Middle market definitions

Definition of middle market

Barry Volpert, Co-founder/CEO Crestview

Partners Enterprise value: $200MM – $2.4B

Lawrence Golub, CEO Golub Capital EBITDA $10MM – 50MM

Rick Miller, Group Managing Director, TCW Low End: > $15MM EBITDA High End: < $250MM Loan Size

James Moglia, Managing Director and Head,

U.S. Debt Capital Markets, BMO Capital Markets EBITDA less than $50MM

Adam Sokoloff, Managing Director, Jefferies Enterprise value: $200MM – $2.5B

Source: Panelists.

Middle market spreads to large corporates remain near peak

levels

Source: S&P LCD.

9 18

-6

80

48 36 33

23 20

-15

33 43

110

64

174

110

-50

0

50

100

150

200

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 1Q14

Middle Market Loan Spread to Large Corporates

Large/upper middle market companies have meaningful choice

of capital providers and product offerings…

Source: Thompson Reuters LPC, Wells Fargo Securities, LLC.

The Broad Lending Spectrum

Bank Senior Debt Non-Bank Senior Debt Mezzanine/HY Equity

Smaller middle market firms often do not have the same choices

Source: Thompson Reuters LPC, Wells Fargo Securities, LLC.

The Broad Lending Spectrum

Bank Senior Debt

Non-Bank Senior Debt

Mezzanine/HY

Equity

Middle market loans – higher spreads, lower leverage

4%

6%

8%

10%

12%

14%

16%

4Q10 4Q11 4Q12 4Q13

LC 1st lien LC 2nd lien

MM 1st lien MM 2nd lien

MM/LC Yields 1st/2nd Lien Loans

Source: Thompson Reuters LPC.

3.5x

4.0x

4.5x

5.0x

5.5x

6.0x

6.5x

7.0x

7.5x

2003 2005 2007 2009 2011 2013

Middle market (MM)Large Corporate (LC)

MM/LC LBO Leverage

Yield LBO debt to EBITDA (x)

Private vs. institutional middle market risk and return

Source: Thompson Reuters, LPC.

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

9.0%

9.5%

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.02

00

9

1Q10

2Q

10

3Q10

4Q

10

1Q11

2Q

11

3Q11

4Q

11

1Q12

2Q

12

3Q12

4Q

12

1Q13

2Q

13

3Q13

4Q

13

1Q14

Yie

ld (

3-y

ea

r)

To

tal l

eve

rag

e (

x:1

)

*Leverage on Institutional MM Deals Leverage on Private MM Deals*Institutional MM TL Yield Private MM Deals TL A&B Yield

*Based on a cohort of middle market deals with both leverage and yields

Lower middle market credits produce more enticing yields and

less leverage

Source: Thompson Reuters, LPC.

4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0%

< $5M

$5-$15M

$15-$25M

$25-$40M

$40-$50M

> $50M

1st Lien TL Yield

0.0x 1.0x 2.0x 3.0x 4.0x 5.0x 6.0x

< $5M

$5-$15M

$15-$25M

$25-$40M

$40-$50M

> $50M

Debt to EBITDA

Average Yield by EBITDA Range Average Leverage by EBITDA Range

The resilience of middle market firms throughout the cycle

Private Net Job Creation/Loss Rate by Firm Size – 2007 to 2011

2007 2008 2009 2010 2011 Total Period Net Job Creation/Loss Rate

Small firms 0.6% -0.7% -7.0% -2.7% 0.6% -1.8%

Middle market firms

2.2% 2.2% -4.7% -1.0% 3.4% 0.5%

Large firms 0.7% 0.8% -3.8% -1.3% 3.1% -0.1%

Sources: McGee, Tom., U.S. Census Bureau’s Longitudinal Business Database, 1977 – 2013, U.S. Census Bureau’s Longitudinal Business Database, 1977 -

2011.

• U.S. middle market firms create aggregate revenues equivalent to approximately 40% of U.S. GDP1

• U.S. middle market firms are steady employers, accounting for 41% of private net job creations between 1977 and 20112

• During the most recent financial crisis, U.S. middle market firms generated a higher level of net job creation relative to either small or large firms3

“Froth” dipping into the middle market US BSL / middle market credit stats

Source: Thompson Reuters LPC

MM volumes / refis / dividend recaps approaching or exceeding their 2007 peaks

“Froth” dipping into the middle market

Source: Thompson Reuters LPC.

0.0

40.0

80.0

120.0

160.0

Jan…

Fe…

Ma…

Ap…

Ma… Ju…

Jul…

Au…

Se…

Oc…

No…

De…

($

B.)

