Financial capital sourcing a facility to increase the business value

1. Financial capital sourcing  a facility to increase the business value Uldis Osis President uldis.osis@gmail.com Increasing the Value of Business:   New Insights and Approaches   BIHE 7th Annual International Conference   October 14, 2005 BIHE

2. Content • The EU Financial Market • Current Situation Assessment • Venture Capital & Innovation • Equity Financing lifecycle • Defragmentation of the European Capital Markets • Strategic Alternatives to Increase Business Value Uldis Osis

3. The European Financial Market The new single financial market in Europe provides the framework for a better financing environment catering for the different needs of enterprises. However... Uldis Osis

4. Current situation • New and growing businesses lack adequate finance facilities; • External equity finance is still underdeveloped, the supply of venture capital is in the very early stage. The bank credits are the most common, and for many enterprises the only, external source of funds; • Reliance for bank loans implies a need for collateral that can act as a considerable barrier for would-be entrepreneurs; • Leasing is widespread as financing alternative for SME's. Uldis Osis

5. Private Equity & Venture Capital The development of private equity, especially of venture capital, is one of the main drivers for the increase of the business value, development of high-growth firms, use of new knowledge and technologies. Uldis Osis

6. Innovation to accelerate growth and increase business value • To increase their business value, companies need to maximise their innovation potential, and to develop and utilise technologies for new products, processes and services; • Innovation finance in this context means the supply of finance for companies, particularly start-ups, which develop and bring to market goods and services that are either new, science based, or contain innovative elements; • The supply of risk capital for financing innovation is a priority. Uldis Osis

7. Financial barriersto innovate • The risks generally associated with new innovative technologies; • The limited supply of equity within innovative enterprises; • The lack of tangible assets as a basis for loan collateral; • The tender for selection of the risk capital fund (3) management companies called by Latvian Guarantee Agency. Uldis Osis

8. Seed Early-stage Expansion IPO, Strategic investors Publicmarkets, banks Entrepreneur, family, friends, businessangels, publicsources Venturecapitalfunds ? Mezzanine Breakeven Point 3rd‑round 2nd‑round 1st‑round Valley of death Graph adapted from Cardullo: Technological entrepreneurism. Equity financing lifecycle Uldis Osis

9. Debt vs. Equity • The gradual increase in the use of equity and alternative forms of financing is needed in Baltic states; • It would make enterprises gradually less dependent on bank finance; • The providers of risk capital will exert an increased influence on smaller enterprises, both in providing management support and in influencing decision-making. Uldis Osis

10. To cross early stage • Equity or quasi-equity capital is crucial for taking innovative companies through their cash-short early phase; • The use of mezzanine finance combining loan finance with the right to subscribe to the equity of the enterprise when it goes public can be appropriate to bridge a gap and generate value. Uldis Osis

11. Next stage: financing growth and expansion • Direct equity investments still should dominate innovation financing in the expansion phase; • When companies have launched their products and are generating stable revenues, tailored financial packages including hybrid debt/equity products can be appropriate; • Tailored financing can include grace periods, flexible performance-related interest rates, and complementary public or other loan guarantee measures to share the risk. Uldis Osis

12. Defragmentation of European Capital Markets • Reduction of the existing fragmentation of the European private equity and venture capital markets is highly urgent • Improvement the opportunities for cross-border investments; • Creation of a European fund structure for private equity and venture capital investment funds has to be considered. Uldis Osis

13. Strategy and focus alternatives in the Baltic's to increase the business value • Dept Finance: PPP-structures for infrastructure projects; • EU grant schemes; • IPO’s for restructuring local energy and other sectors; • Project finance (infrastructure & industrial projects); • Private sector M&A; • Strategic acquisition/partnership opportunities in retail, food processing and construction; • Consolidation and restructuring of local industries; • Buy-out business and associated private equity; • Mezzanine and junior loans; • Cross-Baltic M&A. Uldis Osis

14. Thank you! Konsorts Adrr. 10/12 Meistaru Str. Riga, LV-1050 Tel./Fax: +371 7216990; +371 7216771 www.konsorts.lv office@konsorts.lv