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Navigating the Capital Markets: An Entrepreneur’s Guide to
Raising Capital
John Kraska, Managing PartnerLou Caltavuturo, Partner
Hales & Company | Hales Capital Securities
2
John KraskaManaging Partner
P: (212) 592-5709jkraska@halesgroup.com
Biographies
Louis CaltavuturoPartner
P: (212) 592-5707lcaltavuturo@halesgroup.com
Led management buyout of Hales from Arch Capital Group, Ltd in 2004
Over 15 years experience as an investor and banker, having completed over 75 transactions, representing over $1.5 billion in transaction value
Graduate of Wharton School and University of Pennsylvania
Over 20 years experience as a banker and regulatory to the financial services industry with an emphasis in insurance and healthcare
Prior experience with Fox-Pitt Kelton focusing on capital raising and Deutsche Bank focusing on lending and structured finance
Graduate of Columbia Business School and Colgate University
3Overview of Hales
Founded in 1973, we are one of the oldest and most experienced advisors specializing in the insurance industry
Hales Capital Securities is our registered broker-dealer that engages in securities related transactions on behalf of its clients
Our core business is advising agents, brokers, service providers and companies on corporate finance matters: merger & acquisition transactions and accessing equity and debt capital
We offer additional financial and strategic advisory services such as due diligence representation, valuation and perpetuation planning
Leading Advisor to the Insurance Industry
4Overview of Hales
Leadership Position Among Advisors
We ranked as the #1 leading advisor in each of the last five years – advised on over 150 completed transactions since 2004.
Firm 2005 2006 2007 2008 2009 2010
Hales & Company, Inc. $242.3 $628.2 $461.9 $568.6 $334.7 $14.5
Mystic Capital Advisors Group LLC 7.0 116.4 39.5 300.3 2.9 N/A
Marsh Berry & Co. Inc. 150.4 14.7 29.8 100.3 25.4 N/A
Reagan Consulting Inc. 41.2 104.8 34.4 N/A N/A N/A
Transaction Volume
Source: Hales and SNL DataSource, SNLi. Represents summary of insurance broker / agency sell-side transactions announced or completed in 2005, 2006, 2007, 2008 and 2009.
5Overview of Hales
Why We Are Different
We are SpecialistsWe are Specialists
Our Partners Execute Every Deal
Our Partners Execute Every Deal
Technical and Negotiating Expertise
Technical and Negotiating Expertise
We Don’t QuitWe Don’t Quit
Seasoned and senior professionals are involved from beginning to end.
Seasoned and senior professionals are involved from beginning to end.
We focus on the insurance industry and have unique insights into the business and transactions.
We focus on the insurance industry and have unique insights into the business and transactions.
We leverage our expertise and data on industry transactions to represent our
clients effectively.
We leverage our expertise and data on industry transactions to represent our
clients effectively.
We have a well-earned reputation for “getting deals done” and strive to achieve a
successful outcome for all clients
We have a well-earned reputation for “getting deals done” and strive to achieve a
successful outcome for all clients
We focus on the insurance industry and have unique insights into the business and
transactions.
We focus on the insurance industry and have unique insights into the business and
transactions.
6Overview of Hales
Representative Transactions
2010
Hales advised Risk Transfer Insurance Alliance
has been acquired by
2010
Hales advisedIRUS Corporation
has been acquired by
2010
Hales advisedHedden Insurance
has been acquired by
2010
Hales advisedStone Insurance Agencies
has been acquired by
2010Hales advised
USI Holdings Corp.
have been acquired by
National City Insurance Group Inc.
The Ohio, Kentucky and Missouri offices of
2010Hales advised Bowen, Miclette, Britt &
Merry of Arkansas Inc.
has been acquired by
Bowen, Miclette, Britt & Merry of Arkansas Inc.
a subsidiary of
2010
Hales advisedConfie Seguros
has been acquired by
2010
Hales advised Insurance Company of the West
has been acquired by
The Surety Division of
7Overview of Hales
Representative Transactions
2010
Hales advisedConfie Seguros
has been acquired by
2010Hales advised
Endorsed Administrators, Inc./J.J. Jerome Associates, Inc.
