Innovative sources of finance


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Venture Capital and Loan Syndication, the two prominent innovative finance sources are discussed.

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Innovative sources of finance

  1. 1. Venture Capital & Loan Syndication Innovative Sources of Finance
  2. 2. Innovative Sources
  3. 3. • Innovative sources and mechanisms of funding are non-traditional modes of financing • Finance is made available to the Business Organisations breaking the conventions • All the innovative sources are evolved in response to the magnified and divergent need for Finance What are Innovative Sources?
  4. 4. • Non – Traditional • Tailor Made • Mobility • Finance on Demand Why called ‘Innovative’?
  5. 5. Venture Capital
  6. 6. • Financing a new, growing, or troubled business • Knowledge of the significant risk associated • Investment in exchange for an equity stake • Expects a better-than-average return Meaning
  7. 7. • Money provided by investors to start-up firms and small businesses with perceived long-term growth potential and substantially high risk , in exchange of an equity stake expecting a better than average return. Definition
  8. 8. • New Business • Limited Operating History • No capital market access • Perceived long term growth potential Who opt VC?
  9. 9. • Not necessarily just one wealthy financier • Ltd. partnerships with pooled investment capital • Small group of investors • Affiliate or subsidiary of a; 1) Large commercial bank 2) Investment bank or 3) Insurance company Who can be a Venture Capitalist?
  10. 10. • Commercially Viable • Identifiable Market • Strong Management • Sustainable Competitive Advantage What do Venture Capitalist look for?
  11. 11. • Participation in Equity • Long – Term loans • Participation in Management • Risky Capital • Exit Option Features
  12. 12. Financing Equity Returns Participation in Equity
  13. 13. Financing Equity Lock – Up Period Sale of Equity Long Term Loans
  14. 14. Take part in the Board of Directors Provide Technical/ Technological Assistance Recruiting Key Executives Participation in Management
  15. 15. Risky Capital
  16. 16. Financing Commercial Viability Selling of Equity Exit Option
  17. 17. The Funding Process 1) Business Plan Submission 2) Introductory Conversation /Meeting 3) Due Diligence 4) Term Sheets and Funding
  18. 18. Types of Funding 1) Seed Capital 2) Start-Up Capital 3) Early Stage Capital 4) Expansion Capital 5) Late Stage Capital
  19. 19. The ‘Apple’ Story..!
  20. 20. Loan Syndication
  21. 21. • Huge financial requirements • Involvement of greater risk • Low credit exposure levels • Mismatching Terms & Conditions Why loan syndication?
  22. 22. • The process of involving Several different lenders in providing various portions of a loan. • Borrower requires a large sum of capital that may either be too much for a single lender to provide, or • May be outside the scope of a lender's risk exposure levels. • Multiple lenders together provides a single loan on agreed terms and rates through an agent - ARRANGER. Meaning
  23. 23. • Syndicated loan is one that is provided by a group of lenders and is structured, arranged, and administered by one or several Institutional Lenders or investment banks known as arrangers. Definition
  24. 24. • When there is huge requirement for fund, such as in case of; 1) Mergers 2. Acquisitions and 3) Buyouts When a Syndicated loan is opted?
  25. 25. Borrower Arranger Syndicate Parties to a Syndicated Loan
  26. 26. • Point of Contact • Monitor • Postman and Record Keeper • Paying Agent Duties of an Arranger
  27. 27. Documenting the Loan
  28. 28. • The Borrower appoints the Arranger via a Mandate Letter • The content varies according to whether; 1. The Arranger is mandated to use its "best efforts" to arrange the required facility or 2. If the Arranger is agreeing to "underwrite" the required facility. Mandate Letter/ Commitment Letter
  29. 29. • The Mandate Letter will usually be signed with a Term Sheet attached to it. • The Term Sheet is used to set out the terms of the proposed financing prior to full documentation. • It sets out the parties involved, their expected roles and many key commercial terms Term Sheet
  30. 30. Example : 1. Type of facilities 2. Facility amounts 3. Pricing 4. Term of the loan and 5. Covenant package
  31. 31. • Prepared by both the Arranger and the borrower • Arranger forwards to potential syndicate members. • Includes description of the borrower's business, management, accounts, details of the proposed loan etc. • It is not a public document and all potential lenders that wish to see it usually sign a confidentiality undertaking. Information Memorandum
  32. 32. • Prepared if the syndicate comes to a conclusion and borrower is agreed upon • It sets out the detailed terms and conditions on which the Facility is made available to the borrower. • The repayment structure, Interest rates, Covenant stipulations etc are drafted here Syndicated Loan Agreement
  33. 33. • Made between borrower and arranger • Borrower has to pay the arranger a specific fee for its specialised services • Fee letter contains the rates and the conditions and structure of such payments. Fee Letters
  34. 34. Term Loan Facility Revolving Loan Facility Types of Syndicated Loans
  35. 35. Innovative Features
  36. 36. • Realising Capital • Risk or Portfolio Management • Regulatory Capital Requirement • Crystallise a loss Selling participation in the Loan
  37. 37. • Letter of credit • Swingline Facility • Overdraft Facility Other Features..
  38. 38. What we’ve discussed...
  39. 39. Questions??