisors of more than 1,500 realized lower-middle- 25 local attorneys, accountants, and auditors, 23 DUANE MORRIS Buyouts Insider Connections in the Middle Market 23 . who are encouraged to bring with them four to four in 2015, said Beauregard. five business owners to the breakfasts. The idea behind both efforts is to get the first call when Several of these strategies came together three deal opportunities arise and, by dint of already- years ago with the purchase of Bloomer Plastics, established relationships, limit the field of bidders, a manufacturer of films and plastics based in or at least gain an edge over them. Bloomer, Wisc. An owner with health problems had been unable to attend to the company, so According to Lincoln International, which does a booming business in debt advisory work, borrowers generating more than $15 million in EBITDA can borrow 3x to 4x EBITDA in senior cash flow loans, or 4x to 6x EBITDA in a combination of unitranche, second-lien loans and sub debt. investments in sales and business development fell and revenues had consequently gone flat. After the owner died about four years ago, his wife hired accounting firm Plante Moran to sell the company.

Her desire that the management team have discretion over who to pick worked to Huron Capital’s advantage. Earlier the firm had teamed up with Kevin Keneally, previously an executive at Pliant Corp and Amoco Chemical Company, to find opportunities in the films and plastics market. Keneally’s chemistry with the management team, which was looking for new leadership and a chance to have equity, turned out to be “essential” to winning the deal, Beauregard said. Huron Capital set to work, bringing in Keneally as CEO, hiring a COO and tripling the size of Another strategy used by Huron Capital is to the sales team from three to 10 people. The partner with CEOs in advance of finding a deal and firm made a significant add-on acquisition last to conduct extensive market research even before November, purchasing Optimum Plastics, maker targets come on the market.

When attractive of a complementary set of products. The deal took targets do appear, the firm pounces, ready to revenue at the combined company, which took impress sellers and management teams with its the name Optimum Plastics, to $100 million. And expertise and the C-level skills of its executives- under Huron Capital’s ownership the company, in-waiting.

The firm has averaged launching three which has EBITDA margins in the high teens, of what it calls “ExecFactors” a year for the past introduced new product lines to better meet three years, and plans to tackle another three to demand from its food packaging clients for see- 24 DUANE MORRIS Buyouts Insider . through packages and for ones that take up less said, has been to buy platforms for 7x EBITDA or shelf space. By year end, Huron Capital expects so, work down the average multiple paid to the to do another one or two add-on deals to bring 6x range through add-ons, then sell the resulting revenue to $150 million, paving the way for an company for 8x to 9x. exit in the next two to three years. Jester said Audax Group is taking advantage of the Perhaps the most visible way sponsors have “last great arbitrage” in private equity. Companies responded to high prices has been to become sellers themselves. It has now been more than two years since Leon Black, chairman and CEO of Apollo Global Management, famously said that his firm was “selling everything that’s not nailed down.” As it turns out, he appeared to have been speaking for a great many firms. U.S.

buyout shops sold an estimated 690 companies with disclosed values of $111 billion last year, according to Thomson Reuters, up from 477 with disclosed values of $63.6 billion the previous U.S. buyout shops sold an estimated 690 companies with disclosed values of $111 billion last year, according to Thomson Reuters, up from 477 with disclosed values of $64 billion the previous year. year. Sponsors have also been active players in the IPO market, taking 18 companies public in with enterprise values of $100 million to $499 the fourth quarter of 2014 alone.

Bob Bartell, million represent a real sweet spot for strategic head of investment banking at Duff & Phelps, buyers, sees sponsors by and large staying disciplined on multiples than both smaller and bigger companies. price—“they know they have to stretch, but they’re If they are smaller than that then they don’t really not going to overpay”—and harvesting where they move the needle for acquirers. If they are bigger can. “There’s probably more net sellers out there,” than that then they could be career-killing to their he said. proponents if they don’t work out. Jay Jester, managing director at Audax Group, Combining small companies to reach that $100 said that since its founding in 1999 the firm has million to $499 million range lets Audax Group purchased some 85 platforms, many of them sell into that “white hot market,” said Jester.

❖ he said, often commanding higher generating in the low teens of EBITDA, and another 370 add-ons. The recent formula, he Steve Gelsi contributed to this report Connections in the Middle Market 25 . W About Duane Morris ith experienced private equity lawyers working in the middle market across our global platform, coupled with experience in key verticals and the deep capabilities of more than 700 lawyers from all major practice areas, Duane Morris creates competitive advantage for participants across the industry. For GPs, we deliver insights that optimize transactional value for both sellers and buyers in control and noncontrol investments and with exit strategies, and support portfolio company growth strategies. For LPs, we review LPA terms and advise on efficient, effective investment strategies, including co-investment and direct 26 DUANE MORRIS Buyouts Insider investment; alignment of interests; transparency; and governance issues. For business owners, we advise on growth strategies – not only on the mechanics of full or partial exits, but also on crafting wealth-planning approaches designed to positively impact economics for the owner. Given our strategic firmwide focus on private equity, broad experience in major industry sectors and an innovative culture deeply committed to client service, we are regularly called upon to work with company owners, as well as the most sophisticated and demanding players in the private equity marketplace. .

