As part of its ongoing Breakfast Forum series, BoyarMiller gathers industry experts for a panel discussion on the Current State of the Capital Markets. Speakers include: Lee Partridge, Salient Partners; Cliff Atherton, GulfStar Group; and Paul Murphy, Cadence Bancorp, LLC.

1. The Current State of the Capital Markets
Breakfast Forum
September 2014

2. For Presentation Purposes Only.
BoyarMiller Breakfast Forum
The Current State of Capital Markets September 4, 2014

3. For Presentation Purposes Only.
3
Disclaimers
The information contained in this presentation reflects thoughts and opinions of Salient Capital Advisors, LLC ("Salient") employees only, and the firm is not soliciting any transaction based upon such information. Research and Advisory Services provided by Salient Capital Advisors, LLC, a wholly owned affiliate of Salient Partners, L.P. Salient Capital Advisors, LLC is an investment advisor registered with the U.S. Securities and Exchange Commission. Registration as an investment advisor does not imply any level of skill or training. Salient Partners, L.P. and affiliates do not provide tax or legal advice. Please consult your tax and or legal professional to determine how the information contained in the publication may apply to your situation.
The contents of this presentation are for informational purposes only and may not reflect current financial developments or market conditions. This information is being provided solely for educational purposes and is not an offer to sell or solicitation of an offer to buy an interest in any investment fund. Any such offer or solicitation may only be made by means of a confidential private offering memorandum or prospectus relating to a particular fund and only in a manner consistent with federal and applicable state securities laws. You should not act or refrain from acting on the basis of any content included in this presentation without seeking financial or professional advice on the particular facts and circumstances at issue. Salient reserves the right to change any information contained herein without prior notice.
Some information contained herein has been obtained from third party sources and has not been independently verified by Salient. Salient makes no representations as to the accuracy or the completeness of any of the information herein. The information in this material is only as current as the date indicated, and may be superseded by subsequent market events or for other reasons. Any statements of opinion constitute only current opinions of Salient, which are subject to change and which Salient does not undertake to update. Some information in this presentation is based on unaudited information and is subject to change.
Some statements in this communication are forward-looking statements. The forward-looking statements and other views expressed herein are as of the date of this publication. Actual future results or occurrences may differ significantly from those anticipated in any forward-looking statements, and there is no guarantee that any predictions will come to pass. The views expressed herein are subject to change at any time, due to numerous market and other factors. Salient disclaims any obligation to update publicly or revise any forward-looking statements or views expressed herein.
Salient research has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. Salient recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or strategy will depend on an investor's individual circumstances and objectives.
Salient research or any portion thereof may not be reprinted, sold or redistributed without the written consent of Salient. Salient research is disseminated and available primarily electronically, and, in some cases, in printed form.
Salient is the trade name for Salient Partners, L.P., which together with its subsidiaries provides asset management and advisory services.
© 2014 Salient. All Rights Reserved.

4. For Presentation Purposes Only.
4
-3
-1
1
3
5
7
9
-3.50
-3.00
-2.50
-2.00
-1.50
-1.00
-0.50
0.00
0.50
1.00
Federal Funds Rate (%)
Curve Slope
5-30 Curve
10-30 Curve
FDTR Index
Yield Curves show signs of tighter monetary policy
The Current State of Interest Rate Markets
Source: Bloomberg, Federal Reserve, May 2014. FDTR represents the Federal Funds Target Rate. For illustrative purposes only. Past performance does not guarantee future results. An investor cannot invest directly in an index. The index reflects the reinvestment of dividends and income and does not reflect deductions for fees, expenses or taxes. The index is unmanaged and is not available for direct investment.
Tightening Isn’t Coming…Tightening is Here

5. For Presentation Purposes Only.
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The Current State of Interest Rate Markets
Source: Bloomberg, Hang Seng China Enterprises, Standard & Poors, National Bureau of Statistics of China, May 2014. CNY represents the Chinese Yuan Renminbi currency. HSCEI represents the Hong Kong Stock Exchange: Hang Seng China Enterprises Index. SPX represents the S&P 500 Index. PBOC stands for the People's Bank of China. For Illustrative purposes only. Past performance does not guarantee future results. An investor cannot invest directly in an index. The index reflects the reinvestment of dividends and income and does not reflect deductions for fees, expenses or taxes. The index is unmanaged and is not available for direct investment.
…Except in China

