CAPITAL MARKETS UPDATE

Middle Market M&A

Q1 2023
MARKET COMMENTARY

Patiently Waiting for the Upswing

Uncertainty is seldom received favorably by capital markets and the

lack of economic visibility has caused angst among many market
participants. The Federal Reserve has yet to settle on a terminal interest “As has traditionally been the case, M&A market
rate, with the continued strength of the labor market complicating the valuations and activity levels are driven more by
task of whether to hike or pause. Recent turmoil among regional banks credit trends than by equity market levels. Tightened
has contributed to the tightening of the U.S. economy—an element that
credit conditions have decreased the amount of debt
may be difficult to quantify in basis points. As the U.S. navigates a
higher-for-longer rate environment to quell stubborn inflationary
available for transactions as well as increasing the
headwinds, confidence in a smooth recovery has often fluctuated with cost of that debt. With higher required equity
equity market swings, leaving many to wonder when the U.S. will enter a contributions and more expensive debt, valuations
recession, or if the economy is already in the midst of one. have adjusted downward to maintain returns.
Further, the natural flight to quality in times of
Individuals looking to yield curve inversion signals will point to the uncertainty has further reduced supply in the short
inevitability of a significant correction. However, in the middle market, term. We look forward to the inevitable rebound in
while dealmaking has been challenged it has not paused. The lending activity as conditions stabilize.”
environment has been a severe disruption for small business owners,
many of which do not have the luxury of leveraging capital markets for
debt issuance. Lending standards and interest rates have increased for
middle market business owners, leaving many to reevaluate their near- Phil Seefried
term growth plans. Despite headwinds, a similar theme has remained Executive Advisor, Capstone Partners
prevalent—the middle market has demonstrated greater resilience than
broader merger and acquisition (M&A) markets. While middle market
dealmaking fell by 14.3% year-over-year (YOY) in Q1, the broader M&A
market registered declines of 25.2%. It is likely interest rates will peak
within the next several months, with some optimists even forecasting
rate cuts by year end. As the economy eyes an emergence from
monetary tightening, there is hope that the M&A market may have
reached a modest trough—presenting a strong backdrop for a recovery
in middle market dealmaking.

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MARKET COMMENTARY
Inflation and elevated interest rates have continued to pressure M&A
valuations in the middle market. However, there has been evidence of
some upward pricing momentum in early 2023. The average EBITDA
multiple amounted to 9.1x in Q1, following a drastic decline to 7.2x in Q4
2022. Interestingly, it is the large-scale transactions that have seen the
most significant pullback in pricing. In Q1, the average multiple for
transactions between $250-$500 million in enterprise value fell more
than two turns of EBITDA to 9.3x EV/EBITDA, compared to 11.4x
EV/EBITDA in the prior year. Distressed and underperforming targets
have pulled this valuation average down with select sponsors
recognizing the low buy-in multiple opportunity. The core middle
market ($100-$250 in enterprise value) has continued to be the
bellwether of middle market pricing. Valuations at this range have held
steady at 10.9x EV/EBITDA, nearly mirroring the prior year’s average of
11.1x EV/EBITDA.
In times of market stress, buyers often refrain from large scale
acquisitions, with many moving down market to complete less debt
burdensome transactions. In Q1, the total disclosed transaction volume
fell to $26.8 billion, which marked the lowest total quarterly value since
Q3 2009. Notably, private and public strategic buyers moved further
down market in Q1, with the average paid deal value declining 15.5% and
25.5% YOY, respectively. While strategic deal volume has slowed
compared to the prior year, there have been signs of modest
acceleration in early 2023. Total deals closed by private strategics
increased 2.4% from Q4, with average value declining slightly by 4.3%.
Private equity firms have exhibited increased selectivity in acquisition
pursuits through Q1. Sponsors have been more disciplined in their
analysis of a target’s projected cash flows and how the business may
fare amid a prolonged recession. In Q1, closed transactions by private
equity firms declined 28.9% YOY, certainly impacted by higher
borrowing costs. However, valuations paid by private equity firms for
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middle market companies between $10-$500 million in enterprise value
have improved compared to Q4, rising to 8.0x EV/EBITDA from 6.8x
EV/EBITDA, according to GF Data®. Quality has remained a focus among
the financial buyer universe and sponsors have rewarded targets that
have shown strong operating performance. Notably, targets with above
average financials achieved a 44% premium compared to other
buyouts. This premium is nearly double the 2022 level, which amounted
to 23%.
The U.S. economy is no longer operating in a low cost of capital
environment. More expensive transaction financing has encouraged
greater equity usage in acquisitions. Through Q1, equity contributions
from private equity firms have reached 53.6%, a significant uptick from
50.2% in full-year 2022. However, private equity fundraising has
remained robust and sponsors still have vast reserves of dry powder
available for acquisitions. Clarity over the terminal interest rate will
provide a more favorable backdrop for financial buyer activity. In the
meantime, add-ons have been rampant, which tends to bode well for
smaller middle market players that complement a private equity firm’s
investment thesis.
Business owners, dealmakers, and lenders will be closely monitoring the
monetary policy environment and its reverberations on the broader
economy. If the U.S. has reached, or is approaching, its trough in the
M&A market, there is a precedent for what is to come. Sellers can
expect an exuberant interest from buyers looking to reengage in
inorganic growth upon a market recovery. Timing and asset position will
be key as a substantial level of pent-up demand can be expected to
create healthy levels of competition in the middle market.
MIDDLE MARKET OBSERVATIONS

