Mercer Capital's Portfolio Valuation: Private Equity and Venture Capital Marks and Trends Newsletter provides a brief digest and commentary of some of the most relevant market trends influencing the fair value regarding private equity portfolio investments.

1. BUSINESS VALUATION &
FINANCIAL ADVISORY SERVICES
Portfolio Valuation
Private Equity & Venture Capital Marks & Trends
First Quarter 2019
www.mercercapital.com
The sell-off in risk assets last year points to why some wag on Wall Street
decades ago coined the adage that bull markets take the escalator up
and bear markets take the freight elevator down. The sell-off in the fourth
quarter was intense but not atypical. The unanswerable question then
and today is whether the sell-off reflected the market discounting weaker
earnings to come; illiquidity because heavy selling over the holidays was
accentuated by the inability of large banks to commit capital via prop taking
versus agency-based market making; or both fundamentals and liquidity.
The rebound in 2019 has been swifter than might be expected normally,
but the rally in risk assets accelerated mid-quarter on the 180 degree pivot
by Fed officials that further hikes to the Fed Funds target rate (and there-
fore 30/90-day LIBOR) are on hold until further notice.
While the sell-off was brutal, it was not long enough to materially clip
private equity values because public market pricing is but one of several
methods used to value privately held assets (M&A data and DCF are
among the most common). As for credit, high yield has rallied sharply, too,
after fears of the Fed hiking the economy into a recession eased. Plus, the
global reach for yield is a long-running theme in the years since the GFC.
In short, 1Q19 was not a game changer for private equity and credit as
seemed possible in December. Nonetheless, valuations may be subject to
more scrutiny given a slowing economy and subdued M&A environment
while a robust IPO calendar will allow public investors to have a say on
how well (or not) private markets valued a number of high profile compa-
nies such as Lyft and Uber Technologies.
In This Issue
Private Credit and Equity 1
Publicly Traded Private Credit 2
Venture Capital 3
On the Call 4
About Mercer Capital 5

2. Mercer Capital’s Portfolio Valuation First Quarter 2019
© 2019 Mercer Capital 1 www.mercercapital.com
Private Credit and Equity
Equity Valuation: EBITDA Multiples over Time
As of year-end 2018, non-finan-
cial companies that are included in
the Russell 2000 traded for 10.3x
EBITDA, down 16% from 3Q18 and
at the lowest multiple since 1Q16.
Perhaps due to a time lag, the median
multiple for PE-backed deal tracked
by GF Data®
ticked up slightly to 7.8x
in 4Q18.
Debt Investments: High Yield Spreads by Credit Rating
As is typical in the late stages of a
Fed tightening cycle, the Treasury
and Libor/Swap curves flattened and
partially inverted from rising short
rates and easing long rates for the
first time since 2007 on the eve of
the financial crisis. Credit spreads
widened sharply, too.
Yields on issues rated CCC below
widened 441 bps in the fourth quarter,
compared to 231 bps and 150 bps of
widening for B- and BB-rated credits.
Since the Fed pivot in 1Q19 spreads
have narrowed somewhat and the
Treasury curve has steepened
slightly with a rally in the short-end as
investors have begun to price in the
potential of a rate cut by year-end.
-
2x
4x
6x
8x
10x
12x
14x
4Q12 2Q13 4Q13 2Q14 4Q14 2Q15 4Q15 2Q16 4Q16 2Q17 4Q17 2Q18 4Q18
SP500 R2000 GF Data®Source: Capital IQ, GF Data®
-
2
4
6
8
10
12
Mar-18 May-18 Jul-18 Sep-18 Nov-18 Jan-19 Mar-19
OptionAdjustedSpread(%)
CCC Below B BBSource: BofA Merrill Lynch
Excludes financials
Median EBITDA Multiple
Excludes financials

