Private Markets

Bank and Finance Company Senior Debt

• The fourth quarter of 2010 experienced the highest level of middle market issuance on record and the second highest middle market sponsored loan issuance on record. LBO sponsored middle market loan issuance in the fourth quarter of 2010 exceeded issuance for all of 2009.
• Middle market lenders, particularly for borrowers with over $15.0 million of EBITDA, are exhibiting significantly greater appetite producing tighter spreads and continued relaxation of credit metrics after stalling out in mid-July 2010.

Traditional Private Placements

• Volume for all of 2010 rose over 51.5% year-over-year versus 2009.Spreads modestly tightened and volume continued to rise over the prior quarters. Expectations are for stronger issuance in 2011 over the significant increase in 2010 versus 2009.

Mezzanine

• Mezzanine shops raised more than twice the amount of funds in 2010 versus 2009. The new funds coupled with significant levels of dry powder and an improving economy should drive firms to deploy their significant caches of funds in 2011.

Private Equity

• Private equity deal flow in 2010 picked up significantly versus 2009 levels; however, fundraising continued to be difficult.

Economic Overview

• In the fourth quarter of 2010, GDP increased 3.2%, up from 2.6% in the third quarter of 2010. Growth for all of 2010 came in at 2.9%, the largest gain since 2005, and reversed the 2.6% contraction experienced in 2009. The increase was mostly attributed to consumer spending, which expanded by 4.4%, the fastest pace since 2006. Economists believe GDP must continue to grow above 3.0% before the unemployment rate can come down.
• The Federal Reserve has continued to target a Fed Funds rate of 0.00% to 0.25% despite rising treasury rates as well as rising foreign rates, namely China. The Federal Reserve again reiterated that interest rates would remain at current levels “for an extended period of time.” Inflation is expected to remain at low, stable levels and a recovery in employment is expected to be slow and drawn out.
• The inflation rate was 1.5% for the twelve months ended December 2010 versus 2.7% for the same time period of 2009. Unemployment came in at 9.4% in December 2010, down from 9.9% in December 2009.

Public Markets

Investment Grade / High Yield Bonds

• Investment grade volume for the fourth quarter of 2010 rose 1.3% versus fourth quarter 2009 volume. The number of issues in the fourth quarter of 2010 rose 8.4% versus fourth quarter 2009 issuance.
• High yield volume for the fourth quarter of 2010 rose 77.0% versus fourth quarter 2009 volume. Issues for the fourth quarter of 2010 rose 61.7% versus fourth quarter 2009 issuance.

Convertible Debt

• Convertible debt issuance fell slightly in the fourth quarter of 2010 to $10.2 billion versus $13.0 billion in the fourth quarter of 2009.

Equity Markets

• Major equity indices experienced double-digit gains for a second consecutive year. IPOs continued to show a recovery albeit still below pre-recession levels.
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Private Markets

Bank and Finance Company Senior Debt Market

• Middle market loan issuance for the fourth quarter of 2010 registered a record $58.0 billion, which eclipsed the previous record of $57.0 billion issued during the second quarter of 2007. Loan issuance for all of 2010 came in at $150.0 billion versus $71.8 billion in 2009, an increase of 108.9%. Over 90.0% of respondents to the Thomson Reuters LPC Quarterly Middle Market Survey have raised middle market lending budgets and in some cases believe deal flow will fall short of their demand.
• Middle market sponsored loan issuance for the fourth quarter of 2010 equaled $21.9 billion, the second highest quarterly figure on record to the $24.7 billion raised during the second quarter of 2007. Total issuance for 2010 reached $52.7 billion versus a dismal $13.5 billion in 2009, an increase of 290.4%.
• LBO issuance reached $6.5 billion in the fourth quarter of 2010 and $17.2 billion for all of 2010 versus $3.4 billion for all of 2009, an increase of 405.9%.
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• Traditional Private Placement MarketVolume in December 2010 was approximately $2.4 billion compared to November 2010 which was $5.3 billion. Volume for all of 2010 came in at $44.4 billion, up 51.5% from the 2009 total of $29.3 billion.
• In 2010, continued low interest rates, stable to slightly tighter credit spreads, and more robust investor appetite combined to drive a significant increase in transactions and issue volume. For 2011, these trends are expected to continue.Mezzanine MarketAccording to Thomson Buyouts, mezzanine fundraising improved dramatically in 2010 versus 2009 with $7.4 billion raised in 2010 versus $3.4 billion in 2009, an increase of 117.6%. Investor sentiment, although disciplined from a credit risk perspective, has broadened and strengthened. As a result, competition among investors for deals has intensified producing downward pressure on return targets. However, credit metrics and covenant levels remain stable leaving pricing as the key differentiating factor among investors.Targeted returns for mezzanine structures tightened and competition among investors has increased although credit metrics remained fairly stable in the second half of 2010 versus the first half of 2010. For issuers with over $15.0 million of EBITDA, total debt-to-EBITDA ranges increased to 4.0x to 5.0x. For issuers with less than $10.0 million of EBITDA, levels of 3.0x to 3.5x were more common with a clustering at the low end of the range.

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• Private Equity Market  According to PitchBook News, 1,498 private equity transactions totaling approximately $132.0 billion closed in 2010 topping the 1,349 transactions totaling approximately $61.0 billion in 2009, an increase of 11.0% and 116.4%, respectively. Private equity firms deployed the bulk of their funds to companies that showed strong year-over-year performance. In 2011, we expect private equity deal flow to improve due to the improvement in the financial markets, strengthening company performance, and improving valuations. In addition, private equity firms have owned nearly 6,000 companies for longer than five years and need to begin to show realized returns for their LPs.
• Fundraising continued to be difficult with 95 funds closed for a total of $84.0 billion in 2010 versus 115 funds closed in 2009 for a total of $148.0 billion, a decrease of 17.4% and 43.2%, respectively. Several factors contributed to the slowdown in fundraising, including the $485.0 billion private equity overhang, LPs being at the top of their allocations, and LPs looking for liquidity on current investments before pursuing new funds. That said, the one shining spot for fundraising was the middle market, capturing over 90.0% of total funds raised in 2010. In 2011, fundraising is expected to be stronger versus 2010 with over 660 firms looking to raise new funds, improvement in the overall market driving increased valuations of current investments and thus easier exits, as well as two years of depressed fundraising leading LPs to deploy their caches of dry powder.
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• Public Markets  Investment Grade / High Yield Bond MarketAccording to Thomson Reuters, investment grade volume rose 2.3% to $728.3 billion in 2010, up from $711.7 billion in 2009. The number of issues increased 19.5% to 3,163 in 2010, up from 2,646 issues in 2009. The increase was fueled primarily by alltime record low spreads.High yield debt issuance in 2010 increased considerably, 76.8%, versus 2009, to an all-time record of $259.0 billion. The number of issues also improved dramatically, 66.4%, from the levels experienced in 2009 as investors began to show increased appetite for risk and demand for higher returns.
• Equity Markets  Major equity indices rallied during 2010, the Dow Jones rose 11.0%, the S&P 500 rose 12.8%, and the NASDAQ Composite rose 16.9%. Many companies showed improved year-over-year earnings as well as more favorable margins as a result of cost-cutting measures taken during the recession, both of which contributed to appreciation in stock prices.The IPO market increased dramatically year-over-year from 80 in 2009 to 194 in 2010, or an increase of 142.5%. We expect continued strength for the IPO market in 2011 as companies seek to raise capital and private equity firms seek to realize their investments.
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