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SOURCES OF FUNDING FOR IRISH BUSINESSES MAY 2015
SOURCES OF FUNDING FOR IRISH BUSINESSES MAY 2015
INTRODUCTION TO PEGASUS CAPITAL SECTION I
ABOUT US
• Pegasus Capital is a Dublin-‐based financial advisory firm
• We advise mid-‐market Irish companies on a range of transacRons:
• Raising debt
• Raising quasi-‐equity & equity
• Company disposals, mergers & acquisiRons
• Management buy-‐out & management buy-‐in transacRons
• We typically advise on 8 – 10 transacRons p.a.
• ParRcular experRse in high-‐growth sectors such as technology & lifesciences
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CHOOSING A SOURCE OF FUNDING SECTION II
OUR GENERAL VIEW ON THE FUNDING ENVIRONMENT
• Debt & equity markets less buoyant than pre-‐Crisis
• Companies that are financially strong have mulRple funding opRons
• Given the size of the market, Ireland is well-‐represented with equity funds
• Funding from internaRonal sources is available in certain circumstances
• InsRtuRonal funds prefer to invest in companies with a strong growth outlook
• High net worth investors have an appeRte for invesRng but decision making is more
arbitrary and quantums are generally low relaRve to insRtuRonal funds
• Most insRtuRonal funds have a preference to invest later in the cycle
• Funding takes Rme to put in place … need to build-‐in appropriate headroom
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TYPES OF FUNDING
1. DEBT
AMORTISING
BULLET
EQUITY WARRANT
WARRANTLESS
MINORITY STAKE
MAJORITY STAKE
2. QUASI-‐EQUITY
3. EQUITY
HIGHER RISK = H
IGHER CO
ST
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ü Lower cost
ü Limited loss of control
ü Clear repayment schedule
DEBT EQUITY
ü Strengthens Balance Sheet
ü Increases financial firepower
ü Provides downside protecRon
ü Shareholder de-‐risking
û Typically short-‐term
û Degrees of recourse
û Not always appropriate
û Repaid from cashflow
û Leverage increases
û Expensive
û Difficult to raise
û Dilutes shareholding
û Need to provide an exit
DEBT VS. EQUITY
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OUR SUMMARY VIEW ON THE CURRENT FUNDING ENVIRONMENT
AVAILABILITY COST TERMS &
CONDITIONS
CONVENTIONAL SENIOR DEBT
SPECIALIST SENIOR DEBT
QUASI-‐EQUITY
EARLY STAGE VENTURE CAPITAL
LATE STAGE VENTURE CAPITAL
PRIVATE EQUITY (REVENUE < EUR 10M)
PRIVATE EQUITY (REVENUE > EUR 10M)
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TARG
ET RETURN
S
RISK
FUNDING PROVIDER RETURNS VS. RISK
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SENIOR DEBT c. 5%
INFRASTRUCTURE c. 8% -‐ 10%
PROPERTY c. 10 -‐ 12%
DEV. CAP. & MEZZANINE c. 12% +
PRIVATE EQUITY c. 25%
VENTURE CAPITAL 25% +
VENTURE DEBT c. 20%
DEBT & QUASI-‐EQUITY SECTION III
DEBT AS A SOURCE OF FUNDING
• The Irish banking environment has improved but challenges remain:
• Leverage rates remain low
• Interest rates, while reducing, remain above European levels
• Debt tenor remains low with limited appeRte for long-‐term funding
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DEBT AS A SOURCE OF FUNDING (CONT’D)
• Summary observaRons:
• Debt < 3.5x EBITDA with a focus on profitability
• Key consideraRons:
• Type of funding: term debt vs. invoice discounRng vs. asset finance?
• ConvenRonal bank vs. specialist provider of niche products?
• Debt mulRple … depends on free operaRng cashflow?
• Fixed vs. floaRng interest rate?
• Security & recourse?
• Tenor?
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QUASI-‐EQUITY AS A SOURCE OF FUNDING
• Quasi-‐equity / mezzanine:
• Sits where equity would otherwise sit
• EffecRvely preferred equity in some cases
• More efficient capital structure … reduces average cost of capital
• Lower availability of convenRonal debt has reduced the risk parameters:
• Overall leverage levels have reduced c. 25% from pre-‐Crisis peak
• Many providers will typically only invest in sponsor-‐led opportuniRes:
1. To remove ‘funder of last resort’ risk, and
2. To provide greater comfort on surety of exit
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QUASI-‐EQUITY AS A SOURCE OF FUNDING (CONT’D)
• Summary observaRons:
• Investment criteria focused on cashflow
• Reasonably full due diligence requirements
• Fundraising process similar to an equity fundraising process
• (For tech & lifescience companies) may be backed by a specific charge over IP
• Key consideraRons:
• Mezzanine vs. development capital fund?
• Payment in cash vs. payment in kind?
• Timing of funding need and buy-‐back opRon?
