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Sources of finance available to Irish SMEs and how to access them

Sources of finance available to Irish SMEs and how to access them. 13 May 2014. Michael Neary Partner, Corporate Finance. Overview of presentation . Introduction. Economic outlook for Irish SMEs. Continued recovery of house prices. Irish bond prices to continue to fall relative to Bunds.

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Sources of finance available to Irish SMEs and how to access them

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  1. Sources of finance available to Irish SMEs and how to access them 13 May 2014 Michael Neary Partner, Corporate Finance

  2. Overview of presentation

  3. Introduction

  4. Economic outlook for Irish SMEs Continued recovery of house prices Irish bond prices to continue to fall relative to Bunds Increase in spreads – despite record low interest rates GDP forecast to increase by 2.1% Upcoming stress tests Current Account Surplus Lack of recovery in domestic economy Unemployment continuing to fall Positive Negative

  5. Match Finance to Business Stage R&D Early Growth Fast Growth Sustain Growth Maturity Start-up Founders Business Angels Venture Capital Public Sector Debt Corporate Venturing Public Listing/IPO Private Equity

  6. Where can SMEs tap into finance? PE Bank Govt • Banks - SME-orientated funding schemes • National Pension Reserve Fund – Irish Strategic Investment Fund • Private equity funds • ISEQ

  7. Bank funding

  8. Bank funding for SMEs • Bank of Ireland – pledged €12 billion to SMEs over the next five years • "very much open for business" • AIB: Range of SME funds launched in 2013 • €200 million EIB SME loan fund • €200 million renewable energy fund • €50 million agri loan fund

  9. Advantages of dealing with the banks • No Equity • Cheaper than alternative sources of funds • Can be used as part of a package • Development of a partnership • Full range of products

  10. Disadvantages of dealing with the Banks • Over leverage risks • Restrictions on receipt of funds • "Slow no" • Risk adverse nature of banking • Inflexible

  11. Private Equity

  12. Private equity providers active in Ireland • SME orientated • BlueBay • Carlyle Cardinal Capital • Highland Capital Partners • Broadlake Capital • MML Growth Capital • Greencoat Capital • Proventus Capital Partners

  13. National pension reserve fund

  14. Lily O' Brien's • First deal for Carlyle Cardinal • c. €15 million • Management likely to remain • Revenues rose 40% in 2012 • Exports to 16 countries, inc UK, US and Aus. • Strong online presence • Operating profit of €1.5m in 2012 • Increase from €285k in 2011.

  15. SMEs – Examples of deals involving private equity houses Acquisition MBO

  16. What are Private Equity looking for? • Businesses with capacity to grow • A deleveraging, acquisition, growth capital or shareholder reorganisation opportunity • Strong management • Good MIS and strong cash flows • Value creation opportunities

  17. Venture capital funds • Atlantic Bridge • BOI Seed and Early Stage Fund • AIB Seed Capital Fund • Enterprise Ireland • Investec • Delta • Seroba Kernel

  18. Dealing with PE/VC– Advantages • Assist with Involved in setting business strategy / direction • Flexible and alternative form of finance / capital structures – mezzanine, junior loans • Increases refinance, acquisition or cash extraction capability • Incentive structures for management teams • Possible solution to succession issues • Access to new markets or expertise

  19. Deal with PE/VC Disadvantages • Owners giving up equity • New board directors / greater corporate goverence • More financial information requirements • Exit timeline • Due Diligence requirements

  20. Accessing finance

  21. What documentation is required for raising finance? • Typical requirements: • Business plan • Financial projections/assumptions • Management team • Unique product or service • Financing strategy

  22. Process of Raising Finance –Preparing & Planning Process of Raising Finance • Which source best fits? • matching principle • Bankable proposition? • well thought out plan • key risks identified and understood • healthy cash-flow & security available for debt • If not bankable, what about equity provider => VC etc? • How will funds be repaid?