Q1 2023 TAKEAWAYS & THEMES TABLE OF CONTENTS

Middle market M&A remains active despite economic turbulence, Banking sector Middle Market Observations
disruptions, and interest rate hikes.  Key Considerations for Business Owners
 Q1 2023 by the Numbers
• Middle market M&A volume declined in Q1 2023 as macroeconomic headwinds and  Middle Market Valuations Index
a challenging operating environment facilitated caution among buyers and sellers.  Capital Market Dashboard
 Financial Advisory Services
• While buyers have demonstrated increased selectivity, quality companies with
strong margin profiles have continued to command premium valuations. Middle Market M&A Activity
 M&A Amid Economic Cycles
• Buyers have increasingly moved down market, targeting lower and core middle  Quarterly M&A Volume
market businesses to conserve cash and maximize return on investment.  Breaking it Down by Size
 Pricing Trends
• Elevated private equity fundraising is expected to support heightened sponsor  Strategic Acquirers
activity throughout 2023.  Foreign Acquirers
 Private Equity
Macroeconomic dynamics will likely dictate middle market M&A activity through  Dry Powder
year end.  Transactions
 Preferences
• The Federal Reserve’s ability to navigate a soft landing will likely prove consequential  Valuations
for middle market M&A throughout 2023.
Capstone Barometers
• Interest rate levels will be a major factor in private equity’s presence in the middle  Fully Integrated Expertise
market, as equity-heavy transaction financing structures will likely dimmish  Firm Data
sponsors’ available dry power.  Recent Deal Closings
 Leadership Team
• In the middle market, demographics are a key catalyst for deal volume. As aging
founders and entrepreneurs look to monetize their business, a steady inventory of
transaction volume is expected to follow.

• We are expecting deal activity to regain prior momentum towards Q4 of 2023.

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KEY CONSIDERATIONS FOR BUSINESS OWNERS

Current State Takeaways for Business Owners

Private equity firms remain armed with vast reserves of dry powder to deploy
towards platform and add-on acquisitions. Private equity’s prioritization of add-on
Dry Powder Abundant deals bodes well for middle market business owners seeking a liquidity event,
especially as sponsors have replenished dry powder through elevated fundraising.

Strategic buyers have become increasingly selective in their acquisition targets,

Selective with a focus focusing on quality, profitable businesses with strong margin profiles. The current
Buyer Appetite M&A market has predominantly consisted of smaller transactions, evidenced by
on quality
the decline in average deal value through Q1 2023.

Debt capital remains available despite a difficult lending environment. However,

middle market businesses looking to secure debt capital may need to engage a
Debt Market Tightened lending conditions broader universe consisting of multiple lenders as the elevated cost of credit has
complicated debt placements.

Although M&A valuations have compressed in Q1 2023, quality businesses have

Compressed but robust for continued to garner healthy multiples. The quarter-over-quarter (QoQ) rise in
Valuations average EBITDA multiples may support price momentum in future quarters as
high-quality companies
sellers capitalize on the current transaction window ahead of a potential downturn.

Q1 2023 Capital Markets Update | 4

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Q1 2023 BY THE NUMBERS

14.3% $56.7M 9.1x

DECREASE IN DEAL VOLUME AVERAGE DEAL VALUE AVERAGE EBITDA MULTIPLE

M&A volume fell 14.3% YOY in Q1 as Average deal value declined by 19.2% The average EBITDA multiple in Q1
recessionary headwinds encouraged caution YOY in Q1 as buyers increasingly pursued amounted to 9.1x, rebounding from 7.2x
among buyers and sellers. smaller deals amid economic uncertainty. recorded in Q4 2022.

28.9% 22.4% 10.9x

DECREASE IN PE TRANSACTIONS INCREASE IN PE FUNDRAISING $100-$250 EBITDA MULTIPLE
Closed transactions by sponsors fell Private equity fundraising rose 22.4% YOY Pricing in the core middle market nearly
28.9% YOY in Q1 as higher borrowing in Q1 to $61.1 billion in capital raised as met prior year levels, with the average
rates impacted transaction financing. sponsors prepared for a market rebound. EBITDA multiple amounting to 10.9x.

3.9x 2.4% $1.2T

AVERAGE DEBT MULTIPLE PRIVATE STRATEGIC DEAL VOLUME GLOBAL PE DRY POWDER

Average debt multiples remained healthy Private strategic buyer interest held strong, Capital overhang has remained at
in Q1 2023, matching Q1 2022 and full- as the number of closed deals by private elevated levels, with an overwhelming
year 2022 at 3.9x. companies increased 2.4% QoQ in Q1. majority concentrated in U.S funds.

Q1 2023 Capital Markets Update | 5

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CAPSTONE’S PROPRIETARY MIDDLE MARKET VALUATIONS INDEX

Middle Market M&A

Valuation Takeaways EV/EBITDA Last Three Years
Q1 2022 Q2 2022 Q3 2022 Q4 2022 Q1 2023
• Capstone Partners actively monitors
the purchase multiples of middle 16.6x
market transactions through its 15.1x 14.4x 14.7x 14.7x 14.9x14.9x15.4x14.5x
proprietary database to provide 12.9x 13.3x13.0x
12.4x 12.6x12.7x
insight and transparency into the
pricing environment.
• Industrial Technology has emerged
as the leading industry from an M&A
multiple standpoint, with an average
valuation of 14.7x EV/EBITDA,
surpassing FinTech & Services.
Industrial Technology Fintech & Services Technology, Media & Telecom

11.5x 11.5x 11.8x 11.7x 11.8x 11.7x 11.9x 12.0x 11.4x 11.7x
10.4x10.5x10.4x10.3x10.2x 9.7x 9.8x 9.8x 9.9x 9.7x

Healthcare Aerospace, Defense, Consumer Industrials

Government & Security

8.4x 8.3x 8.3x 8.2x 8.4x 8.1x 8.2x 8.2x 8.3x 8.3x 8.0x 7.8x 7.9x 8.1x 8.2x 8.6x 8.1x 8.2x 8.4x
7.3x

Business Services Transportation, Logistics & Building Products & Energy, Power &
Supply Chain Construction Services Infrastructure

