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CFA Pittsburgh Luncheon - Private Equity: A Local SBIC Fund’s Perspective March 18, 2015 Presented by: Stephen J. Gurgovits, Jr. CFA, CPA – Managing Partner.

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Presentation on theme: "CFA Pittsburgh Luncheon - Private Equity: A Local SBIC Fund’s Perspective March 18, 2015 Presented by: Stephen J. Gurgovits, Jr. CFA, CPA – Managing Partner."— Presentation transcript:

1 CFA Pittsburgh Luncheon - Private Equity: A Local SBIC Fund’s Perspective March 18, 2015 Presented by: Stephen J. Gurgovits, Jr. CFA, CPA – Managing Partner at F.N.B. Capital Partners

2 I.Background on F.N.B. Capital Partners i.History ii.Regional Advantage iii.Investment Criteria II.Mezzanine Debt & Private Equity i.Hierarchy of Private Investors ii.Roles of Capital Providers iii.What is Mezzanine Debt? iv.Business Succession / Case Study v.Majority Recapitalization / Case Study vi.Management Buyout / Case Study III.Market Update i.M&A and Debt Market Update ii.Deal Pipeline and Activity Update Table of Contents

3 History of F.N.B. Capital Partners Legacy Fund  F.N.B. Capital Corporation established in November 2005 ‒ Wholly owned merchant banking subsidiary of F.N.B. Corporation ‒ Invested $65 million in 17 companies ‒ Team members included Stephen Gurgovits, Jr., Matthew Harnett, and Tyson Smith Newly-Formed SBIC Fund  May 2013 – F.N.B. Capital Partners (“FNBCP”) closed first capital raise for proposed fund  August 2013 – FNBCP approved and licensed by U.S. Small Business Administration (“SBA”) as a Small Business Investment Company (“SBIC”) fund ‒ Spin out of F.N.B. Corporation and hire three new team members ‒ FNBCP now managed independently by newly formed management company, Tecum Capital Management ‒ New fund has over $175 million of committed capital $67 million of private LP capital Up to $134 million of low cost leverage available from SBA 1

4 FNBCP Regional Advantage  FNBCP is only current SBIC licensed fund in Central/Western Pennsylvania, Western New York and Eastern Ohio  Team experience has positioned it as #1 source of junior capital in region ‒ There are approximately 12,000 companies with 20-250 employees in the region ‒ Estimated that, at any one time, 200 of these companies are actively considering ownership transitions 2  Financing options have ancillary goal of retaining companies and jobs in region  While core focus is within FNBCP’s target region, the team will consider investment opportunities East of the Mississippi

5 FNBCP Investment Criteria DescriptionCriteria Investment Size$3 million to $15 million per Transaction Transaction StructureMezzanine Debt: rate only, rate with warrants, rate with equity co-invest Revenue Size$8 million to $100 million EBITDA Size> $2 million EBITDA Margins> 10% with History of Profitability GeographyEast of the Mississippi Industries of InterestIndustry Agnostic with Strong Market Position Customer BaseHighly Diversified with Low Customer Concentration Not of InterestReal Estate, Start-Ups or Project Financing Investment SituationsEstate Planning, Recapitalizations, Management Buyouts, Sponsored Buyouts, Growth Capital Preferable Business Characteristics Growing Market Opportunity, Differentiating Intellectual Property, Recurring Revenue Base, Deep Management Team with Strong Corporate Governance 3

6 Hierarchy of Private Investors Angel Investors Typically wealthy individuals that are the first investors in a company Seed Capital Institutional or sometimes government investors that invest in businesses at the early stages of development, before the business model is proven Venture Capital Follows Angels or Seed Capital, typically comes after fundamental business model is demonstrated, used to fund additional R&D Mezzanine Debt and Private Equity After Company has demonstrated ability to make profits and has steady cashflow; money used to fund expansion, acquisitions, and in some cases to provide partial or full liquidity to founders through backing of management or a new operator Family Office / Foundation Invests money for a single or multiple wealthy families, typically has a longer term investment horizon than traditional private equity Growth of Company 4

7 Mezzanine / Equity Back Management Team or Investor in the Buyout of a Company Cash Out the Founder (partial or full) Provide Liquidity / Buy Out the Existing Investors Invest in Expansion Capital Recapitalize a Business There Are Many Uses of Mezzanine Debt & Private Equity 5

8 Roles of Capital Providers  Senior debt is the first source of capital used to fund buyouts or MBOs ‒ Senior multiple generally represents 1.00x - 3.00x of EBITDA ‒ Appetite from senior debt providers driven by assets available for security and risk of underlying business ‒ Amortization features may constrain ability to invest in growth opportunities  Additional options are available to fill-out the remaining capital required to close a transaction: ‒ Term B Senior Debt  Lowest cost alternative source of capital, but often least flexible  Rates on these facilities will range from 10.50% - 12.50% and amortization periods are short  Downturn in financial performance often leads to these credit facilities being “called” by the bank ‒ Mezzanine Debt  Second lowest cost alternative source of capital, but most flexible  Interest only terms which benefit cash flow  “Equity kicker” aligns the interest of the mezzanine debt investor with those of the buyer ‒ Private Equity  Most expensive source of capital  Private equity firms typically desire control and an overall return of 24.0% - 30.0%  Alternatively, this could represent the buyer’s “cash equity” 6

