State of the Middle Market: M&A • Private Equity • Financing June 2012

DE BT ADVISO RY G RO UP The Capital Markets Desk for the Middle Market SM

Significant Available Debt Capital in the Market Monthly Loan Prime Fund Flows ($Bn) $5.0

Volume of CLO Issuances ($Bn) $30.0 $25.0

$3.0

$25.0

$1.0

$20.0

-$1.0

$15.0

$12.4

$13.8

-$3.0 $10.0

-$5.0

$4.1

$4.1

$5.0

$1.2

-$7.0

$4.5 $2.6

$0.0 2010 Source: Standard & Poor’s Leveraged Commentary and Data

Commentary • Improved investor confidence and stable market conditions have resulted in more available debt capital as: – Fund flows became positive in Q1 2012 for the first time since July 2011; – New CLO issuances have gained traction with $13.8

billion issued during the YTD period; – Public BDCs raised significant capital during Q1 2012;

Q1 2011 Q2 2011 Q3 2011 Q4 2011

2011

YTD

2012F

Source: Standard & Poor’s Leveraged Commentary and Data Note: YTD period through May 25, 2012

Capital Raised by Existing Public BDCs in 2011 and YTD 2012 Name of BDC

Capital Raised

Ares Capital Corporation*

$1.3 billion

Fifth Street*

$435 million

Golub Capital BDC

$109 million

GSV Capital Corp.

$264 million

Hercules*

$123 million

Kohlberg Capital*

$60 million

Main Street Capital

$117 million

Medley Capital*

$216 million

however, the window for new equity raises is temporarily

PennantPark

$194 million

closed; and

Prospect Capital*

$639 million

– Private BDCs have continued to raise capital • Lenders are aggressively seeking to put this capital to work

TICC Capital Corp.

$42 million

Triangle Capital*

$248 million

Total Follow-on Capital Raised

$3.8 billion

Source: BB&T Capital Markets, CapitalIQ, Company press releases *Issued convertible debt 2

Improved Company Fundamentals Create Favorable Lending Conditions Company Performance Continues to Improve Over Prior Year LTM Q1 ‘12 vs LTM Q1 ‘11 Change

10%

Loans Outstanding Under Default (Percent of Principal) 12.0%

9.4%

10.8%

10.0%

8% 6.8%

LTM Revenue

6%

8.0%

LTM EBITDA 6.0%

4.4% 4%

4.0% 1.8%

2%

1.0%

0.9%

5.0%

2.0%

0.6%

0.0%

0% < $10

$10 - $50

> $50

EBITDA Size ($MM) Source: Lincoln International Proprietary Database

Market Dynamics

Source: Standard & Poor’s Leveraged Commentary and Data

Average Bid and Ask of Flow Name Leveraged Loans 102

• Middle market companies have exhibited fundamental

100

improvements in operating performance, resulting in stronger

98

credit quality

96 94

• Improved company fundamentals have driven relatively low default levels, which indicate appropriate capital structures

92 90 88

• The current secondary market conditions make primary

86

issuances more attractive Bid

Ask

Source: Standard & Poor’s Leveraged Commentary and Data 3

Despite Available Capital & Improved Borrower Characteristics, Loan Volume Has Contracted Middle Market Sponsored Loan Volume ($Bn) $25.0 $20.0 $15.0

Avg. = $10.1

$10.0 $5.0

All Other

LBO

1Q12

3Q11

1Q11

3Q10

1Q10

3Q09

1Q09

3Q08

1Q08

3Q07

1Q07

3Q06

1Q06

3Q05

1Q05

3Q04

1Q04

3Q03

1Q03

3Q02

1Q02

3Q01

1Q01

$0.0

Div. Recap

Source: Thomson Reuters

Market Dynamics • Coming out of the economic downturn and debt crisis, pent up borrower demand caused rapid increases in middle market lending

volume from 2009 through the first half of 2011 • Since the first half of 2011, deal volume has been lackluster – Capital raised by lenders has not been met by equal demand • While the second half of 2012 may experience increased deal activity due to tax motivated sellers, loan volume is just as likely to remain near the historical average – As an indicator of lower expected deal activity, some BDCs have announced share repurchases

