Navigating the Capital Markets:
An Entrepreneur’s Guide to
Raising Capital
John Kraska, Managing Partner
Lou Caltavuturo, Partner
Hales & Company | Hales Capital Securities
Biographies
John Kraska
Managing Partner
P: (212) 592-5709
jkraska@halesgroup.com
2

Led management buyout of Hales from Arch
Capital Group, Ltd in 2004

Over 15 years experience as an investor and
banker, having completed over 75 transactions,
representing over $1.5 billion in transaction value

Graduate of Wharton School and University of
Pennsylvania

Over 20 years experience as a banker and
regulatory to the financial services industry with
an emphasis in insurance and healthcare

Prior experience with Fox-Pitt Kelton focusing on
capital raising and Deutsche Bank focusing on
lending and structured finance

Graduate of Columbia Business School and
Colgate University
Louis Caltavuturo
Partner
P: (212) 592-5707
lcaltavuturo@halesgroup.com
Overview of Hales
Leading Advisor to the Insurance Industry

Founded in 1973, we are one of the oldest and most experienced
advisors specializing in the insurance industry

Hales Capital Securities is our registered broker-dealer that engages in
securities related transactions on behalf of its clients

Our core business is advising agents, brokers, service providers and
companies on corporate finance matters: merger & acquisition
transactions and accessing equity and debt capital

We offer additional financial and strategic advisory services such as due
diligence representation, valuation and perpetuation planning
3
Overview of Hales
4
Leadership Position Among Advisors
Transaction Volume
We ranked as the
#1 leading
advisor in each of
the last five years
– advised on over
150 completed
transactions since
2004.
Firm
2005
2006
2007
2008
2009
Hales & Company, Inc.
$242.3
$628.2
$461.9
$568.6
$334.7
7.0
150.4
41.2
116.4
14.7
104.8
39.5
29.8
34.4
300.3
100.3
N/A
2.9
25.4
N/A
Mystic Capital Advisors Group LLC
Marsh Berry & Co. Inc.
Reagan Consulting Inc.
Source: Hales and SNL DataSource, SNLi. Represents summary of insurance broker /
agency sell-side transactions announced or completed in 2005, 2006, 2007, 2008 and
2009.
201
$1
N
N
N
Overview of Hales
5
Why We Are Different
We are Specialists
We
onthe
the
insurance
industry
and
We focus
focus on
insurance
industry
and have
unique
insights insights
into the business
transactions.
have unique
into theand
business
and
transactions.
Our Partners Execute
Every Deal
Seasoned and senior professionals are
involved from beginning to end.
Technical and Negotiating
Expertise
We leverage our expertise and data on
industry transactions to represent our
clients effectively.
We Don’t Quit
We have a well-earned reputation for
“getting deals done” and strive to achieve a
successful outcome for all clients
Overview of Hales
6
Representative Transactions
The Surety Division of
has been acquired by
The Ohio, Kentucky and
Missouri offices of
National City Insurance
Group Inc.
has been acquired by
has been acquired by
have been acquired by
2010
2010
2010
2010
Hales advised
Risk Transfer Insurance Alliance
Hales advised
IRUS Corporation
Hales advised
Insurance Company of the West
Hales advised
USI Holdings Corp.
Bowen, Miclette, Britt & Merry
of Arkansas Inc.
a subsidiary of
has been acquired by
has been acquired by
has been acquired by
has been acquired by
2010
2010
2010
2010
Hales advised
Hedden Insurance
Hales advised
Confie Seguros
Hales advised
Stone Insurance Agencies
Hales advised Bowen, Miclette, Britt &
Merry of Arkansas Inc.
Overview of Hales
7
Representative Transactions
The Gardner-Kirby
Corporation
has been acquired by
has been acquired by
has been acquired by
2010
2010
Hales advised
Endorsed Administrators, Inc./
J.J. Jerome Associates, Inc.
2010
2010
Hales advised
McCutcheon Burr & Sons
Hales advised
Confie Seguros
Hales advised
The Gardner-Kirby Corporation
Trident IV, L.P.
has been acquired by
selected assets of
a fund managed by
Financial Associates LLC
has been acquired by
2009
Hales advised The Maksin
Group
have provided equity and debt
capital to
2009
Hales advised
Higginbotham & Associates
has been acquired by
has been acquired by
2009
2009
Hales advised
MeyersDining LLC
Hales advised
Caruso Benefits Group, Inc.
Overview of Hales
8
Representative Transactions
has been acquired by
Key & Piskuran Insurance
Agency
Slapin-Lieb & Co.
has been acquired by
has been acquired by
has been acquired by
2009
2009
Hales advised Slapin-Lieb & Co.
Hales advised Edgewood Partners
Insurance Center
have been acquired by
has been acquired by
has been acquired by
2009
2009
2009
2009
Hales advised
John Grady Insurance, Inc.
Hales advised
Boston Insurance Brokerage, Inc.
Hales advised
Irving Weber Associates
Hales advised
Unland Companies
2009
2009
Hales advised
BridgeStreet Consulting & Ins. Svcs., Inc.
Hales advised Key & Piskuran Insurance
Agency
Select assets of
has been acquired by
Guide to Raising Capital
9
Complex Map of Capital Providers – Where to Begin?
EQUITY
• Private equity firms
• Venture capital
• Hedge funds
• Business development cos.
• Insurance Companies
• Friends & family
DEBT
• Commercial banks
• Specialty lenders
• Insurance Companies
Guide to Raising Capital
10
Different Kinds of Capital

