Post on 30-May-2015
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Venture Capital & Loan Syndication
Innovative Sources of Finance
Innovative Sources
• Innovative sources and mechanisms of funding are non-traditional modes of financing
• Finance is made available to the Business Organisations breaking the conventions
• All the innovative sources are evolved in response to the magnified and divergent need for Finance
What are Innovative Sources?
• Non – Traditional
• Tailor Made
• Mobility
• Finance on Demand
Why called ‘Innovative’?
Venture Capital
• Financing a new, growing, or troubled business
• Knowledge of the significant risk associated
• Investment in exchange for an equity stake
• Expects a better-than-average return
Meaning
• Money provided by investors to start-up firms and small businesses with perceived long-term growth potential and substantially high risk , in exchange of an equity stake expecting a better than average return.
Definition
• New Business
• Limited Operating History
• No capital market access
• Perceived long term growth potential
Who opt VC?
• Not necessarily just one wealthy financier
• Ltd. partnerships with pooled investment capital
• Small group of investors
• Affiliate or subsidiary of a;1) Large commercial bank
2) Investment bank or
3) Insurance company
Who can be a Venture Capitalist?
• Commercially Viable
• Identifiable Market
• Strong Management
• Sustainable Competitive Advantage
What do Venture Capitalist look for?
• Participation in Equity
• Long – Term loans
• Participation in Management
• Risky Capital
• Exit Option
Features
Financin
g
Equi
ty
Returns
Participation in Equity
Financing
Equity
Lock – Up Period
Sale of Equity
Long Term Loans
Take part in the Board of Directors
Provide Technical/ Technological Assistance
Recruiting Key Executives
Participation in Management
Overall Failure Rate is 20% - 90%
300 % to
1000% returns
Risky Capital
Financing
Commercial Viabili
ty
Selling of
Equity
Exit Option
The Funding Process
1) Business Plan Submission
2) Introductory Conversation /Meeting
3) Due Diligence
4) Term Sheets and Funding
Types of Funding
1) Seed Capital
2) Start-Up Capital
3) Early Stage Capital
4) Expansion Capital
5) Late Stage Capital
The ‘Apple’ Story..!
Loan Syndication
• Huge financial requirements
• Involvement of greater risk
• Low credit exposure levels
• Mismatching Terms & Conditions
Why loan syndication?
• The process of involving Several different lenders in providing various portions of a loan.
• Borrower requires a large sum of capital that may either be too much for a single lender to provide, or
• May be outside the scope of a lender's risk exposure levels.
• Multiple lenders together provides a single loan on agreed terms and rates through an agent - ARRANGER.
Meaning
• Syndicated loan is one that is provided by a group of lenders and is structured, arranged, and administered by one or several Institutional Lenders or investment banks known as arrangers.
Definition
• When there is huge requirement for fund, such as in case of;
1) Mergers
2. Acquisitions and
3) Buyouts
When a Syndicated loan is opted?
Borrower Arranger Syndicat
e
Parties to a Syndicated Loan
• Point of Contact
• Monitor
• Postman and Record Keeper
• Paying Agent
Duties of an Arranger
Documenting the Loan
• The Borrower appoints the Arranger via a Mandate Letter
• The content varies according to whether;
1. The Arranger is mandated to use its "best efforts" to arrange the required facility or
2. If the Arranger is agreeing to "underwrite" the required facility.
Mandate Letter/ Commitment Letter
• The Mandate Letter will usually be signed with a Term Sheet attached to it.
• The Term Sheet is used to set out the terms of the proposed financing prior to full documentation.
• It sets out the parties involved, their expected roles and many key commercial terms
Term Sheet
Example :
1. Type of facilities
2. Facility amounts
3. Pricing
4. Term of the loan and
5. Covenant package
• Prepared by both the Arranger and the borrower
• Arranger forwards to potential syndicate members.
• Includes description of the borrower's business, management, accounts, details of the proposed loan etc.
• It is not a public document and all potential lenders that wish to see it usually sign a confidentiality undertaking.
Information Memorandum
• Prepared if the syndicate comes to a conclusion and borrower is agreed upon
• It sets out the detailed terms and conditions on which the Facility is made available to the borrower.
• The repayment structure, Interest rates, Covenant stipulations etc are drafted here
Syndicated Loan Agreement
• Made between borrower and arranger
• Borrower has to pay the arranger a specific fee for its specialised services
• Fee letter contains the rates and the conditions and structure of such payments.
Fee Letters
Term Loan Facility
Revolving Loan Facility
Types of Syndicated Loans
Innovative Features
• Realising Capital
• Risk or Portfolio Management
• Regulatory Capital Requirement
• Crystallise a loss
Selling participation in the Loan
• Letter of credit
• Swingline Facility
• Overdraft Facility
Other Features..
What we’ve discussed...
Questions??
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