3. Mercer Capital’s Portfolio Valuation First Quarter 2019
© 2019 Mercer Capital 2 www.mercercapital.com
Long-Term Dividend Yield Trend
Long-Term Business Development Companies P/NAV TrendPublicly Traded
Private Credit
The median P/NAV for BDCs fell
from 90% at the end of 3Q18 to 82%
at year-end. By late March 2019,
the rally in BDC stocks pushed the
median P/NAV multiple to 93% and
the median dividend yield to 9.5%
from 11.1% at year-end.
7.5
8.0
8.5
9.0
9.5
10.0
10.5
11.0
11.5
3/20/19
2018Q
3
2018Q
1
2017Q
3
2017Q
1
2016Q
3
2016Q
1
2015Q
3
2015Q
1
2014Q
3
2014Q
1
2013Q
3
2013Q
1
Median BDC Yield (%) Market Cap Weighted BDC Yield (%)
Source: SP Global
75
80
85
90
95
100
105
110
115
3/20/19
2018Q
3
2018Q
1
2017Q
3
2017Q
1
2016Q
3
2016Q
1
2015Q
3
2015Q
1
2014Q
3
2014Q
1
2013Q
3
2013Q
1
Median BDC P/NAV (%) Market Cap Weighted BDC P/NAV (%)
Source: SP Global
Stock Performance for Publicly Traded PE Sponsors:Total Returns (Trailing Twelve Months)
The shares of PE companies and
BDCs during 4Q18 sold-off more
sharply than the broad market as
measured by the SP 500 due to
investor concerns about what a
potential recession might mean for
private equity and credit valuations;
however, both private equity and
credit (as represented by BDCs)
rebounded sharply in 1Q19 as the
Fed pivoted and indicated rate hikes
are over for the time being.
-20
-15
-10
-5
0
5
10
15
20
Mar-18 May-18 Jul-18 Sep-18 Nov-18 Jan-19 Mar-19
TotalReturn(%)
SP 500 PE Firms BDC GroupSource: SNL Financial

4. Mercer Capital’s Portfolio Valuation First Quarter 2019
© 2019 Mercer Capital 3 www.mercercapital.com
$37.2
184
0
50
100
150
200
250
300
350
$0
$10
$20
$30
$40
$50
$60
$70
$80
$90
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
2010 2011 2012 2013 2014 2015 2016 2017 2018
$ billions
Exit Value # of Exits Closed
Source: Pitchbook/NVCA Venture Monitor
U.S. VC-Backed Exit Activity
More than 50% of total value exited
during 2018 was through a public
offering even though IPOs accounted
for only 10% of all exits. However, the
most notable IPO news for the year
revolved more around filings than
actual offerings. Details of these
potential offerings are still largely
unknown, as companies are taking
advantage of the ability to file confi-
dentially.
Median Deal Size by Stage ($ millions)
The trend of growing median deal
sizes held through the end of the year,
with late stage deals cresting $12.0
million. Another notable trend is the
divergence between median angel
and seed stage deals. These two
groups looked largely similar through
2014 before median seed deals took
off on an upward trajectory.
Venture Capital
U.S. VC-Backed Funding Activity
Funding activity met expectations for
a record year in capital deployment.
$41 billion was invested in just under
9,000 deals. The number of angel
and seed stage deals funded during
the year fell to just two-thirds of those
funded in 2015.
$0.7
$2.0
$7.0
$12.0
$0
$2
$4
$6
$8
$10
$12
$14
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
$ millions
Angel Seed Early VC Later VC
Source: Pitchbook/NVCA Venture Monitor
$41.8
2,072
0
600
1,200
1,800
2,400
3,000
3,600
$0
$5
$10
$15
$20
$25
$30
$35
$40
$45
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
2010 2011 2012 2013 2014 2015 2016 2017 2018
$ billions
Deal value # of Deals Closed Angel/Seed Early VC Later VC
Source: Pitchbook/NVCA Venture Monitor