4

Increased Competition in Redefined Senior Debt Market

5.0x 4.5x 4.0x 3.5x 3.0x 2.5x 2.0x 1.5x 1.0x 0.5x 0.0x

4.9x 3.7x

4.0x

4.4x

4.0x

4.5x

4.7x

4.7x

4.6x

4.3x

100% 90% 80%

2.8x

3.0x

3.4x

3.5x

3.1x

3.3x

3.9x

3.6x

3.5x

4.1x

70%

60% 50%

Senior Debt

Total Debt

Senior Debt as a % of Total Debt

Leverage Multiple

Increased Mid-Market LBO Senior Debt as a % of Total Debt

Investor Share of Primary Mid-Market Leveraged Loans 100%

90% 80% 70% 60% 50%

40% 30% 20% 10% 0%

Senior Debt % of Total Debt Banks

Source: Thomson Reuters Note: Senior debt includes unitranche facilities

Non-Banks

Source: Standard & Poor’s Leveraged Commentary and Data

Commentary Unitranche Lending Market •

Senior debt is taking a larger share of the total debt structure, driven in part by unitranche lenders who require first liens

•

Minimum yield requirements by non-traditional unitranche lenders are resulting in a floor on pricing to borrowers

Senior Cash Flow Loans •

Lenders are competing heavily for high quality credits backed by equity sponsors

•

However, the senior cash flow market is still limited for borrowers with EBITDA less than $10 million to $15 million

Asset-Based Lending Market •

Asset-based loans continue to be an attractive source of capital for issuers with a significant collateral base

•

ABL lenders are increasingly being utilized in conjunction with unitranche facilities

5

The Evolution of Unitranche Types of Unitranche Facilities (Illustrative Examples)

First Dollar

ABL Revolver with Term Loan

ABL Revolver with First Out / Last Out Term Loan

ABL Revolver with First Out / Last Out Term Loan & Mezz

Revolver…....………$0 Term Loan....……$100 Total……………..$100

Revolver…….…….$20 Term Loan……..…$80 Total……..……...$100

Revolver………….$20 First Out …..…….$20 Last Out …..…….$60 Total…………….$100

Revolver.………….$20 First Out .…..…….$20 Last Out ………….$60 Mezzanine………..$20 Total……………..$120

Commentary • The unitranche loan was initially introduced to the market in the form of a “first dollar in” structure, with no other lender ahead of the unitranche provider in the capital structure • Unitranche loans, in an effort to reduce pricing to the borrower, are often now structured behind an ABL revolver • Some unitranche providers are now looking to split their facilities, in the form of “first out / last out” structures, so that lenders targeting first lien asset protection and others looking to enhance their yield may participate under the same facility

• As market conditions have improved and leverage has expanded, rather than going deeper in the capital structure certain unitranche lenders are opting to include mezzanine debt to bridge the gap, presenting new opportunities for mezzanine lenders

6

Competition from Unitranche Is Also Changing the Mezzanine Lending Landscape New Mezzanine Funds Raised ($Bn) $28.0

$25.3

Commentary 35

30

$24.0

30

29

$20.0

$19.1

25

21 18

$16.0

20

16

$12.0

15 $6.5

$8.0

$8.3

$7.4

$7.4 8

$4.0

10 5

$0.0

0 2007

2008

2009

2010

Total Capital Raised

2011

YTD 2012

Fund Count

• As a result of unitranche loans’ continued growth in popularity, fewer new mezzanine funds are being raised, albeit with larger amounts of capital raised per fund • In order to co-exist with unitranche lenders, an increasing number of mezzanine funds have realized the need to adapt and evolve into two new models

Sponsor / Relationship Bank: – Raise large amounts of capital, often in excess of $500 million, and cater to financial sponsors – Acknowledge low rates of return on sub debt, with no warrants or other potential for upside

Source: PitchBook

– Sacrifice yield for volume, relying on fee as a percentage of a larger capital base, along with a modest carried interest

Changing Universe of Mezzanine Lenders

Small Business Focused:

2005 Traditional, 52.0%

BDC, 9.0%

– Raise far less capital, often $50 million to $75 million, and participate in the SBIC leverage program

2011

SBIC, 4.0%

BDC, 12.0%

Traditional, 38.0%

– Increased focus on smaller EBITDA companies, to which senior debt capital is largely unavailable, provides opportunity to enter at lower multiples yet extract greater yield

SBIC, 28.0%

LP / Coinvest., 11.0% Institutional, 24.0%

– Seek smaller deals, often involving companies with less EBITDA, in an effort to get better pricing, along with a warrant or equity co-invest

LP / Coinvest., 8.0%

Institutional, 14.0%

– Trade volume for price, resulting from the riskier nature of smaller transactions, with modest management fees

Source: PNC Mezzanine Market Survey Note: Data reflects number of firms 7

Overview of U.S. Middle Market Pricing and Terms Lincoln’s View on Pricing and Terms