9 What is Mezzanine Debt?  Mezzanine debt (i.e. subordinated debt or junior capital) has the following characteristics: ‒ Below senior debt but above equity in capital structure ‒ Equity-like returns with debt-like risk ‒ Current coupons ranging from 12.0% - 14.0% ‒ Interest only terms for 36 – 72 months, balloon payments due at maturity ‒ May include PIK (i.e. capitalized interest) of 2.0% - 4.0% ‒ May include warrants or success fees, i.e. “equity kickers” ‒ Subordinated to the senior creditors and often unsecured ‒ Mezzanine debt investors desire total returns of 16.0% - 24.0% ‒ Mezzanine debt is an alternative to more expensive equity capital 4.0x –6.0x 2.5x –4.0x Up to 2.5x Traditional Senior Revolving LOC Senior Term A (4.5% - 6.5%) Equity Preferred Stock Common Stock (24% - 30% IRR) Subordinated Debt (16% - 24% IRR) Capital Levels (expected returns) EBITDA Multiple 7

10 Primary Models of Mezzanine Debt Growth Capital Capital is used to fund growth initiatives and focus on companies that grow quickly and organically This may include funding for CAPEX, hiring additional personnel or other growth expenses Mezzanine works well for growth situations because it is patient capital that does not amortize and allows cash flow to be reinvested to support growth Acquisition Capital Capital is used to fund acquisitions Needed when Management believes making acquisitions is the most efficient way to gain market share or expand product lines Using Mezzanine Debt for acquisitions allows Management to make strategic acquisitions while minimizing equity dilution Buyout Capital Capital is needed to support a leveraged buyout through a private equity sponsor Necessary when private equity sponsors need to bridge the gap between the senior debt raised and their equity contribution Mezzanine debt helps enhance private equity returns and also alleviates fixed charges due to its non-amortizing characteristic Recapitalization Capital is needed to provide liquidity to certain shareholders, transition management ownership and/or to refinance existing debt FNBCP can support a management team’s acquisition of a Company or cash out a founding shareholder (Management Buyout or MBO) Using Mezzanine Debt is a cheaper alternative that typically allows current Management to retain control of the business Mezzanine Debt is used to reduce amount of equity capital required to finance a leveraged buyout or major expansion, or used when there is collateral shortfall on senior financing (but adequate cash flow) 8

11 Importance of Business Succession  Business owners often create substantial personal wealth by creating value in their businesses ‒ Wealth is often illiquid and concentrated within the business ‒ Wealth must be monetized for retirement and planning purposes ‒ Typical transfer options include: 9 Family Other Owners Third Party Buyer Voluntary Liquidation ESOP Management  As an alternative to transferring or selling the business, owners may decide to “take some chips off the table” through a majority recapitalization ‒ May not be ready to retire and step away from the business ‒ May believe in the long-term growth potential and seek to retain some ownership ‒ Opportunity to seek strategic or financial partner to help grow the business

12 BACKGROUND  Located in Vandergrift, PA, Uncle Charley’s Sausage produces and distributes gourmet sausage and meat products to retail markets throughout six states, including Pennsylvania, West Virginia, Ohio, and Maryland ACTIONS  As part of the succession planning process, Charles Armitage hired an investment banker to sell the business  FNBCP brought in Jim Rudolph as operating partner, who is the former Chairman & CEO of Rita’s Italian Ice Franchise Company and President & Founder of the 46- unit Wendy’s of Greater Pittsburgh franchisee group  FNBCP and Mr. Rudolph won the auction and executed a joint Letter of Intent to purchase Uncle Charley’s  FNBCP provided mezzanine debt and equity to facilitate the buyout RESULTS  The transaction closed in January 2014  Transaction helped increase funding to expand the business while keeping Uncle Charley’s unique brand value, leadership, Vandergrift-based manufacturing, and employees intact 10 Capitalization Uncle Charley’s Sausage Company (Business Succession)

13 BACKGROUND  Founded in 1997, PHOENIX Rehabilitation and Health Services, Inc. offers physical and occupational therapy services throughout Pennsylvania. The Company’s physical therapy services include sports rehabilitation, orthopedic rehabilitation, home health physical therapy, women’s health services, occupational health rehabilitation, wound care programs, and aquatic rehabilitation ACTIONS  PHOENIX ran a sale process through an investment banker  Pittsburgh, PA based private equity firm 3 Rivers Capital (“3RC”) won the auction and executed a Letter of Intent to purchase PHOENIX  FNBCP provided mezzanine capital and an equity co- investment to support the buyout  Management was able to re-invest capital and have an opportunity to grow the Company and get at a 2 nd bite of the apple RESULTS  The transaction closed in October 2013  3RC is looking at potential acquisitions and additional start- up physical therapy centers to grow the business 11 Capitalization Phoenix Rehabilitation (Majority Recapitalization)

