BoyarMiller Forum: The Current State of the Capital Markets 2016
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Transcript of BoyarMiller Forum: The Current State of the Capital Markets 2016
The Current State of the
Capital Markets
Today and Tomorrow
September 2016
September 26th, 2016
S&P 500 Index at Infliction Points
Copyright 2016 Kanaly Trust All rights reserved.
Source: Compustat, FactSet, Standard & Poor’s, J.P. Morgan Asset Mgmt.
International Equity Earnings and Valuations
Copyright 2016 Kanaly Trust All rights reserved.
Source: Compustat, FactSet, MSCI, Standard & Poor’s , J.P. Morgan
Cumulative Net Flows into Equity vs. Bond Mutual Funds
Copyright 2016 Kanaly Trust All rights reserved.
Source: Strategas Research
01/01/08 through 07/31/16
Cumulative Net Flows into Equity vs. Bond Mutual Funds & ETFs
Copyright 2016 Kanaly Trust All rights reserved.
Source: Strategas Research
$BN, 01/01/08 through 07/31/16
Nonfinancial Corporate Business:
Copyright 2016 Kanaly Trust All rights reserved.
Source: Strategas Research
Corporate Equities Net Issuance ($Bil)
Year 2004-2016
Copyright 2016 Kanaly Trust All rights reserved.
Source: FactSet | WSJ.com
Copyright 2016 Kanaly Trust All rights reserved.
Rolling the Dice Investors grappling with lower interest rates have to take bigger risks if they want to equal returns of two decades ago.
Estimates of what investors needed to earn 7.5%
Bonds
U.S. Large Cap
U.S. Small Cap
Non-U.S. Equity
Real Estate
Private Equity
*Likely amount by which returns could vary
Source: Callan Associates The Wall Street Journal.
10
THE CURRENT STATE OF THE CAPITAL MARKETS
MIDDLE MARKET M&A + PRIVATE EQUITY UPDATE
CLIFF ATHERTON | MANAGING DIRECTOR | SEPTEMBER 2016
11
Source: Thompson Reuters
“The Worst Quarter Since 2009” - Mergers and Acquisitions, June 2016
MIDDLE MARKET M&A DEAL FLOW – JANUARY THROUGH JUNE
266 212
93 144 161 124 156 175 191 129
199 176
68
108 110 99
108 121 156
119
206
138
75
113 126 113
113 134
148
116
220
181
76
123 155
138 140
163
168
119
189
133
66
107
151
137 112
127 111
103
223
164
84
146
153
154 94
174 171
70
0
200
400
600
800
1,000
1,200
1,400
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Jun
May
Apr
Mar
Feb
Jan
1,303
1,004
462
741
856
765 723
894 945
656
Q2 2009: 226 Deals
Q2 2016: 292 Deals
12
Middle Market Deal Parameters Have Been Relatively Stable
TEV/EBITDA
Source: GF Data M&A Report; Transactions from $10 Million to $250 Million
5.6x 5.8x
6.0x
5.6x
5.9x 6.0x
7.3x 7.4x 7.5x
7.8x
9.0x
8.3x
6.5x 6.6x
6.8x 6.7x
7.5x
7.2x
4.5x
5.0x
5.5x
6.0x
6.5x
7.0x
7.5x
8.0x
8.5x
9.0x
9.5x
2003-2011 2012 2013 2014 2015 YTD 2016
$10-25 MM $100-250 MM Avg $10-250 MM
SIZE PREMIUM PERSISTS – SOME COMPRESSION IN 2016 UP A FULL TURN – SENIOR LENDERS HAVE LED THE WAY
DEBT/EBITDA MULTIPLES
2.1x 2.4x 2.4x 2.6x 2.7x
3.0x 3.0x
0.9x
1.0x 1.1x 0.8x 1.0x
0.9x 0.9x
0.0x
0.5x
1.0x
1.5x
2.0x
2.5x
3.0x
3.5x
4.0x
4.5x
2010 2011 2012 2013 2014 2015 2016 YTD
Senior Debt / EBITDA Sub Debt / EBITDA
Multiple Multiple
3.0x
3.4x 3.5x 3.4x
3.7x 3.9x 3.9x
13
$139
$226
$178
$0
$100
$200
$300
$400
$500
$600
2007 2008 2009 2010 2011 2012 2013 2014 2015
Cu
mu
lati
ve D
ry P
ow
de
r
Cumulative Dry Powder Under $1B $1B-$5B $5B+
Fund Size
Private Equity Buyers Have Significant Capital to Deploy
Source: PitchBook
DRY POWDER BY FUND SIZE DRY POWDER BY YEAR FUNDS WERE RAISED
Total Dry Powder
$543MM
$33
$73
$34
$0
$20
$40
$60
$80
$100
$120
$140
$160
2008 2009 2010 2011 2012 2013 2014 2015
Dry
Po
wd
er
by
Vin
tage
Ye
ar
Under $1B $1B-$5B $5B+
Fund Size
24.3%
51.9%
23.8%
32.6%
41.7%
25.7%
($ in millions)
14
Historical Overview – Oil Prices and Treasury Yields
CRUDE OIL WTI ($/BBL) AND 10-YEAR TREASURY YIELDS – SEPTEMBER 1980 TO TODAY
0%
2%
4%
6%
8%
10%
12%
14%
16%
$0
$20
$40
$60
$80
$100
$120
$140
Crude Oil Price 10-Yr. Treasury Yield
Source: FactSet
Oil Price Treasury Yield
15
Federal Reserve Notes
$1,424,422 32%
Deposits $2,382,028
54%
Other Liabilities $327,370
7%
Capital $325,574
7%
The Fed: We’re Not in Kansas Anymore…
Source: Federal Reserve Banks and the U.S. Department of the Treasury
$-
$0.5
$1.0
$1.5
$2.0
$2.5
$3.0
Trill
ion
s
Federal Reserve Notes
$795,563 87%
Deposits $33,417
4%
Other Liabilities $49,183
5%
Total Capital $40,383
4%
EXCESS RESERVES OF DEPOSITORY INSTITUTIONS JULY 2008 – “KANSAS”
SEPTEMBER 2016 – “OZ”
$0.0 $1.0 $2.0 $3.0 $4.0 $5.0
Jul-08
Total Assets
($ in millions)
$918,546
$0.0 $1.0 $2.0 $3.0 $4.0 $5.0
Sep-16
Total Assets
$4,459,394
16
What will stop the music?