Q1 2023 Capital Markets Update | 6

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CAPITAL MARKET DASHBOARD

YTD EQUITIES FIXED INCOME ECONOMIC INDICATORS

S&P 500 U.S. Yield Curve GDP, LABOR MARKET, & INFLATION
6.00
+7.9% Last YOY
5.00
4.00 1.3% +2.9%
GDP
3.00
2.00 Consumer Confidence 101.3 -0.1%
Last 1Y % P/E LTM 1.00
Unemployment 3.4% -0.2%
0.00
4,115.2 +6.2% 20.3
1 Year 3 Year 5 Year 10 Year 30 Year
Consumer Price Index 306.5 +5.5%
1Y 3Y 5Y 10Y 30Y
Dow Jones Industrial
-0.2% 5.122 4.027 3.782 3.712 3.963 HOUSING MARKET
Housing Starts 1,401.0 -22.3%

POLICY RATE $1,834.7 +3.8%

Total Construction
Last 1Y % P/E LTM
Federal Funds Target Rate
32,799.9 +4.9% 17.9 PMI & NMI
5.00 Purchasing Managers 47.1% -9.0%
NASDAQ 4.00
Non-Manufacturing 54.8% -1.6%
+19.7% 3.00
2.00
RETAIL
1.00
Retail Sales $597.9 +0.5%
Last 1Y % P/E LTM 0.00

12,484.2 +11.8% 28.6

Source: FactSet as of 5/25/23

Q1 2023 Capital Markets Update | 7

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FINANCIAL ADVISORY SERVICES

Acquisition solutions. A business’ team—whether it is in-house, an

Brian Phillips outside resource, or a combination of both working together—should
Director, Financial Advisory Services be addressing these common issues:
248-421-1907
bphillips@capstonepartners.com On-site Changeover Management
• “Day One” planning and implementation
• On-site point of contact
• Immediate responsibility changeover
Creating an Evidence-Based Post-Acquisition Strategy
Update/Upgrade Financial Planning & Reporting
Business owners cannot afford to take a hit-or-miss approach when it
• Master file consolidated reporting
comes to creating a post-acquisition strategy. Conducting proper due
• Manage and consolidate information from various systems (internal
diligence, attaining accurate information, and ensuring a fair purchase
and external)
price are key facets of a successful acquisition. Post–closing, it is
• Standardized chart of accounts
equally important to analyze the integration process, map a strategy to
• Standardized upstream reporting
maximize the target’s profitability, and incorporate financial reporting.
• Budgeting & projections
The post-acquisition integration strategy and implementation are vital
to the success of an acquisition and should not be overlooked. Many Internal Systems and Controls
aspects of the newly-acquired business need to be integrated with the • Internal controls review and upgrade implementation
acquirer to ensure proper alignment. From specialized accounting and • Accounting policy and procedures review, upgrade,
reporting, to internal communication, nearly every aspect of life at the and implementation
target company changes in an acquisition. By recognizing, • ERP (enterprise resource planning) systems management, review,
communicating, and controlling those changes, the buyer can ensure a and recommendations
more efficient transition and positive long-term outcome. • ERP systems improved use and useability

Furthermore, placing the burden of integration solely on existing staff
requires those individuals to take on activities and concerns well
outside their day-to-day roles. Depending on the size of an organization
and its in-house capabilities, owners may consider seeking short-term,
specialized professionals with the right skillsets, experience, and ability
to focus on the important integration tasks. This allows internal staff to
move more seamlessly from one set of pre-acquisition tasks to post-
Operational Improvements
• Cost accounting review and improvements
• Operational reporting and review
• Push information to parties with P&L (profit & loss) responsibilities
• Interim executive-level professional support
• New hire interviews, assessment, and recommendations
• Training for new or existing staff

Q1 2023 Capital Markets Update | 8

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FINANCIAL ADVISORY SERVICES (CONTINUED)
Prep for Sale/Re-Sale Activities
• Historical restatements/corrections
• Forensic accounting
• Transaction level EBITDA adjustment tracking and reporting
• Technical accounting issues
• Opening balance sheet calculation and full audit support
• GAAP statement issues and pronouncement implementations
• Third-party technical accounting memos for file and audit purposes
Audit Preparation and Management
• Audit workpaper review or preparation
• Point of contact for audit team
• Audit footnotes and disclosures preparation
While an internal team may possess these capabilities, completing
these tasks during and post-acquisition can present challenges.
Outside help from a team of experienced professionals can be a
significant value-add to the organization.
Case Study: Standing Up a Post-Acquisition Integration Department
Capstone’s client, a large, regional waste services company, was in full
acquisition mode. It had made more than 20 acquisitions in 2020,
nearly 20 in 2021, and planned similar numbers going forward.
During 2021, it became apparent that the integration process for the
various new acquisitions was ineffective. New entities had little
guidance on how to report financially into the corporate systems.
Operations were running as they did prior to an acquisition for months
without any meaningful interaction with corporate. In addition, the
corporate accounting department did not have the staff or skills to
manage the specialized changes in reporting, so purchase accounting
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was postponed for months or simply estimated, leading to year-end
audit issues.
Capstone assisted with the initial design and stand-up of a new
Integration Department, including initial design and work responsibilities.
Capstone was also part of the interview process, providing
recommendations on candidates from the Vice President of Integration
to staff appointments, and worked directly with staff once hired to
assist in initial identification of responsibilities and requirements.
Since its inception, the Integration Department has implemented both
pre-acquisition and post-acquisition procedures to standardize and
smooth the transition at both the acquired entity and in the client itself.
From pre-acquisition initial accounting entries to final working capital or
other true-up, the integration department has relieved a significant load
from the corporate Accounting Department. At the same time, the
Integration Department manages all information technology (IT), human
resources (HR), operations, and other integration processes for new
acquisitions, helping to make the process relatively smooth and easy.
Capstone has continued to work directly with the integration
department and corporate accounting as part of its end-to-end
transaction support services.
Taking the Next Step
Capstone’s Financial Advisory Services Team consists of professionals
with deep experience advising clients across all states of the business
lifecycle including preparing for a transaction and integration and
optimization of the unified organization, post close. If you would like
more information about our services or have a specific question, please
contact us.
Q1 2023 Capital Markets Update | 9
MIDDLE MARKET M&A ACTIVITY
M&A AMID ECONOMIC CYCLES

