How has the economic downturn affected the cost of capital in private markets? There’s some empirical data on lenders’ expected returns, thanks to I-banker Rob Slee’s on-going biennial survey, completed with Pepperdine University. The latest findings, as summarized in a recent article:

• Banks.  Instead of lending 5 or 6 times EBITDA during peak times, banks are funding only half as much, based on asset values rather than cash flows. They are still a cheap source of private capital, averaging 6% to 8% for loans of $1 million to $5 million.
• Asset-based lenders. Expected returns from Tier I loans (> $10 million) range from 8% to 10%; for Tier II ($2 million to $10 million) the range is 10% to 15%; and for Tier III (> $2 million) the expected return is well above 18%.
• Mezzanine lenders. Because this debt is subordinated, often lacking personal guaranties (but with equity participation through warrants), these lenders demand higher rates—12% to 13%—for loans of $2 million to $10 million, a couple of points higher than a year ago.
• Private equity. This lending is at an all-time low; PE groups want to see a 25% return on future funding, but expect only 10% on current investments.
• Venture capital. VCs still expect to earn 40% to 45% on their limited partner interests, with higher returns for early-stage investments.

Slee is currently conducting the survey again (every six months), adding lawyers and business owners. He’ll also be speaking in Boston on Dec. 9th on the Private Cost of Capital Model. “This will be the first time I'll give guidance as to how to use the model,” he tells BVWire™. In the meantime, anyone who registers at MidasNation.com will receive regular updates plus MidasNotes each Monday. “This is my written harangue as to what's happening in the economy,” Slee says. “My Note this week shows that the U.S. banking system is technically insolvent.”