US PE Middle Market Report 3Q 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 Contents Credits & contact Introduction 3 PitchBook Data, Inc. John Gabbert Founder, CEO Overview 4-5 Adley Bowden Vice President, Market Development & Analysis Private debt: Top five things to watch in 2020 6-7 Spotlight: Taking stock of private market returns 8-10 Content Stephen-George Davis Analyst, PE ACG Q&A: Canadian PE veterans look to the future 12-13 Zane Carmean Senior Data Analyst Exits 14-15 Contact PitchBook Fundraising 16-17 Research [email protected] Designed by Conor Hamill Click here for PitchBook’s report methodologies. Introduction Dealmaking in the MM continues to flourish. GPs have MM fundraising is on pace to set annual records. Perennial taken particular interest in tech investments due to the MM shops continue to propel fundraising, sticking to their sector’s high level of growth, which is outpacing the skillset in the interest of consistent returns, but some larger broader market. Take-privates and divestitures were GPs boasting several strategies have also been raising MM also a major focus in the quarter as PE firms have taken funds as LPs seek to diversify their allocations. advantage of companies that performed poorly in the public markets or needed to sell off non-core assets. These sizable transactions helped bolster the median deal size, which sits at an all-time high YTD. Stephen-George Davis Analyst, PE MM exits saw a downturn due to a pullback in corporate acquisitions. Due in part to many deals outgrowing the MM threshold through organic means and add-ons, MM exit count and value are on pace for their lowest annual results in years. SBOs in the quarter helped pick up some of the slack from the decline in corporate acquisitions. Similarly, a few IPOs on the larger end of the MM spectrum have buoyed results. 3 PITCHBOOK 3Q 2019 US PE MIDDLE MARKET REPORT Lead sponsor In partnership with Overview PE MM deal activity 3,066 2,567 2,180 2,361 2,183 2,687 1,890 1,610 1,453 1,293 716 9 0 7 8 4 6 7 0 . 7 9 4 7 1 1 7 5 3 . 7 1 1 5 4 4 0 9 5 449.0 374.3 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 September 30, 2019 The third quarter saw PE MM deal activity further proliferate, Add-ons as proportion of overall PE MM with $374.3 billion closed over 2,687 deals in 2019 thus far. deal activity This puts 2019 on track to overtake 2018’s highs. One sign 80% of elevated dealmaking activity is the increasing median MM deal size—which has risen to $205.0 million through 3Q 68.7% 70% 66.6% 2019—despite add-ons, which tend to be smaller than non- add-ons, having grown further as a proportion of all deal 57.6% 60% 56.9% flow. A major driver of deal value in 3Q involved GPs sourcing deals from public markets, either through take-privates or 50% large-scale divestitures. Many PE firms successfully targeted companies that performed poorly in the public markets, 40% some of which put themselves up for sale. A continued push for underperforming companies to refocus on core offerings 30% and pay down debt also drove divestiture activity. 20% GPs continue to use add-ons to target lower-multiple acquisitions in the current high-price environment. Although 10% median EV/EBITDA multiples have come down slightly in the most recent quarters, pricing remains aloft. However, 0% continued MM revenue and earnings growth should partially 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019* allay investor worries about headline prices. Companes Deal value Deal count within the MM experienced YoY earnings growth of 13.2% and 1 Source: PitchBook | Geography: US revenue growth of 9.6% in 3Q. These gains are even more *As of September 30, 2019 pronounced in the tech sector, which saw earnings growth of 20.1% and revenue growth of 11.9%. This profound growth has attracted GPs to the sector, which has comprised 21.1% of MM deal value through 3Q 2019, up from 16.4% in 2018. 1. This is according to the Golub Capital Altman Index (GCAI), which is an index based on revenue and earnings for MM companies. The index measures median revenue and earnings growth for more than 150 private US companies in the loan portfolio of Golub Capital. 