Amortizing and secured against stock or
personal guarantees

1.5 – 2.5x EBITDA; LIBOR + or Prime +
pricing; strict financial covenants

Bullet loans

15% - 25% total cost depending on leverage

Liquidation preferences, mandatory put
options / redemption privileges

Generally priced to achieve 25% - 40%
returns
SENIOR DEBT
(Revolver / Term Loan)
SUBORDINATED DEBT
(Bullet Loan w/Interest)
PREFERRED
SECURITIES
(Dividends, Convertibility)
Guide to Raising Capital
Common Misconceptions

“All Private Equity firms are the same”

“My company is worth X, so I can sell 33% of my company for 33% of X”

“Borrowing is always better than selling equity”

“I am only raising $10 million or less, that should be easy”
11
Guide to Raising Capital
12
US Insurance Industry - Debt Market
180
Proceeds (USD bn)
70
60
59
162
600
550
160
499
500
140
400
50
120
40
100
33
34
400
300
80
30
22
60
20
40
10
20
2007
2008
2009
2010*
249
60
48
200
32
100
2007
2008
2009
2010*
* Until August 2010
* Until August 2010
Source: Thomson Banker
No.of Transactions
Median (USD mn)
Source: Thomson Banker

Global financial crisis impacted debt raising by US Insurance companies. Amount
raised fell to USD33 bn in 2008 and USD34 bn in 2009 from USD59 bn in 2007.

In 2007 and 2008 AIG, Inc. was the largest debt issuer raising 32% and 31% of the
total amount raised, respectively.

In 2010, the scenario is looking much better both in terms of median transaction
value and number of transactions.
Guide to Raising Capital
13
US Insurance Industry - Private Equity Market
PE Investment in Insurance
PE Investments across Financial Services
14
60
12
100%
50
48
80%
10
40
36
8
60%
30
6
17
20
4
40%
12
10
2
20%
0
0
2007
2008
Investment (USD bn)
2009
2010 H1
0%
2007
Number of deals
Capital Markets/Ins.
Source:Pitchbook
2008
Comm. Banks
2009
Insurance
2010 H1
Other Finan.Serv.
Source:Pitchbook

Private Equity investments in the US Insurance sector fell sharply in 2008 following
the global financial crisis and the attached credit freezing in the financial markets.

Composition of Investments into insurance remained flat in H1 2010 (6% versus 7%
in 2009).
Guide to Raising Capital
14
All Industries - Private Equity Market
Total PE investments and No. of Deals
2,918
800
700
Median PE investments by Type
627
2,102
600
500
3000
160
2500
140
2000
1,219
100
400
1500
300
120
211
655
80
1000
60
500
40
200
65
100
48
0
0
2007
2008
2009
2010 H1
20
0
2007
Capital Invested (USD bn)
Buyout - LBO
Source:Pitchbook
2008
2009
2010 Q2
No. of Deals
Source:Pitchbook
PE Growth/Expansion
Other PE Deal Types*
Guide to Raising Capital
15
PE Investment by Deal Size – 2003 to H1 2010
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
2003
Under USD 50mn
Source:Pitchbook
2004
USD50mn-250mn
2005
2006
USD250mn-500mn
2007
USD500mn-1bn
2008
USD1bn-2.5bn
2009
2010 H1
Above USD2.5bn
Guide to Raising Capital
Four Simple Steps

Step One:
The Business Plan – Why am I raising capital?

