Year End Update 2010

Brookwood generated consistently excellent results for our clients in 2010.  We are proud of the level of value we added, especially in light of the often murky economic picture.  We are also very pleased that we helped our clients complete assignments in a timely and efficient way – every sell-side transaction that was scheduled to close during 2010 actually closed on schedule and without a change in its economic terms. 

We attribute this performance to our senior-focused staffing model, deep market and sector knowledge, high-quality and stable professional team and our absolute focus on achieving our clients’ objectives.  We were one of the few investment banks that did not reduce staff in 2009/2010, and our confidence was rewarded with a very high level of client service and successful transaction activity.  An overview of our 2010 transaction activity and other Brookwood news is summarized after the Middle-Market Update below.

Middle-Market Update
Conditions in the middle-market improved substantially in 2010, especially in the second half of the year.  The depth, breadth and pricing in the M&A and debt finance markets strengthened.

• Middle-Market M&A Activity.  Activity gained momentum throughout most of 2010, with the number of U.S. middle-market transactions up more than 55% compared to 2009.  Many private equity groups pursued the sale of some of their strongest performing portfolio companies.  Private business owners were motivated to achieve attractive valuations and wealth diversification, to some degree driven by uncertainty in tax rates.
• Sector Strength.  Most of the companies sold in early 2010 performed well through the recession, had good earnings visibility and a strong market position.  Many of these businesses were healthcare, education, business services, food/beverage and related businesses.  Later in 2010, the breadth of healthy business transactions increased to include many manufacturing, distribution, energy and consumer businesses that are
  well-positioned for an improving economy.
• Buyers. The amount of liquidity available for acquisitions increased throughout the year to record proportions.  The commitment to use the liquidity, however, varied considerably.
  • Private Equity.  Private equity has never had more committed capital to invest (approaching $500 billion), and debt markets are improving.  Most firms focused on accretive add-ons, and many larger funds lowered their target acquisition ranges.  With the number of firms and amount of capital available, many firms are embracing differentiated business strategies to invest capital, and the market is becoming more segmented and dynamic.
  • Corporate.  Domestic non-financial corporations have over $2 trillion in cash on their balance sheets.  With business conditions and earnings improving, these companies returned to a normal level of acquisition activity in order to achieve their growth targets.  Foreign corporate buyers were slower to return to historical acquisition levels, however, accounting for a smaller percentage of
    middle-market transactions than in 2009.  This decline was driven by economic unrest in Europe and the strengthening of the dollar against the euro and yen throughout the second half of the year.
• Transaction Types/Structures.  Many middle-market business owners considering liquidity transactions did not believe that 2010 was the right time to sell all of their business interest.  Consequently, there was a dramatic increase in debt recapitalizations and an increase in transactions where new investors bought modest majority or significant minority stakes.  We saw this recap theme among private equity firms and independent business owners and expect it continue will in 2011, with more debt recaps by private equity firms and equity recaps by private business owners.
• Valuations.  Valuations recovered steadily during 2010.  While early in the year only very strong businesses commanded attractive values, as the year progressed, the breadth of demand for businesses at attractive values increased.  As a rule of thumb, multiples in 2H10 were approximately 10% off their 2007 peaks, with the strongest businesses approaching peak multiples.
• Lending.  Middle-market lending experienced continued improvement, with a broader, more active group of leveraged lenders.  Leverage levels, pricing and terms have improved and debt recapitalizations have increased.  Minimum EBITDA levels to access the cash flow leveraged lending market dropped below $10 million, but the lower end of the cash flow lending market remains thin.
• Distressed Company Sales.  During most of 2010, businesses in covenant default enjoyed considerable tolerance and patience from their lenders in light of the improving economic environment and the absence of DIP financing.  We expect continued low levels of distressed business sales in 2011.

2011 Outlook
We are optimistic that 2011 will yield an increase in transaction activity.  Our optimism is founded in the following views:

• Despite a shareholder desire for liquidity following a challenging economic period, many businesses were not well-positioned to be sold or recapitalized from 2008 through 2010.
• Many companies experienced a strong rebound in 2010 and have improved clarity about 2011 results.
• Valuation multiples are increasing and debt markets are improving.
• Market dynamics are attractive and improving.  The economy is expected to continue steady growth, tax rates and interest rates remain historically low, and business confidence is increasing.
• Finally, there is an enormous amount of liquidity (debt and equity) available for M&A and recapitalization transactions. 

Strategic Issues for Business Owners in 2011
Having survived a particularly scary recession, we find that business owners are more careful and diligent about how they approach a possible sale or recapitalization.  We are fielding questions more thoughtful than ever about the preparation, timing, process and risks associated with pursuing a transaction.  We believe that our depth of experience, proven track record and unwavering commitment to our clients’ best interests make Brookwood an ideal partner for those discussions. 
 
Brookwood Organization and Transaction Update
Brookwood has enjoyed continued development of our professional staff, which has helped drive our high level of client service and transaction activity during 2010.  We are particularly pleased to announce the promotions of Kevin Kaeppler to Managing Director, Michael Stollmack to Senior Vice President and Rob Tyndall to Director.

On the following page we summarize our recent activity by sector.  We are particularly gratified that many of these transactions were completed on behalf of repeat clients.  Reflecting the strong recovery of the industrial sector, we completed several transactions in business services, manufacturing, packaging and specialty distribution.  Certain U.S. healthcare services sectors continue to consolidate, as reflected in our completion of the sale of a large anesthesiology and pain management services provider to a public company acquiror.  While we developed considerable corporate interest in our sell-side clients’ businesses, the majority of the buyers or capital providers in our assignments were private equity funds, reflecting the return of cash flow debt financing and the economic recovery.