has been acquired by
Hales advised The Maksin Group
has been acquired by
2009
2010
Hales advisedMcCutcheon Burr & Sons
has been acquired by
2010
Hales advisedThe Gardner-Kirby Corporation
has been acquired by
The Gardner-Kirby Corporation
2009
Hales advised MeyersDining LLC
has been acquired by
2009
Hales advisedCaruso Benefits Group, Inc.
has been acquired by
Financial Associates LLC
selected assets of
2009
have provided equity and debt capital to
Hales advisedHigginbotham & Associates
Trident IV, L.P.a fund managed by
8Overview of Hales
Representative Transactions
2009Hales advised Key & Piskuran Insurance
Agency
has been acquired by
Key & Piskuran Key & Piskuran Insurance AgencyInsurance Agency
2009
Hales advised Slapin-Lieb & Co.
has been acquired by
Slapin-Lieb & Co.Slapin-Lieb & Co.
2009
Hales advisedJohn Grady Insurance, Inc.
has been acquired by
2009
Hales advisedIrving Weber Associates
has been acquired by
2009
Hales advisedBoston Insurance Brokerage, Inc.
have been acquired by
Select assets of
2009Hales advised
BridgeStreet Consulting & Ins. Svcs., Inc.
has been acquired by
2009
Hales advised Edgewood Partners Insurance Center
has been acquired by
2009
Hales advisedUnland Companies
has been acquired by
9Guide to Raising Capital
Complex Map of Capital Providers – Where to Begin?
• Private equity firms• Venture capital• Hedge funds
• Business development cos.• Insurance Companies
• Friends & family
• Commercial banks• Specialty lenders
• Insurance Companies
EQUITY DEBT
10Guide to Raising Capital
Different Kinds of Capital
SUBORDINATED DEBT(Bullet Loan w/Interest)
SUBORDINATED DEBT(Bullet Loan w/Interest)
PREFERRED SECURITIES
(Dividends, Convertibility)
PREFERRED SECURITIES
(Dividends, Convertibility)
SENIOR DEBT (Revolver / Term Loan)
SENIOR DEBT (Revolver / Term Loan)
Amortizing and secured against stock or personal guarantees
1.5 – 2.5x EBITDA; LIBOR + or Prime + pricing; strict financial covenants
Bullet loans
15% - 25% total cost depending on leverage
Liquidation preferences, mandatory put options / redemption privileges
Generally priced to achieve 25% - 40% returns
11Guide to Raising Capital
Common Misconceptions
“All Private Equity firms are the same”
“My company is worth X, so I can sell 33% of my company for 33% of X”
“Borrowing is always better than selling equity”
“I am only raising $10 million or less, that should be easy”
12Guide to Raising Capital
US Insurance Industry - Debt Market
Global financial crisis impacted debt raising by US Insurance companies. Amount raised fell to USD33 bn in 2008 and USD34 bn in 2009 from USD59 bn in 2007.
In 2007 and 2008 AIG, Inc. was the largest debt issuer raising 32% and 31% of the total amount raised, respectively.
In 2010, the scenario is looking much better both in terms of median transaction value and number of transactions.
162
4860
32
550
400
499
249
20
40
60
80
100
120
140
160
180
2007 2008 2009 2010*
100
200
300
400
500
600
No.of Transactions Median (USD mn)
* Until August 2010
59
33 34
22
10
20
30
40
50
60
70
2007 2008 2009 2010*
Pro
ceed
s (U
SD
bn)
* Until August 2010
Source: Thomson Banker Source: Thomson Banker
13Guide to Raising Capital
US Insurance Industry - Private Equity Market
Source:Pitchbook
0%
20%
40%
60%
80%
100%
2007 2008 2009 2010 H1
Capital Markets/Ins. Comm. Banks Insurance Other Finan.Serv.
Source:Pitchbook
PE Investment in Insurance
36
12
17
48
0
2
4
6
8
10
12
14
2007 2008 2009 2010 H1
0
10
20
30
40
50
60
Investment (USD bn) Number of deals
PE Investments across Financial Services
Private Equity investments in the US Insurance sector fell sharply in 2008 following the global financial crisis and the attached credit freezing in the financial markets.
Composition of Investments into insurance remained flat in H1 2010 (6% versus 7% in 2009).