  23. Process of Raising debt/equity Finance - overview Process of Raising Finance • Prepare and plan • Document Business Plan • Information Memorandum/Report with Financial Projections • Approach potential funders • Term sheets • Due diligence • Final legal documentation

  24. Process of Raising debt Sources of Finance • Approaching lenders • Gauge interest • meet and present case • communicate your knowledge • ensure the message in the Plan is communicated • provide copy of Business Plan and Projections

  25. Process of Raising debt Sources of Finance • Term sheets • Offers received • Term sheet outlines key details: • interest costs / margin • fees • security • Assess terms from different funders • Seek clarification if necessary – fill gaps

  26. Process of Raising debtCash-flow assessment – trading business

  27. Process of Raising debt Sources of Finance • Due diligence / Independent business report? • Financial => focus on figures, cashflow • Legal => assess securities, etc

  28. Process of Raising debt Sources of Finance • Letter of offer/ Facility Letter • Outlines facilities and interest rates • Notes security required • Outlines financial covenants (interest cover,DSCR, etc) and general covenants • Representation and warranties from borrower

  29. Dealing with private equity providers:Overview of the process

  30. Dealing with private equity providersWhat should an information memorandum contain? • Detailed written description of the target (often 50+ pages) • Primary marketing document • Contents: • Company overview • Operations overview • Industry overview • Financial information – historic and projections

  31. Dealing with private equity providersWhat are they looking for? • Historical financials • EBITDA; maintainable, repeatable • Cash-flow • strong working capital • Debtors – tidy up • Projections • Management team • Potential for exit

  32. Dealing with private equity providersWhat to expect from an offer letter • Offer amount • rationale • i.e. why the private equity company wants to partner with your firm • valuation of the target company on a cash-free. debt-free basis • outline of how the deal will be financed • Maintainable EBITDA • Conditions of offer

  33. Dealing with private equity providersDue diligence • Purpose of due diligence • to confirm the information on which the vendor has based its bid • Three possible outcomes: • no issues discovered • some issues are discovered but remedied • issues are discovered which cannot be remedied and bring the deal down.

  34. Dealing with private equity providersIssues typically arising from due diligence • Revenue recognition • Deferred revenue • Accounting policies • Aged debtors and provisions • Forecasts and assumptions • Capex

  35. Dealing with private equity providersClosing the deal • Post due diligence • offer may be revised • Deal may fall through if both parties cannot agree

  36. Case study

  37. Case Study I: Software company • Business: • Irish software company • Purpose of funds: • Raise growth equity to fund expansion • Structure of transaction: • Newly issued series B shares • Funds were used for: • Repurchase of stock from existing shareholders

  38. Case Study I: Software company • Issues/areas of focus for P/E Investor • Pipeline sales & customer • Forecasts/projections & assumptions • Management experience and plans • Growth and acquisition strategy • Product/technology capability

  39. Case Study I: Software company • Outcome • Successful due diligence process • Comfort around risks • Solid numbers (projections and assumptions) • Quality management team in place • Successful deal close

  40. Your advisor

  41. The Advisor? • What value does the corporate finance advisor add? • Would the company secure the same funding if they negotiated on their own?

  42. The role of the Advisors • Provide realistic advice from the start, and advise on the options available • Financial Projections – specialist model - assist management in determining their assumptions - build tailor made model to construct projections based on management’s assumptions • Business Plan going forward - advise management on writing their business plan - complete the plan into a presentable report suitable for meeting funder’s requirements

  43. The role of the Advisors • Utilise contacts within funding institutions – eg banks, VCs • Assist with approaching funders, and presenting teaser document and/or business plan • Demonstrate stronger points to funders • Negotiating the best terms: • Debt => interest margin, etc • Equity/VC => level of dilution in exchange for investment • Advice on comparing terms from different funders • Assist in driving process to completion.

  44. Contact details Our team comprises corporate finance professionals who have extensive transaction experience across a large range of sectors and clients We bring commercial and industry knowledge, analytical skills and technical knowledge to each engagement Corporate Finance Michael Neary Partner T +353 (0)1 6805 797 E michael.neary@ie.gt.com www.grantthornton.ie

  45. Questions & feedback

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