6. For Presentation Purposes Only.
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The Current State of Interest Rate Markets
Source: Bloomberg, Federal Reserve, May 2014. For illustrative purposes only. Past performance does not guarantee future results.
The return on US 10-Year Bonds shown reflects the reinvestment of income and does not reflect deductions for taxes. U.S. treasury bonds are guaranteed by the U.S. government and, if held to maturity, offer a fixed rate of return and guaranteed principal value. U.S. treasury bonds are issued and guaranteed as to the timely payment of principal and interest.
Rates Can Only Go Up From Here…Right?
0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% 14.00% 16.00% 18.00% 1/31/197011/30/19709/30/19717/31/19725/31/19733/31/19741/31/197511/30/19759/30/19767/31/19775/31/19783/31/19791/31/198011/30/19809/30/19817/31/19825/31/19833/31/19841/31/198511/30/19859/30/19867/31/19875/31/19883/31/19891/31/199011/30/19909/30/19917/31/19925/31/19933/31/19941/31/199511/30/19959/30/19967/31/19975/31/19983/31/19991/31/200011/30/20009/30/20017/31/20025/31/20033/31/20041/31/200511/30/20059/30/20067/31/20075/31/20083/31/20091/31/201011/30/20109/30/20117/31/20125/31/20133/31/2014US 10-Year Bond Yield Month-End
Return on US Treasuries After Selling
“At the Bottom”
87%
54%
62%
24%

7. For Presentation Purposes Only.
7
The Current State of Interest Rate Markets
Source: Bloomberg, Federal Reserve, May 2014. For illustrative purposes only. Past performance does not guarantee future results.
The return on US 10-Year Bonds shown reflects the reinvestment of income and does not reflect deductions for taxes. U.S. treasury bonds are guaranteed by the U.S. government and, if held to maturity, offer a fixed rate of return and guaranteed principal value. U.S. treasury bonds are issued and guaranteed as to the timely payment of principal and interest.
Tell That to the Germans
0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 8/31/19901/31/19916/30/199111/30/19914/30/19929/30/19922/28/19937/31/199312/31/19935/31/199410/31/19943/31/19958/31/19951/31/19966/30/199611/30/19964/30/19979/30/19972/28/19987/31/199812/31/19985/31/199910/31/19993/31/20008/31/20001/31/20016/30/200111/30/20014/30/20029/30/20022/28/20037/31/200312/31/20035/31/200410/31/20043/31/20058/31/20051/31/20066/30/200611/30/20064/30/20079/30/20072/29/20087/31/200812/31/20085/31/200910/31/20093/31/20108/31/20101/31/20116/30/201111/30/20114/30/20129/30/20122/28/20137/31/201312/31/20135/30/201410-Year Bond Yield DateUS TreasurysGerman Bunds
US 10-Year Yield at Historic Highs vs. Bunds

8. For Presentation Purposes Only.
8
The Current State of Equity Markets
Source: FactSet, Bloomberg, Salient Partners, L.P., August 2014.
For illustrative purposes only. Past performance does not guarantee future results.
A Matter of Perspective
4.48 8.19 5.29 3.52 0123456789All WorldEmerging MarketsUSWorld ex US Percentage (%) RegionGlobal Equity4.83 6.44 5.53 4.68 - 1 2 3 4 5 6 7CoreValueLargeGrowth Percentage (%) StyleUS Equity Style9.66 9.54 8.37 7.86 5.33 4.36 2.42 0.20 (1.34)(1.49)-4-202468 1012 Percentage (%) SectorUS Equity Sectors
vs.
Return (%)
Return (%)
Return (%)

9. For Presentation Purposes Only.
9
The Current State of Equity Markets
Source: FactSet, Salient Partners, L.P., August 2014.
For illustrative purposes only. Past performance does not guarantee future results. Index performance does not reflect the deduction of fees or expenses. Note that an investor cannot invest directly in the index. Each quintile is based on a 20% holding. The Top Quintile represents the top 20%, the Bottom Quintile represents the bottom 20%, based on 1-Year Beta in the S&P 500. The S&P 500 Index is an unmanaged, capitalization weighted index comprising publicly traded stocks issued by companies in various industries.
024681012Top Beta Quintile(Riskiest) 2nd Quintile3rd Quintile4th QuintileBottom BetaQuintile (LowestRisk) YTD Return through 7/30/2014 Quintiles
Profile of a Manic/Depressive Market
S&P 500 YTD Return Through 7/30/2014

