Mercer Capital's Portfolio Valuation: Private Equity and Venture Capital Marks and Trends | Q2 2019

BUSINESS VALUATION &
FINANCIAL ADVISORY SERVICES
Portfolio Valuation
Private Equity & Venture Capital Marks & Trends
Second Quarter 2019
www.mercercapital.com
As the second quarter draws to a close, two seemingly disparate cross
currents are evident that have implications for private equity and credit.
One is a market in which capital flows are generous. The IPO market is
red-hot like (sort of) 1999, while the market for middle market and broadly
syndicated credits entails little pushback from lenders.
The other trend is the drop in interest rates. As this newsletter is being
penned, the entire U.S. Treasury curve, with the exception of the 30-year,
yields less than the Fed Funds target rate of 2.25% to 2.50%. It is not a
new development. Rates have been trending lower since last November,
and the forward 90-day LIBOR curve first inverted in June 2018.
To the extent curve inversion points to an oncoming recession, the credit
markets are not yet reflecting it. High yield credit spreads are slightly
higher than September 30, 2018, but are lower than year-end 2018.
Some believe the Eurodollar market is pointing to funding issues outside
the U.S. that have been building for a year and have created a scramble for
“good” repo collateral (i.e., U.S. Treasuries). That may be true, but as Ares
Capital CEO Kipp DeVeers notes, the existing demand for assets outstrips
supply in a world where yields are low and M&A and buybacks reduce the
float of public equities.
If economic conditions do not change much and the market remains
robust, then marks applied to private equity and credit investments prob-
ably will not change much over the balance of the year. Nonetheless, the
bond market is credited with calling the economy well before equities and
the Fed’s PhDs. Time will tell if the bond market is right again.
In This Issue
Does the Public Market
Believe in Unicorns? 1
Private Credit and Equity 4
Publicly Traded Private Credit 5
Venture Capital 6
On the Call 7
About Mercer Capital 8

Mercer Capital’s Portfolio Valuation Second Quarter 2019
© 2019 Mercer Capital 1 www.mercercapital.com
Does the Public Market Believe in Unicorns?
by Jeff K. Davis and Megan E. Richards
The IPO market is hot thanks to the intersection of investor
enthusiasm and a new crop of venture capital-backed, and in
some instances traditional private equity-backed, firms that
have gone public. Unicorns (pre-IPO valuation of $1 billion or
more) in particular have caught investors’ attention.
There is nothing new about a hot IPO cycle in the U.S. IPO
activity waxes and wanes with markets. The last massive
wave occurred in 1999 when a mania swept through markets
as then internet and other technology-focused companies
captured investors’ imaginations.
1999 vs. 2019
Why has 2019 become the year of the unicorn IPO? It could be
a matter of timing and monetary policy. After a nearly ten-year
bull market, private equity is monetizing while the IPO window
remains open after it more or less closed in the fourth quarter
of 2018. Also, easy money policies the past decade arguably
have incented investors to shower capital on growth-focused
tech companies. With the Fed likely to begin cutting rates
again in 2019, capital flows may intensify again.
Nonetheless, the current IPO wave is different from 1999 and
other peaks on three related counts. One is the length of time
most venture-backed companies have remained private before
going public. The other is the staggering amount of losses
incurred even on an “adjusted” basis before going public.
The link between the two differences has been the willing-
ness of deep-pocketed investors, such as SoftBank, to fund
losses through multiple capital raises. The link gives rise to
the third difference: staggeringly large private market valua-
tions for some.
Looking at how several of the big name public offerings
have fared this year (see charts on page 3), we can’t help
but wonder:
»» Do current losses matter to public market investors?
»» Did the private market overvalue these unicorns?
»» What does all of this mean for other unicorns plan-
ning to go public in 2019?
The short answers are: perhaps, probably, and hurry.
Sentiment Toward Recent Unicorns
Public investors seemingly have been more discerning about
losses than private investors who pushed valuations higher
for many companies with successive funding rounds. Price
performance in the post-IPO market has been uneven as
would be expected, but it points to less tolerance among
public market investors to the extent big money losers such
as Lyft and Uber have much lower valuations today than
expected when their IPO roadshows were launched. Blue
Apron is a poster child for a disaster post-IPO stock, but it is
not alone.
Lyft and Uber point to the more critical view public investors
have taken of each company’s business model as it relates
to future earnings. Lyft priced near the high end of the range
targeted initially by lead underwriter JPMorgan and then saw
strong first day performance; however, it now trades about
15% below the IPO price.
Uber has traded down modestly from the IPO price, but lead
underwriter Morgan Stanley had to sharply reduce the IPO
price from when the roadshow started with price talk of a $90
billion to $100 billion post-raise valuation compared to about
$73 billion presently.
Uber and Lyft posted the highest revenue growth over the
prior three years, but also the largest losses. The losses didn’t
prohibit the companies from going public, but the uncertainty
of a future path to profitability has led to disappointing perfor-
mance relative to the hype that has surrounded the companies.

