Lead sponsor In partnership with US PE Middle Market Report 2Q 2019 The market can turn at any time. But we’re prepared. With reliable access to capital. Strong client relationships. Innovative solutions. And a consistent approach to leveraged lending that’s delivered success across changing market cycles for 20+ years. Antares.com Lead sponsor In partnership with Credits & contact Contents PitchBook Data, Inc. Introduction 3 John Gabbert Founder, CEO Overview 4-5 Adley Bowden Vice President, Market Development & Analysis Antares Q&A: Daniel Barry 6-7 Content Spotlight: Sovereign wealth funds 8-10 Stephen-George Davis Analyst, PE ACG Q&A: Andrew McCabe 11-12 Darren Klees Senior Data Analyst Exits 14-15 Contact PitchBook Fundraising 16-17 Research [email protected] 2Q 2019 US PE MM lending league tables 18 Report & cover design by Kelilah King Click here for PitchBook’s report methodologies. Introduction Through the first half of 2019, US PE MM dealmaking MM fundraising figures were down in 2Q 2019; however, is matching 2018’s record-setting pace. This activity the average and median MM fund size are on pace to has been driven by an accumulation of dry powder, a reach the highest levels on record. The number of first- low interest rate environment and continued economic time funds in the MM is also on the decline, falling sharply expansion. In 2Q, manufacturing deals played an outsized from 2018 highs. Although fundraising was down, LPs role in MM activity, with four of the top 10 deals coming were busy allocating to fund strategies that perform well from the vertical. Corporate divestitures and carveouts in challenging economic times. Several mezzanine funds, were also overrepresented in the top MM deals, as an which typically have a hybrid of equity and debt exposure, increasing number of companies are divesting assets. were raised in the quarter. Across all sectors, MM GPs are continuing to use add- ons to blend down acquisition multiples and gain from multiple arbitrage while hopefully improving operations Stephen-George Davis and growth. Analyst, PE In contrast with healthy dealmaking activity, MM exit activity continued its downward trend. This is partially due to the continued proliferation of add-ons leading to an increase in platform sizes above the MM threshold. Following strong 1H performances from public indices, IPOs made a resurgence in 2Q after 1Q was devoid of any MM PE-backed public listings. SBOs also continued to grow in prominence—a trend we do not see abating anytime soon. 3 2Q 2019 US PE MIDDLE MARKET REPORT Lead sponsor In partnership with Overview PE MM deal activity 2,978 2,540 2,338 2,177 2,183 1,883 1,609 1,451 1,569 1,294 714 2 4 8 7 7 8 2 3 8 . 3 5 8 9 9 9 0 6 4 2 . 3 7 0 1 4 4 4 0 9 8 217.0 4 3 3 3 3 2 2 2 1 7 $ $ $ $ $ $ $ $ $ $ $ 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019* Deal value ($B) Es�mated deal value ($B) Deal count Es�mated deal count Source: PitchBook | Geography: US *As of June 30, 2019 MM deal activity in the first half of 2019 is on pace to raised across the PE landscape, which in turn necessitate approximate 2018’s record-setting figures in terms of both that capital be deployed into larger companies. Though deal count and value. In 2Q 2019, buyout shops closed these figures could change by year end, we expect the 866 deals for a total of $124.2 billion, representing YoY longer-term trend of rising deal sizes is here to stay. increases of 12.9% and 15.8%, respectively. This put 1H 2019 figures at an estimated 1,569 deals valued at $217.0 Due in part to an overall decline in relative performance billion, including debt and equity. The robust activity can vis-à-vis public equities, GPs have continued to utilize be partially attributed to vast sums of dry powder raised add-ons as a technique to enhance returns in a highly in recent years, as well as continued economic expansion competitive and richly priced environment. In 1H 2019, and a low interest rate environment. This strength in add-ons comprised 59.5% of deal value as well as 68.8% dealmaking is also occurring against a dimming economic of the number of deals closed in the MM, higher than backdrop in the US. The Federal Reserve is signaling its any other full-year figures on record for both categories. intention to make its second rate cut this year, a move that Meanwhile, US PE buyout multiples surpassed the 12.3x indicates the fragility of the current economic recovery. mark in 2Q 2019. The buy-and-build strategy allows for a GP to blend down