5. On the Call
The following is a brief compendium of quotes from 4Q18 earnings season conference calls.
Source: All transcripts obtained from SNL.
© 2019 Mercer Capital 4 www.mercercapital.com
Mercer Capital’s Portfolio Valuation First Quarter 2019
Josh Harris (APO, Co-Founder) – “But on the credit
side certainly, the volatility in December provided us the
opportunity to deploy a bunch of capital. It was short-lived in
the sense that the credit markets rallied in January and have
recovered a lot of what they had — and retraced some of the
losses. And so we took advantage of it.”
Scott Kleinman (APO, Co-President) – “So from a perfor-
mance quarter, notwithstanding the equity market volatility,
4Q18 continued the trend that we had seen for much of the
year, solid mid-single digits across the portfolio on average,
sort of mid-single-digit revenue and EBITDA growth across
the portfolio. The vast, vast majority of the companies are in
very good shape. Look, as far as exit and monetization, it’s
pretty consistent with what we’ve been saying for the last few
quarters, which is ‘19 should be — assuming there’s not a
massive market meltdown, ‘19 should be better than ‘18 and
‘20 will be better than ‘19.”
Kipp DeVeer (ARCC, CEO) – “We believe that the big
negative move that we saw in December was largely a
technical event. As a result, during the fourth quarter, the
broadly syndicated loan market experienced price weakness,
but the buy-and-hold middle-market, where we are most
active, demonstrated materially less price volatility. Since
the start of this year, institutional money has returned and
secondary prices in the broadly syndicated loan market have
partially recovered.”
Steve Schwarzman (BX, Chariman CEO) – “As everybody
knows, the fourth quarter was an extremely difficult period for
markets. For the full year, for the first time in at least 15 years,
every major traditional asset class had negative real returns
after adjusting for inflation. Looking at the world today, we
remain constructive on the U.S. economy. Employment
trends remain strong. The consumer is healthy and there are
no visible signs of a recession.”
Jon Gray (BX, President COO) – “But the underlying
credit factors still look pretty good, particularly here in the
U.S. There’s been a lot of focus in the media around the
leverage loan market in particular. And yet, when you look at
that market, defaults are less than half of historic levels and
interest coverage is the highest it’s been since the crisis.”
Kewsong Lee (CG, Co-CEO) – “High levels of dry powder
in our industry, combined with slowing global growth and
volatile markets, could affect both investment pace and
realizations in 2019. Buyers to mark the market faster than
sellers, and so there’s a period of time that needs to happen
for that recalibration to occur.”
Curt Buser (CG, CFO) – “What we see on a go-forward
basis is a continued high price environment. Every asset
is expensive. We do see, potentially, some reduction in
purchase prices, as Kew said, in the international arena.”
David Golub (CG, President CEO) – “We think there is a
stronger case for interpreting the recent volatility as another
tantrum where there really is not a set of fundamental changes
in market conditions. A line I’ve often used is that the middle
market is insulated from, but not immune from trends in the
broadly syndicated market. By that I mean, the amount of
capital that’s been raised, the number of new players who’ve
come in, the amount of money that’s looking for a home
in new middle-market loan assets. So we’re seeing less
volatility in the middle market for better or for worse.”
Scott Nuttall (KKR, Co-President Co-COO) – “The LPs
take a longer-term perspective and the general view is that
we’re entering a lower-return environment for the markets
more broadly. And in that context, we have a lot of discussions
around clients feeling like they’re going to need more
alternatives, not less, in order to hit their target. We also think
as the overall market return drops, the illiquidity premium that
we’re able to generate actually increases as a percentage of
their overall return. And so that’s meaningful for us too.”
Art Penn (PNNT, Chairman CEO) – “We focus, today,
mostly on the self-originated middle-market, which generally
doesn’t really move. It’s a much more placid environment.
The U.S. economy is generally strong. I think we’re seeing
probably mid-single-digit EBITDA growth as a broad and
general statement in the portfolio.”

6. Copyright © 2019 Mercer Capital Management, Inc. All rights reserved. It is illegal under Federal law to reproduce this publication or any portion of its contents without the publisher’s permission. Media
quotations with source attribution are encouraged. Reporters requesting additional information or editorial comment should contact Barbara Walters Price at 901.685.2120. Mercer Capital’s Portfolio
Valuation is published quarterly and does not constitute legal or financial consulting advice. It is offered as an information service to our clients and friends. Those interested in specific guidance for
legal or accounting matters should seek competent professional advice. Inquiries to discuss specific valuation matters are welcomed. To add your name to our mailing list to receive this complimentary
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