14Guide to Raising Capital
627
211
6548
655
2,918
2,102
1,219
0
100
200
300
400
500
600
700
800
2007 2008 2009 2010 H1
0
500
1000
1500
2000
2500
3000
Capital Invested (USD bn) No. of Deals
0
20
40
60
80
100
120
140
160
2007 2008 2009 2010 Q2
Buyout - LBO PE Growth/Expansion Other PE Deal Types*
Total PE investments and No. of Deals Median PE investments by Type
Source:Pitchbook Source:Pitchbook
All Industries - Private Equity Market
15Guide to Raising Capital
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2003 2004 2005 2006 2007 2008 2009 2010 H1
Under USD 50mn USD50mn-250mn USD250mn-500mn USD500mn-1bn USD1bn-2.5bn Above USD2.5bn
PE Investment by Deal Size – 2003 to H1 2010
Source:Pitchbook
16Guide to Raising Capital
Step One: The Business Plan – Why am I raising capital?
Step Two: The Financial Plan – How much capital do I really need?
Step Three: The Capital Structure – What kind of capital can I attract?
Step Four: The Execution – Show me the money!
Four Simple Steps
17Step One: The Business Plan
Reasons for Seeking Capital
Pay DebtPay DebtBuy Out ShareholdersBuy Out Shareholders
GrowthGrowth
Debt or working capital obligations Legal matters
Perpetuation Fund down payments
Hire new producers Upgrade systems Fund acquisitions
18Step One: The Business Plan
Clear explanation for the use of capital
Investors never write blank checks or invest in blind pools
Differentiation in strategy or market – be specific
What advantage do you have over competitors?
What is happening in the market that may drive growth?
Honest self assessment of competitive threats
Management and track record
What Captures an Investor’s Attention?
19Step One: The Business Plan
Why Will You Grow When Industry Isn’t?
1.9%
5.0%
8.4%
15.3%
10.0%
3.9%
0.5%2.7%
-0.3% -0.5%-3.7%
-1.3%-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010(P)
Net Written Premium Growth
20Step One: The Business Plan
Why Will You Grow When Industry Isn’t?
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2003 2004 2005 2006 2007 2008 2009
Public Broker Median Organic Revenue Growth
Median
21Step Two: The Financial Plan
Detailed set of financial projections with assumptions
Earnings, Cash Flow and Balance Sheet
Detail demonstrates understanding and gives confidence
Growth rates and margins that make sense
Anticipate questions from financial analyst types
They have to defend recommendations to an investment committee
What Captures an Investor’s Attention?
22Step Three: The Capital Structure
What are Lenders demanding?
Collateral
Personal guarantees
Financial covenants
Co-investment of equity
Ability to get loans repaid
What are Equity Investors demanding?
Aggressive growth/margin hurdles
Control and governance (i.e., “Alignment”)
Liquidity
Investor / Lender Expectations
23Step Three: The Capital Structure
$35 m
TODAYEBITDA $5 milValue (7x) $35 mil
$75 m
YR 5EBITDA $10 milValue (7.5x) $75 mil
2.1x multiple16% annual ROI
$10 m 3.0x multiple25% annual ROI
NO LEVERAGE
W/ LEVERAGE
$25 m
$75 m
NOTE: Assumes debt prepaid out of CF
24Step Four: Execution
Prepare before Contacting Investors
Determine needs and types of capital
Control information flow versus reacting to investor demands
Resources and Focus
Contact multiple sources simultaneously in a competitive process
Time consuming: Meetings / Presentations / Follow-up Requests
Due Diligence and Documentation
As rigorous and costly as a sale
How to Successfully Complete a Capital Raise
25
Closing
Coordinate due diligence
Analyze terms
Negotiate / execute documentation
Regulatory approval(s)
Announcement
3 - 4 weeks 5 - 8 weeks 4 - 6 weeks 3 - 5 weeks
Information collection / diligence
Compile, screen and evaluate potential investors
Draft materials
Contact potential investors and sign NDA’s
Management presentations
Facilitate informational requests and queries
Solicit indications of interest
Hales in MarketDue Diligence &
NegotiationExecutionPrepare for Market
Step Four: Execution
26Conclusions
Raising capital is harder than you think
Lots of misconceptions; wide variety of capital sources
Preparation, process and focus are paramount to success