Borrowers with less than $10 - $15mm EBITDA

Pricing

Borrowers with at least $10 - $15mm EBITDA

Pricing

Multiples

Multiples

Asset Based Senior

• •

L + 200 – 300 LIBOR Floor: none

•

n/a

• •

L + 175 – 250 LIBOR Floor: none

•

n/a

Cash Flow Senior

• •

L + 550 – 650 LIBOR Floor: 100 - 150

•

2.00x – 3.00x EBITDA

• •

L + 500 – 600 LIBOR Floor: 100 - 150

•

3.00x – 3.50x EBITDA

Unitranche

• •

L + 750 – 850 LIBOR Floor: 200

• •

L + 750 – 850 LIBOR Floor: 200

2nd Lien Loans

•

Unlikely

• •

L + 900 – 1100 LIBOR Floor: 200

•

4.00x – 5.00x EBITDA

Sub Debt

• • •

Cash of 11.0% - 13.0% PIK of 2.0% - 4.0% All-in of 14.0% - 16.0%

• • •

Cash of 11.0% - 12.0% PIK of 1.5% - 2.5% All-in of 12.5% - 14.5%

Equity

•

n/a

•

n/a

•

35% - 40%

•

•

3.50x – 4.50x EBITDA

35% - 40%

As regularly published in:

8

UK Debt Markets – Leverage and Enterprise Value • Some post-crunch deals saw more than 50% equity, driven by the relatively low levels of leverage in conjunction with the high purchase multiple Leverage

Equity contribution

Equity contribution decreasing after a 13-year high in 2010

• Average equity contribution in 2011 dropped to 47.9% from 50.6% in 2010 and 53.1% in 2009. Half of the LBOs in 2011 had equity of below 50% • Recent benchmarks/term sheets indicate minimum 40% equity where structures include mezzanine

Leverage increased from its trough in Q1 2009 to July 2011 but since the beginning of July, the stretched senior deal appears to have ended for the time-being • Sponsored transactions launched in 2011 had an average leverage ratio of 4.5x at closing – up slightly from 4.4x in 2010 but well under the 56x area seen in the boom years • Leverage through senior debt stood at 4.2x on average – up from 3.9x last year and close to the levels seen in 2005-2006 • In 2012 maximum senior leverage is in the 4.0x-4.5x range

2011

2010

4.0x

2.1x

3.9x

3.5x

3.4x

3.8x

U-Pol

Poundland

Sophos

Inspired Gaming

Card Factory

Camelot

1.0x

1.2x

3.7x

4.1x Host Europe

Acorn

3.5x NSL

3.8x

3.0x Tomkins

3.7x

4.6x Autobar

Xafinity

3.4x

Survitec

5.0x JLA

WorldPay

3.0x

2.7x Office

CPA

4.0x Spice plc

3.5x

4.3x Vue Entertainment

BCA

4.9x Britax

4.7x

4.1x

Marken

3.1x Quorn

OpenBet

3.7x

4.4x IDH

LGC

3.9x Wagamama

3.0x

4.1x Jimmy Choo

3.8x

5.6x ERM

Martindale

5.7x RAC

3.8x

4.3x V.Ships

Deb Group

3.3x Volution

Pets at Home

4.2x

Source: LCD news, Lincoln International

0.8x

Equity

1.5x

1.3x

Subordinated debt

CPA

1.6x

1.8x

1.6x

Net senior debt

1.7x

2012

3.5x

14x 13x 12x 11x 10x 9x 8x 7x 6x 5x 4x 3x 2x 1x 0x

Iceland Foods

EBITDA multiple

Recent UK leveraged transactions

Note: (1) In the Wagamama deal, Hutton Collins invested in mezzanine and equity. Split is assumed 50/50

9

• Proportion of amortising loans in senior structures reached 50% and then declined rapidly in 2011

Bullet only structures

Senior structures

UK Debt Markets – Transaction structures

• In 2012 40% on a mid-market A-loan is achievable, with less if the transaction can be structured for the institutional market

• Driven by institutional demand and their need to have cash invested (both due to repayments and the upcoming expiry of their re-investment periods), there were three UK bullet only structures: – RAC, ERM and Jimmy Choo • However, these structures are unachievable in 2012 as the institutions have limited funds to invest in new deals

A-loan vs. Bullet – UK deals 2012

2011

2010

100%

80%

60%

40%

20%

TLA

Survitec

CPA

BCA

Marken

LGC

Martindale

Pets at Home

Deb Group

Card Factory

Inspired Gaming

Sophos

Poundland

U-Pol

Host Europe

NSL

Tomkins

Autobar

WorldPay

Spice plc

Vue Entertainment

Britax

OpenBet

IDH

Wagamama

Jimmy Choo

ERM

RAC

V.Ships

Volution

CPA

Iceland Foods

0%

TLB

Source: LCD news, Lincoln International

10

UK Debt Markets – Pricing

Tranche: Senior A Senior B Senior C Second lien High Yield Bond Mezzanine Fees OIDs

