4Economic outlook for Irish SMEs Continued recovery of house pricesIrish bond prices to continue to fall relative to BundsIncrease in spreads – despite record low interest ratesGDP forecast to increase by 2.1%Upcoming stress testsCurrent Account SurplusLack of recovery in domestic economyUnemployment continuing to fallPositive Negative
5Match Finance to Business Stage R&DStart-upEarly GrowthFast GrowthSustain GrowthMaturityFoundersBusiness AngelsVenture CapitalPublic SectorDebtCorporate VenturingPublic Listing/IPOPrivate Equity
6Where can SMEs tap into finance? PEBankGovtBanks - SME-orientated funding schemesNational Pension Reserve Fund – Irish Strategic Investment FundPrivate equity fundsISEQ
8Bank funding for SMEsBank 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
9Advantages of dealing with the banks No EquityCheaper than alternative sources of fundsCan be used as part of a packageDevelopment of a partnershipFull range of products
10Disadvantages of dealing with the Banks Over leverage risksRestrictions on receipt of funds"Slow no"Risk adverse nature of bankingInflexible
12Private equity providers active in Ireland SME orientatedBlueBayCarlyle Cardinal CapitalHighland Capital PartnersBroadlake CapitalMML Growth CapitalGreencoat CapitalProventus Capital Partners
13National pension reserve fund NPRF Commitment3rd PartyTotalFocusSME Equity Fund – Better Capital€50m€100mTurnaround fundSME Equity Fund – Cardinal€125m€250mSME equitySME Credit Fund – Blue Bay€200m€450mLoans to larger SMEsCIC Technology Fund€72m€36mChina-Ireland tech growth capitalInnovation Fund IrelandEarly stage and high-growthLocal Venture Capital Funds€81m€320m€401mHigh growthSilicon Valley BankTechnology innovation sectorIrish Water-Irish waterIrish Infrastructure Fund€66m€316mIrish InfrastructureIrish Forestry€35m€187m€223mInvestments in Irish ForestryPPP Schools Bundle 3€14m€121mSchoolsPPP N11€18m€165mRoadsCommitted to Date€1,257m€1,517m€2,670m
14Lily O' Brien'sFirst deal for Carlyle Cardinalc. €15 millionManagement likely to remainRevenues rose 40% in 2012Exports to 16 countries, inc UK, US and Aus.Strong online presenceOperating profit of €1.5m in 2012Increase from €285k in 2011.
15SMEs – Examples of deals involving private equity houses AcquisitionMBO
16What are Private Equity looking for? Businesses with capacity to growA deleveraging, acquisition, growth capital or shareholder reorganisation opportunityStrong managementGood MIS and strong cash flowsValue creation opportunities
17Venture capital fundsAtlantic BridgeBOI Seed and Early Stage FundAIB Seed Capital FundEnterprise IrelandInvestecDeltaSeroba Kernel
18Dealing with PE/VC– Advantages Assist with Involved in setting business strategy / directionFlexible and alternative form of finance / capital structures – mezzanine, junior loansIncreases refinance, acquisition or cash extraction capabilityIncentive structures for management teamsPossible solution to succession issuesAccess to new markets or expertise
19Deal with PE/VC Disadvantages Owners giving up equityNew board directors / greater corporate goverenceMore financial information requirementsExit timelineDue Diligence requirements
21What documentation is required for raising finance? Typical requirements:Business planFinancial projections/assumptionsManagement teamUnique product or serviceFinancing strategy
22Process of Raising Finance – Preparing & Planning Which source best fits?matching principleBankable proposition?well thought out plankey risks identified and understoodhealthy cash-flow & security available for debtIf not bankable, what about equity provider => VC etc?How will funds be repaid?
23Process of Raising debt/equity Finance - overview Process of Raising FinancePrepare and planDocument Business PlanInformation Memorandum/Report with Financial ProjectionsApproach potential fundersTerm sheetsDue diligenceFinal legal documentation
24Process of Raising debt Sources of FinanceApproaching lendersGauge interestmeet and present casecommunicate your knowledgeensure the message in the Plan is communicatedprovide copy of Business Plan and Projections
25Process of Raising debt Sources of FinanceTerm sheetsOffers receivedTerm sheet outlines key details:interest costs / marginfeessecurityAssess terms from different fundersSeek clarification if necessary – fill gaps
26Process of Raising debt Cash-flow assessment – trading business
27Process of Raising debt Sources of FinanceDue diligence / Independent business report?Financial => focus on figures, cashflowLegal => assess securities, etc
28Process of Raising debt Sources of FinanceLetter of offer/ Facility LetterOutlines facilities and interest ratesNotes security requiredOutlines financial covenants (interest cover,DSCR, etc) and general covenantsRepresentation and warranties from borrower
29Dealing with private equity providers: Overview of the process Prepare an information memorandumContact private equity providersPresentReceiveoffersNegotiate and second round offersAccept offerDue diligenceFinal negotiations and deal close
30Dealing with private equity providers What should an information memorandum contain? Detailed written description of the target (often 50+ pages)Primary marketing documentContents:Company overviewOperations overviewIndustry overviewFinancial information – historic and projections
31Dealing with private equity providers What are they looking for? Historical financialsEBITDA; maintainable, repeatableCash-flowstrong working capitalDebtors – tidy upProjectionsManagement teamPotential for exit
32Dealing with private equity providers What to expect from an offer letter Offer amountrationalei.e. why the private equity company wants to partner with your firmvaluation of the target company on a cash-free. debt-free basisoutline of how the deal will be financedMaintainable EBITDAConditions of offer
33Dealing with private equity providers Due diligence Purpose of due diligenceto confirm the information on which the vendor has based its bidThree possible outcomes:no issues discoveredsome issues are discovered but remediedissues are discovered which cannot be remedied and bring the deal down.
34Dealing with private equity providers Issues typically arising from due diligence Revenue recognitionDeferred revenueAccounting policiesAged debtors and provisionsForecasts and assumptionsCapex
35Dealing with private equity providers Closing the deal Post due diligenceoffer may be revisedDeal may fall through if both parties cannot agree
37Case Study I: Software company Business:Irish software companyPurpose of funds:Raise growth equity to fund expansionStructure of transaction:Newly issued series B sharesFunds were used for:Repurchase of stock from existing shareholders
38Case Study I: Software company Issues/areas of focus for P/E InvestorPipeline sales & customerForecasts/projections & assumptionsManagement experience and plansGrowth and acquisition strategyProduct/technology capability
39Case Study I: Software company OutcomeSuccessful due diligence processComfort around risksSolid numbers (projections and assumptions)Quality management team in placeSuccessful deal close
41The Advisor?What value does the corporate finance advisor add?Would the company secure the same funding if they negotiated on their own?
42The role of the Advisors Provide realistic advice from the start, and advise on the options availableFinancial Projections – specialist model- assist management in determining their assumptions- build tailor made model to construct projections based on management’s assumptionsBusiness Plan going forward- advise management on writing their business plan- complete the plan into a presentable report suitable for meeting funder’s requirements
43The role of the Advisors Utilise contacts within funding institutions – eg banks, VCsAssist with approaching funders, and presenting teaser document and/or business planDemonstrate stronger points to fundersNegotiating the best terms:Debt => interest margin, etcEquity/VC => level of dilution in exchange for investmentAdvice on comparing terms from different fundersAssist in driving process to completion.
44Contact detailsCorporate FinanceMichael NearyPartnerT +353 (0)EOur team comprises corporate finance professionals who have extensive transaction experience across a large range of sectors and clientsWe bring commercial and industry knowledge, analytical skills and technical knowledge to each engagement