14 The MBO Solution and Structure  Management Buyouts (“MBO”) are completed when managers in a business buy a controlling interest from the existing owners  There are several key advantages to selling directly to the management team ‒ Management often knows the business better than outsiders Often most familiar with strategy and growth opportunities Transactions often close more quickly which reduces time to liquidity realization ‒ Due diligence phase is less intrusive Compared to a traditional auction where financials and customer lists are available to many suitors and maybe even competitors ‒ Qualitative advantages include the opportunity to reward the people who made the owner successful and the ability to retain the workforce  Selling directly to the management team also comes with some potential disadvantages ‒ Management often lacks sufficient financing resources to complete the sale, which may require the seller to rollover equity or retain a note ‒ Departure of owner may leave “gaps” in management teams ‒ Difficulties in determining fair value for the business 12

15 COMPANY BACKGROUND  Cox Transportation Services, Inc. and Cox Truck Brokerage (collectively “Cox” or the “Company”) specialize in transporting time-sensitive full truckload freight on a local, regional, and national basis for a variety of customers. The Company was founded by John Cox in 1982. SITUATION  John Cox had gradually stepped away from the business while increasing Jay Smith’s (current President) role inside the Company over the last several years  John Cox wanted to gain liquidity on his 100% ownership and agreed to sell the Company to Jay Smith at a below market valuation  Jay Smith hired Marriott & Co. to advise him through the purchase and help raise the capital  Capital One Bank and FNBCP partnered together and were awarded the opportunity to provide the necessary capital to facilitate the transaction RESULTS  The transaction closed in September 2014  Along with the mezzanine financing, FNBCP received a significant economic interest in Cox via warrants Cox Transportation Services (Management Buyout) *Trailing Twelve Months Capitalization 13

16 Source: GF Data Resources provides data on private equity sponsored M&A transactions with enterprise values of $10 to $250 million GF Data Resources - M&A Market Update Transaction multiples for deals < $250 million remain relatively stable (Chart A) Spread between smaller and larger transactions is apparent in market (Chart B)  Elevating multiples for larger deals creating significant market bifurcation Chart B Chart A 1.5x 14

17 GF Data Resources - Debt Market Update Senior and subordinated debt multiples continue to increase into 2014 (Chart A) Similar to M&A multiples, significant bifurcation in debt multiples between smaller and larger deals (Chart B) Source: GF Data Resources provides data on private equity sponsored M&A transactions with enterprise values of $10 to $250 million Chart B Chart A 3.0 3.4 3.5 3.6 15

18 Q & A Conclusion 16

19 Stephen Gurgovits, Jr. - Managing Partner Stephen J. Gurgovits, Jr. is the Managing Partner and co-founding partner of F.N.B. Capital Partners, a $175 million SBIC fund managed by Tecum Capital for which he serves as President. In this capacity, he is responsible for providing strategic, operational and investment management leadership to the fund, including its overall planning, fund raising, growth and execution. Mr. Gurgovits, Jr. also currently serves on the board of directors for Tri-Tech Forensics, Inc. During his career, Mr. Gurgovits, Jr. has been directly involved in over $1 billion of aggregate financial transactions, both public and private. Mr. Gurgovits, Jr. has also served as the investment and portfolio manager for over $200 million of publically-traded securities. When contemplating new investments with F.N.B. Capital Partners, Mr. Gurgovits, Jr. and his partners will structure, research, negotiate and approve investments in companies, based on financial analysis, financial modeling, industry research, and overall coordination of additional internal and/or external resources. After the investment has closed, Mr. Gurgovits, Jr. and his team advise companies and/or partner with management teams to create profitable and sustainable businesses to protect and secure adequate returns on the investment portfolio. Prior to founding F.N.B. Capital Partners, Mr. Gurgovits, Jr. was President and C.E.O. of F.N.B. Capital Corporation, LLC, a wholly-owned merchant banking subsidiary of F.N.B. Corporation (NYSE: FNB) from its inception in 2005. Mr. Gurgovits, Jr. started his career with KPMG and was employed by the Sports and Exhibition Authority prior to joining F.N.B. He graduated with High Distinction from Pennsylvania State University after earning a Bachelor of Science in Accounting and subsequently obtained his MBA from the Katz School of Business at the University of Pittsburgh. Mr. Gurgovits, Jr. holds a CFA Charter designation and is a licensed CPA in the state of Pennsylvania. A native of western Pennsylvania, he currently resides in Pittsburgh, PA. Phone: 724-602-4401 Email: sgurgovits@fnbcp.com Background on Presenter 17


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