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Sources of finance available to Irish SMEs and how to access them

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Presentation on theme: "Sources of finance available to Irish SMEs and how to access them"— Presentation transcript:

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

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