The Pepperdine Private Capital Markets Project previews key finding from its forthcoming 126-page report detailing the 2010 outlook for private capital providers and privately-held businesses.

1. Survey II Findings– Winter/Spring 2010January 27, 2010 John K. Paglia, Senior Researcher, Denney Academic Chair, and Associate Professor of Finance

2. Private Capital Markets Survey Web-based survey that included banks, asset based lenders, mezzanine funds, private equity, venture capital, and privately-held companies Typical survey asked about firm profile, credit box, historical returns, expected returns, view of next 12 months Capital providers were surveyed in October and November 2009 Over 700 responses

4. Banks (Senior Lenders) Tough Credit Environment Despite fewer applications, the time to process loans has increased 82% report reductions in credit quality of borrowers 45% report smaller loan sizes 64% report reductions in cash flow multiples 45% report declines in standard advance rates on collateral Industry Challenges Continue Increases in delinquency rates (nearly half report an increase) Increases in charge-off rates (nearly half report an increase) 80% report the number of loans being made by competitor banks declined

5. Banks (Continued) Motivations for Loans Refinancing at 40.2% (44% previously) Acquisitions at 17.1% (7% previously) Growth at 9.8% (12% previously) Important Factors when Lending Collateral at 14.8% (7% previously) Liquidity (14.1%) Debt to cash flow (12.2%) Fixed charge coverage (12.1%)

6. Asset Based Lenders Restrictive Credit Environment 82% report increases in loan applications 73% report lower percentage of borrowers approved for credit Industry Concerns Linger Increases in delinquency rates Increases in charge-off rates Declines in the number of loans being made by competitor banks

7. ABLs (Continued) Motivations for Loans Refinancing at 44.1% (53% previously) Growth at 20.2% (12% previously) Acquisitions at 10.4% (22% previously) Advance Rates Vary by collateral type and quality Highest for marketable securities and receivables All-in Rates Decline Significantly for Larger Loans: Working Capital

8. Mezzanine Funds Signs of Growth Nearly 78% report increases in business plans received Slight net increase in number of investments being made 54% of respondents report growth in the size of industry 48% report increases in warrant coverage Risk Aversion Nearly 52% report a decrease in cash flow multiples 56% indicate a decreased appetite for risk 48% report an increase in interest rate spreads Net increase in tightness of financial covenants Motivations for Loans Refinancing at 31.6% (33% previously) MBOs at 24.6% (21% previously) Growth at 20.6% (22% previously)

9. Mezzanine (Continued) Financial Ratios A typical firm will invest up to 4X EBITDA (3.75X previously) Up to 2.5X can be senior debt (unchanged) Minimum fixed charge ratios are 1.1X (1.2X previously) Pricing Median coupon rate of 14% (previously 13%) Nearly 58% with PIK provision 65% of deals with warrants (4-8% of diluted ownership) Expect 8% return on warrants Targeting Service and Manufacturing Over Next 12 Months

10. Private Equity Challenging Investing Environment 53% report a decline in leverage multiples 62% report a decline in deal multiples 68% report a longer time to exit deals 70% report a decline in the size of industry Interesting Minority Interests Nearly 70% of respondents report willingness to invest in minority interests with investor protections Median discount from pro rata is 20% Deal Flow Funnel 100 plans reviewed (up from 80) 15 meetings 5 term sheets 2 letters of intent

11. Private Equity (Continued) Exit Plans for Portfolio Companies 43% report plans to sell to a public company (up from 35%) 30% plan to sell to another PEG (34% previously) 7% IPO (previously 9%) Service and Manufacturing Industries Targeted Over Next 12 Months Service at 30.7% (up from 27.3%) Manufacturing at 23.8% (up from 21.3%) Retail down to 0.8% from 4.1%

12. Venture Capital Contraction Continues... 59% report a decline in percent of plans funded while 66% report decreasing percentages of “up” rounds 61% report an increase in time to exit 73% report a decrease in appetite for risk 61% believe fundraising prospects have declined 91% report a contraction in size of industry Yet Hope Remains Nearly 48% report increases in number of business plans received Approximately 46% report an increase in number of high-quality investment prospects 45.5% report increases in quality of portfolio Review 100 Business Plans to Close a Deal

13. Venture Capital (Continued) Higher Expected Sales to TVI Ratios for New Investments Made in Last 6 Months Stage 1 increased from 8.2X to 9.5X Stage 3 from 6.4X to 8.5X Stage 6 rose from 3.9X to 5.5X Longer Expected Time to Exit for New Investments Made in Last 6 Months Stage 1 from 6.2 years to 7.5 years Stage 3 from 5.1 years to 6.5 years Stage 6 from 3.8 years to 3.5 years (shorter) Implied Returns on Investment Lower Stage 1 from 40.5% to 35.8% Stage 3 from 43.5% to 41.4% Stage 6 from 43.3% to 43.0% Exit Plans Sell to public company is 58.9% (previously 50%) Sell to private company is 21.6% (previously 24%) IPO is 12.4% (down from 17%)

14. Venture Capital (Continued) California is Target for Nearly 36% of Investments over Next 12 Months Nearly 10.7% outside of U.S. 5.7% in Texas Massachusetts decline from 6.9% to 3.6% Clean Technology is Industry Targeted for Largest Concentration of New Investment over Next 12 Months Increase from 12.3% to 14.5% Software from 15.8% to 13.5% Hardware from 6.7% to 3.2% Biotech from 11.6% to 9.8%

15. Privately-Held Businesses Glass Half Empty or Half Full? Despite nearly 50% indicating increased competitive pressures, approximately 64% report that growth opportunities increased relative to 6 months ago However, nearly 46% report decreased access to capital Businesses Report Varied Costs of Capital, Paybacks, and Expected Returns Realistic, Optimistic, or Delusional? Approximately 57% believe they qualify for a bank loan Nearly 47% believe they qualify for a private equity investment Almost 41% believe they qualify for venture capital

16. Investment Analysis Techniques Frequency of Use in the Private Markets

17. 12 Month Outlook

18. Thank You! John K. Paglia Associate Professor of Finance Senior Researcher, Pepperdine Private Capital Markets Project Bschool.pepperdine.edu/privatecapital John.paglia@pepperdine.edu