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
10.10– 11.00
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Introduction
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Economic outlook for Irish SMEs
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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
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Bank funding
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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
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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
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Disadvantages of dealing with the Banks
•
•
•
•
•
Over leverage risks
Restrictions on receipt of funds
"Slow no"
Risk adverse nature of banking
Inflexible
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Private Equity
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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
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National pension reserve fund
Fund
NPRF
Commitment
3rd
Party
Total
Focus
SME Equity Fund – Better
Capital
€50m
€50m
€100m
Turnaround fund
SME Equity Fund – Cardinal
€125m
€125m
€250m
SME equity
SME Credit Fund – Blue Bay
€200m
€250m
€450m
Loans to larger SMEs
CIC Technology Fund
€72m
€36m
€72m
China-Ireland tech growth
capital
Innovation Fund Ireland
€125m
€125m
€250m
Early stage and high-growth
Local Venture Capital Funds
€81m
€320m
€401m
High growth
Silicon Valley Bank
€36m
€72m
€72m
Technology innovation sector
Irish Water
€250m
-
€250m
Irish water
Irish Infrastructure Fund
€250m
€66m
€316m
Irish Infrastructure
Irish Forestry
€35m
€187m
€223m
Investments in Irish Forestry
PPP Schools Bundle 3
€14m
€121m
€121m
Schools
PPP N11
€18m
€165m
€165m
Roads
Committed to Date
€1,257m
€1,517m
€2,670m
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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.
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SMEs – Examples of deals involving private equity
houses
Acquisition
MBO
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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
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Venture capital funds
•
•
•
•
•
•
•
Atlantic Bridge
BOI Seed and Early Stage Fund
AIB Seed Capital Fund
Enterprise Ireland
Investec
Delta
Seroba Kernel
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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
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Deal with PE/VC Disadvantages
•
•
•
•
•
Owners giving up equity
New board directors / greater corporate goverence
More financial information requirements
Exit timeline
Due Diligence requirements
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Accessing finance
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What documentation is required
for raising finance?
• Typical requirements:
– Business plan
– Financial projections/assumptions
– Management team
– Unique product or service
– Financing strategy
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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?
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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
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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
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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
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Process of Raising debt
Cash-flow assessment – trading business
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Process of Raising debt
Sources of
Finance
• Due diligence / Independent business report?
– Financial => focus on figures, cashflow
• Legal => assess securities, etc
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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
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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
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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
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Dealing with private equity providers
Closing the deal
• Post due diligence
– offer may be revised
• Deal may fall through if both parties cannot agree
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Case study
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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
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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
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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
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Your advisor
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The Advisor?
• What value does the corporate finance advisor
add?
• Would the company secure the same funding if
they negotiated on their own?
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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
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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.
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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
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Questions
& feedback
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