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 transac ons:
• Raising debt
• Raising quasi-equity & equity
• Company disposals, mergers & acquisi ons
• Management buy-out & management buy-in transac ons
• We typically advise on 8 – 10 transac ons p.a.
• Par cular exper se 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 mul ple funding op ons
• Given the size of the market, Ireland is well-represented with equity funds
• Funding from interna onal sources is available in certain circumstances
• Ins tu onal funds prefer to invest in companies with a strong growth outlook
• High net worth investors have an appe te for inves ng but decision making is more
arbitrary and quantums are generally low rela ve to ins tu onal funds
• Most ins tu onal 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 protec on
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 VENTURE CAPITAL
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 appe te for long-term funding
Page 11 DEBT AS A SOURCE OF FUNDING (CONT’D)
• Summary observa ons:
• Debt < 3.5x EBITDA with a focus on profitability
• Key considera ons:
• Type of funding: term debt vs. invoice discoun ng vs. asset finance?
• Conven onal bank vs. specialist provider of niche products?
• Debt mul ple … depends on free opera ng cashflow?
• Fixed vs. floa ng interest rate?
• Security & recourse?
• Tenor?
Page 12 QUASI-EQUITY AS A SOURCE OF FUNDING
• Quasi-equity / mezzanine:
• Sits where equity would otherwise sit
• Effec vely preferred equity in some cases
• More efficient capital structure … reduces average cost of capital
• Lower availability of conven onal 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 opportuni es:
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 observa ons:
• 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 considera ons:
• Mezzanine vs. development capital fund?
• Payment in cash vs. payment in kind?
• Timing of funding need and buy-back op on?
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 ((opera ng cashflow – tax – working cap – capex) / (capital + interest)) > 1.2x • Interest cover ((opera ng cashflow – tax – working cap – capex) / (interest)) > 4.0x • Debt mul ple (net debt / EBITDA) < 3.0x
4. Consider bank security op ons
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 conserva ve projec ons
• Raising equity overseas is challenging in the absence of reasonable scale
• The majority of ac ve funds see the current environment as an “investors” market
• Most VC funds only invest in high-growth areas (technology & lifesciences)
• Terms may be op mised by maximising the number of credible interested par es
• 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 exis ng investors
Page 18 EUROPEAN VS. US VENTURE CAPITAL
ü Generally more entrepreneurial ü Generally more suppor ve of unforeseen challenges ü Valua ons frothy in certain segments ü Proximity = closer rela onship ü More focused on genera ng very high exit values and willing to fund the higher cash burn ü Generally give their por olio companies more required to achieve this me to succeed
û May require reloca on to the US û Capacity may be more limited if the investee company requires significant follow-on funds û Less suppor ve 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 considera ons:
• Confidence in projec ons … i.e. trade downside protec on 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. Addi onal 20 - 25% disregarded a er an ini al ‘sense-check’ c. 333 1 hr. Post desktop review c. ⅓ of applica ons given considera on 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 commi ee review + 3 - 4 wks. Review Business Plan and internal due diligence 20 - 25 Indica ve Heads of Terms variable Full due diligence 4 - 5 Comple on
Page 22 KEY STAGES IN A FUNDRAISING PROCESS
• Formulate the ‘story’ 1. PREPARATION • Assess most appropriate list of poten al investor(s)
• Informa on Memorandum / Business Plan 2. DOCUMENTATION • Management presenta on
• Build a book around exis ng investors 3. APPROACH • Target preferred / most likely investors in the first instance
• Feedback from poten al investors & ini al nego a ons 4. HEADS OF TERMS • Target receipt of indica ve funding proposals
5. DETAILED • Detailed nego a ons with preferred party(ies) NEGOTIATIONS • Financial & commercial due diligence
• Legal process: Subscrip on & Shareholder’s Agreement 6. COMPLETION • Comple on & 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 acquisi on (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 produc on facility
5. Debt pay-down (i.e. de-leveraging) … replacing exis ng debt with new equity
6. Internal recapitalisa on 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 & exper se?
• Profile of the Fund’s precedent investments?
• Investment track record (i.e. performance) of the Fund?
• Key transac on considera ons:
• Valua on?
• Exit rights / influence / meframe?
• Poten al for addi onal future dilu on?
• Investment instrument (i.e. equity, loan-note etc.)?
• Ins tu onal vs. private investors (vs. combina on)?
Page 26 SAMPLE PRIVATE EQUITY FUNDS ACTIVE IN IRELAND
+ non- ins tu onal sources
Page 27 TYPICAL PRIVATE EQUITY INVESTMENT HYPOTHESIS
MARKET
Growth outlook & compe on? VALUATION & RETURNS COMPANY’S FOCUS
Upfront valua on & exit poten al? Posi oning & market advantage?
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 combina on
• Minority vs. controlling stake:
• Control by veto / consent ma ers
• Management vs. investor rights & responsibili es
• Informa on rights, Board representa on & vo ng rights
• Availability of follow-on funding?
• Pre-emp on & an -dilu on rights
• Agreement in principle on exit ( ming etc.):
• Drag & tag along rights
• Recapitalisa on op ons (incl. valua on mul ples)
Page 30 GENERAL COMMENTS ON RAISING EQUITY
• Shareholder’s Agreement only likely to be important in the event of a future breakdown in rela onships … at which me it will be very important
• Other key considera ons:
• Venture capital or private equity firms will not give warran es 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 op ons?
Page 31 EQUITY RAISING … INITIAL DOCUMENTATION REQUIREMENTS
1. Transac on drivers
2. Company overview: • Landscape & posi oning • 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. Poten al exit op ons
Page 32 FUNDING CASE STUDIES SECTION VI CASE STUDY 1
• Scenario:
• EUR 5.2m acquisi on
• Target company is export-focused
• Target company profitability of EUR 1.0m … with > 80% of this conver ng to cash
• Funding op ons:
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 genera on
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 facili es • 3.0x EBITDA debt • Accelerated repayment op on • Margin of 3% • Margin of 6% • Extended term • Warrant
Page 35 CASE STUDY 3
• Scenario: SHAREHOLDERS • Private equity to fund an acquisi on 100% • Could have used debt but this would have meant ‘be ng the ranch’ CLIENT COMPANY
51% minor cash • Structure: injec on
• Preferred op on was to fund the deal 49% through a new subsidiary vehicle PRIVATE EQUITY NEWCO FUND • Private equity fund holds < 50% and is cash injec on subject to a buy-out clause 100% • Fully ring-fenced
TARGET COMPANY
Page 36
Q & A
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