CLO issuance

Loan fund flows

0.0

100.0

200.0

300.0

400.0

500.0

600.0

Jan…

Feb

…

Ma…

Apr…

Ma…

Jun…

Jul-…

Au…

Se…

Oct…

No…

De…

($

B.)

Repricings ($130B)

Dividend recaps ($50B)

M&A ($221B)

Refinancings ($626B)

Other new money ($108B)

Substantial loan market liquidity + limited new deal supply = refi, refi, refi

CLO & Loan Fund Issuance 2013 MM Cumulative Monthly Loan Issuance by Purpose

“Froth” dipping into the middle market

*** 1Q14 Thompson Reuters LPC MM Lender Survey Source: Thompson Reuters LPC.

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.02

00

12

00

22

00

32

00

42

00

52

00

62

00

72

00

82

00

92

010

20

112

012

20

131Q

142

014

E

MM

div

ide

nd

re

cap

issu

an

ce ($

B.)

0%

5%

10%

15%

20%

25%

30%

35%

40%

< $8.0B $8-10B $10-12B > $12B

% o

f re

spo

nd

en

ts

MM Dividend Recap 2014 Dividend Recap Expectation***

Middle market investments PE investments ($) by deal size

Source: Pitchbook.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014*

$2.5B+ $1B-$2.5B $500M-$1B $100M-$500M $25M-$250M Under $25M

Transactions with Deal Sizes less than $500mm now account for over 55% of total deal value.

Transactions with Deal Sizes less than $1 Billion now account for over 88% of total deal value. The highest % ever.

Middle market PE fundraising – MM funds attract more interest

today than at any point in recent history

Source: Probitas Partners.

Top 5 Sectors of Interest PE Sectors of Interest

Commercial banking regulation

Source: Federal reserve.

Tighter banking regulation and higher capital requirements may limit commercial bank involvement in the middle market / levered lending category

Leverage lending guidance impact on commercial banks

Source: Thompson Reuters LPC.

0%

10%

20%

30%

40%

50%

60%

70%

< 3x 3x - 3.5x 3.5 - 4x > 4x

% o

f b

an

k r

esp

on

de

nts

1st lien debt to EBITDA

4Q13 Survey 1Q14 Survey

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

< 4x 4x - 4.5x 4.5 - 5x 5 - 5.5x > 5.5x

% o

f b

an

k r

esp

on

de

nts

Total debt to EBITDA

4Q13 Survey 1Q14 Survey

Sponsored: Total to ebitda Sponsored: senior debt to ebitda

Banks lower their leverage tolerance for middle market deals citing levered lending guidance as a primary driver

The changing middle market lending landscape

Source: S&P LCD, Wells Fargo LLC.

37%

7%1%

7%

13%

7%

25%

7%

4%

25%

67%87%

5% 6%1%

1997 2007 2014

Domestic Banks

Finance Co

Foreign Bank

InstitutionalInvestors

Securities Firms

Primary Market for Highly Levered Transactions in the Upper Middle Market (as of 3/31/14)

Institutional loan investors (CLOs/BDCs/Loan Funds) now account for 87% of the purchase of highly levered transactions in the upper middle market.

Middle market lending fundraising – BDC growth highlights

demand for middle market paper and above average yields

Source: Thompson Reuters LPC

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

2000 2002 2004 2006 2008 2010 2012 2014

$ in

mil

lio

ns

IPOFollow OnRights Offerings

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

2Q…

1Q 2

00

5

4Q…

3Q…

2Q

20

07

1Q 2

00

8

4Q…

3Q…

2Q

20

10

1Q 2

011

4Q

20

11

3Q 2

012

2Q

20

13

$ in

mil

lio

ns

BDC Loan Balances BDC Capital Issuance

Direct Origination and Credit-Driven Focus Drive

Below-Market Golub Capital Default Rates

1. Source: Standard & Poor’s Leveraged Commentary & Data (The S&P/LCD is a market value-weighted index designed to measure the performance of the U.S. broadly syndicated leveraged loan market. The S&P/LSTA Index typically encompasses anywhere from 90%-95% of the entire broadly syndicated leveraged loan market). Trailing 12-month leveraged loan default rate by principal amount.

2. Data calculated as the aggregate principal amount of leveraged loans on a cost basis that experienced an uncured payment default during the year, expressed as a percentage of aggregate outstanding leveraged loans at the end of the period. Data is a composite of Golub Capital loans and not specifically loans that are held by any Golub Capital managed entity.

