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Private Capital Assessment

Private Capital Assessment . Case for a Hybrid Model For Investment. Data Sources. PEG sponsorship discussions (6 months) Trends McGladrey Capital Markets, EisnerAmper , Pitchbook Grant Thornton, WSJ, ACG TCG Contact with +200 Investment Bankers Consultants active in M&A

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Private Capital Assessment

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  1. Private Capital Assessment Case for a Hybrid Model For Investment

  2. Data Sources • PEG sponsorship discussions (6 months) • Trends • McGladrey Capital Markets, EisnerAmper, Pitchbook • Grant Thornton, WSJ, ACG • TCG Contact with +200 Investment Bankers • Consultants active in M&A • Business owners-Lower Middle Market (LMM) • Corporate Development Executives (Strategics) • Prior Operational and Acquisition experience

  3. Observations affecting PE • Governmental/Regulatory • Reporting, transparency, costs • Economic shock - Asset Supply vs. Demand • Significant Dry Powder($2.5 trillion ), dearth of quality assets • NA market maturity = recession accelerated consolidation in segments • Hypercompetitive behavior for quality assets • Strategics aggressively pursuing deals; PEGs trying to put $ to work • Owner sophistication has grown • Strategic vs. Financial buyer options understood • Fatigue from frequent buyer contact w/increasing aversion to Financial Buyer(“the “multiple”) • Financial Buyer • Disruption to historical model and ability to put money to work. • Expectations conundrum -Entry EV, holding period, available assets to build, Exit EV. • LMM environment • Number and availability of assets; majority below platform criteria($30-$50M revenues) • Need for space expertise and efficient M&A processes • DD similar regardless of deal size (No elasticity)

  4. Macro View- M&A Market Structure External Influences • Trends • Deal Values • Deal Volumes • Asset Quality • Government • Capital • Globalization • Investor Behavior • Capital Sources • Service Providers • Owners • Models -Criteria • Returns • Value • Risk • Shock • Regulations • Monetary Policy • Psychology MARJON LLC

  5. Macro View- M&A Market Structure Influencers Trends Behavior Returns • (2009-2011) • Restrictive Policies • Added Complexity • Capital Availability-Significant • Increasing global competition • Excess NA Capacity • Inefficiency will continue • to be driven out of NA • Shock • Forced Efficiency-Co. survival • Capital gridlock-For LMM Cos. • Economic Uncertainty • Political Uncertainty • Investor Behavior • Capital Sources • Service Providers • Owners • Models -Criteria • Returns • Value • Risk MARJON LLC

  6. Macro View- M&A Market Structure Influencers Trends Behavior Returns • (2009-2011) • Enterprise Values Increasing • Multiples (+2-3X) • Deal Volume Decreasing (-40%) • Equity ratio high • Deal Mix Shifting to Strategics • Synergy vs. Leverage • Holding period not relevant • “Paying Up”-Significant cash • Platform Quality • Bigger better assets “Mined” • Significant bifurcation in LMM • Good or very poor • Bolt on Quality • Reasonable number of Assets availabile • Good or very poor • Trends • Restrictive Policies • Added Complexity • Capital Availability-Significant • Increasing global competition • Excess NA Capacity • Inefficiency will continue • to be driven out of NA • Shock • Forced Efficiency-Co. survival • Capital gridlock-For LMM Cos. • Economic Uncertainty • Political Uncertainty • Investor Behavior • Capital Sources • Service Providers • Owners • Models -Criteria • Returns • Value • Risk MARJON LLC

  7. Macro View- M&A Market Structure Trends Behavior Returns Influencers • (2009-2011) • Enterprise Values Increasing • Multiples (+2-3X) • Enterprise Values Increasing • Multiples (+2-3X) • Deal Volume Decreasing (-40%) • Equity ratio high • Deal Mix Shifting to Strategics • Synergy vs. Leverage • Holding period not relevant • “Paying Up”-Significant cash • Platform Quality • Bigger better assets “Mined” • Significant bifurcation in LMM • Good or very poor • Bolt on Quality • Reasonable number of Assets availabile • Good or very poor • Hyper competitive • Quality assets & scale • Disruptive -Rational Returns? • IRRs dropping • PE model • Generic? Spreadsheet? • Future Earn out advantage? • Strategics’ advantage increasing • Economies of scale • DD -No elasticity in process • Operational Knowledge • Space Knowledge • Quality IB behavior • Shop Strategics first • Mind share with “players” • LMM PEG –Rationalization • Specialize & build skill • Thrive vs. Survive • Owner sophistication • Financial buyer vs. strategic • Risk- future appreciation (PE) • Fatigue-contact (4-6x/week) • Owner financial security • The Devil you know • Post liquidity Uncertainty • Trends • Restrictive Policies • Added Complexity • Capital Availability-Significant • Increasing global competition • Excess NA Capacity • Inefficiency will continue • to be driven out of NA • Shock • Forced Efficiency-Co. survival • Capital gridlock-For LMM Cos. • Economic Uncertainty • Political Uncertainty • Returns • Value • Risk MARJON LLC

  8. Macro View- M&A Market Structure Trends Behavior Returns Influencers • (2009-2011) • Enterprise Values Increasing • Multiples (+1-2X) • Deal Volume Decreasing (-20%) • Deal Mix Shifting to Strategics • Synergy vs. Leverage • Holding period not relevant • “Paying Up”-Significant cash • Global view • Platform Quality • Bigger better assets “Mined” • Significant bifurcation in LMM • Good or very poor • Bolt on Quality • Reasonable number of Assets available • Good or very poor • Hyper competitive • Quality assets & scale • Disruptive -Rational Returns? • IRRs dropping • PE model • Generic? Spreadsheet? • Future Earn out advantage? • Strategics’ advantage increasing • Economies of scale • DD -No elasticity in process • Operational Knowledge • Space Knowledge • Quality IB behavior • Shop Strategics first • Mind share with “players” • LMM PEG –Rationalization • Specialize & build skill • Thrive vs. Survive • Owner sophistication • Financial buyer vs. strategic • Risk- future appreciation (PE) • Fatigue-contact (4-6x/week) • Owner financial security • The Devil you know • Post liquidity Uncertainty • Historical expectations -Misaligned ? • Gap - current LMM environment • Favor the Strategic buyer • PEG with existing platforms • Risk to acquire –Increasing • Expense, Time • Entry EV increasing • Risk to Grow –Increasing • Management skill decreasing (small co) • Operation resource rationalized • Uncertainty • Exit Risk- ? • ? Achievable returns • LP Expectations • Holding period • Achievable exit EV • Recap potential • Trends • Restrictive Policies • Added Complexity • Capital Availability-Significant • Increasing global competition • Excess NA Capacity • Inefficiency will continue • to be driven out of NA • Shock • Forced Efficiency-Co. survival • Capital gridlock-For LMM Cos. • Economic Uncertainty • Political Uncertainty TCGHYBRID MARJON LLC

  9. Macro View M&A Market Structure • Acquisition Model Summary • Returns MARJON LLC

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