10. For Presentation Purposes Only.
10
The Current State of Labor Markets
Source: Bloomberg, Bureau of Labor Statistics. For illustrative purposes only.
1Unemployment rate reflects those not in the labor force, but actively seeking employment over 16 years of age.
2By combining the labor non-participation rate with the unemployment rate we derive the percent of the working age population that are currently not working, which is represented by the orange line.
123456789303234363840424446 19701972197419761978198019821984198619881990199219941996199820002002200420062008201020122014Unemployment Expressed as Percent of Working Age Population1Percent of Working Age Population Labor Non-ParticipationPeople not Working as a % of Working Age Pop. "Unemployed" as % of Working Age Pop. At northof 41%, the percent of the working age population who are not working is as high as it was in 1983 and has barely come down since the financial crisis.2
Better Employment is Still a Myth

11. For Presentation Purposes Only.
11
Takeaways
Source: Salient Capital Advisors, LLC, September 2014.
The Current State of Capital Markets
Treasury yields are low historically, but, in our opinion, believing they can “only go up from here” is a mistake
Investors in equities are set up in multiple camps with divergent views on risk Risks we see from here…
Populist policies stemming from perceptions of income inequality may pose a material risk to markets over the coming years
European banking does not appear to be fixed yet
Corrections from geopolitical shocks thus far have been very small relative to the potential risk – a large enough event could tip the tide away from focus on central banks

12. Commercial Banking and Real Estate Lending

13. Banking Regulation Update

Increased regulation will continue to drive financial sector M&A

Smaller banks hit hardest

33% of Dodd Frank Reform still not implemented

15. C&I Lending Perspective

Shale plays continue to be the major driver for middle market C&I companies and their lenders

Companies benefiting from increased capital expenditure along Gulf Coast in the next 10 years. In the Houston Ship Channel, 125 projects have been announced with investments estimated at $84Bn

Purchase multiples for growing companies continuing to climb; Reaching 6x EBITDA

16. Commercial Real Estate Lending Overview

Houston recovered quickly from recession

Fierce competition amongst banks

Focus on Sponsorship, Equity, Real Estate

Developers and equity sponsors have been more careful with leverage, offering more equity in projects

Great time to borrow money

17. Commercial Real Estate Perspective - Houston Multifamily Market

24,000 units under construction at end of 2Q 2014; 18,000 additional units proposed

15,000 units absorbed in the last 12 months

7.4% rent growth in last 12 months

Average occupancy of 91% in all asset classes

18. Commercial Real Estate Perspective – Houston Office Market

17.0MM SF of space under construction at end of 2Q 2014; Overall 67% pre-leased

5.7% rental rate increase in first half of 2014

Vacancy trending downward, overall 9.8% at end of 2Q 2014

19. Commercial Real Estate Perspective – Houston Industrial Market

4.6 million SF of positive absorption in first 6 months of 2014
Currently 4.5MM SF of space under construction, down from 5.6MM SF in 1Q 2014

High demand keeping up with high volume of deliveries

Market well positioned for future rent growth

20. The Current State of the Capital Markets
Middle Market M&A and Private Equity Update
Cliff Atherton Managing Director September 2014

21. 21
U.S. Private Equity Deal Flow
Source: PitchBook U.S. Private Equity Breakdown
# of Deals
Billions
In 2014, we’ve had the strongest first half since 2007
$102
$109
$151
$158
$223
$190
$120
$96
$80
$91
$165
$220
$184
$215
$183
$276
$192
$273
$244
632
656
815
875
1,072
987
780
649
771
812
1,052
1,218
1,221
1,223
1,208
1,408
1,187
1,415
1,272
0
200
400
600
800
1,000
1,200
1,400
1,600
$0
$50
$100
$150
$200
$250
$300
1H
2H
1H
2H
1H
2H
1H
2H
1H
2H
1H
2H
1H
2H
1H
2H
1H
2H
1H
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Total Capital Invested ($B)
Deals Closed

