Private Equity Investment as a Source of Financing for Leasing Companies Natalia Best, Vice-President Horizon Capital Banking Sector & Leasing Market Business & State Regulation February 21, 2006 Kyiv

Outline Private equity as a source of financing –Types of investors and funds –How a private equity fund works Practical considerations of working with an private equity fund –Investment process –Valuation and control –Eligibility requirements Experience of Horizon Capital

Private Equity Investment Financing Options Company NeedsFinancing Options Replenishment of working capitalShort-term loan & retained earnings if profitable Capacity expansionDebt may be sufficient in case of incremental growth and if the company is profitable, Equity is required if expansion is aggressive Expansion through acquisitionEquity and/or long-term loan with grace period Buyout/replacement of existing shareholder Equity

Private Equity Investment Private Equity Fund vs. Portfolio Investor Private Equity FundPortfolio Investor / Hedge Fund Significant stakes in closely held companies Small stakes in publicly held companies Active participant (usually via BOD) Passive investor (buy and hold) Backs management team and focuses on value creation Takes advantage of market arbitrage opportunities Exist after creating valueSells when market recognizes value

Private Equity Investment Private Equity Fund vs. Strategic Investor Private Equity FundStrategic Investor Significant stakes in companies, including minority shareholdings 100% or super majority stakes in the company Relies on existing management team to increase company value Brings own management team, business strategy and vision Participates via representation in the Board of Directors Participates in day-to-day management Resells its stake after completion of the investment program Does not exit (or exits in exceptional cases)

Private Equity Investment Types of Funds Early Stage –Seed investment –Venture capital Later Stage –Expansion –Buyout

Private Equity Investment Basic Premise Provide a superior return by: Selecting appropriate opportunities –Country/region –Sector/industry –Company Creating value post investment Realizing that value at exit

Private Equity Investment Selecting Opportunities Attractive industries –Rapidly growing –Fragmented/undergoing consolidation –Barriers to entry are or will be high Companies –Professional management teams –Clear vision/strategy –Market leader ot leadership potential –Capitalize on existing and create new competitive advantages –Management and shareholder interest aligned –Clear exit path for investor

Private Equity Investment Creating Value Participate in corporate governance –Usually at BOD level –Formulate strategy, establish Key Performance Indicators (KPIs) –Not distracted by day-to-day management issues Provide access to broad network of contacts, resources and outside expertise Focus on long-term value vs. short-term profits Develop/enhance management team Improve financing options by –Lowering risk profile –Strengthening balance sheet Monitor KPIs and react to early warning signals

Private Equity Investment Realizing of value Focus on exit from day one –Networking and communication –Strategic relationships/alliances Available exit options –Trade sale to strategic investor –Sale to financial investor –IPO –Dividends –Leveraged recapitalization –Management buyout

Practical Considerations The Investment Process Analysis of company and business plan Negotiations and sign Term Sheet –Amount & preliminary use of funds –Corporate governance, shareholders rights, exit mechanism –Conditions precedent –Due diligence budget Due diligence –IAS audit –Legal review; preparation of documents –Operational review –Final agreement on business plan, near-term initiatives Closing/ Funding

Practical Considerations Valuation and Control Pre-money valuation will depend on –Risk profile of industry/company/business plan –Likelihood that value will increase –Liquidity Necessity for control will depend on –Common vision of the strategy –Alignment of shareholders and managers –Willingness of existing investors to exit the investment together PE investor more interested in high rate of return then either valuation or control

Investment Candidates Positive Signs Successful track record –Untarnished reputation of company and owners –Previous relationship with reputable business partners and lenders Management aligned with investor with same vision and economic incentives Legal/ownership structure that ensures –Shareholders’ input/involvement –Investors’ rights protection –Control of profit center Financial transparency Profitable operations or achieving profitability within 12 months of investment Willingness to understand and accommodate investor’s needs

Investment Candidates Red Flags Previous investment disputes Lack of transparency Related party transactions Misleading information / non-disclosure (it will come out during due diligence) Interest in money but not input Inability to differentiate management from shareholder Unwillingness to provide exit vehicle or give up control

Horizon Capital is a private equity fund manager Originates and manages investments in mid-cap companies with with outstanding growth and profit potential in Ukraine and Moldova Provides expansion and/or buyout capital to management teams with proven track records Priority sectors : Financial services FMCG (food and non-food) Industrial Retail Funds under management –Western NIS Enterprise Fund Horizon Capital

$150 million private equity fund Established in 1995; first investment in Significant stakes in mid-size private enterprises in Ukraine and Moldova $1-$10 million per investment $111 million to 28 companies since inception $72 million to 16 companies outstanding Western NIS Enterprise Fund

Contacts Natalia Best Vice-President +380 (44) (44) fax