Credit Markets
What could spook them?
Inflation?
Drop in oil price (deflation)?
Macroprudential Policy?
Presented to the September 2014
Boyar Miller Breakfast Panel
$2.00
$3.00
$4.00
$5.00
$6.00
$7.00
$85
$90
$95
$100
$105
$110Prices During 2014
Crude Oil Price Natural Gas Price
17
$ in billions $ in billions
Destruction of Value in the Energy Sector
INDEPENDENT E&P1
Source: FactSet
OILFIELD SERVICES2
1 Includes Anadarko, Antero, Apache, Cabot, Canadian Natural Resources, Chesapeake, ConocoPhillips, Consol, Continental Resources, Devon, EnCana, EOG, Hess, Linn Energy, Marathon, Noble, Occidental Petroleum, Range Resources and Southwestern Energy
2 Includes Baker Hughes, Basic Energy, Cameron, DXP, Emerge, Exterran, FMC, Forum Energy, Halliburton, Key Energy, National Oilwell Varco, Newpark Resources, Oceaneering, Oil States, RPC, Schlumberger, Seventy Seven, Superior, Tidewater and Weatherford
11%
29% 31%
34%
51% 53%
51%
43% 41%
0%
10%
20%
30%
40%
50%
60%
70%
80%
$–
$100
$200
$300
$400
$500
$600
$700
$800
11%
32% 35% 34%
47% 48%
47%
43% 45%
0%
10%
20%
30%
40%
50%
60%
70%
80%
$–
$50
$100
$150
$200
$250
$300
$350
$400
John Sarvadi – Houston Market President
Middle Market Senior Debt Themes
September 29th, 2016
$21 billion Texas-based commercial and private client bank … but 50% of loans originated outside of Texas
One of the fastest organically grown financial institutions in U.S. history
Middle market focused lender with core competency in leveraged finance
Approximate market capitalization of $2.5 billion
19
Texas Capital Bank Overview
Dallas Fort Worth
San Antonio
Austin
Houston
“I remember when my mortgage was 10%...”
20
Interest rates remain low, debt is cheap, and investors are chasing yield …
The Fed last raised funds rate in December ‘15 for the first time in nearly a decade .
- Fed seems divided among
hawks/doves, but signaling for a post-election increase.
But absent dramatic change in the global economy, are we in a “low for long” environment?
4.8% 10yr UST AVG
Takeaway
Macro Environment US Rate Comparison
Borrowers … take advantage of market conditions
New debt capital from BDCs & private credit funds flooding credit markets
Bank margins depressed … pushing for ancillary business to improve bottom line
Impact On the Middle Market
21
Leverage multiples at near historic highs Abundant non-bank capital available for financing replacing bank debt … How long will it last?
‒ Unitranche structures becoming
more common
‒ BDC market capitalization at all time high of +$30 billion
Middle Market LBO multiples up from ‘12-’14 but have fallen through 2Q’16 …
- Decrease driven by economic
uncertainty? the election? Or…..
Effects Transaction Trends
“It may not feel like it, but the “recovery” is long in the tooth.”
22
+7yrs…
Source: WSJ Data as of July 29, 2016
5.2yr AVG
Takeaway What are the chances of continued expansion vs. possible contraction or recession?
Credit cycle peaking?
Despite lower growth than past recoveries (2.1%), the current expansion is much longer than previous business cycles Globally, monetary options seemingly exhausted
Lingering concern over China and Europe However, US unemployment lower and inflation stable … rate hike imminent?
US Economy Length of Expansions Since 1949
“I’m from Washington and I’m here to help.”
23
Takeaway
Bank regulatory oversight has dampened risk appetite for levered transactions
‒ OCC guidance of 3x senior
and 4x total leverage
Likely eventual significant regulatory infiltration into non-bank sources of capital
Regulatory Environment
Ultimately, greater regulation and cost in the system could lesson availability of credit during future cycles.
Advice to Debt Market Participants
24
1) Raise capital opportunistically, when you can, not when you need it.
- Extend maturities , reprice, amend covenants, even when you don’t need to.
2) Watch capital flows.
- Pay attention to what happens in public debt and equity markets … influences the middle market.
3) Keep relevant financing information updated/fresh.
- Bankers who know you/your story are your friend when the credit pendulum starts to swing.
4) Take capital providers up on their offers for lunch.
- Maintain your relationships, even when no transaction is imminent.