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Q3 2016 Middle Market Equity Capital Report Pockets of Strength and Reasons for Optimism

A CohnReznick LLP Report

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Middle Market Equity Capital Report ― Q3 2016


“We’re seeing more small IPOs, which clearly signifies that IPO markets are shifting, but we’re still missing the larger IPOs that drive activity and volume.” Many of the same market conditions from Q2 continued in Q3 and transaction activity reacted in much the same way. There is still plenty of private capital available in the market, public investors are more selective in pursuing new opportunities, the stock markets have stabilized and seem to have adjusted to current market conditions, and uncertainty surrounds the results of the U.S. presidential election. Once we move beyond the high level Q3 data indicating that both IPOs and proceeds raised were down year to year, several data points suggest pockets of strength and optimism. Yes, IPO activity was down in Q3, but the decrease was far less severe than in Q1 and Q2. It’s too early to suggest a complete comeback in IPO activity, but an 11% decrease is far better than a 78% or 46% decline.

We are encouraged to see improvement in the proportion of small (proceeds under $50M) IPOs and middle market (operating companies with market values between $10M and $2B) IPOs as both help fuel the growth of the U.S. economy. Technology sector IPOs, stagnant for the past several quarters, improved in Q3 offering hope to emerging technology companies and their investors, who at one point depended on the IPO to provide much needed growth capital. We hope you find the contents of our report to be insightful as you navigate the opportunities and challenges that lie ahead.

CPA, Partner, CohnReznick’s National Liquidity and Capital Formation Advisory Group Leader Alex Castelli

Thinking of Raising Capital? Q3 2016 Transaction Data IPO activity was down, but improved in comparison to Q1 and Q2. As the proportion of small IPOs has increased, proceeds raised has decreased. IPOs

Middle market IPO activity improved in Q3.

% CHANG

Proceeds % CHANGE

($ billions)

-11%

-30%

40 All IPOs

2

40 45

6.8 9.7

2016

2016

2015

2015

Middle Market Equity Capital Report ― Q3 2016

60%

73%

% CHANGE

29

45

MM IPOs

All IPOs

2016

27 MM IPOs

2015

+22%


Follow-on transactions gained traction in Q3 increasing in both the number of deals completed and the amount of proceeds raised. Investors may be more comfortable with the additional transparency offered by companies that have been public longer.

While overall IPO activity decreased year over year, we saw an increased number of small IPOs in Q3.

Q3 - 2016

% CHANGE

Number of Deals

+225% 9

4

2016

2015

Proceeds

Proceeds

40

36

1,693,000,000

36

1,517,000,000

46

6,034,000,000

45

6,485,000,000

148

$ 8,514,000,000

121

$ 8,328,000,000

66

Micro Cap Small Cap

$

Number of Deals

787,000,000

Nano Cap

TOTAL

Q3 - 2015

$

326,000,000

Nano Cap, market cap of $10m to $99m Micro Cap, market cap of $100m to $499m Small Cap, market cap of $500m to $2b

A higher percentage of IPOs priced within their range in Q3.

Q3 - 2016

Q3 - 2015

Above

4

14%

7

26%

Within

20

69%

16

59%

Below

5

17%

4

15%

TOTAL

29

27

Technology sector IPOs accelerated in Q3. Healthcare and Life Sciences sector IPOs continue to attract investor attention.

Q3 - 2016

Q3 - 2015 Technology

Other 11%

Retail Energy and Utilities Real Estate Financial Services

Technology

Other 11%

12%

Retail

7%

11%

31%

3% 3%

Energy and Utilities

10% 14%

Healthcare ex. Life Sciences

7%

Real 4% Estate

21%

Life Sciences

Financial Services

37% 11% 7%

Healthcare ex. Life Sciences

Healthcare and life sciences IPOs have been especially attractive given the limited pool of money directed to public offerings. Moving forward, the technology sector may take a bigger share.

Life Sciences

A CohnReznick Report

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Private equity deals and capital invested both decreased in Q3. The highest proportion of investments were made in industry sectors such as commercial services, clinics and outpatient services, building and property, and media and information services. Deals

Proceeds % CHANGE

($ billions)

% CHANGE

-32%

-44%

627 921

18

32

2016

2016

2015

2015

Venture capital deals and capital invested decreased in Q3. The highest proportion of investments were made in industry sectors like social and platform software, application software, business productivity software, electronics, and biotechnology. Deals

2016

($ billions)

2015

Today, it’s common for multiple bookrunners to participate in a single transaction. These bookrunners were involved in four or more middle market IPOs in Q3. Barclays Capital Citigroup Credit Suisse Goldman Sachs Jefferies Group JP Morgan Piper Jaffray RBC Capital Markets William Blair