22. 22
$192
$244
1,187
1,272
1,100
1,150
1,200
1,250
1,300
$0
$100
$200
$300
1H 2013
1H 2014
Capital Invested ($B)
# of Deals Closed
On an annual basis, the market has been stable since 2010 and it appears that 2014 will be above trend
Billions
# of Deals
# of Deals
Billions
Source: PitchBook U.S. Private Equity Breakdown
$210
$309
$413
$216
$171
$385
$399
$459
$465
1,288
1,690
2,059
1,429
1,583
2,270
2,444
2,616
2,602
0
500
1,000
1,500
2,000
2,500
3,000
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
$500
2005
2006
2007
2008
2009
2010
2011
2012
2013
Capital Invested ($B)
# of Deals Closed
U.S. Private Equity Deal Flow

23. 23
6.0x
6.0x
6.0x
5.9x
6.2x
6.2x
6.5x
6.4x
202
165
91
197
203
239
145
0
50
100
150
200
250
300
5.6x
5.7x
5.8x
5.9x
6.0x
6.1x
6.2x
6.3x
6.4x
6.5x
6.6x
2007
2008
2009
2010
2011
2012
2013
1H 2014
Average multiple in middle market was 6.4 times in first half of 2014
Average Multiples and Deal Volume
Source: GF Data M&A Report; Transactions from $10 Million to $250 Million
Multiple
Deal Count
TEV/EBITDA 1H 2014
TEV/EBITDA
Deals/Year
75

24. 24
Buyout Multiples within the Middle Market by Deal Size
Multiple
Source: GF Data M&A Report; Transactions from $10 Million to $250 Million
5.5
5.3
5.3
5.6
5.9
5.3
7.2
6.5
7.5
7.4
7.1
8.3
4.0x
4.5x
5.0x
5.5x
6.0x
6.5x
7.0x
7.5x
8.0x
8.5x
9.0x
2003-2009
2010
2011
2012
2013
1H 2014
$10-25 MM
$100-250 MM
In the middle market, there has been a flight to quality as multiples have moved up for larger companies while they have fallen for smaller companies

25. 25
Middle Market ($30-75 million EBITDA) “There are a lot of deals to choose from that will result in higher prices and a lot of people getting nervous. That’s primarily driven around the true mid-market companies – businesses with $30 to $75 million in EBITDA. That market is insanely competitive.” – Jay Jester, Audax Group, Mergers & Acquisitions, August 2014 Lower Middle Market ($5-15 million EBITDA) “So for small platforms and add-on acquisitions, I think this is a terrific market. As I look at our numbers for deal flow, what I’m seeing are private sellers coming to market, those family owned businesses in the EBITDA range of $5 million to $15 million. There are a ton of those companies coming to market right now and people will be spending a lot of time on them in the next half of the year.” – Jay Jester, Audax Group, Mergers & Acquisitions, September 2014
Buyers acknowledge that the market for all middle market companies is active and very competitive

26. 26
2.8x
2.3x
1.8x
3.0x
2.4x
2.4x
2.6x
2.7x
0.9x
1.0x
1.1x
0.9x
1.0x
1.0x
0.8x
1.1x
3.7x
3.3x
2.9x
3.9x
3.4x
3.4x
3.4x
3.8x
0.0x
1.0x
2.0x
3.0x
4.0x
2007
2008
2009
2010
2011
2012
2013
1H 2014
Total Debt Multiples
Senior Debt / EBITDA
Sub Debt / EBITDA
Private equity buyers are actively using sub debt to increase total debt and EBITDA multiples in transactions
Multiple
Source: GF Data August 2014 Leverage Report; Transactions from $10 Million to $250 Million

27. 27
Equity and Debt as a % of Total Enterprise Value (TEV)
% of TEV
42.4%
46.9%
54.0%
50.7%
48.0%
46.8%
49.3%
42.7%
13.7%
16.5%
16.2%
13.9%
15.0%
16.1%
12.3%
16.9%
44.0%
36.6%
29.7%
35.5%
37.0%
37.0%
38.4%
40.3%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
2007
2008
2009
2010
2011
2012
2013
1H 2014
Equity
Sub Debt
Senior Debt
Source: GF Data August 2014 Leverage Report; Transactions from $10 Million to $250 Million
…resulting in a smaller percentage of equity in closing capital structures

