1. Sources of finance available to Irish SMEs and how to access them
13 May 2014
Michael Neary
Partner, Corporate Finance

2. Overview of presentation
Topic
Time
Presentation on SME financing
8.30 – 9.55
Break
9.55 – 10.10
Case Study
10.10– 11.00

3. Introduction

4. Economic outlook for Irish SMEs
Continued recovery of house prices
Irish bond prices to continue to fall relative to Bunds
Increase in spreads – despite record low interest rates
GDP forecast to increase by 2.1%
Upcoming stress tests
Current Account Surplus
Lack of recovery in domestic economy
Unemployment continuing to fall
Positive Negative

5. Match Finance to Business Stage
R&D
Start-up
Early Growth
Fast Growth
Sustain Growth
Maturity
Founders
Business Angels
Venture Capital
Public Sector
Debt
Corporate Venturing
Public Listing/IPO
Private Equity

6. Where can SMEs tap into finance?PE
Bank
Govt
Banks - SME-orientated funding schemes
National Pension Reserve Fund – Irish Strategic Investment Fund
Private equity funds
ISEQ

7. Bank funding

8. Bank funding for SMEs
Bank of Ireland – pledged €12 billion to SMEs over the next five years
"very much open for business"
AIB: Range of SME funds launched in 2013
€200 million EIB SME loan fund
€200 million renewable energy fund
€50 million agri loan fund

9. Advantages of dealing with the banks
No Equity
Cheaper than alternative sources of funds
Can be used as part of a package
Development of a partnership
Full range of products

10. Disadvantages of dealing with the Banks
Over leverage risks
Restrictions on receipt of funds
"Slow no"
Risk adverse nature of banking
Inflexible

11. Private Equity

12. Private equity providers active in Ireland
SME orientated
BlueBay
Carlyle Cardinal Capital
Highland Capital Partners
Broadlake Capital
MML Growth Capital
Greencoat Capital
Proventus Capital Partners

13. National pension reserve fund
NPRF Commitment
3rd Party
Total
Focus
SME Equity Fund – Better Capital
€50m
€100m
Turnaround fund
SME Equity Fund – Cardinal
€125m
€250m
SME equity
SME Credit Fund – Blue Bay
€200m
€450m
Loans to larger SMEs
CIC Technology Fund
€72m
€36m
China-Ireland tech growth capital
Innovation Fund Ireland
Early stage and high-growth
Local Venture Capital Funds
€81m
€320m
€401m
High growth
Silicon Valley Bank
Technology innovation sector
Irish Water -
Irish water
Irish Infrastructure Fund
€66m
€316m
Irish Infrastructure
Irish Forestry
€35m
€187m
€223m
Investments in Irish Forestry
PPP Schools Bundle 3
€14m
€121m
Schools
PPP N11
€18m
€165m
Roads
Committed to Date
€1,257m
€1,517m
€2,670m

14. Lily O' Brien's
First deal for Carlyle Cardinal
c. €15 million
Management likely to remain
Revenues rose 40% in 2012
Exports to 16 countries, inc UK, US and Aus.
Strong online presence
Operating profit of €1.5m in 2012
Increase from €285k in 2011.

15. SMEs – Examples of deals involving private equity houses
Acquisition
MBO

16. What are Private Equity looking for?
Businesses with capacity to grow
A deleveraging, acquisition, growth capital or shareholder reorganisation opportunity
Strong management
Good MIS and strong cash flows
Value creation opportunities

17. Venture capital funds
Atlantic Bridge
BOI Seed and Early Stage Fund
AIB Seed Capital Fund
Enterprise Ireland
Investec
Delta
Seroba Kernel

18. Dealing with PE/VC– Advantages
Assist with Involved in setting business strategy / direction
Flexible and alternative form of finance / capital structures – mezzanine, junior loans
Increases refinance, acquisition or cash extraction capability
Incentive structures for management teams
Possible solution to succession issues
Access to new markets or expertise

19. Deal with PE/VC Disadvantages
Owners giving up equity
New board directors / greater corporate goverence
More financial information requirements
Exit timeline
Due Diligence requirements

20. Accessing finance

21. What documentation is required for raising finance?
Typical requirements:
Business plan
Financial projections/assumptions
Management team
Unique product or service
Financing strategy

22. Process of Raising Finance – Preparing & Planning
Which source best fits?
matching principle
Bankable proposition?
well thought out plan
key risks identified and understood
healthy cash-flow & security available for debt
If not bankable, what about equity provider => VC etc?
How will funds be repaid?