MIDDLE MARKET M&A PERSISTS

AMID VOLATILE CONDITIONS
Middle Market Transactions
• Total middle market M&A
Transactions (Disclosed Value) Transactions (Undisclosed Value) Total Value ($B)
volume declined 14.3% YOY in Q1
2023 as macroeconomic
8 Years 5 Years 10 Years
headwinds caused a slowdown 18,000 $500
in dealmaking. However, middle
16,000
market deal volume continued
to outperform the broader M&A 14,000
$400

market, as total M&A volume

declined 25.2% YOY in Q1. 12,000

U.S. Dollars in Billions

$300
Transactions

10,000
• Elevated interest rates, market
volatility, and Banking sector 8,000
$200
disruptions have hindered deal
6,000
activity. Gross margin strength
has been increasingly 4,000
$100
emphasized amid higher costs.
2,000

• The average enterprise value of 0 $0

closed deals in Q1 2023 fell
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
1990

Q1 2022
Q1 2023
1991
1992
1993
1994
1995
1996
1997
1998
1999

2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
19.2% YOY to $56.7 million as
buyers have increasingly
pursued smaller deals to Shaded areas indicate expansion
Source: Capital IQ
conserve cash amid volatility. Enterprise Value < $500mm

Q1 2023 Capital Markets Update | 11

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QUARTERLY M&A VOLUME

DEAL VOLUME MODERATELY

DECELERATES THROUGH Q1
Quarterly Middle Market Transactions
• Total closed transactions in Q1
Transactions (Disclosed Value) Transactions (Undisclosed Value) Total Value ($B)
fell 2.6% QoQ. Through Q1 2023,
strategic and financial acquirers
have exhibited greater 7,000 $140
selectivity amid significant
macroeconomic challenges. 6,000 $120

• Total disclosed transaction value 5,000 $100

in Q1 amounted to $26.8 billion,

U.S. Dollars in Billions

representing a 36.3% decline
Transactions

4,000 $80
compared to Q4 2022 and
marking the lowest total 3,000 $60
quarterly value since Q3 2009.
2,000 $40
• Amid economic downturns,
buyers often refrain from 1,000 $20
pursuing large-scale deals. The
drop in total deal value points to 0 $0
acquirers moving down market
Q1 '17
Q2 '17

Q1 '18

Q1 '19

Q4 '22
Q3 '17

Q2 '18
Q3 '18

Q2 '19
Q3 '19

Q1 '20
Q2 '20
Q4 '16

Q3 '20

Q1 '21
Q4 '17

Q4 '18

Q4 '19

Q2 '21
Q4 '20

Q3 '21
Q4 '21
Q1 '22
Q2 '22
Q3 '22

Q1 '23
to target smaller businesses—
creating greater competition at
lower market levels.
Source: Capital IQ
Enterprise Value < $500mm

Q1 2023 Capital Markets Update | 12

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PRICING TRENDS

TRANSACTION VALUATIONS
REBOUND FROM Q4 LOW
Middle Market Average EBITDA Multiple
• The middle market has
20.0x
undoubtedly experienced
valuation compression, with the 18.0x
average purchase multiple falling
to 9.1x EV/EBITDA in Q1 2023 16.0x
compared to 10.0x EV/EBITDA in
14.0x
Q1 2022. However, valuations
have rebounded from the Enterprise Value/EBITDA 11.7x 11.9x 11.9x
12.0x 11.4x 11.3x 11.0x 10.9x 10.8x 10.7x
10.9x 10.8x 10.7x
substantial decline in Q4 2022 10.1x 9.9x 9.9x 10.0x
9.6x
(7.2x EV/EBITDA), indicating that 10.0x
8.7x
9.1x
M&A multiples may no longer be
8.0x
pricing in a drastic recession.
6.0x
• High-quality targets in resilient
industries including Industrial 4.0x

Technology, FinTech & Services, 2.0x

and TMT have continued to draw
healthy multiples. 0.0x
20062007 20082009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Q1 Q1
2022 2023
• Profitability, recurring revenue,
and customer stickiness
Dotted line indicates 2006 to 2022 average of 10.7x
continued to be key factors Source: Capital IQ and Capstone Partners
Includes multiples 3x-30x
scrutinized by buyers in Q1. Enterprise Value < $500mm

Q1 2023 Capital Markets Update | 13

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BREAKING IT DOWN BY SIZE

CORE MIDDLE MARKET EBITDA

MULTIPLES REMAIN STEADY
Average Enterprise Value to EBITDA Multiple
• Average EBITDA multiples in the Enterprise Value $10-100mm Enterprise Value $100-250mm Enterprise Value $250-500mm
core middle market ($100-$250
million) remained steady as 20.0x
acquirers have increasingly
18.0x
moved down market to mitigate
risk. The average core middle 16.0x
market EBITDA multiple reached 14.0x
10.9x in Q1 2023 compared to Enterprise Value/EBITDA
11.1x in Q1 2022. 12.0x

10.0x
• The average lower middle market
($10-$100 million) EBITDA 8.0x
multiple declined slightly YOY, 6.0x
falling to 9.5x from 10.0x, as
smaller assets have shown less 4.0x
valuation resilience. 2.0x

• The average upper middle 0.0x

2006200720082009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Q1 Q1
market ($250-$500 million) 2022 2023
EBITDA multiple sharply declined
to 7.4x in Q1 as select sponsors
have acquired distressed public Source: Capital IQ
Includes multiples 3x-30x
companies at a discount. Enterprise Value < $500mm

