SOURCES OF FUNDING FOR IRISH BUSINESSES MAY 2015 INTRODUCTION TO PEGASUS CAPITAL SECTION I ABOUT US

• Pegasus Capital is a Dublin-based financial advisory firm

• We advise mid-market Irish companies on a range of transacons:

• Raising debt

• Raising quasi-equity & equity

• Company disposals, mergers & acquisions

• Management buy-out & management buy-in transacons

• We typically advise on 8 – 10 transacons p.a.

• Parcular experse in high-growth sectors such as technology & lifesciences

Page 3 CHOOSING A SOURCE OF FUNDING SECTION II OUR GENERAL VIEW ON THE FUNDING ENVIRONMENT

• Debt & equity markets less buoyant than pre-Crisis

• Companies that are financially strong have mulple funding opons

• Given the size of the market, Ireland is well-represented with equity funds

• Funding from internaonal sources is available in certain circumstances

• Instuonal funds prefer to invest in companies with a strong growth outlook

• High net worth investors have an appete for invesng but decision making is more

arbitrary and quantums are generally low relave to instuonal funds

• Most instuonal funds have a preference to invest later in the cycle

• Funding takes me to put in place … need to build-in appropriate headroom

Page 5 TYPES OF FUNDING

AMORTISING 1. DEBT

BULLET COST HIGHER = RISK HIGHER

WARRANTLESS 2. QUASI-EQUITY EQUITY WARRANT

MINORITY STAKE 3. EQUITY MAJORITY STAKE

Page 6 DEBT VS. EQUITY

DEBT EQUITY

ü Lower cost ü Strengthens Balance Sheet

ü Limited loss of control ü Increases financial firepower

ü Clear repayment schedule ü Provides downside protecon

ü Shareholder de-risking

û Typically short-term û Expensive

û Degrees of recourse û Difficult to raise

û Not always appropriate û Dilutes shareholding

û Repaid from cashflow û Need to provide an exit

û Leverage increases

Page 7 OUR SUMMARY VIEW ON THE CURRENT FUNDING ENVIRONMENT

TERMS & AVAILABILITY COST CONDITIONS

CONVENTIONAL SENIOR DEBT

SPECIALIST SENIOR DEBT

QUASI-EQUITY

EARLY STAGE

LATE STAGE VENTURE CAPITAL

PRIVATE EQUITY (REVENUE < EUR 10M)

PRIVATE EQUITY (REVENUE > EUR 10M)

Page 8 FUNDING PROVIDER FUNDING VS. RETURNS RISK

TARGET RETURNS SENIOR DEBT SENIOR c.5% INFRASTRUCTURE c. 8% - 10% c.8% - c.1012% - PROPERTY MEZZANINE DEV. CAP. & c.12% +

VENTURE c.20% DEBT PRIVATE EQUITY c.25% VENTURE CAPITAL 25%+ RISK Page 9 Page

DEBT & QUASI-EQUITY SECTION III DEBT AS A SOURCE OF FUNDING

• The Irish banking environment has improved but challenges remain:

• Leverage rates remain low

• Interest rates, while reducing, remain above European levels

• Debt tenor remains low with limited appete for long-term funding

Page 11 DEBT AS A SOURCE OF FUNDING (CONT’D)

• Summary observaons:

• Debt < 3.5x EBITDA with a focus on profitability

• Key consideraons:

• Type of funding: term debt vs. invoice discounng vs. asset finance?

• Convenonal bank vs. specialist provider of niche products?

• Debt mulple … depends on free operang cashflow?

• Fixed vs. floang interest rate?

• Security & recourse?

• Tenor?

Page 12 QUASI-EQUITY AS A SOURCE OF FUNDING

• Quasi-equity / mezzanine:

• Sits where equity would otherwise sit

• Effecvely preferred equity in some cases

• More efficient … reduces average cost of capital

• Lower availability of convenonal debt has reduced the risk parameters:

• Overall leverage levels have reduced c. 25% from pre-Crisis peak

• Many providers will typically only invest in sponsor-led opportunies:

1. To remove ‘funder of last resort’ risk, and

2. To provide greater comfort on surety of exit

Page 13 QUASI-EQUITY AS A SOURCE OF FUNDING (CONT’D)

• Summary observaons:

• Investment criteria focused on cashflow

• Reasonably full due diligence requirements

• Fundraising process similar to an equity fundraising process

• (For tech & lifescience companies) may be backed by a specific charge over IP

• Key consideraons:

• Mezzanine vs. development capital fund?

• Payment in cash vs. payment in kind?

• Timing of funding need and buy-back opon?

