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China BPO Presentation Finance
 

China BPO Presentation Finance

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China Presentation-Beijing

China Presentation-Beijing
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    China BPO Presentation Finance China BPO Presentation Finance Presentation Transcript

    • Agenda to Alternative Strategies to Attract Foreign Investment for OutSourcing Companies in China • Types of Financing • Profiles of Targets • Status of Company • Private Placement Memorandum • Deal Costs • Strategic Choices
    • Capital Market Line Seed Stage VC Late Stage VC Early Stage VC Return Grwth Pub Equity Private Equity Est. Pub Equity T-Bonds T-Bills Risk
    • Types of Financing
    • Profiles of Targets
    • Stages of New Venture Development Financing Stages of Development • Seed • Early Stage (“Series A”) • Expansion (“Series B”) • Late Stage (“Series B”) • Exit
    • Stages of Corporate Development Dollars Revenue Net Income 0 Cash Flow 0 Time Seed Early Stage Expansion Late Stage Exit!!
    • Stages of Financing • Bootstrapping – Proof of concept- <US$50k • Seed Financing – (R&D Financing) - US$150k • Early Stage Financing – First Customers - US$1 to 5 million • Expansion – Sales and marketing - US$5 to 10 million • Late Stage – Continued growth to exit - US$10 to US$25 million • Exit – IPO, LBO, M&A
    • Sources of Financing • Entrepreneur/State Funding • Friends and Family • Angel Investor - Individuals • Strategic Partner – Corporate Investor • Venture Capital - Firms • Asset-based Lending; equipment lessor; venture debt • Trade credit; Factor • Mezzanine Lender; Public Debt • IPOs • Acquisition; LBO; MBO
    • Sources of New Venture Financing SourcesSeed New Venture Stage Exit of Early Expnsn Financing Stage Late Entrepreneur/State Fund Friends and Family Angel Investors Strategic Partner Venture Capital Asset-based Lender Equipment Lessor Venture Debt Trade Credit Factor Mezzanine Lender Public Debt IPO Acquisition, LBO, MBO Black shading indicates primary focus of investor type. Gray shading indicates secondary focus, or focus of a subset of investors.
    • Deal Costs
    • Costs of Capital • Venture funds focused on seed and early-stage companies deliver superior long-term returns. 1-year 5-year 10-year 20-year Early/Seed 38.9% -1.5% 44.7% 19.9% Balanced* 14.7% 0.4% 18.2% 13.3% Late Stage 10.4% -4.7% 15.4% 13.7% All Venture 19.3% -1.3% 26.0% 15.7% NASDAQ 8.6% -11.8% 11.2% 12.4% S&P 500 9.0% -3.8% 10.2% 11.7% Source: Thompson Venture Economics/National Venture Capital Association for periods ending December 31, 2004
    • What is Venture Capital and Why does it exist? • An asset class within Private Equity • It exists to finance businesses which are not finance-able via traditional means while providing superior returns to investors • What kinds of businesses cannot financed? • What is a superior return?
    • Venture Capital Overview • Asset Class – Real Estate, Stocks, Bonds and Private Equity – $100B Under Management – $65M Invested every working day • Who Invests and Why? – Limited Partners – Pension Funds, others – Higher Returns – 41% + • What is the deal – Management fee and carry • Mgt Fee of 2% and 20% of profits • Creating a VC – Four years and $20M
    • Venture Capital Cycle • Limited Partner invests in a Venture Capital Fund • The fund manager (aka, the “VC”) invests equity in a portfolio company • The VC monitors the company • The Venture Capital Fund realizes cash proceeds upon an exit event and returns capital to the Limited Partner
    • What a VC does • Identifies an opportunity, recruits investors, raises a fund, hires partners • Finds the deal, negotiates the terms and closes the transaction • Sits on the Board of Directors, works with the CEO, CFO and others • Advises on contracts, agreements and company direction • Pursues, negotiates and closes the sale of the company
    • Review: The Axis of VC • Stage – Seed, Early, Expansion, Late • Region – Local, Regional, National, International • Technology Focus – Retail, IT, Energy, Life Sciences, Nanotechnology
    • Venture Capital and Private Equity Dynamics