Corporate mergers and acquisitions activity decreased in Q3. The highest proportion of investments were made in industry sectors like media and information services, commercial services, application software, and consulting services. Deals

Proceeds

431 815

Middle Market Bookrunners

Proceeds

% CHANGE

% CHANGE

% CHANGE

-47%

-36%

-41%

9

14

2016

2015

1060 1795 2016

2015

($ billions)

% CHANGE

-10% 45

50

2016

2015

Forward Looking Thoughts While good companies will continue to attract interest, there is heightened scrutiny from investors on profitability while revenue growth continues to be important. We may need to look to the later part of 2017 or possibly 2018 for any kind of meaningful improvement. One of the driving forces influencing IPO activity will be the continued availability of private capital. In the near term, companies will pursue private capital sources in lieu of an IPO. They may attempt to structure private deals that include many of the benefits of going public and will reap the benefits of an IPO and enjoy the upsides, without taking on the risk and expense of going public.

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Middle Market Equity Capital Report ― Q3 2016

The technology sector will continue to pick up speed in using the IPO to access capital, with the healthcare and life sciences industry not far behind. The presidential election will result in a change in administration, and companies may contend with greater uncertainty or increased regulations. We expect that it will take time for the market to adjust and respond to the new administration and policies, and as a result, IPO activity could very likely accelerate in the first half of 2017 as companies gain additional clarity about the direction of the markets.


About CohnReznick’s Public Companies Group Utilizing comprehensive resources and deep industry expertise, the professionals of CohnReznick’s Public Companies Group understand the goals of both middle market companies and investors to deliver timely and appropriate solutions and services. We understand the challenges and opportunities of the capital markets and possess the forward thinking technical skills and experience necessary to address the needs of clients, investment bankers, investment advisors, attorneys, lenders, investors, managements, audit committees, and the U.S. Securities and Exchange Commission and other regulatory authorities. • Alex Castelli, CPA, Partner, National Liquidity and Capital Formation Advisory Group and Technology and Life Sciences Industry Practice Leader • Anton Cohen, CPA, Partner, Renewable Energy Industry Practice Co-National Director • George Gallinger, Principal, CohnReznick Advisory − Governance, Risk, and Compliance National Director • Craig Golding, CPA, Partner, Technology and Life Sciences Industry Practice • David Kessler, CPA, Partner, Commercial Real Estate Industry Practice National Director • Adam Kleeman, CPA, Partner, Commercial Real Estate Industry Practice • Gary Levy, CPA, Partner, Hospitality Industry Practice Leader • Cindy McLoughlin, CPA, Partner, Hospitality Industry Practice • Steven Schenkel, CPA, Partner, Chief Risk Officer • Richard Schurig, CPA, Partner, Retail and Consumer Products Industry Practice Leader • Mark Spelker, CPA, Partner, National Director of SEC Services • Jeremy Swan, Principal, National Director, Private Equity and Venture Capital Industry Practice • Stephen Wyss, CPA, Partner, Retail and Consumer Products Industry Practices

CohnReznick Advantage for Capital Markets Industry Insights, Optimized Solutions • Partners immersed in supporting public companies and capital markets transactions who understand your business drivers. • Support from industry specialists to offer comprehensive industry-specific solutions and insights. • Engagement teams utilize the Firm’s broad resources to provide innovative solutions and breakthrough ideas. Transformative Advice • Timely, relevant views about critical economic, business, legislative, tax, and global news and emerging trends in the capital markets. • Thought leadership reports, alerts, conferences, and events delivered in the context of what these issues mean to public companies, companies considering a public filing, the capital markets, and your business. Responsive Culture • Our partners are empowered and entrepreneurial decision makers. • They draw on our depth of knowledge and expertise to provide faster, smarter, more efficient service. Capital Markets Dexterity • Preparation, valuation, structuring, and facilitation of capital markets transactions, and introductions to capital sources. • Assistance with acquisitions, dispositions, liquidity events, and other capital-raising needs. Proactive, Resourceful Service • A true partner-led service model ensures direct access and active partner management. • Accountability and expectations are developed to meet your needs and documented in the CohnReznick Client Service Plan. National and Global Reach • With offices in 30 cities, we seamlessly and cost-efficiently serve clients on a regional, national, and international basis. • Companies with international interests in 100+ countries are served through our membership in Nexia International, a global network of independent accountancy, tax, and business advisors.

A CohnReznick Report

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CohnReznick LLP Š 2016 Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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