Page 14 DEBT RAISING … INITIAL DOCUMENTATION REQUIREMENTS

1. Proposal overview

2. Financial profile: • Min. 3 years historic and 1 – 2 years future • Detailed use of cash

3. Detailed cashflow: • Cash cover ((operang cashflow – tax – working cap – capex) / (capital + interest)) > 1.2x • Interest cover ((operang cashflow – tax – working cap – capex) / (interest)) > 4.0x • Debt mulple (net debt / EBITDA) < 3.0x

4. Consider bank security opons

Page 15 VENTURE CAPITAL SECTION IV VENTURE CAPITAL FUNDRAISINGS

IRISH LIFESCIENCES & TECH EQUITY FUNDRAISINGS (2009 – DATE) 4 50

45

40 3 35

30

2 25

20

15 FUNDRAISINGS (RED) NO. 1 10 NO. FUNDRAISINGS (GREEN) 5M > EUR NO.

AVERAGE FUNDRAISING (EURM, BLUE COLUMN) BLUE FUNDRAISING (EURM, AVERAGE 5

- 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 09 09 09 09 10 10 10 10 11 11 11 11 12 12 12 12 13 13 13 13 14 14 14 14

Page 17 RAISING VENTURE CAPITAL

• Summary comments:

• Raise sufficient capital to fund breakeven based on conservave projecons

• Raising equity overseas is challenging in the absence of reasonable scale

• The majority of acve funds see the current environment as an “investors” market

• Most VC funds only invest in high-growth areas (technology & lifesciences)

• Terms may be opmised by maximising the number of credible interested pares

• High availability of seed funding locally over the past number of years

• Consider the availability of follow-on funding

• No short-term cash / liquidity issues

• Support of exisng investors

Page 18 EUROPEAN VS. US VENTURE CAPITAL

ü Generally more entrepreneurial ü Generally more supporve of unforeseen challenges ü Valuaons frothy in certain segments ü Proximity = closer relaonship ü More focused on generang very high exit values and willing to fund the higher cash burn ü Generally give their porolio companies more required to achieve this me to succeed

û May require relocaon to the US û Capacity may be more limited if the investee company requires significant follow-on funds û Less supporve if the Company underperforms û Limited value-add if customer base is US centric û Criteria may exclude companies outside US

û Target revenue > US$ 5m for overseas deals

Page 19 TYPICAL VENTURE CAPITAL TERMS

á QUANTUM OF FUNDING á VALUATION

DRAG ALONG â ANTI-DILUTION â LIQUIDATION PREFERENCE â

• Key consideraons:

• Confidence in projecons … i.e. trade downside protecon for greater upside?

• Will the Company require more capital?

• Strategic or financial investor(s)?

• Quantum of funding required?

Page 20 SAMPLE VENTURE CAPITAL FUNDS ACTIVE IN THE IRISH MARKET DEVELOPMENT CAPITAL

LOW APPETITE FOR IRISH DEALS HIGH STAGE OF INVESTMENT STAGE

SEED Page 21 TYPICAL VC INVESTMENT PROCESS

NO. OF PROPOSALS TIMEFRAME COMMENTS

c. 1,000 Annual investment proposals c. 750 5 mins. 20 - 25% disregarded immediately … not in the area of focus c. 500 1 hr. Addional 20 - 25% disregarded aer an inial ‘sense-check’ c. 333 1 hr. Post desktop review c. ⅓ of applicaons given consideraon c. 100 1 hr. Conf. call with Target to assess opportunity + 2 wks. Internal desk-top & industry research c. 50 30 mins. Sponsor-led investment commiee review + 3 - 4 wks. Review Business Plan and internal due diligence 20 - 25 Indicave Heads of Terms variable Full due diligence 4 - 5 Compleon

Page 22 KEY STAGES IN A FUNDRAISING PROCESS

• Formulate the ‘story’ 1. PREPARATION • Assess most appropriate list of potenal investor(s)

• Informaon Memorandum / Business Plan 2. DOCUMENTATION • Management presentaon

• Build a book around exisng investors 3. APPROACH • Target preferred / most likely investors in the first instance

• Feedback from potenal investors & inial negoaons 4. HEADS OF TERMS • Target receipt of indicave funding proposals

5. DETAILED • Detailed negoaons with preferred party(ies) NEGOTIATIONS • Financial & commercial due diligence

• Legal process: Subscripon & Shareholder’s Agreement 6. COMPLETION • Compleon & receipt of funds

Page 23 PRIVATE EQUITY SECTION V PRIVATE EQUITY AS A SOURCE OF FUNDING

• Private equity is most suitable for: 1. Funding an acquision (or merger)

2. Funding a management buy-out or buy-in

3. The outright (or majority) purchase of a company

4. Business expansion … e.g. purchase of a new producon facility

5. Debt pay-down (i.e. de-leveraging) … replacing exisng debt with new equity

6. Internal recapitalisaon or other minority stake investment … only a limited

number of private equity funds will be content with a minority stake

7. Other Balance Sheet restructuring

Page 25 PRIVATE EQUITY AS A SOURCE OF FUNDING (CONT’D)

• Choosing a private equity fund:

• Personal fit?

