Sources of finance available to Irish SMEs and
Sources of finance available to Irish SMEs and how to access them 13 May 2014 Michael Neary Partner, Corporate Finance © 2014 Grant Thornton Ireland. All rights reserved
Overview of presentation Topic Presentation on SME financing Time 8. 30 – 9. 55 Break Case Study 9. 55 – 10. 10– 11. 00 © 2014 Grant Thornton Ireland. All rights reserved.
Introduction © 2014 Grant Thornton Ireland. All rights reserved
Economic outlook for Irish SMEs overy c e r d e u Contin rices p e s u o h of es to c i r p d n Irish bo to fall e u n i t n co unds B o t e v i relat st to a c e r o f GDP y 2. 1% b e s a e r inc ads – e r p s n i Increase rd low o c e r e t i desp ates interest r tests s s e r t s ng Upcomi ount c c A t n e Curr Surplus oyment l p m e n U to fall g n i u n i t con ry in e v o c e r Lack of conomy e c i t s e dom ve i t a g e N e v i t i s o P © 2014 Grant Thornton Ireland. All rights reserved.
Match Finance to Business Stage R&D Early Growth Start-up Fast Growth Sustain Growth Maturity Founders Business Angels Venture Capital Public Sector Debt Corporate Venturing Public Listing/IPO Private Equity © 2014 Grant Thornton Ireland. All rights reserved.
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 © 2014 Grant Thornton Ireland. All rights reserved.
Bank funding © 2014 Grant Thornton Ireland. All rights reserved
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 © 2014 Grant Thornton Ireland. All rights reserved.
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 © 2014 Grant Thornton Ireland. All rights reserved.
Disadvantages of dealing with the Banks • • • Over leverage risks Restrictions on receipt of funds "Slow no" Risk adverse nature of banking Inflexible © 2014 Grant Thornton Ireland. All rights reserved.
Private Equity © 2014 Grant Thornton Ireland. All rights reserved
Private equity providers active in Ireland • SME orientated – Blue. Bay – Carlyle Cardinal Capital – Highland Capital Partners – Broadlake Capital – MML Growth Capital – Greencoat Capital – Proventus Capital Partners © 2014 Grant Thornton Ireland. All rights reserved.
National pension reserve fund Fund NPRF Commitment 3 rd Party Total Focus SME Equity Fund – Better Capital € 50 m € 100 m Turnaround fund SME Equity Fund – Cardinal € 125 m € 250 m SME equity SME Credit Fund – Blue Bay € 200 m € 250 m € 450 m Loans to larger SMEs CIC Technology Fund € 72 m € 36 m € 72 m China-Ireland tech growth capital Innovation Fund Ireland € 125 m € 250 m Early stage and high-growth Local Venture Capital Funds € 81 m € 320 m € 401 m High growth Silicon Valley Bank € 36 m € 72 m Technology innovation sector Irish Water € 250 m - € 250 m Irish water Irish Infrastructure Fund € 250 m € 66 m € 316 m Irish Infrastructure Irish Forestry € 35 m € 187 m € 223 m Investments in Irish Forestry PPP Schools Bundle 3 € 14 m € 121 m Schools PPP N 11 € 18 m € 165 m Roads Committed to Date € 1, 257 m € 1, 517 m € 2, 670 m © 2014 Grant Thornton Ireland. All rights reserved.
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. 5 m in 2012 – Increase from € 285 k in 2011. © 2014 Grant Thornton Ireland. All rights reserved.
SMEs – Examples of deals involving private equity houses Acquisition MBO © 2014 Grant Thornton Ireland. All rights reserved.
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 © 2014 Grant Thornton Ireland. All rights reserved.
Venture capital funds • • Atlantic Bridge BOI Seed and Early Stage Fund AIB Seed Capital Fund Enterprise Ireland Investec Delta Seroba Kernel © 2014 Grant Thornton Ireland. All rights reserved.
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 © 2014 Grant Thornton Ireland. All rights reserved.
Deal with PE/VC Disadvantages • • • Owners giving up equity New board directors / greater corporate goverence More financial information requirements Exit timeline Due Diligence requirements © 2014 Grant Thornton Ireland. All rights reserved.
Accessing finance © 2014 Grant Thornton Ireland. All rights reserved
What documentation is required for raising finance? • Typical requirements: – Business plan – Financial projections/assumptions – Management team – Unique product or service – Financing strategy © 2014 Grant Thornton Ireland. All rights reserved.
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? © 2014 Grant Thornton Ireland. All rights reserved.
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 © 2014 Grant Thornton Ireland. All rights reserved.
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 © 2014 Grant Thornton Ireland. All rights reserved.
Process of Raising debt Sources of Finance • Term sheets – Offers received – Term sheet outlines key details: 1. interest costs / margin 2. fees 3. security • Assess terms from different funders • Seek clarification if necessary – fill gaps © 2014 Grant Thornton Ireland. All rights reserved.
Process of Raising debt Cash-flow assessment – trading business • © 2014 Grant Thornton Ireland. All rights reserved.
Process of Raising debt Sources of Finance • Due diligence / Independent business report? – Financial => focus on figures, cashflow • Legal => assess securities, etc © 2014 Grant Thornton Ireland. All rights reserved.
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 © 2014 Grant Thornton Ireland. All rights reserved.
Dealing with private equity providers: Overview of the process Prepare an information memorandum Receive offers Negotiate and second round offers Final negotiations and deal close Contact private equity providers Present Accept offer Due diligence © 2014 Grant Thornton Ireland. All rights reserved.
Dealing with private equity providers What 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 © 2014 Grant Thornton Ireland. All rights reserved.
Dealing with private equity providers What are they looking for? • Historical financials – EBITDA; maintainable, repeatable • Cash-flow – strong working capital • Debtors – tidy up • Projections • Management team • Potential for exit © 2014 Grant Thornton Ireland. All rights reserved.
Dealing with private equity providers What 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 © 2014 Grant Thornton Ireland. All rights reserved.
Dealing with private equity providers Due 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. © 2014 Grant Thornton Ireland. All rights reserved.
Dealing with private equity providers Issues typically arising from due diligence • • • Revenue recognition Deferred revenue Accounting policies Aged debtors and provisions Forecasts and assumptions Capex © 2014 Grant Thornton Ireland. All rights reserved.
Dealing with private equity providers Closing the deal • Post due diligence – offer may be revised • Deal may fall through if both parties cannot agree © 2014 Grant Thornton Ireland. All rights reserved.
Case study © 2014 Grant Thornton Ireland. All rights reserved
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 © 2014 Grant Thornton Ireland. All rights reserved.
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 © 2014 Grant Thornton Ireland. All rights reserved.
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 © 2014 Grant Thornton Ireland. All rights reserved.
Your advisor © 2014 Grant Thornton Ireland. All rights reserved
The Advisor? • What value does the corporate finance advisor add? • Would the company secure the same funding if they negotiated on their own? © 2014 Grant Thornton Ireland. All rights reserved.
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 © 2014 Grant Thornton Ireland. All rights reserved.
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. © 2014 Grant Thornton Ireland. All rights reserved.
Contact details Corporate Finance Michael Neary Partner T +353 (0)1 6805 797 E michael. neary@ie. gt. com © 2014 Grant Thornton Ireland. 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 www. grantthornton. ie
Questions & feedback © 2014 Grant Thornton Ireland. All rights reserved.
- Slides: 45