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DEBT RAISING … INITIAL DOCUMENTATION REQUIREMENTS
1. Proposal overview
2. Financial profile:
• Min. 3 years historic and 1 – 2 years future
• Detailed use of cash
3. Detailed cashflow:
• Cash cover ((operaRng cashflow – tax – working cap – capex) / (capital + interest)) > 1.2x
• Interest cover ((operaRng cashflow – tax – working cap – capex) / (interest)) > 4.0x
• Debt mulRple (net debt / EBITDA) < 3.0x
4. Consider bank security opRons
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VENTURE CAPITAL SECTION IV
0
5
10
15
20
25
30
35
40
45
50
-‐
1
2
3
4
Q1 09
Q2 09
Q3 09
Q4 09
Q1 10
Q2 10
Q3 10
Q4 10
Q1 11
Q2 11
Q3 11
Q4 11
Q1 12
Q2 12
Q3 12
Q4 12
Q1 13
Q2 13
Q3 13
Q4 13
Q1 14
Q2 14
Q3 14
Q4 14
NO. FUNDRA
ISINGS (RED
) NO. FUNDRA
ISINGS > EU
R 5M
(GRE
EN)
AVER
AGE FU
NDRA
ISING (E
URM
, BLU
E CO
LUMN)
IRISH LIFESCIENCES & TECH EQUITY FUNDRAISINGS (2009 – DATE)
VENTURE CAPITAL FUNDRAISINGS
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RAISING VENTURE CAPITAL
• Summary comments:
• Raise sufficient capital to fund breakeven based on conservaRve projecRons
• Raising equity overseas is challenging in the absence of reasonable scale
• The majority of acRve funds see the current environment as an “investors” market
• Most VC funds only invest in high-‐growth areas (technology & lifesciences)
• Terms may be opRmised by maximising the number of credible interested parRes
• High availability of seed funding locally over the past number of years
• Consider the availability of follow-‐on funding
• No short-‐term cash / liquidity issues
• Support of exisRng investors
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EUROPEAN VS. US VENTURE CAPITAL
ü Generally more entrepreneurial
ü ValuaRons frothy in certain segments
ü More focused on generaRng very high exit
values and willing to fund the higher cash burn
required to achieve this
û May require relocaRon to the US
û Less supporRve if the Company underperforms
û Criteria may exclude companies outside US
û Target revenue > US$ 5m for overseas deals
ü Generally more supporRve of unforeseen
challenges
ü Proximity = closer relaRonship
ü Generally give their porzolio companies more
Rme to succeed
û Capacity may be more limited if the investee
company requires significant follow-‐on funds
û Limited value-‐add if customer base is US centric
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TYPICAL VENTURE CAPITAL TERMS
• Key consideraRons:
• Confidence in projecRons … i.e. trade downside protecRon for greater upside?
• Will the Company require more capital?
• Strategic or financial investor(s)?
• Quantum of funding required?
á QUANTUM OF FUNDING
á VALUATION
DRAG ALONG â
ANTI-‐DILUTION â
LIQUIDATION PREFERENCE â
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HIGH
SEED
LOW APPETITE FOR IRISH DEALS
DEVELOPMENT CAPITAL
STAG
E OF INVE
STMEN
T
SAMPLE VENTURE CAPITAL FUNDS ACTIVE IN THE IRISH MARKET
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NO. OF PROPOSALS TIMEFRAME COMMENTS
Annual investment proposals
5 mins. 20 -‐ 25% disregarded immediately … not in the area of focus
1 hr. AddiRonal 20 -‐ 25% disregarded a{er an iniRal ‘sense-‐check’
1 hr. Post desktop review c. ⅓ of applicaRons given consideraRon
1 hr. Conf. call with Target to assess opportunity
+ 2 wks. Internal desk-‐top & industry research
30 mins. Sponsor-‐led investment commi}ee review
+ 3 -‐ 4 wks. Review Business Plan and internal due diligence
IndicaRve Heads of Terms
variable Full due diligence
CompleRon
c. 1,000
4 -‐ 5
c. 750
c. 500
c. 333
c. 100
c. 50
TYPICAL VC INVESTMENT PROCESS
20 -‐ 25
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KEY STAGES IN A FUNDRAISING PROCESS
• Formulate the ‘story’ • Assess most appropriate list of potenRal investor(s)
• Build a book around exisRng investors • Target preferred / most likely investors in the first instance
• InformaRon Memorandum / Business Plan • Management presentaRon
• Feedback from potenRal investors & iniRal negoRaRons • Target receipt of indicaRve funding proposals
• Detailed negoRaRons with preferred party(ies) • Financial & commercial due diligence
• Legal process: SubscripRon & Shareholder’s Agreement • CompleRon & receipt of funds
1. PREPARATION
3. APPROACH
2. DOCUMENTATION
4. HEADS OF TERMS
5. DETAILED NEGOTIATIONS
6. COMPLETION
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PRIVATE EQUITY SECTION V
PRIVATE EQUITY AS A SOURCE OF FUNDING
• Private equity is most suitable for:
1. Funding an acquisiRon (or merger)
2. Funding a management buy-‐out or buy-‐in
3. The outright (or majority) purchase of a company
4. Business expansion … e.g. purchase of a new producRon facility
5. Debt pay-‐down (i.e. de-‐leveraging) … replacing exisRng debt with new equity
6. Internal recapitalisaRon or other minority stake investment … only a limited
number of private equity funds will be content with a minority stake
7. Other Balance Sheet restructuring
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PRIVATE EQUITY AS A SOURCE OF FUNDING (CONT’D)
• Choosing a private equity fund:
• Personal fit?