Note: There is no guarantee that future investments will maintain historical default levels. All indices designed, calculated and published by third parties and presented herein are the property of their respective owners. Golub Capital makes no representations about the accuracy or appropriateness of the data reported by such third party data sources and such companies have not endorsed the contents of this presentation.

2.35%

1.09%

0%

1%

2%

3%

2004–2013 (Annual Average)

Default Rate

S&P/LCD Leveraged LoanDefault Rate

Golub Capital Senior Debt& One-Stop Middle MarketDefault Rate

126 bps

1

2

Historical Default Rates of Market Leveraged Loans vs. Golub Capital Senior & One-Stop Loans

Golub Capital’s Focus on Solutions Yields Repeat Business

Completed multiple financings with over 100 private equity sponsors

75% of lending in 2013 and 2012 has been with repeat sponsors

Median returns for public pension funds

Sources: Bain & Company Global Private Equity Report 2013, Preqin. Note: Data based on review of public pension funds in North America and Europe.

6.4% 6.4%

12.5%

7.1% 6.7%

0%

2%

4%

6%

8%

10%

12%

14%

Listed Equity Fixed Income Private Equity Real Estate Total InvestmentPortfolio

Median returns for public pension funds

Middle market funds have outperformed over the long term

Source: Pregin. Note: Middle Market Funds defined as fund size between $0.5 billion and $3.0 billion. Large Cap funds defined as fund size greater than $3.0 billion

1.52x

1.44x

1.35x

1.40x

1.45x

1.50x

1.55x

Average multiple

Middle Market Funds

Large Cap Funds

Average Fund Net Multiple

13.0%

11.4%

10.5%

11.0%

11.5%

12.0%

12.5%

13.0%

13.5%

Average Net IRR

Middle Market Funds

Large Cap Funds

Average Fund Net IRR

Middle market funds have outperformed over the long term

Source: Cambridge Associates; Note: Pooled end-to-end return, net of fees, expenses, and carried interest

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

10-Year 15-Year 20-Year 25-Year

U.S. Buyout Funds <$350 million U.S. Buyout Funds between $350 million - $1 billion

U.S. Buyout Funds $1 billion - $3.5 billion U.S. Buyout Funds > $3.5 billion

S&P 500

U.S. Buyout Funds End-to-End Pooled Return (Net to Limited Partners)

Fund capitalization groupings for vintage years are as follows (figures in millions): 1986 - 92: Sm Cap is < or = $100, Mid Cap is > $100, < or = $300, Lg Cap is > $300. 1993 - 94: Sm Cap is < or = $100, Mid Cap is > $100, < or = $500, Lg Cap is > $500. 1995 - 96: Sm Cap is < or = $200, Mid Cap is > $200, < or = $500, Lg Cap is > $500, < or = $1000, Mega Cap is > $1000. 1997 - 99: Sm Cap is < or = $250, Mid Cap is > $250, < or = $750, Lg Cap is > $750, < or = $1000, Mega Cap is > $1000. 2000 - 13: Sm Cap is < or = $350, Mid Cap is > $350, < or = $1000, Lg Cap is > $1000, < or = $3500, Mega Cap is > $3500.

Purchase price multiples

Source: Capital IQ Note: Mid Cap LBOs defined as Enterprise Value between $500 million and $2 billion. Large Cap LBOs defined as Enterprise Value greater than $2 billion

10.4x

11.5x

9.5x

10.0x

10.5x

11.0x

11.5x

Mid Cap LBOs Large Cap LBOs

Average EBITDA Purchase Multiple

Leverage multiples

Source: Capital IQ Note: Mid Cap LBOs defined as Enterprise Value between $500 million and $2 billion. Large Cap LBOs defined as Enterprise Value greater than $2 billion

3.3x

4.2x

0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

3.0x

3.5x

4.0x

4.5x

Mid Cap LBOs Large Cap LBOs

Total Debt / LTM EBITDA at Acqusition

Top performing funds generate fewer losing deals and more big

winners

Notes: Includes US, European and Asian buyout funds of vintage years 1995-2006; percent of funds based on >$100M funds Source: Bain analysis

Worse performing funds Better performing funds

Sponsor-to-sponsor deals perform well compared with other

deal types and are significantly less risky

Source: Bain & Company Global Private Equity Report 2013, data from HEC Paris; analysis by PERACS PE Analysis and Track Record Certification analysis includes 101 sponsor-to-sponsor deals and 660 other deals, all fully realized.

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Pre-2004 Since 2004

Sponsor-to-sponsor Other

Deal rate of return (PERACS rate if return)

0%

5%

10%

15%

20%

25%

30%

35%

Pre-2004 Since 2004

Sponsor-to-sponsor Other

Deal alpha (PERACS alpha)