Outlook positive after big comeback in 2010

NORWALK, CT — This year is expected to be another strong one for leveraged loans, said Sage Nakamura, managing director of loan syndications with GE Capital Markets, Inc. GE Capital, Americas is a leading provider of commercial loans and leases to mid-market businesses across diverse industries throughout the U.S., Canada and Mexico.

Nakamura characterized 2010 as “a comeback year for leveraged loans,” with volume of $233 billion – a 205% increase over 2009. “As the economy rebounded and loan defaults eased, liquidity flowed back into the loan market and investors, including GE Capital, were eager to lend,” he said.

“The surge in investor demand for these types of loans that began at mid-year last year is still picking up speed in early 2011,” he later noted. “Already, we are seeing tighter pricing on transactions, and yield compression should continue throughout the year.”

The Third Quarter 2010 survey analyzed the valuations and terms of venture financings for 107 technology and life science companies headquartered in the Silicon Valley that reported raising capital in the third quarter of 2010.

“During the third quarter of 2010, up rounds exceeded down rounds 52% to 30% with 18% flat. This was similar to the second quarter of 2010, when up rounds exceeded down rounds 55% to 27%, with 18% flat, and the fifth consecutive quarter in which up rounds exceeded down rounds,” said Barry Kramer, partner in the Corporate Group of Fenwick & West and co-author of the survey.

An up round is one in which the price per share at which a company sells its stock has increased since its prior financing round. Conversely, a down round is one in which the price per share has declined since a company’s prior financing round.

The Fenwick & West Venture Capital Barometer™ – which measures the change in share price of Silicon Valley companies funded during the quarter compared with the share price of their previous financing round – showed a 28% average price increase for the quarter, compared to 30% in the first quarter of 2010.

“This was also the fifth consecutive quarter in which the Venture Capital Barometer was positive,” said Kramer.

“The best performing industries in the quarter from a valuation perspective were internet/digital media, and to a lesser extent life sciences, with internet/digital media clearly out performing other industries from a valuation perspective through the first three quarters of 2010,” added Michael Patrick, partner in the Corporate Group of Fenwick & West and co-author of the survey.

“However, as reported by third party sources, since the beginning of 2009 venture capitalists have invested significantly more in companies than the amount of new funds that has been committed to venture funds. This trend would likely result in valuations decreasing if commitments to venture funds do not increase,” noted Patrick. “Yet with the recent improvement in liquidity for venture-backed companies, and improvements in the stock market in general, there is reason to be hopeful that an increase in commitments to venture funds may be on the horizon.”

Complete results of the survey with related discussion are posted on Fenwick & West’s website at www.fenwick.com/vctrends.htm.

About the Survey
The Fenwick & West Quarterly Venture Capital Survey, co-authored by law firm partners Barry J. Kramer and Michael J. Patrick, offers a unique view of the venture capital market in the Silicon Valley/San Francisco Bay Area by providing insight into the changes in venture capital valuations and terms. Focusing exclusively on trends in venture financing and valuations, the Fenwick & West Surveys complement the economic data presented in the Dow Jones VentureSource Survey and the MoneyTree™ Report by PricewaterhouseCoopers and the National Venture Capital Association based on data from Thomson Reuters.

By KEN MacFADYEN

November 18, 2010

The good news is that deal volume is moving incrementally higher, reflecting growing confidence among private equity buyers; the bad news is that prices are also rising, showing a “pronounced increase” according to GF Data Resources’ third-quarter report.

Philadelphia-based GF Data, which tracks transactions of 163 participating mid-market PE firms, reported that the number of deals in the third quarter represented the highest figure over the past seven quarters. Meanwhile the average purchase price multiple reached 6x trailing 12-month Ebitda, up significantly from the previous four quarters that saw valuations reside in the 5x times Ebitda range.

GF Data specializes on the small and mid market, tracking deals between $10 million and $250 million in size.

Andrew Greenberg, CEO and co-founder of the data provider, said in a statement that he believes deal volume “will continue to expand” heading into the New Year. He added the caveat that the market has not reached the point at which it would be “impervious to backsliding.”

Breaking it down by segment, GF Data cited deals in the manufacturing, business services and healthcare sectors as contributing to the uptick in valuations. Deal multiples in the media and retail industries, however, continued to be soft.

The last time average enterprise multiples exceeded 6x was in the second quarter of last year, a period marked by a “flight to quality,” according to the authors of the report, when just 16 deals were documented.

Leverage multiples, with total debt averaging 2.7x Ebitda year to date, represents an improvement over the year-ago corresponding period. Equity contributions from sponsors, meanwhile, still typically make up more than half of the capital structure, showing a year-to-date average of 54.2 percent and underscoring a cautiousness that still pervades sponsor activity.

Mr. O’Connor brings a wealth of experience to Culver Capital.  Previously Dick was the CFO of Bluefire Capital Partners, Managing Partner and Co-Founder of IntelliCap LLC and President and Founder of ILM where he specialized in the design and management of captive customer finance programs for high technology companies.  Clients included companies such as Silicon Graphics, Netscape, BEA Systems, Synopsys, Octel Communications, ADAC Laboratories, Red Brick Systems and Plantronics.  Before founding ILM, he was Senior Vice President of First Sierra Financial where he was part of a three member team that launched First Sierra’s internet financing program and raised $83M of equity. Previous to Sierra, he was Chief Financial Officer of the Open Systems Software Division of Convergent Technologies, Inc. where he led the acquisition and consolidation of thirteen software companies.  The division was subsequently grown to $240M in revenues and sold to Unisys in 1990.

Mr. O’Connor holds a BA of Business Administration from St. Thomas University, ST. Paul Minnesota and an MBA in finance from the University of Minnesota/Minnesota State University.

We are extremely pleased to have Dick as a member of the Culver Capital Investment Banking team,” said Bill Weaver, Managing Director of the Investment Banking Division. “His many years of experience in deal making and acquisition integration will add new depth to the team.”