28. 28
U.S. Private Equity Deal Flow
PE capital invested and deal count have grown substantially since 1995
Billions
# of Deals
Source: PitchBook; Transactions between $25 Million and $1 Billion
$7
$8
$9
$11
$14
$16
$35
$49
$70
$124
$106
$78
$80
$147
$227
$210
$309
$413
$216
$171
$385
$399
$459
$465
$244
83
83
131
146
157
227
333
474
660
894
1,049
751
935
1,316
1,801
1,288
1,690
2,059
1,429
1,583
2,270
2,444
2,616
2,602
0
500
1,000
1,500
2,000
2,500
3,000
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
$500
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
1H
2014
Total Capital Invested ($B)
Deals Closed
1,272

29. 29
PE firm growth since 1980 – The inflection in PE industry growth occurred in 1996 and 1997
No. of Firms
Source: Preqin
New funds continue to shrink as a percentage of the pie
Number of Active Private Equity Firms over Time (By Vintage of First Fund Raised)

30. 30
With portfolio companies and dry powder combined, PE firms control more than $3.7 trillion today
418
374
360
465
554
675
898
1,265
1,204
1,413
1,783
2,029
2,332
2,546
298
377
407
402
409
563
806
1,011
1,075
1,067
993
1,007
941
1,174
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Assests under Management ($bn)
Unrealized Portfolio Value ($bn)
Dry Powder ($bn)
Source: Preqin
All Private Equity – Assets Under Management, 2000-2013

31. 31
$541
$526
$504
$484
$497
$509
$486
$0
$100
$200
$300
$400
$500
$600
2007
2008
2009
2010
2011
2012
2013*
2013*
2012
2011
2010
2009
2008
2007
2006
Cumulative dry powder
Dry powder by Vintage
Source: PitchBook U.S. PE & VC Fundraising & Capital Overhang
Most of today’s $486 billion of dry powder is in funds closed in 2012 & 2013
Billions
*Through 12/31/2013
2006 - 2009
U.S. Private Equity Capital Overhang

32. 32
The typical middle market investor manages a fund of $1 billion or less; they have 26% of the $486 billion of dry powder
26%
38%
36%
Percentage of dry powder
Under $1B
$1B -$5B
$5B +
Source: PitchBook U.S. PE & VC Fundraising & Capital Overhang

33. 33
The Bottom Line

Underlying real economy in Houston and Texas is strong - slow recovery elsewhere

Sellers see valuations at or above those achievable in 2007 and 1H 2008, and they are now 7 years older and wiser

Private equity is deploying and raising capital at a pace consistent with pre- crash levels

Strategics are under pressure to grow earnings, and their balance sheets are flush with cash and unused debt capacity

34. 34
What will stop the music?
Credit Markets

What could spook them?

Inflation?

Drop in oil price (deflation)?

Macroprudential Policy? Geopolitical Risk

35. 35
US Treasury Securities
$479,206 52%
Repurchase Agreements
$123,250 14%
Other Assets
$316,090 34%
The wild card in the credit markets is the Federal Reserve and its policy changes
$4,406,637
$918,546
$0
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
$3,000,000
$3,500,000
$4,000,000
$4,500,000
$5,000,000
Jul-14
Jul-08
Total Assets (Millions)
July 2008
July 2014
Source: Federal Reserve Banks and the U.S. Department of the Treasury
US Treasury Securities
$2,240,285 55%
MBS
$1,674,363 38%
Other Assets $311,989 7%

36. 36
Buffet is correct; the Fed is the world’s largest hedge fund
$4,406,637
$918,546
$0
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
$3,000,000
$3,500,000
$4,000,000
$4,500,000
$5,000,000
Jul-14
Jul-08
Total Liabilities and Capital (Millions)
Source: Federal Reserve Banks and the U.S. Department of the Treasury
Federal Reserve Notes
$795,563 87%
Deposits $33,417 4%
Other Liabilities
$49,183 5%
Total Capital
$40,383 4%
Federal Reserve Notes
$1,241,974 28%
Deposits
$2,785,798 63%
Other Liabilities
$322,539 8%
Capital $56,326 1%
July 2008
July 2014

37. 37
…and the banks have become its primary source of funding
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
Jan-04
May-08
Sep-12
Millions of Dollars
Excess Reserves of Depository Institutions
Source: Federal Reserve Banks and the U.S. Department of the Treasury