• Fund vintage, sectoral focus & experRse?
• Profile of the Fund’s precedent investments?
• Investment track record (i.e. performance) of the Fund?
• Key transacRon consideraRons:
• ValuaRon?
• Exit rights / influence / Rmeframe?
• PotenRal for addiRonal future diluRon?
• Investment instrument (i.e. equity, loan-‐note etc.)?
• InsRtuRonal vs. private investors (vs. combinaRon)?
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SAMPLE PRIVATE EQUITY FUNDS ACTIVE IN IRELAND
+ non-‐insRtuRonal sources
TYPICAL PRIVATE EQUITY INVESTMENT HYPOTHESIS
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� GROWTH OPPORTUNITY
Ramp-‐up financial scale?
� MARKET
Growth outlook & compeRRon? �
COMPANY’S FOCUS
PosiRoning & market advantage?
� TRACK-‐RECORD
Track-‐record of growth?
� EXIT OPTIONS
Trade or financial acquirers?
� VALUATION & RETURNS
Upfront valuaRon & exit potenRal?
TYPICAL FUND STRUCTURE
• Limited Partners (investors) + General Partners (fund managers)
• Investors include pension funds, endowments, Sovereign funds, fund-‐of-‐funds, etc.
• Management fees are typically ~ 1.5% -‐ 2.0% of overall funds raised
• 80% : 20% split in ‘profits’ (in favour of LP’s) subject to a ~ 8% LP hurdle rate
• Typical terms:
• Fund life typically 7 -‐ 10 years
• No single investment > 10% of the fund
• Aim to have 75% of fund invested by year 5
• 20% -‐ 30% of funds held in reserve for follow-‐on investment
• Will typically raise a new fund when 75% of ‘old’ fund is invested
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T&C’S OF PRIVATE EQUITY INVESTMENT
• Ordinary equity vs. loan note combinaRon
• Minority vs. controlling stake:
• Control by veto / consent ma}ers
• Management vs. investor rights & responsibiliRes
• InformaRon rights, Board representaRon & voRng rights
• Availability of follow-‐on funding?
• Pre-‐empRon & anR-‐diluRon rights
• Agreement in principle on exit (Rming etc.):
• Drag & tag along rights
• RecapitalisaRon opRons (incl. valuaRon mulRples)
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GENERAL COMMENTS ON RAISING EQUITY
• Shareholder’s Agreement only likely to be important in the event of a future
breakdown in relaRonships … at which Rme it will be very important
• Other key consideraRons:
• Venture capital or private equity firms will not give warranRes in an exit
• Future fundraising(s) should not be through different investment instruments
• Timing of investment process?
• Due diligence vs. exclusivity
• Investors will require full clarity on:
• Use of proceeds & future funding requirements?
• Exit opRons?
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EQUITY RAISING … INITIAL DOCUMENTATION REQUIREMENTS
1. TransacRon drivers
2. Company overview:
• Landscape & posiRoning
• Short-‐term growth outlook
• Shareholder & capital structure
3. Financial profile:
• Min. 3 years historic and 3 – 5 years future
• Sales analysis & pipeline
• Profit bridge
4. PotenRal exit opRons
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FUNDING CASE STUDIES SECTION VI
CASE STUDY 1
• Scenario:
• EUR 5.2m acquisiRon
• Target company is export-‐focused
• Target company profitability of EUR 1.0m … with > 80% of this converRng to cash
• Funding opRons:
1. Bank debt available up to EUR 3.2m (local bank @ 5.0% over 3 years)
2. Outside investor (loan note @ 15% or ordinary equity)
3. Vendor financing
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CASE STUDY 2
• Scenario:
• Irish manufacturing company with a EUR 13m funding need (to fund an MBO)
• EBITDA c. EUR 2.5m, ex-‐growth but strong cash generaRon
Bank # 1:
• Dublin-‐based bank
• Specialist sector focus
• Standard senior debt:
• Higher equity requirement (EUR 5.5m)
• 3.0x EBITDA debt
• Margin of 3%
Bank # 2:
• London-‐based bank
• Unitranche debt:
• Lower equity (EUR < 3m)
• c. 4x EBITDA debt faciliRes
• Accelerated repayment opRon
• Margin of 6%
• Extended term
• Warrant
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CASE STUDY 3
• Scenario:
• Private equity to fund an acquisiRon
• Could have used debt but this would
have meant ‘be�ng the ranch’
• Structure:
• Preferred opRon was to fund the deal
through a new subsidiary vehicle
• Private equity fund holds < 50% and is
subject to a buy-‐out clause
• Fully ring-‐fenced
NEWCO
CLIENT COMPANY
TARGET COMPANY
100%
SHAREHOLDERS
100%
51% minor cash injecRon
PRIVATE EQUITY FUND
49%
cash injecRon
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THANK YOU