23. Process of Raising debt/equity Finance - overview
Process of Raising Finance
Prepare and plan
Document Business Plan
Information Memorandum/Report with Financial Projections
Approach potential funders
Term sheets
Due diligence
Final legal documentation

24. Process of Raising debt
Sources of Finance
Approaching lenders
Gauge interest
meet and present case
communicate your knowledge
ensure the message in the Plan is communicated
provide copy of Business Plan and Projections

25. Process of Raising debt
Sources of Finance
Term sheets
Offers received
Term sheet outlines key details:
interest costs / margin
fees
security
Assess terms from different funders
Seek clarification if necessary – fill gaps

26. Process of Raising debt Cash-flow assessment – trading business

27. Process of Raising debt
Sources of Finance
Due diligence / Independent business report?
Financial => focus on figures, cashflow
Legal => assess securities, etc

28. Process of Raising debt
Sources of Finance
Letter of offer/ Facility Letter
Outlines facilities and interest rates
Notes security required
Outlines financial covenants (interest cover,DSCR, etc) and general covenants
Representation and warranties from borrower

29. Dealing with private equity providers: Overview of the process
Prepare an information memorandum
Contact private equity providers
Present
Receive
offers
Negotiate and second round offers
Accept offer
Due diligence
Final negotiations and deal close

30. Dealing with private equity providers What should an information memorandum contain?
Detailed written description of the target (often 50+ pages)
Primary marketing document
Contents:
Company overview
Operations overview
Industry overview
Financial information – historic and projections

31. Dealing with private equity providers What are they looking for?
Historical financials
EBITDA; maintainable, repeatable
Cash-flow
strong working capital
Debtors – tidy up
Projections
Management team
Potential for exit

32. Dealing with private equity providers What to expect from an offer letter
Offer amount
rationale
i.e. why the private equity company wants to partner with your firm
valuation of the target company on a cash-free. debt-free basis
outline of how the deal will be financed
Maintainable EBITDA
Conditions of offer

33. Dealing with private equity providers Due diligence
Purpose of due diligence
to confirm the information on which the vendor has based its bid
Three possible outcomes:
no issues discovered
some issues are discovered but remedied
issues are discovered which cannot be remedied and bring the deal down.

34. Dealing with private equity providers Issues typically arising from due diligence
Revenue recognition
Deferred revenue
Accounting policies
Aged debtors and provisions
Forecasts and assumptions
Capex

35. Dealing with private equity providers Closing the deal
Post due diligence
offer may be revised
Deal may fall through if both parties cannot agree

36. Case study

37. Case Study I: Software company
Business:
Irish software company
Purpose of funds:
Raise growth equity to fund expansion
Structure of transaction:
Newly issued series B shares
Funds were used for:
Repurchase of stock from existing shareholders

38. Case Study I: Software company
Issues/areas of focus for P/E Investor
Pipeline sales & customer
Forecasts/projections & assumptions
Management experience and plans
Growth and acquisition strategy
Product/technology capability

39. Case Study I: Software company
Outcome
Successful due diligence process
Comfort around risks
Solid numbers (projections and assumptions)
Quality management team in place
Successful deal close

40. Your advisor

41. The Advisor?
What value does the corporate finance advisor add?
Would the company secure the same funding if they negotiated on their own?

42. The role of the Advisors
Provide realistic advice from the start, and advise on the options available
Financial Projections – specialist model
- assist management in determining their assumptions
- build tailor made model to construct projections based on management’s assumptions
Business Plan going forward
- advise management on writing their business plan
- complete the plan into a presentable report suitable for meeting funder’s requirements

43. The role of the Advisors
Utilise contacts within funding institutions – eg banks, VCs
Assist with approaching funders, and presenting teaser document and/or business plan
Demonstrate stronger points to funders
Negotiating the best terms:
Debt => interest margin, etc
Equity/VC => level of dilution in exchange for investment
Advice on comparing terms from different funders
Assist in driving process to completion.

44. Contact details
Corporate Finance
Michael Neary
Partner
T +353 (0) E
Our team comprises corporate finance professionals who have extensive transaction experience across a large range of sectors and clients
We bring commercial and industry knowledge, analytical skills and technical knowledge to each engagement

45. Questions & feedback