Step Two:
The Financial Plan – How much capital do I really need?

Step Three:
The Capital Structure – What kind of capital can I attract?

Step Four:
The Execution – Show me the money!
16
Step One: The Business Plan
17
Reasons for Seeking Capital
Buy Out Shareholders


Pay Debt
Perpetuation
Fund down payments


Growth



Hire new producers
Upgrade systems
Fund acquisitions
Debt or working capital obligations
Legal matters
Step One: The Business Plan
What Captures an Investor’s Attention?

Clear explanation for the use of capital
 Investors never write blank checks or invest in blind pools

Differentiation in strategy or market – be specific
 What advantage do you have over competitors?
 What is happening in the market that may drive growth?

Honest self assessment of competitive threats

Management and track record
18
Step One: The Business Plan
19
Why Will You Grow When Industry Isn’t?
Net Written Premium Growth
20.0%
15.3%
15.0%
10.0%
10.0%
8.4%
5.0%
5.0%
3.9%
2.7%
1.9%
0.5%
0.0%
-0.3%
-0.5%
-1.3%
-3.7%
-5.0%
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010(P)
Step One: The Business Plan
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Why Will You Grow When Industry Isn’t?
Public Broker Median Organic Revenue Growth
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
-2.0%
-4.0%
Q1
Q2
Q3
2003
Q4
Q1
Q2
Q3
2004
Q4
Q1
Q2
Q3
2005
Q4
Q1
Q2
Q3
2006
Median
Q4
Q1
Q2
Q3
2007
Q4
Q1
Q2
Q3
2008
Q4
Q1
Q2
Q3
2009
Q4
Step Two: The Financial Plan
What Captures an Investor’s Attention?

Detailed set of financial projections with assumptions
 Earnings, Cash Flow and Balance Sheet
 Detail demonstrates understanding and gives confidence

Growth rates and margins that make sense

Anticipate questions from financial analyst types
 They have to defend recommendations to an investment committee
21
Step Three: The Capital Structure
Investor / Lender Expectations

What are Lenders demanding?
 Collateral
 Personal guarantees
 Financial covenants
 Co-investment of equity
 Ability to get loans repaid

What are Equity Investors demanding?
 Aggressive growth/margin hurdles
 Control and governance (i.e., “Alignment”)
 Liquidity
22
Step Three: The Capital Structure
TODAY
EBITDA
$5 mil
Value (7x)
$35 mil
23
YR 5
EBITDA
Value (7.5x)
NO LEVERAGE
$75 m
$35 m
2.1x multiple
16% annual ROI
W/ LEVERAGE
$10 m
$25 m
3.0x multiple
25% annual ROI
NOTE: Assumes debt prepaid out of CF
$75 m
$10 mil
$75 mil
Step Four: Execution
How to Successfully Complete a Capital Raise

Prepare before Contacting Investors
 Determine needs and types of capital
 Control information flow versus reacting to investor demands

Resources and Focus
 Contact multiple sources simultaneously in a competitive process
 Time consuming: Meetings / Presentations / Follow-up Requests

Due Diligence and Documentation
 As rigorous and costly as a sale
24
Step Four: Execution
3 - 4 weeks
Prepare for Market
5 - 8 weeks
Hales in Market
25
4 - 6 weeks
Due Diligence &
Negotiation
Information
Contact potential
collection /
diligence
Compile, screen
and evaluate
potential
investors
Draft materials
investors and sign
diligence
NDA’s
Analyze terms
Management
presentations
Facilitate
informational
requests and
queries
Solicit indications
of interest
Coordinate due
3 - 5 weeks
Execution
Negotiate /
execute
documentation
Regulatory
approval(s)
Announcement
Closing
Conclusions

Raising capital is harder than you think

Lots of misconceptions; wide variety of capital sources

Preparation, process and focus are paramount to success
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