Q1 2023 Capital Markets Update | 14

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STRATEGIC ACQUIRERS

PRIVATE BUYER M&A VOLUME Acquisitions by Private Companies

HOLDS STRONG
Transactions (Disclosed Value) Transactions (Undisclosed Value) Average Value

12,000 $140
• Although the number of closed
$120
transactions by private 10,000

U.S Dollars in Millions

$100

Transactions
companies fell 5.9% YOY in Q1, 8,000
$80
volume rose 2.4% QoQ. The 6,000
$60
average transaction value fell to 4,000
$40
$62.8 million, however, average 2,000 $20

valuations have remained on 0 $0

2006 2007 20082009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Q1 Q1
pace with pre-pandemic levels. 2022 2023

• Closed transactions by public

companies recorded deeper Acquisitions by Public Companies
declines, falling 19.0% YOY in Q1.
Transactions (Disclosed Value) Transactions (Undisclosed Value) Average Value
The average deal value also fell
in Q1, declining 25.5% as public 3,500 $140
strategics have prioritized

U.S. Dollars in Millions

3,000 $120
Transactions

smaller deals. 2,500 $100

2,000 $80
1,500 $60
• Driven by volatile public equity 1,000 $40
markets, public strategic buyers 500 $20
have been increasingly unwilling 0 $0
2006 2007 20082009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Q1 Q1
to deploy capital to acquisitions, 2022 2023
focusing on internal operational
enhancements. Source: Capital IQ
Enterprise Value < $500mm

Q1 2023 Capital Markets Update | 15

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FOREIGN ACQUIRERS

STRONG U.S. DOLLAR DETERS

FOREIGN BUYER INTEREST
Non-U.S. Buyers
• In Q1, the volume of transactions
Transactions with Non-U.S. Buyers Percent of Non-U.S. Buyers
and the share of total deals
involving a foreign buyer fell 3,000 30.0%
21.6% and 0.9%, respectively,
compared to Q1 2022.
2,500 25.0%

• Near-term cross-border M&A is

Percentage of Total Transactions

likely to be impacted by Russia’s 2,000 20.0%
war on Ukraine, antitrust
Transactions

scrutiny, interest rate hikes, and

foreign relations. In addition, a 1,500 15.0%

strong U.S. dollar in Q1 reduced

the purchasing power of foreign 1,000 10.0%
buyers, making U.S. assets
more expensive.
500 5.0%

• As the U.S. dollar has weakened

in recent months, foreign buyers 0 0.0%
are expected to regain 20082009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Q1 Q1
2022 2023
purchasing power in the second
half of 2023, providing a
favorable outlook for cross- Source: Capital IQ
border M&A. Enterprise Value < $500mm
To ensure accuracy, data methodology has changed as of 2022 publication

Q1 2023 Capital Markets Update | 16

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PRIVATE EQUITY DRY POWDER

CAPITAL OVERHANG LEVELS

REMAIN ROBUST
PE Capital Overhang by Year
• Private equity firms remain armed
with vast reserves of dry powder,
which have exceeded $1.2 trillion.
U.S. Dry Powder Global Dry Powder
While capital overhang fell 16.2%
YOY in 2022, middle market $1,600

companies that complement

$1,400
sponsors’ investment theses have
continued to attract investment. U.S. Dollars in Billions
$1,200 $1,250.0

• Many sponsors have become $1,000

more selective in acquisition
$800
pursuits. However, the current $775.6
economic downturn will likely $600
present private equity firms with
ample opportunities to acquire $400
underperforming assets trading at
a discount. $200

$0
• The majority ($775.6 billion) of dry 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
powder is held in U.S.-domiciled
funds, providing a favorable
outlook for stateside private
equity deals through year end. Source: PitchBook

Q1 2023 Capital Markets Update | 17

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PRIVATE EQUITY ACTIVITY

PRIVATE EQUITY BUYOUTS Middle Market Transactions Closed by Private Equity Firms
SLOW IN Q1
8,000
7,000
• Closed transactions by private 6,000 5,364

Transactions
equity firms significantly 5,000
3,763
declined in Q1, falling 28.9% YOY. 4,000 3,071 3,124 3,055
3,000 2,463
Sponsor dealmaking slowed as 1,869 1,794 1,5922,015
2,131 2,218
2,000 1,500 1,408 1,325 1,544
higher borrowing rates impacted 750
1,044
742
1,000
transaction financing. 0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Q1 Q1
2022 2023
• Many sponsors have placed
heightened scrutiny on the cash
flow defensibility of potential
Middle Market Fundraising by Private Equity Firms
target companies and the
target’s ability to weather
Total Capital Raised Fund Count
recessionary headwinds.
$250 700
U.S. Dollars in Billions

• Private equity fundraising rose $200

600

Fund Count
500
22.4% YOY in Q1 to $61.1 billion in $150 400
capital raised. Elevated $100 300
fundraising was largely driven by $50
200
100
equity-heavy transaction
$0 0
financing structures, with 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Q1 Q1
sponsors raising funds to offset 2022 2023

higher debt costs.

Source: PitchBook
Enterprise Value; $25-$500mm, Fund size < $5B

Q1 2023 Capital Markets Update | 18

Internal Use
PRIVATE EQUITY TRANSACTION TYPES

PE FIRMS CREATE VALUE PE Platform Investments

THROUGH ADD-ON DEALS
3,000

Number of Transactions
• Platform investments declined 2,500 2,110
46.3% YOY in Q1 as GPs focused 2,000
1,534
1,707 1,609
1,473 1,515
1,432
1,300 1,356 1,449 1,381
on maintaining the financial and 1,500 1,290
1,142
1,015 1,068 1,070
operational health of their 1,000 678
existing holdings amid current 500
395
212
macroeconomic headwinds. 0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Q1 Q1
2022 2023
• Add-ons comprised a historic
79.7% of buyouts in Q1 as
sponsors increasingly pursued PE Add-On Acquisitions
complementary middle market
businesses to bolster their Add-on Platform Add-on % of buyout
portfolio holdings with effective 10,000 100%
Number of Transactions

operational synergies.

