news from the middle deal perspectives for middle market companies and their advisors

Q4 2017

SELLERS MARKET LEAVES BUYERS FIGHTING FOR THE PRIZE

MERGERS & ACQUISITIONS The ripe economic environment in 2017 has created a vibrant sellers market with
companies achieving premium EBITDA multiples of approximately 9.1x. Although
CORPORATE RESTRUCTURING Q3 YTD deal volume dropped 16.2% year-over-year, it is Capstones view that the
decline is attributable to fewer companies available for sale rather than a lack of
PRIVATE PLACEMENTS buyer demand. As a result, buyers face fierce competition for quality companies and
this scarcity has contributed to increased valuations. Private equity buyers have
FINANCIAL ADVISORY
been particularly heavy hitters as they seek to deploy $545.5 billion in capital and
MERCHANT BANKING are completing transactions with EBITDA multiples at a 15-year high. Consequently,
PE firms share of the M&A pie has increased at the expense of corporate buyers
which have experienced a drop of 20.5% year-over-year in completed deals.

In many respects, the macroeconomic and microeconomic trends of 2017 reflect

the peaks of recent bull market runs. Unemployment (4.1%) is at its lowest since
2000, consumer confidence (125.9) has reached a 17-year high, middle market
valuations ($50.4 million) are at their highest since 2007 and M&A debt multiple
(4.2x) are the highest in our 14-year data base. Taken collectively, these statistics
seem to suggest that the market is reaching an apex. At the same time, Capstone
believes M&A activity and pricing will remain strong in 2018 due to low interest
rates (1.15% compared to 4.24% in 2007), aggressive and healthy lenders, and
continued appetite from PE firms with dry powder. Capstone believes that these
favorable market conditions will result in steady appetite for transactions as sellers
seek to capitalize on the current market run and achieve high valuations.

Middle Market M&A Volume

18,000 $140
$130
16,000
$120
14,000 $110
$100
12,000
Transactions

$90
$80
$ in millions

10,000
$70
8,000 $60
6,000 $50
$40
4,000 $30
2,000 $20
$10
0 $0
2009 2010 2011 2012 2013 2014 2015 2016 Q3 '16 Q3 '17

Transactions (Undisclosed Value) Transactions (Disclosed Value) Average Value

Source: Capital IQ
Note: Enterprise Value < $500mm
 news from the middle

M&A snapshot
AVERAGE MULTIPLES 12.0x

BY TRANSACTION SIZE
Enterprise Value / EBITDA
10.0x

8.0x

6.0x

4.0x
Deals valued between $250-
$500mm reached strong 2.0x
EBIDTA multiples of 11.4x, 0.0x
the highest seen since 2008 2008 2009 2010 2011 2012 2013 2014 2015 2016 Q3 '17
Enterprise Value $10-100mm Enterprise value $100-250mm Enterprise Value $250-500mm

Source: Capital IQ
Note: includes multiples 3x-16x

14,000
CORPORATE 12,487 12,384
12,044
BUYER ACTIVITY 12,000
10,674 10,938 11,149
9,655
10,000 8,946
Transactions

8,000 7,084 7,109

6,000
Corporate buyers have been
less active as they compete 4,000
against PE buyers seeking to 2,000
deploy capital
0
2009 2010 2011 2012 2013 2014 2015 2016 Q3 '16 Q3 '17
Source: Capital IQ
Note: Enterprise Value < $500mm

FOREIGN 3,000 30%

BUYER ACTIVITY 2,500 25%

2,000 20%
Transactions

1,500 15%

1,000 10%
The share of foreign
buyers has reached 500 5%
20.1%, the largest
percentage since 2009 0 0%
2009 2010 2011 2012 2013 2014 2015 2016 Q3 '16 Q3 '17

Transactions with Non-US Buyers Non-US Buyers as % of Total Transactions

Source: Capital IQ
Note: Enterprise Value < $500mm

CAPSTONE PARTNERS LLC 2

 news from the middle

M&A snapshot
5.0x
PRIVATE EQUITY 4.2x
4.0x
DEBT MULTIPLES 4.0x 3.7x 3.7x 3.7x
3.9x
3.4x 3.5x 3.4x
3.3x
Total Debt / EBITDA

2.9x 3.0x
3.0x

2.0x
Debt multiples have
climbed to 4.2x, the 1.0x
highest recorded in our
data base 0.0x
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Q3 '17
Source: GF Data Resources
Note: includes multiples 3x-15x, Enterprise Value $10-$250mm

PRIVATE EQUITY 2,500 2,272

2,242 2,218
BUYER ACTIVITY
1,904
2,000
1,706 1,678
1,497 1,563
Transactions

1,500 1,325

1,000
PE buyers have remained 731
highly active in the M&A
500
market as they seek to
deploy capital
0
2009 2010 2011 2012 2013 2014 2015 2016 Q3 '16 Q3 '17
Source: Pitchbook
Note: Pitchbook changed methodology to only include buyout deals as of Q3 2017. All data reflects new methodology.

PRIVATE EQUITY 9.0x

MULTIPLES 8.0x 7.5x
6.7x 6.7x 6.9x
7.0x 6.4x 6.3x 6.5x
Enterprise Value / EBITDA

6.1x
6.0x
5.0x
4.0x
Valuation multiples have 3.0x
been at a premium and Q3
2.0x
surpassed the 15-year high
of 7.4x set by Q2 2017 1.0x
0.0x
2003-2010 2011 2012 2013 2014 2015 2016 Q3 '17

Source: GF Data Resources

Note: includes multiples 3x-15x, Enterprise Value $10-$250mm

CAPSTONE PARTNERS LLC 3

 built for the middle market

ABOUT CAPSTONE PARTNERS

Capstone Partners LLC is an award-winning investment banking firm dedicated to serving the corporate finance needs of
middle market business owners, investors and creditors. Over the past 15 years, Capstone has earned a reputation as one of
the most innovative firms in the industry, offering corporate sale & divestiture, merger & acquisition, private placement,
corporate restructuring, valuation and financial advisory services. The firm maintains seven industry practices, including:
Business Services, Consumer Products, Education & Training, Government Services, Health & Medical, Manufacturing &
Industrial, and Technology & Telecom. Headquartered in Boston, Capstone has offices in Chicago, London, Los Angeles, New
York, Orange County, Philadelphia, San Diego, Silicon Valley and Tampa with an international presence that spans 450+
professionals in 70 offices across 31 countries.

CAPSTONES OFFICE LOCATIONS

BOSTON CHICAGO LONDON LOS ANGELES

176 Federal Street 200 South Wacker Drive 42 Brook Street 401 Wilshire Blvd.
3rd Floor Suite 3100 London W1K 5DB Suite 1200
Boston, MA 02110 Chicago, IL 60606 United Kingdom Santa Monica, CA 90401
(617) 619-3300 (312) 674-4531 +44 (0) 203 427 5068 (858) 926-5950

NEW YORK ORANGE COUNTY PHILADELPHIA SAN DIEGO

340 Madison Avenue 23046 Avenida de la 1515 Market Street 12707 High Bluff Drive
10th Floor Carlota 12th Floor Suite 200
New York, NY 10173 Suite 600 Philadelphia, PA 19102 San Diego, CA 92130
(212) 634-0855 Laguna Hills, CA 92653 (215) 854-4063 (858) 926-5950
(949) 460-6431

SILICON VALLEY TAMPA

228 Hamilton Avenue 1550 W Cleveland Street
3rd Floor Suite 10
Palo Alto, CA 94301 Tampa, FL 33679
(650) 319-7370 (813) 251-7285

www.capstonellc.com

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