the acquisition multiple and Through 2Q 2019, the MM continued to grow in capture the associated multiple arbitrage, while ideally prominence. MM PE deal activity (deal sizes between $25 also improving operations and growth in the process. million and $1 billion) comprised 82.4% of all buyouts in As we stated in a recent note, this strategy has become the US, marking five consecutive years in which the MM the norm for many GPs now that “the use of leverage, has grown as a percentage of overall PE deal count, if financial engineering and multiple expansion are no current figures hold. The MM also made up 69.2% of PE longer adequate to deliver strong returns.” We believe deal value in 1H, higher than any full-year figure since the use of add-ons will continue to be an increasingly 2014. The MM’s importance has grown in part due to the prevalent strategy of GPs moving forward. prevalence of add-ons, which tend to be smaller than their corresponding platform companies. Additionally, One recent transaction that exemplifies the use of the median deal size within the MM halfway through the add-ons is the buyout of Anvil International, a New year has increased to $200 million from 2018’s full-year Hampshire-based manufacturer of pipe fittings and figure of $180 million, coinciding with heftier funds being piping components. Anvil was originally bought out in 4 2Q 2019 US PE MIDDLE MARKET REPORT Lead sponsor In partnership with Overview 2017 by One Equity Partners for $315 million. Between Add-ons as proportion of overall PE MM deals the original buyout and One Equity Partners’ exit of the company in May 2019, Anvil International horizontally 80% integrated five companies to its platform in order 68.8% to boost revenues. A consortium including Babson 70% 66.8% Capital Management, CDIB Capital International and Tailwind Capital purchased Anvil International through a 59.5% 60% 56.5% secondary buyout (SBO) in 2Q for $765 million, making it one of the largest manufacturing deals of the quarter. 50% The acquisition of Anvil itself was an add-on as the company was tacked on to portfolio company Smith- Cooper International. 40% The manufacturing vertical helped drive MM activity 30% in 2Q, with four of the 10 largest deals falling into the category. Another manufacturing deal to close in the 20% quarter was the acquisition of Formica by Broadview Holdings via its financial sponsor HAL Investments. The 10% buyout of Formica, an Ohio-based manufacturer and distributor of countertops and other laminate products, was the largest manufacturing deal of 2Q 2019. With an 0% $840 million price tag, it was also the third largest MM 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019* deal to close in the quarter. Formica was initially bought Deal value Deal count in 2007 for $750 million by Fletcher Building (NZE: Source: PitchBook | Geography: US FBU), a construction conglomerate based in Auckland, *As of June 30, 2019 New Zealand. Fletcher Building decided to sell the company as part of a larger strategy to divest from non- Four-quarter rolling median PE EV/ core businesses. A near-record number of companies are planning on making a divestiture in the next two EBITDA buyout multiples years, according to a recent Ernst & Young survey.¹ This 14x strategy could provide additional targets for MM GPs sitting on record-setting capital levels. 12x Carveouts and divestitures accounted for four of the 10 largest deals in 1H 2019. Along with Formica, other 10x x x x x x 1 1 9 4 x . x . x x 9 x x . notable corporate divestiture deals to close included 6 6 6 6 5 6 6 8 . 7 . 7 5 . x . 5 x 5 5 5 x x 5 6 5 x 8 Blackboard’s Transact business unit, Bolthouse Farms . x 3 3 8x . 3 . 4 4 x . 4 . 5 5 1 4 4 (formerly of Campbell’s Soup), Newell Brands’ Process . 4 Solutions and Life Fitness (formerly of Brunswick). While 6x there has been some recent debate about the suitability of PE’s involvement in divestitures, the fact remains that an increasing number of companies are divesting 4x x x x x x x x x x x x x 2 x 1 1 x 0 x 0 0 9 . 8 x . x x 8 7 . 7 . 6 5 . 5 . assets.² These divestitures are usually done for reasons . 4 . 6 . 2 6 6 2 . 2 6 . 6 6 5 5 . 5 5 5 5 5 5 5 5 5 other than business failure, which leads to several viable 2x 5 investment opportunities for GPs down the line.³ 0x 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 1: “Global Corporate Divestment Study 2019,” Ernst & Young, 2019 as quoted in 2015 2016 2017 2018 2019* “Why So Many Companies are Divesting,” Carsten Kniephoff, et.