Duane Morris is proud to be an Official Sponsor of Growth® of the Association for Corporate Growth (ACG). UNITED STATES Atlanta Baltimore Boca Raton Boston Cherry Hill Chicago Houston Lake Tahoe Las Vegas Los Angeles Miami New York Newark Philadelphia INTERNATIONAL Pittsburgh San Diego San Francisco Silicon Valley Washington, D.C. Wilmington Hanoi Ho Chi Minh City London Mexico City (alliance) Myanmar Oman Singapore Connections in the Middle Market 27 . B About Buyouts Insider uyouts Insider delivers a portfolio of marketleading titles, online services, and senior executive conferences covering private equity and venture capital. The print and online publishing brands of  Buyouts,  Venture Capital Journal, and PE HUB offer the intelligence professionals need to raise money, find deal opportunities, secure loans to finance deals and benchmark their performance against rival firms.  PartnerConnect, the suite of private equity and venture capital conferences, are networking opportunities for fund managers to raise capital for their next fund and source deal flow by hearing from and meeting institutional investors and deal intermediaries. Senior executives involved in private capital have relied on Buyouts Insider products since 1961. BUYOUTS CHICAGO JUNE 23-24, 2015 THE PALMER HOUSE, CHICAGO buyoutsconferences.com/chicago15 EXPAND YOUR NETWORK AND YOUR BRAND WHILE GETTING DEALS DONE AT THE 8TH ANNUAL BUYOUTS CHICAGO! Join the Buyouts editorial team and hundreds of LPs and GPs in Chicago for two days of deal flow, industry knowledge, networking and thought leadership. • A blue-chip, senior executive conferences, ensuring you meet key decision-makers onsite • Produced by the editors of Buyouts and peHUB.com – knowledgeable leaders in these asset classes for as long as 50+ years J. Christopher Flowers J.C.

Flowers & Co. J.B. Pritzker Pritzker Group May 18, 2015 • Issue 11 www.buyoutsnews.com Meet the Speakers • More than 300 fund managers, investors and intermediaries to attend over 2 days of programming Wilbur L. Ross Jr. WL Ross & Co. Impact investing BUYOUTS Vol.

28, No. 11, May 18, 2015 Key Facts About Buyouts Chicago: Deval Patrick wants to leave a mark at Bain Here are a sample of firms who have previously attended Buyouts Chicago from the past three years to give you a sense of the types of companies you’ll meet this year: 38 • 57 Stars • 747 Capital • Abbott Capital Management • Adveq Management US • American Securities • Angelo Gordon • Atlas Diligence • Auximos Asset Management Group • Babson Capital Management • Barclays • Bay Hills Capital • BDO • BlackRock Private Equity Partners • Bow River Capital Partners • Bowside Capital • Brookfield Asset Management • Castle Harlan • Chicago Growth Partners • CIC Partners • Cimarron Capital Partners • Coller Capital • Comerica Bank • Commonfund • Crow Holdings Capital Partners • Crystal & Company • DB Private Equity & Private Markets • Diversified Trust Company • Evercore • Evolution Capital Partners • Fisher Lynch Capital • FLAG Capital Management • Franklin Park • GE Capital • Google inc • Greenberg Traurig • Green-Path Advisors • Grove Street Advisors • GTCR • Hamilton Lane • HarbourVest Partners • Harris Williams & Co. • Hauser Private Equity • Hewitt EnnisKnupp • Insight Equity • Lazard Middle Market • • • • • • • • • • • • • • • • • • Madison Capital Funding Manulife Capital McGladrey MCM Capital Partners McNally Capital Monroe Capital Muller & Monroe Asset NB Alternatives New Harbor Capital New MainStream Capital Northern Trust Alternatives Northwestern Mutual Capital Oak Hill Capital Management Oaktree Capital Ocean Avenue Capital Partners Odyssey Investment Partners Park Hill Group Performance Equity Management • Pine Brook • Private Advisors • Providence Equity • RCP Advisors • RDV Corporation • • • • • • • • • • • • • • • • • • • • • • • • Rothstein Kass Shinrun Advisors Siguler Guff Silicon Valley Bank Sixpoint Partners SL Capital Partners Solar Capital Star Mountain Capital Sterling Partners Stonington Capital Advisors Summit Strategies Group Sun Capital Partners SURS Sutton Place The Hauser Group The Riverside Company TIAA-CREF Trive Capital TriVista Twin Bridge Capital UPS Group Trust Victory Park Capital Wind Point Partners WP Global Partners Impact investing: Deval Patrick wants to leave a mark at Bain Register TOday: buyoutsconferences.com/chicago15 • 250+ private 1:1 meetings will be prearranged between LPs and GPs through the ExecConnect private meeting program Want to market in Europe? Get to know AIFMD Amid LP concerns, Saybrook resolves labor dispute LP Scorecard: Even the distributions are big in Texas 5 12 16 For effective leadership, improve your power score 1-800-455-5844 registrar@buyoutsinsider.com The capital of tomorrow 37 The pendulum swings back in favor of GPs For more information contact our team at: 60 May 4, 2015 • Issue 10 www.buyoutsnews.com BUYOUTS Vol. 28, No.