Percentage of Buyouts
8,000 80%

• Many sponsors turned to growth 6,000 60%

equity transactions, which often 4,000 40%

require far less debt usage than 2,000 20%
traditional buyouts. Notably,
0 0%
growth equity investments 2006 2007 20082009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Q1 Q1
accounted for 22.2% of PE deals 2022 2023

in Q1 2023, an uptick from 19.1%

in Q4 2022. Source: PitchBook
Includes all U.S. PE transactions

Q1 2023 Capital Markets Update | 19

Internal Use
CAPSTONE’S PRIVATE EQUITY NETWORK PREFERENCES

FOOD & BEVERAGE REMAINS

PE Sector Preferences
TOP PE SECTOR
750

Number of Active Sponsors

600
• Food & Beverage and Healthcare
Services remain the most 450

preferred sectors among 300

Capstone’s sponsor network,
followed by Industrial Services 150

& Distribution. 0
Food & Healthcare Industrial Professional Vertical Market Application Apparel,
• Healthcare subsectors have Beverage Services Services & Services - BS Software Software Footwear &
Distribution Accessories
been highly sought after by
private equity, comprising four
out of the top seven most PE Subsector Preferences
preferred spaces by Capstone’s 200
sponsor network.
Number of Active Sponsors

160
• Sports Technology has become
120
the most preferred subsector
among Capstone’s sponsor 80
network, passing Provider
Practice, as growing digital fan 40
engagement capabilities have
0
prompted sponsors to build Sports Provider Post Acute Value Added Behavioral Payors / Outsourced
platforms in the space. Technology Practice Care Distribution Health Managed Care Services

Source: Capstone proprietary data

Q1 2023 Capital Markets Update | 20

Internal Use
PRIVATE EQUITY ACTIVITY

EBITDA MULTIPLES PAID BY Private Equity Exit Activity

SPONSORS RISE IN Q1
800

• Private equity exit activity in Q1 578

600

Transactions
fell to its lowest level since Q2 422 390 417 407
2020 as poor equity market 400 306 287
329 307 311
243
performance discouraged 154 169
200
widespread public listings. Exits
may remain lower over the next 0
few quarters if economic Q1 '20 Q2 '20 Q3 '20 Q4 '20 Q1 '21 Q2 '21 Q3 '21 Q4 '21 Q1 '22 Q2' 22 Q3' 22 Q4' 22 Q1 '23
headwinds persist.

• EBITDA multiples paid by

sponsors in Q1 have remained
Average EBITDA Multiple Paid By Financial Buyers
robust, averaging 8.0x
EV/EBITDA. Despite an elevated 14.0x
Enterprise Value/EBITDA

interest rate environment, 12.0x

private equity firms have paid 10.0x
7.4x 7.5x 7.5x 8.0x
8.0x 6.7x 6.7x 7.2x 7.2x 7.1x 7.0x
premiums for quality targets. 6.3x 6.5x 6.4x
6.0x
4.0x
• Sponsors have been starved for
2.0x
acquisition targets, presenting
0.0x
an opportunity for middle 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Q1 2022Q1 2023
market businesses engaging in
sell-side M&A. Note: Exit activity inclusive of all enterprise value ranges
Source: PitchBook and GF Data®
Includes multiples 3x-15x; Enterprise Value $10mm-$250mm

Q1 2023 Capital Markets Update | 21

Internal Use
PRIVATE EQUITY VALUATIONS

INCREASED EMPHASIS PLACED Average Valuations by Buyer Type

ON FINANCIAL PERFORMANCE
PE Group Family Office Mezz/Junior Capital
16.0x

Enterprise Value/EBITDA
14.0x
• Larger transactions continued to 12.0x
11.4x
9.9x 9.9x
command elevated valuations in 10.0x 8.5x
9.6x 9.1x 9.1x 9.2x
Q1. Mezzanine/junior capital 8.0x 6.4x 6.5x 6.3x
7.4x
6.6x 6.8x 6.9x
providers seemingly moved up 6.0x
market, paying an average of 4.0x
11.4x EV/EBITDA for businesses in 2.0x
the $250-$500 million range, 0.0x
above the average multiple paid $10-25mm $25-50mm $50-100mm $100-250mm $250-500mm

by sponsors and family offices.

Key Transaction Valuation Drivers
• Buyout targets with above
average financials garnered PEG/Corp. Seller Above Average Financials Post-Closing Mgt.
16.0x
premium valuations in Q1,
Enterprise Value/EBITDA

14.0x
generating an elevated average 12.0x 10.2x 9.9x 10.4x
EBITDA multiple across all 10.0x 8.6x 8.4x 9.0x 9.5x 9.2x
7.6x 7.1x 7.8x
enterprise value ranges. 8.0x 6.6x 6.4x 6.2x
5.6x
6.0x
• Above average financials and a 4.0x
2.0x
strong management team have
0.0x
remained key determinants of $10-25mm $25-50mm $50-100mm $100-250mm $250-500mm
pricing, which has been most
Source: GF Data®
evident in the $25-$50 million GF Data® defines Above Average Financial Performers as businesses with TTM EBITDA margins and revenue
enterprise value range. growth above 10%, or one above 12% and the other metric at least 8%
Includes multiples 3x-15x; Enterprise Value $10mm-$500mm

Q1 2023 Capital Markets Update | 22

Internal Use
PRIVATE EQUITY VALUATIONS

AVERAGE DEBT MULTIPLES Average Debt Multiples of Middle Market LBO Transactions
REMAIN ELEVATED IN Q1 8.0x
7.0x

The average debt multiple 6.0x

Total Debt/EBITDA
•
remained healthy at 3.9x in Q1. 5.0x
4.0x 4.1x 3.9x 4.0x 3.9x 3.9x 3.9x
3.7x 3.8x 3.8x 3.7x
However, the average senior 4.0x 3.5x 3.4x

debt multiple for sponsor 3.0x

platform deals has declined in Q1 2.0x
2023, dropping to 2.4x from 2.6x 1.0x
in Q1 2022, indicating an 0.0x
increasingly difficult lending 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Q1 2022Q1 2023

environment for larger deals.

