For the Risk Management Association, Pepperdine University researcher John Paglia offers a perspective on data and current trends on capital markets across major segments. Sourcing the most results from the on-going Pepperdine Private Capital Markets Project, Dr. Paglia share how these markets work in relation to the publicly traded markets .

1. The State of the Middle MarketsRisk Management AssociationMay 18, 2011 John K. Paglia, Ph.D., CFA, CPA Associate Professor of Finance Senior Researcher, Pepperdine Private Capital Markets Project

2. Pepperdine Private Capital Markets Project What is cost of capital for privately-held businesses? The project launched in 2007 We survey 12 segments Survey asks about firm profile, behavior, returns, view of next 12 months Capital providers surveyed semi-annually Last report published in December Next report to be released in May 2011

4. Business Owners

6. What are Owners Focusing on Today?

9. Motivation for CAPEX Planned Over Next 12 Months

11. What Motivates Business Owners to Open Businesses?

12. Capital Access Drives Valuations in the Middle Markets How much senior leverage is available and how does one qualify? How much junior leverage is available and how does one qualify? How much equity capital is available and how does one qualify? What happens if one doesn’t qualify?

14. State of Financing Approximately 54% of those businesses attempting to raise capital in the last six months were unsuccessful Of those that were successful, approximately 59% of them secured bank loans followed by 20% who secured friends and family financing Just 13% raised funding from angels, venture capital and private equity combined

15. How Competitive is Access to Capital? Banks denied approximately 60% of loan applications over last six months Angel investors funded just one business plan of 25 reviewed Venture capitalists funded just one business plan of 80 reviewed Private equity funds invested in just one business plan out of approximately 150 reviewed

16. Businesses Need Capital to Grow and Build Value Expected increase in organic revenues over the next year is approximately 20% Nearly 95% of business owners report having the enthusiasm to execute growth strategies Yet just 53% report having the necessary financial resources to successfully execute growth strategies

17. What are Top Issues Facing Privately-Held Businesses Today According to I-Bankers?

19. Most Important Emerging Issues According to Business Owners

20. Overall Impressions of Capital Sources

21. Impressions of Costs of Capital Sources

22. Ranking of Capital Sources

23. Business Transfer Intentions (Spring 2011)

24. Business Transfer Timing (Spring 2011)

25. Capital Providers

26. What’s Happening in Banks 37% of activity from refinancing; 17% acquisitions; 12% growth financing 60% of applications declined, 36% lack high-quality earnings/cash flow Demand for loans up, due diligence efforts increased significantly Leverage increased slightly

27. What’s Happening in Banks (Cont’d) Personal guarantees and collateral requirements mandatory under $15 million Regulatory pressure to avoid risky loans increased, 76% report feeling increased pressure 60% indicate that increased pressure led to declining loans that otherwise would have been made 60% of applications declined, 36% lack high-quality earnings/cash flow Demand for loans up, due diligence efforts increased significantly considerably along with leverage and deal multiples Confidence and conditions improving

28. What’s Happening in Mezz 26% of investments in next 12 months in business services, 25% in manufacturing, 14% in wholesale and distribution Demand for investment up considerably along with leverage and deal multiples Confidence and conditions improving Warrant coverage and expected returns down slightly

29. What’s Happening in PE 25% of investments in next 12 months in manufacturing, 14% in business services, 14% healthcare Demand for investment up considerably along with leverage and deal multiples Confidence and conditions improving

30. What’s Happening in PE (cont’d) Power of LPs increasing! 30% say beneficial; 38% say detrimental 56% now looking at larger/smaller investments to deploy capital Making more minority investments; 60% indicate no change in expected returns

31. Investment Bankers

32. Private Business Sales Transactions Closed in Last 6 Months

33. Average Number of Months to Close a Deal

34. Components of Closed Deals

35. Equity Invested to Close Deals (Financial Buyers)

36. Reasons for 40% of Business Sale Engagements not Transacting

37. Valuation Gaps for Non-Transacted Engagements

38. Deal Multiples by Financial Buyers

39. Premiums by Strategics?

40. Difficulty Securing Senior Debt

41. Balance of Capital with Opportunities

42. Top Issues Facing Privately Held Businesses (Today versus Emerging) Today Emerging

43. The Road Ahead Continued economic uncertainty Inflation and competitive pressures Increasing confidence in growth prospects Increasing demand for capital and capital availability Increasing deal multiples

44. Thank You! John K. Paglia, Ph.D., CFA, CPA Associate Professor of Finance Senior Researcher, Pepperdine Private Capital Markets Project bschool.pepperdine.edu/privatecapital john.paglia@pepperdine.edu