Pricing has increased since the beginning of July 2011 as – The secondary market has fallen, resulting in higher implied yields

Drivers of pricing

Consensus pricing

Banks are favouring existing relationships and providing facilities to them on the following terms: Pricing: 400bps – 500bps 450bps – 550bps 500bps – 600bps (if available) n.a. c.7% (BB+) to 12% (CCC) 1,100bps – 1,300bps + warrants 400bps – 500bps 1% – 10% (where applicable)

– Wholesale funding costs have increased for banks Sterling pricing is perhaps 25bps higher than Euro’s in deals arranged for the institutional market Benchmark pricing is 450-475bps for an A-loan and 500-525bps for a B-loan

Recent senior pricing – UK deals

Spread over interest rate (bps)

600

2012

2011

2010

TLA

550

TLB

500 450 400

350 Xafinity

Survitec

CPA

Marken

LGC

Martindale

Pets at Home

Deb Group

Card Factory

Inspired Gaming

Sophos

U-Pol

Host Europe

NSL

Tomkins

Autobar

WorldPay

JLA

Spice plc

Vue Entertainment

Britax

OpenBet

IDH

Wagamama

Jimmy Choo

ERM

RAC

V.Ships

Volution

CPA

Iceland Foods

300

Source: LCD news, Lincoln International Note: (1) TLB pricing for OpenBet and Inspired Gaming is respectively 550bps cash / 2% PIK and 700bps cash / 3% PIK

11

Bringing Efficiency to the Middle Market Lincoln International U.S. Advised on Over $1 Billion of Financing in 2011 Atlas Holdings

Atlas Holdings

has refinanced its portfolio company

has refinanced its portfolio company

$45,000,000 Senior Credit Facilities $70,000,000 Senior Credit Facility

$48,000,000 Junior Capital

Atlas Holdings

Industrial Opportunity Partners

has refinanced its portfolio company

$50,000,000 Senior Credit Facility

Industrial Opportunity Partners

Exponent Private Equity

has acquired

has financed the U.S. subsidiary of its portfolio company

Gridiron Capital has acquired

and

$16,000,000 Senior Credit Facilities $9,000,000 Junior Capital

Senior Credit Facility

Senior Credit Facilities

Shareholders

Gryphon Investors

Graham Partners

have refinanced

has recapitalized its portfolio company

has acquired

$155,000,000 Senior Credit Facilities

Senior Credit Facilities and Junior Capital

has refinanced its portfolio company $27,000,000 Senior Credit Facilities

$44,500,000 Senior Credit Facilities

$7,500,000 Junior Capital

$28,000,000 Second Lien Facilities

Recent Lincoln International U.K. Capital Raise Assignments TowerBrook

Undisclosed

has acquired the company

Covenant Restructuring

£75,000,000 Senior Debt £5,000,000 Revolving Credit Facility

£50,000,000 Senior Debt

H.I.G. Capital has acquired the company £14,000,000 Senior Debt £3,000,000 PIK £6,000,000 Revolving Credit Facility

Management / ICG have acquired the company

£56,500,000 Senior Debt £6,000,000 Acquisition Facility £20,000,000 Mezzanine Debt £7,500,000 Revolving Credit Facility

A portfolio company of

Vitruvian Partners has raised acquisition financing

£39,000,000 Senior Debt £10,000,000 Accordion £4,000,000 Revolving Credit Facility

12

Lincoln’s Debt Advisory Group adds the following value to each assignment: • • • • • •

Robust process ensures best available pricing and terms Strong relationships with over 300 capital sources throughout the world Multiple capital structure alternatives are generated which enhances certainty of closing Provides clients with transparency and control over financing process Lincoln’s independence assures there is no conflict of interest Maximum leverage of time and resources for management team and financial sponsor

DE BT ADVISO RY G RO UP Lincoln International U.S. DAG Team

International DAG Heads

Ron Kahn Managing Director (312) 580-6280 [email protected]

Robert Horak Managing Director (312) 580-2804 [email protected]

Christine Tiseo Director (312) 580-6287 [email protected]

Jonathan Broome Managing Director – U.K. +44 (0) 20 7632 5238 [email protected]

Natalie Marjancik Vice President (312) 506-2729 [email protected]

David Graham Associate (312) 506-2757 [email protected]

Ryan Deegan Associate (312) 506-2754 [email protected]

Serge Palleau Managing Director - France +33 (1) 53 53 18 18 [email protected]

Dylan Lyons Analyst (312) 506-2760 [email protected]

Justin Malina Analyst (312) 506-2785 [email protected]

Steve Yan Analyst (312) 506-2709 [email protected]

Dominik Spanier Managing Director - Germany +49 (69) 97105-428 [email protected]