Average Middle Market LBO Equity Contribution
• Lenders, particularly commercial
banks, have increased senior 80%
debt pricing in Q1, further 70%
contributing to lower debt
Equity Contribution

60% 53.6%
49.8% 49.7% 50.0% 48.1%
utilization in private equity 46.6% 45.6% 42.8% 44.8% 44.9% 46.7% 48.9% 48.1%
50%
platform transactions. 40%
30%
• The lower levels of debt 20%
utilization in transactions has 10%
encouraged buyers to increase 0%
their equity contributions. In Q1, 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Q1 2022Q1 2023
the average equity commitment
reached a record high of 53.6%. Source: GF Data®
Includes multiples 3x-15x; Enterprise Value $10mm-$250mm

Q1 2023 Capital Markets Update | 23

Internal Use
CAPSTONE BAROMETERS
CAPSTONE PARTNERS’ FULLY INTEGRATED EXPERTISE

We have developed a service delivery model that can address the needs of any client situation, supported by vast internal resources.
These capabilities are delivered together with deep domain expertise across 12 dedicated industry groups with an established, real-
time access to the private equity community.

Mergers & Capital Financial Special Situations & ESOP

Acquisitions Advisory Advisory Restructuring Advisory

• Sell-side Advisory • Equity Advisory • Transaction Advisory • Special Situations

• Buy-side Advisory
• Recapitalizations
• Mergers & Joint Ventures
• Debt Advisory
• Infrastructure Finance
• Interim Management
• Performance Improvement
• Valuation Advisory
• Litigation Support
• Preliminary Analysis
• Turnaround
• Feasibility Study
• Restructuring
• ESOP Implementation
• Bankruptcy
• Liability Study
• Insolvency
• IRC § 1042 Design

Industry Groups

Aerospace, Defense, Building Products &

Business Services Consumer
Government & Security Construction Services

Education & Energy, Power, &

FinTech & Services Healthcare
Training Infrastructure

Industrial Technology, Transportation

Industrials
Technology Media, & Telecom & Logistics

Sponsor Coverage Group

Q1 2023 Capital Markets Update | 25

Internal Use
FIRM DATA

MIDDLE MARKET ACTIVITY Capstone Engagements By Service

PERSISTS AMID HEADWINDS
Sell-side M&A Financial Advisory Services Equity Capital Raise
Debt Capital Raise Buy-side M&A

• While middle market dealmaking

Engagements by Service
has been challenged by
economic headwinds, the
backlog of transaction inventory
has remained robust. Increased
visibility in near term market
conditions may provide
momentum for dealmaking
towards the end of the year.
Q1 2021 Q1 2022 Q1 2023
• Financial buyers have accounted
for 67.6% of trailing twelve-
month transactions (TTM), with Capstone TTM Buyer Breakdown
platform deals comprising 41.2%.
14.7% Strategic
• Strategic buyers have remained 26.5%
Public
active in the middle market, Private
17.6%
accounting for 32.4% of TTM Financial
transactions. Private buyers have Platform
completed 17.6% of transactions, Add-on

slightly outpacing public buyers 41.2%

at 14.7%.
Source: Capstone proprietary data based on live engagements and closed sell-side engagements

Q1 2023 Capital Markets Update | 26

Internal Use
RECENT DEAL CLOSINGS

Capstone is an active leader in middle market M&A advisory, serving many clients and their needs, despite the unprecedented
disruptions to the economy. Select our recent tombstones below to read the full press release.

HAS ACQUIRED HAS BEEN ACQUIRED BY HAS BEEN RECAPITALIZED BY HAS BEEN ACQUIRED BY HAS BEEN ACQUIRED BY HAS BEEN ACQUIRED BY
ENGAGED
CAPSTONE PARTNERS
DURING A CHAPTER 11 a portfoliocompany of
a portfolio company of
REORGANIZATION

a portfolio company of

HAS RAISED 20 MM
HAS BEEN ACQUIRED BY HAS BEEN ACQUIRED BY HAS BEEN ACQUIRED BY HAS BEEN ACQUIRED BY HAS BEEN ACQUIRED BY HAS BEEN ACQUIRED BY
IN EQUITY FROM

AN EMPLOYEE STOCK
and executed
OWNERSHIP PLAN (ESOP)
facility sale &
leaseback with

a portfolio company of
HAS BEEN ACQUIRED BY HAS BEEN ACQUIRED BY HAS BEEN RECAPITALIZED BY HAS BEEN ACQUIRED BY CRO AND FINANCIAL HAS BEEN ACQUIRED BY
ADVISORY SERVICES
AN UNDISCLOSED
HAS RECEIVED
A portfolio company of PRIVATE EQUITY a portfolio company of
DEBT FINANCING
SPONSOR

Q1 2023 Capital Markets Update | 27

Internal Use
LEADERSHIP TEAM

JOHN FERRARA, FOUNDER AND PRESIDENT

jferrara@capstonepartners.com | 617-619-3325
John has dedicated 30+ years to serving as a trusted advisor to privately held businesses. Representative of over 200 engagements, he has
acted as investment banker, management consultant, interim executive, investor, founder and board member. John has been recognized as one of
the Top 50 M&A advisors in the U.S. and honored as an M&A Advisor Hall of Fame inductee. Under his leadership, Capstone has expanded to 19
offices in the U.S., U.K., and Brazil with an international platform that spans over 450 professionals in 40 countries worldwide. John graduated from
Wesleyan University with an MBA from UCLA and The London School of Economics.
OLIVIA FERRIS, COO
oferris@capstonepartners.com | 303-962-5772
Olivia Ferris has over 10 years of investment banking experience with Capstone Partners and currently serves as Chief Operating Officer on the
firm’s executive team. In this role, Olivia is responsible for overall firm strategy, corporate development, partnerships, strategic initiatives, and
investments. She is central to communicating, executing, and sustaining Capstone’s priorities and translating them into a comprehensive strategic
plan. Olivia earned a BSBA in Finance from Daniels College of Business, University of Denver.