Perhaps investors see a better outlook for Slack Technologies,
which went public via a direct listing on the NYSE in mid-June.
Although the company is not yet profitable, the shares rose
nearly 50% on the first day of trading as either investors see a
path to profitability or too few shares were floated.
On the other hand, both Tradeweb and Zoom among a
number of newly minted tech companies have performed well
since their respective IPOs. Both were profitable in the year
prior to the IPO, which is more in line with the kind of pre-
offering financials that public investors are used to seeing.
The market has rewarded the two companies accordingly.
The next big name to test investors’ willingness to fund sizable
losses is The We Company. The company confidentially filed for
an IPO at the end of 2018 and is expected to begin a roadshow
soon. The We Company may be the ultimate unicorn to test the
market. It is minting losses. Only through the company’s defined
term “community adjusted” EBITDA, which is akin to a twice-
adjusted EBITDA, does the company post positive EBITDA.
Also, the company has a huge $45 billion valuation based upon
its last fundraising round; yet, its business model may be suspect
in that it entails acquiring expensive real estate that generally
is leased under short-term arrangements. Presumably, in a
recession, lease rates would plummet as vacancies soar.
Some have raised legitimate questions about valuation
processes employed by private equity and VC firms and
whether private market valuations are too high. Others have
noted investors can, in effect, mark-up the value of prior
investments by investing in follow-on capital raises for a
given company at a higher valuation.
Conclusion
We do not mean to disparage anyone with the issues raised
in this article. We respect markets and the pricing informa-
tion that is conveyed. The prices at which assets transact in
private and public markets are critical observations; however,
so too are a subject company’s underlying fundamentals,
especially the ability to produce positive operating cash flow
and a return on capital that at least approximates the cost of
capital provided.
At Mercer Capital we have been valuing private equity and
private credit securities for nearly four decades and have
deep experience in most industries. If we can help you
establish the value of securities held in your fund or offer a
second opinion, please call. We would be glad to assist.
LYFT Zoom PagerDuty Tradeweb Uber
Ticker LYFT ZM PD TW UBER
Exchange NASDAQ NASDAQ NYSE NASDAQ NYSE
Date 3/29/19 4/18/19 4/11/19 4/4/19 5/10/19
Initial Price $72.00 $36.00 $24.00 $27.00 $45.00
First Day Close $78.29 $62.00 $38.25 $35.74 $41.57
First Day Price Premium 9% 72% 59% 32% -8%
6/20/19 Close $62.84 $102.30 $53.79 $42.95 $43.86
% Change from IPO Price -12.7% 184.2% 124.1% 59.1% -2.5%
IPO Amt Raised ($M) $2,340 $751 $218 $1,080 $8,100
Last Private Valuation ($M) $23,400 $5,000 $1,800 $1,100 $82,400
IPO Market Cap $20,583 $9,230 $1,767 $6,000 $75,713
6/20/19 Market Cap $18,262 $27,872 $4,093 $9,544 $74,367

© 2019 Mercer Capital // Source: Capital IQ 3 www.mercercapital.com
Stock Performance Since IPO (Pricing as of 6/20/19)
Three Year Financial Performance
Private vs. Public Valuation (Pricing as of 6/20/19)
$23B
$5B
$2B $1B
$82B
$18B
$28B
$4B $10B
$74B
$0
$20
$40
$60
$80
$100
Billions
Last Private Valuation Market Cap
80%
126%
124%
123%
108%
40%
60%
80%
100%
120%
140%
160%
3/29/19
4/5/19
4/12/19
4/19/19
4/26/19
5/3/19
5/10/19
5/17/19
5/24/19
5/31/19
LYFT ZM PD TW UBER
-$4.00
$0.00
$4.00
$8.00
$12.00
Billions
Revenue (-3 Yr) EBITDA (-3 Yr) Revenue (-2 Yr) EBITDA (-2 Yr) Revenue (-1 Yr) EBITDA (-1 Yr)