10, May 4, 2015 All eyes on GE Antares All eyes on GE Antares 32 Oil price volatility starts to draw blood Lindsay Goldberg produces anything but small potatoes for Idaho Caisse de dépôt pivots further toward direct investing Advisory | Debt | Equities | Principal Investing macquarie.com/whiteboard These examples may not be representative of every client’s experience. Past performance is not a guarantee of future performance or success. Macquarie Capital (USA) Inc.

(Macquarie Capital) is a registered broker-dealer and member of FINRA and SIPC. This document does not constitute an offer to sell or a solicitation of an offer to buy any securities. This document does not constitute and should not be interpreted as either an investment recommendation or advice, including legal, tax or accounting advice.

Macquarie Capital is not an authorized deposit-taking institution for the purposes of the Banking Act 1959 (Commonwealth of Australia). Obligations of Macquarie Capital do not represent deposits or other liabilities of Macquarie Bank Limited ABN 46 008 583 542 (MBL). MBL does not guarantee or otherwise provide assurance in respect of the obligations of Macquarie Capital. MAQ134 Buyouts_8.5x11_02_M01.indd 1 28 DUANE MORRIS Buyouts Insider 4/13/15 12:13 PM 6 19 36 Talking Top Quartile with John Hill of First Reserve Corp 37 Top-performing co-investments target GPs’ ‘strike zone’ 54 .

INNOVATIONS IN GLOBAL CONNECTIONS PRIVATE EQUITY IN THE MIDDLE MARKET SUPPLIERS SUPPLIERS VENDORS Contributor Profiles PORTFOLIO COMPANIES CUSTOMERS CUSTOMERS David Toll, executive editor, BENEFICIARIES LIMITED PARTNERS Fluent Partners Buyouts Insider DAVID TOLL is the executive editor of Buyouts Insider, where he oversees the editorial direction of Buyouts Magazine, Venture Capital Journal and the peHUB.com community website. David has been writing about the private equity markets since 1997, and publishes a biweekly column in Buyouts Magazine. He is the co-author of several survey-based studies on the private equity and venture capital markets, covering such topics as partnership terms and employee compensation. He is the chief cartoonist at privateequitycartoon.com. TRUSTEES Paul Centopani, research editor, Buyouts Insider YOUR FIRM Tom Stein, founder, TOM STEIN provides a range of editorial and marketing services to corporate clients, including Yahoo!, Facebook, Sony, Oracle, Saatchi & Saatchi, Marvell, Microsoft and PayPal. His services include contributed articles, newsletters, white papers, website copy, social media content, and speeches. He has contributed to leading business and general interest publications including Buyouts Magazine, Wired Magazine, Forbes, Tennis Magazine, and Venture Capital Journal. Previously, Tom was a senior editor at Red Herring, a magazine where he covered start-ups and venture capital.

He also worked as a staff writer at the San Francisco Chronicle, where he covered the tech industry. Additionally, Tom served as a senior editor at InformationWeek and Success Magazine. PAUL CENTOPANI is a writer and developer of media and editorial in print, online and presentation formats for Buyouts Insider. His work centers on plumbing the private equity industry for trends and ideas that can be turned into thoughtprovoking, high-quality content. His stories have been regularly featured in Buyouts Magazine, Venture Capital Journal and the peHUB. com community website.

Earlier in his career Paul was a pricing analyst and senior consultant for defense contractor Booz Allen Hamilton. There he managed more than 600 proposals representing nearly $900 million in value. . INNOVATIONS IN GLOBAL CONNECTIONS PRIVATE EQUITY IN THE MIDDLE MARKET SUMMER 2015 CYBERSECURITY: ARE YOU AND YOUR STAKEHOLDERS BEING TARGETED? ALSO INSIDE! Top 11 tips to harden your cyber defenses How much it will cost to prevent cyber attacks Valuations rebound to near pre-crisis levels INNOVATIONS IN GLOBAL PRIVATE EQUITY www.duanemorris.com Duane Morris – Firm and Affiliate Offices | New York | London | Singapore | Los Angeles | Chicago | Houston | Hanoi | Philadelphia San Diego | San Francisco | Silicon Valley | Oman | Baltimore | Boston | Washington, D.C. | Las Vegas | Atlanta | Miami | Pittsburgh | Newark Boca Raton | Wilmington | Cherry Hill | Lake Tahoe | Myanmar | Ho Chi Minh City | Duane Morris LLP – A Delaware limited liability partnership Exclusive survey: Where are prices heading? How leading investment bankers view pricing .