PAUL JANSON, HEAD OF INVESTMENT BANKING

pjanson@capstonepartners.com | 303-887-0174
With 25 years of executive experience, Paul manages all investment banking operations for the firm. On the M&A Advisory side, he is active in
telecommunications services, manufacturing and infrastructure. Previously, Paul served as President & CEO of Camiant, a Packet Cable Multimedia
broadband company. Paul was also CEO of Worldbridge Broadband Services Inc, a broadband and telecommunications company that was later
acquired by C-Cor. Paul then became President of C-Cor’s Global Services Division. He earned a BA in Business from Saint Anselm College.

PETER ASIAF, HEAD OF BUSINESS DEVELOPMENT

pasiaf@capstonepartners.com | 617-619-3368
Peter has more than 20 years of experience as a senior business development executive across the professional and financial services industries.
He has been a growth-oriented leader in early-stage, middle-market and Fortune 500 enterprises, helping them to design and execute strategic
expansion plans, optimize brand positioning and strengthen key market relationships. Peter is a Certified Exit Planning Advisor (CEPA) designated
by the Exit Planning Institute

BRENDAN BURKE, HEAD OF SPONSOR COVERAGE

bburke@capstonepartners.com | 303-531-4603
Brendan has 16 years in investment banking experience. He oversees the firm’s outreach to private equity sponsors and recruitment of senior
investment bankers. Since joining Headwaters MB (now Capstone) in 2004, he has held roles in transaction execution, business development,
recruiting and marketing. In 2012, he was awarded 40 UNDER 40 by the M&A Advisor. He received a BA in Politics, Philosophy, Economics from
Pomona College.

Q1 2023 Capital Markets Update | 28

Internal Use
LEADERSHIP TEAM (CONTINUED)

DANIEL MCBROOM, HEAD OF PRIVATE CAPITAL MARKETS

dmcbroom@capstonepartners.com | 303-951-7128
Daniel has 15 years of private and investment banking experience and is responsible for sourcing and analyzing hundreds of companies a year
introduced by the firm’s institutional clients and partners. Select companies are engaged and his team will stay involved until the transaction is
closed. Before his financial career, Daniel spent seven years as a pilot in the United States Air Force. He earned an MBA from the University of
Notre Dame and a BS from the United States Air Force Academy.

SARAH DOHERTY, DIRECTOR OF MARKET INTELLIGENCE

sdoherty@capstonepartners.com | 617-619-3310
Sarah has more than 10 years of professional research, writing, and data visualization experience and leads the strategic coverage and
development of Capstone’s middle market insights. She manages the firm’s Market Intelligence Team, which produces 150+ reports, articles, white
papers, surveys, and capital markets updates each year. Her team’s award-winning M&A commentary and analysis has been featured in more than
50 of the nation’s top news outlets. Sarah earned a BA from Biola University and was recognized in 2021 with the “Emerging Leader Award” by the
M&A Advisor.
BRIAN DAVIES, MANAGING PARTNER, FINANCIAL ADVISORY SERVICES GROUP
bdavies@capstonepartners.com | 617-619-3328
Brian has 20+ years of experience working in the fields of corporate recovery, business reorganization and interim management services. He has
provided financial advisory services to lenders, debtors, creditors’ committees, trustees and equity holders in bankruptcy matters and out-of-
court restructurings. Brian has provided assistance to under-performing businesses, acquirers of distressed companies. He has worked with
companies to develop cost containment and asset rationalization plans, improve liquidity, re-engineer financial and other back-office functions.
He received a MS from Bentley University and MSF from The McCallum School, Bentley University.

JIM CALANDRA, HEAD OF FINANCIAL ADVISORY SERVICES GROUP

jcalandra@capstonepartners.com | 617-619-3395
Jim has more than 25 years of experience in turnaround management consulting, interim management, fraud and forensic accounting, mergers and
acquisitions, and recapitalizations. He has advised more than 50 companies through significant strategic transitions involving both public and
private middle market companies with varying situations. Jim received a BS in Accountancy from Bentley University and an MS in Accountancy
from The McCallum Graduate School of Business, Bentley University.

Q1 2023 Capital Markets Update | 29

Internal Use
Capstone Partners, a subsidiary of Huntington Bancshares Incorporated Market Intelligence Team Report Contributors
(NASDAQ:HBAN), has been a trusted advisor to leading middle market
companies for over 20 years, offering a fully integrated range of investment Sarah Doherty, Director of Market Intelligence
banking and financial advisory services uniquely tailored to help owners,
sdoherty@capstonepartners.com | 617-619-3310
investors, and creditors through each stage of the company's lifecycle.
Capstone's services include M&A advisory, debt and equity placement,
corporate restructuring, special situations, valuation and fairness opinions, Connor McLeod, Vice President of Market Intelligence
and financial advisory services. Headquartered in Boston, the firm has 175+ cmcleod@capstonepartners.com | 617-619-3319
professionals in multiple offices across the U.S. With 12 dedicated industry
groups, Capstone delivers sector-specific expertise through large, cross- Max Morrissey, Market Intelligence Manager
functional teams. For more information, visit www.capstonepartners.com. mmorrissey@capstonepartners.com | 617-619-3336

Joseph Collins, Market Intelligence Analyst

jcollins@capstonepartners.com | 617-619-3344
Sign Up for Industry Insights
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pkulesh@capstonepartners.com | 203-962-3040
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Internal Use