Private Credit and Equity
Equity Valuation: EBITDA Multiples Over Time
In the first quarter of 2019, the
valuation gap between small cap
and large cap stocks widened as
the rebound in equity markets this
year has been focused on large
cap stocks (a corollary being the
Russell 2000 has materially lagged
the SP 500 YTD).
The median EBITDA multiple for
PE-sponsored transactions in the
lower middle-market as compiled
by GF Data®
was 6.9x, which repre-
sented the first sub-7x quarter since
the first quarter of 2018.
Debt Investments: High Yield Spreads by Credit Rating
High yield credit spreads ticked
up in May as the outlook for U.S.
economic conditions weakened.
2018 rate hikes seem to be slowing
the economy in 2019 beyond
weakness seen in traditional rate
sensitive industries such as home
building and autos. Year-over-
year, credit spreads have widen
by 40 bps among B-rated credits,
117 bps for BB, and 171 for CCC.
-
2x
4x
6x
8x
10x
12x
14x
1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 1Q18 3Q18 1Q19
SP500 R2000 GF Data®Source: Capital IQ, GF Data®
-
2
4
6
8
10
12
May-18 Jul-18 Sep-18 Nov-18 Jan-19 Mar-19 May-19
OptionAdjustedSpread(%)
CCC Below B BBSource: BofA Merrill Lynch
Excludes financials
Median EBITDA Multiple
Excludes financials

Long-Term Dividend Yield Trend
Long-Term Business Development Companies P/NAV TrendPublicly Traded
Private Credit
The median P/NAV for BDCs
eased from 93% at the end of
the first quarter of 2019 to 90% at
the end of May, while the median
dividend yield declined to 9.3%
from 9.5%.
7.5
8.0
8.5
9.0
9.5
10.0
10.5
11.0
11.5
5/31/19
2018Q
4
2018Q
2
2017Q
4
2017Q
2
2016Q
4
2016Q
2
2015Q
4
2015Q
2
2014Q
4
2014Q
2
2013Q
4
2013Q
2
Median BDC Yield (%) Market Cap Weighted BDC Yield (%)
Source: SP Global
75
80
85
90
95
100
105
110
115
5/31/19
2018Q
4
2018Q
2
2017Q
4
2017Q
2
2016Q
4
2016Q
2
2015Q
4
2015Q
2
2014Q
4
2014Q
2
2013Q
4
2013Q
2
Median BDC P/NAV (%) Market Cap Weighted BDC P/NAV (%)
Source: SP Global
Stock Performance for Publicly Traded PE Sponsors:Total Returns (Trailing Twelve Months)
The U.S. economy remains rela-
tively strong in comparison to the
rest of the world. However, markets
fell in the latter part of May as the
outlook for 2019 deteriorated due
to a slowing global economy that
has been accentuated by deep-
ening trade tensions between the
U.S. and China. Nonetheless, PE
stocks and the BDC group outper-
formed the broader market in the
trailing twelve month period.
-20
-15
-10
-5
0
5
10
15
20
25
May-18 Jul-18 Sep-18 Nov-18 Jan-19 Mar-19 May-19
TotalReturn(%)
SP 500 PE Firms BDC GroupSource: SNL Financial

$46.7
137
0
50
100
150
200
250
300
350
$0
$10
$20
$30
$40
$50
$60
$70
$80
$90
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
$ billions
Exit Value # of Exits Closed
Source: Pitchbook/NVCA Venture Monitor
U.S. VC-Backed Exit Activity
First quarter 2019 saw public
offerings from several notable
unicorns, albeit with mixed
post-IPO performance. Despite
some unicorn IPOs pricing below
their last private valuations, regis-
trations continue to pour in as VC
and PE funds seek to monetize
private investments in a receptive
public market.
Median Deal Size by Stage ($ millions)
The median deal size for late
stage funding fell for the first
time in several years to $10
million while early stage funding
continued to climb.
Venture Capital
U.S. VC-Backed Funding Activity
First quarter VC funding at
$32.6 billion is up 9% from 1Q18
and is double the amount raised
in 1Q17. The number of deals
continued to decline, however,
falling to 1,853 in 1Q19 from 2,338
in 1Q18 and 2,536 in 1Q17.
$0.6
$2.3
$8.2
$10.0
$0
$2
$4
$6
$8
$10
$12
$14
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
$ millions
Angel Seed Early VC Later VC
Source: Pitchbook/NVCA Venture Monitor 2019 data through first quarter
$32.6
1,853
0
600
1,200
1,800
2,400
3,000
3,600
$0
$5
$10
$15
$20
$25
$30
$35
$40
$45
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
$ billions
Deal value # of Deals Closed Angel/Seed Early VC Later VC
Source: Pitchbook/NVCA Venture Monitor