4 PITCHBOOK 3Q 2019 US PE MIDDLE MARKET REPORT Lead sponsor In partnership with Overview Along with tech, massive deals in the energy sector have Median PE EV/EBITDA buyout multiples helped buoy deal value as PE firms take advantage of 14x relatively lower prices for oil & gas stocks. As of December 12.9x 3, 2019, the energy sector has lagged all others on the S&P 500 (+12.8%) YoY at -11.3%. PE firms are drawn to the 12x 11.5x space because of the lucrative opportunities for M&A and divestitures that resulted from the current downturn in oil x 7 . 10x x & gas stocks, which began in 2014 and saw further price 5 9 x . 8 x 6 declines at the end of last year. The largest MM deal of . 8 5 . x x 5 the quarter was the $925.0 million buyout of a portion of 1 3 x . 8x . 5 4 5 . Concho Resources’ (NYSE: CXO) New Mexico assets by x 4 6 x . x 1 4 KKR-backed Spur Energy Partners. In this carveout, KKR 5 . 4 was able to capitalize on the trend of oil & gas companies 6x 3 x 1 divesting non-core assets and paying down debt as the . industry combats near-term oversupply and as investors 4 4x x 2 . x x x x lose patience with companies that have produced negative 7 1 x 9 9 x . 8 . 3 3 x x 6 . 5 x 5 . cash flows for years. Another notable deal in the energy 5 6 6 5 3 5 . 4 4 2x x sector was the take-private of Third Coast Midstream 4 9 . by ArcLight Capital Partners, the firm that already had 2 a controlling interest in the entity before the acquisition. 0x ArcLight purchased the remaining stake with favorable 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019* terms given Third Coast Midstream’s rapid stock price drop Debt/EBITDA Equity/EBITDA EV/EBITDA in 2018 due to changes the company made to its scrip Source: PitchBook | Geography: US 2 dividend. The final buyout offer from ArcLight, which was *As of September 30, 2019 finalized in March, was less than the offer the company Note: Totals may not reflect debt and equity figures due to rounding. To clarify, this represents all US PE and not only the the MM. had previously received from ArcLight in September 2018. This deal highlights one way in which GPs may be able to acquire publicly traded assets at more favorable prices following temporary sell-offs. Take-privates as proportion of overall PE MM deals ($) Significant take-private deals also occurred outside 7.0% the energy sector and played a prominent role in the 6.7% quarter, comprising 2.7% of MM deal value, up from 0.6% in 2Q 2019. A notable take-private in the B2C sector saw 5.6% 5.3% Waterstones, a portfolio company of Elliott Advisors’ UK division, purchase Barnes & Noble for $683.0 million. Elliot Advisors is the UK subsidiary of Elliott Management, the famed activist hedge fund. In the last few years, 3.5% 3.3% 3.2% Elliott has diversified beyond simply buying stakes in companies and agitating for change to buying them 2.4% outright. This is a trend we are seeing more frequently 2.0% 1.9% 1.9% at a time when hedge funds are under pressure due to prolonged underperformance and many are looking to 3 2 8 7 8 . adjust their playbooks. While hedge funds have struggled . 0 4 5 9 8 3 2 . 0 . 2 . 3 0 . 1 7 1 8 1 7 6 1 1 8 to outperform passive benchmarks, buyout funds still 5 $ $ $ $ $ $ $ $ $ $ $ put up comfortable gains over the S&P 500. The strategy behind Elliott’s acquisition of Barnes & Noble seems to 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019* double down on the concept of brick & mortar locations Deal value ($B) Take-private % and diverge from the general shift to ecommerce. Going forward, we expect GPs to continue coming up with Source: PitchBook | Geography: US *As of September 30, 2019 atypical methods to procure value from their portfolio companies. 2. A stock dividend as an alternative to a cash dividend. 5 PITCHBOOK 3Q 2019 US PE MIDDLE MARKET REPORT Lead sponsor Antares: Private debt—Top five things to watch in 2020 But first, a few tidbits from 2019… David Brackett Equity markets cheer Fed “put” Chief Executive Officer Antares Capital The Federal Reserve Bank has signaled recently that it may pause its adjustments following three Fed Fund rate Dave is a member of Antares’ cuts since July, hopeful that it has completed a mid-cycle Investment Committee as well adjustment that will support a continued mature economic as Antares’ Board of Directors.