• Fund vintage, sectoral focus & experse?

• Profile of the Fund’s precedent investments?

• Investment track record (i.e. performance) of the Fund?

• Key transacon consideraons:

• Valuaon?

• Exit rights / influence / meframe?

• Potenal for addional future diluon?

• Investment instrument (i.e. equity, loan-note etc.)?

• Instuonal vs. private investors (vs. combinaon)?

Page 26 SAMPLE PRIVATE EQUITY FUNDS ACTIVE IN IRELAND

+ non- instuonal sources

Page 27 TYPICAL PRIVATE EQUITY INVESTMENT HYPOTHESIS

ΠMARKET

Growth outlook & compeon? ‘  VALUATION & RETURNS COMPANY’S FOCUS

Upfront valuaon & exit potenal? Posioning & market advantage?

 Ž EXIT OPTIONS TRACK-RECORD

Trade or financial acquirers? Track-record of growth?

 GROWTH OPPORTUNITY

Ramp-up financial scale? Page 28 TYPICAL FUND STRUCTURE

• Limited Partners (investors) + General Partners (fund managers)

• Investors include pension funds, endowments, Sovereign funds, fund-of-funds, etc.

• Management fees are typically ~ 1.5% - 2.0% of overall funds raised

• 80% : 20% split in ‘profits’ (in favour of LP’s) subject to a ~ 8% LP hurdle rate

• Typical terms: • Fund life typically 7 - 10 years • No single investment > 10% of the fund • Aim to have 75% of fund invested by year 5 • 20% - 30% of funds held in reserve for follow-on investment • Will typically raise a new fund when 75% of ‘old’ fund is invested

Page 29 T&C’S OF PRIVATE EQUITY INVESTMENT

• Ordinary equity vs. loan note combinaon

• Minority vs. controlling stake:

• Control by veto / consent maers

• Management vs. investor rights & responsibilies

• Informaon rights, Board representaon & vong rights

• Availability of follow-on funding?

• Pre-empon & an-diluon rights

• Agreement in principle on exit (ming etc.):

• Drag & tag along rights

• Recapitalisaon opons (incl. valuaon mulples)

Page 30 GENERAL COMMENTS ON RAISING EQUITY

• Shareholder’s Agreement only likely to be important in the event of a future breakdown in relaonships … at which me it will be very important

• Other key consideraons:

• Venture capital or private equity firms will not give warranes in an exit

• Future fundraising(s) should not be through different investment instruments

• Timing of investment process?

• Due diligence vs. exclusivity

• Investors will require full clarity on:

• Use of proceeds & future funding requirements?

• Exit opons?

Page 31 EQUITY RAISING … INITIAL DOCUMENTATION REQUIREMENTS

1. Transacon drivers

2. Company overview: • Landscape & posioning • Short-term growth outlook • Shareholder & capital structure

3. Financial profile: • Min. 3 years historic and 3 – 5 years future • Sales analysis & pipeline • Profit bridge

4. Potenal exit opons

Page 32 FUNDING CASE STUDIES SECTION VI CASE STUDY 1

• Scenario:

• EUR 5.2m acquision

• Target company is export-focused

• Target company profitability of EUR 1.0m … with > 80% of this converng to cash

• Funding opons:

1. Bank debt available up to EUR 3.2m (local bank @ 5.0% over 3 years)

2. Outside investor (loan note @ 15% or ordinary equity)

3. Vendor financing

Page 34 CASE STUDY 2

• Scenario: • Irish manufacturing company with a EUR 13m funding need (to fund an MBO) • EBITDA c. EUR 2.5m, ex-growth but strong cash generaon

Bank # 1: Bank # 2: • Dublin-based bank • London-based bank • Specialist sector focus • Unitranche debt: • Standard senior debt: • Lower equity (EUR < 3m) • Higher equity requirement (EUR 5.5m) • c. 4x EBITDA debt facilies • 3.0x EBITDA debt • Accelerated repayment opon • Margin of 3% • Margin of 6% • Extended term • Warrant

Page 35 CASE STUDY 3

• Scenario: SHAREHOLDERS • Private equity to fund an acquision 100% • Could have used debt but this would have meant ‘beng the ranch’ CLIENT COMPANY

51% minor cash • Structure: injecon

• Preferred opon was to fund the deal 49% through a new subsidiary vehicle PRIVATE EQUITY NEWCO FUND • Private equity fund holds < 50% and is cash injecon subject to a buy-out clause 100% • Fully ring-fenced

TARGET COMPANY

Page 36

Q & A

www.pegasuscapital.ie [email protected] 086 3811166

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