On the Call
The following is a brief compendium of quotes from 1Q19 earnings season conference calls.
Source: All transcripts obtained from SNL.
Jim Zelter (APO, Chief Investment Officer-Credit) –
“It’s going to continue through the rest of the year. Lower
rates, probably muted inflation, (we) look forward to
opportunities with market dislocations, but we probably
prefer private opportunities than public.”
Kipp DeVeer (ARCC, CEO) – “Let me transition to some
thoughts on the rebound in the leveraged finance market.
Following tremendous market volatility at the end of 2018
in the broadly syndicated market, things have rebounded
quickly but this volatility did leave some aftereffects. The
most significant is that transaction volume continues to
be lower across the board, and the existing demand for
assets has outstripped the supply of deal flow.
We continue to believe that we’re late in the credit cycle.
With this, we continue to see better risk/reward for
investment opportunities in the middle market. The lower
middle market remains quite crowded in our opinion with
competitors that lack differentiation and a real ability to
compete.”
Jon Gray (BX, President COO) – “What’s interesting
in private equity is, if you look at the data and you went
back to say 2006, now 13 years ago and the number
of large buyout funds, call it $15 billion or more, I think
that number is unchanged and yet during that time, the
Global market cap has more than doubled. So what
we’ve seen is lots of capital move into the middle market
private equity area and a lot less capital move into these
larger transactions.”
David Golub (GBDC, President CEO) – “The piece I
see as least attractive would be banking companies (as
lenders) that are in the $10 million to $25 million EBITDA
range where we’re finding that the combination of pricing
and terms and leverage that’s being offered frequently
leave the lender in a situation where the risk/reward is
not attractive.”
Scott Nuttall (KKR, Co-President Co-COO) – “So
on the first, the question about the banks reentering the
lending space, we haven’t seen a big impact thus far on
our efforts from that. In terms of the second question, the
traditional asset managers moving into alternatives, there
has been some activity in the space. It’s received quite a
bit of attention. It has not had an impact on our business
to-date.”
Art Penn (PNNT, Chairman CEO) – “At this point
in time, our underlying portfolio indicates a strong U.S.
economy and no signs of recession. (But) the LIBOR
floor question is a great question. I think we all (ought to)
start looking at it again.
People say, ‘Gee, middle-market MA levels activity has
been a little bit lighter so far in 2019 than it was in ‘18.’
Obviously, you typically had the seasonality in the first
quarter, but it has been lighter. And we think, in part, it is
because buyers and financiers are being more skeptical
of the pro forma adjustments.”

Copyright © 2019 Mercer Capital Management, Inc. All rights reserved. It is illegal under Federal law to reproduce this publication or any portion of its contents without the publisher’s permission. Media
quotations with source attribution are encouraged. Reporters requesting additional information or editorial comment should contact Barbara Walters Price at 901.685.2120. Mercer Capital’s Portfolio
Valuation is published quarterly and does not constitute legal or financial consulting advice. It is offered as an information service to our clients and friends. Those interested in specific guidance for
legal or accounting matters should seek competent professional advice. Inquiries to discuss specific valuation matters are welcomed. To add your name to our mailing list to receive this complimentary
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Services Provided
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Contact a Mercer Capital professional to discuss your needs in confidence.
Jeff K. Davis, CFA
615.345.0350
jeffdavis@mercercapital.com
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901.322.9760
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713.239.1005
smithd@mercercapital.com
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ericksonb@mercercapital.com
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arehartm@mercercapital.com
Megan E. Richards
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richardsm@mercercapital.com
MERCER CAPITAL www.mercercapital.com
BUSINESS VALUATION
FINANCIAL ADVISORY SERVICES

Mercer Capital's Portfolio Valuation: Private Equity and Venture Capital Marks and Trends | Q2 2019

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Mercer Capital's Portfolio Valuation: Private Equity and Venture Capital Marks and Trends | Q2 2019