    • Types of Funds Venture Funds are a part of a larger trend Asset Class # of Funds # of Funds % in 1995 in 2004 Increase U.S. Venture Capital 361 946 162% U.S. Private Equity 150 454 203% Non-U.S. Private Equity 57 424 644% Real Estate/Timberland 53 160 202% Oil and Gas 36 57 58% Distressed/Recovery 23 58 152% Fund of Funds 39 178 356% TOTAL 722 2,277 215% Source: Cambridge Associates
    • History of Venture Capital • American Research and Development, 1946 • Draper, Gaither and Anderson, 1958 • Closed end funds or SBICs • Amendment to “prudent man”, 1979 • Enter the investment advisors, 1980s • The bubble • Today
    • Venture Capital Returns Upper Quartile Vintage Years 1989 – 2003, as of 31 March, 2004 Median Lower Quartile 600 Internal Rate of Return (%) 500 400 300 200 100 1 1 1 1 0 -100 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Source: Cambridge Associates LLC Non Marketable Alternative Assets Database Note: These internal rates of return have been compiled from 755 US Venture Capital funds with inceptions from 1989 through 2003 and are net of management fees, expenses and carried interest 1 Most of these funds are too young to have produced meaningful returns. Analysis and comparison of partnership returns to these benchmark statistics may be irrelevant.
    • Private Equity Returns Vintage Years 1989 – 2003, as of 31 March, 2004 Upper Quartile Median Lower Quartile 300 250 Internal Rate of Return (%) 200 150 100 50 0 1 1 1 1 -50 -100 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Source: Cambridge Associates LLC Non Marketable Alternative Assets Database Note: These internal rates of return have been compiled from 407 US Private Equity funds with inceptions from 1989 through 2003 and are net of management fees, expenses and carried interest 1 Most of these funds are too young to have produced meaningful returns. Analysis and comparison of partnership returns to these benchmark statistics may be irrelevant.
    • Comparison of All Returns VC and Private Equity End-to-End, Net to L.Ps. as of 31 March 2004 60.0 50.0 46.4 38.6 40.0 30.0 Percentage (%) 20.0 11.1 10.0 5.0 7.4 3.9 2.6 -0.2 0.0 -10.0 -20.0 -19.6 -30.0 Three Years Five Years Ten Years U.S. VC (Mean) U.S. PE (Mean) MSCI World Index Source: Cambridge Associates LLC Non-marketable Alternative Assets Database. Note: Returns are end-to-end pooled means net of management fees, expenses and carried interest. The pooled means represent the end-to-end rates of return calculated on the aggregate of all cash flows and the beginning and ending market values as reported by the General Partners to Cambridge Associates LLC in the quarterly and annual audited financial reports.
    • Comparison of Top Two Quartiles VC and Private Equity End-to-End, Net to L.Ps., as of 31 March 2004 60.0 54.8 150.7 50.0 46.4 38.6 40.0 30.0 Percentage (%) 21.8 20.0 15.1 12.6 11.1 10.0 5.0 7.4 3.9 2.6 -0.2 0.0 -10.0 -20.0 -13.4 -19.6 -30.0 Three Years Five Years Ten Years U.S. VC (Mean) U.S. VC U.S. PE (Mean) U.S. PE MSCI World Index (Top Two Quartiles ) (Top Two Quartiles ) Source: Cambridge Associates LLC Non-marketable Alternative Assets Database. Note: Returns are end-to-end pooled means net of management fees, expenses and carried interest. The pooled means represent the end-to-end rates of return calculated on the aggregate of all cash flows and the beginning and ending market values as reported by the General Partners to Cambridge Associates LLC in the quarterly and annual audited financial reports.
    • The “Bubble” National Venture Investment $120,000 Millions 2000 $100,000 Dollar Value $80,000 $60,000 1999 2001 $40,000 1998 2002 2003 2004 2005* $20,000 1995 1996 1997 $0 Year
    • US Venture Capital Fundraising $83.1 $80 $60 $57.8 Funds Raised ($B) $50.3 $40 $26.6 $20 $17.1 $18.4 $15.9 $12.7 $13.1 $9.2 $5.3 $7.1 $0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 YTD05 YTD05: 1Q05 – 3Q05
    • Median New VC Funds Are Largest Ever $200 $200 $163 $150 Median Fund Size ($M) $120 $110 $100 $100 $100 $100 $88 $80 $76 $67 $57 $50 $0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 YTD05 YTD05: 1Q05 – 3Q05
    • Median Premoney Valuation by Year $25.3 $25 Median Premoney Valuation ($M) $21.1 $20 $16.0 $16.7 $15.5 $15 $12.9 $13.0 $11.1 $10.8 $10.0 $10.0 $10 $9.3 $5 $0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 YTD05 YTD05: 1Q05-3Q05
    • Median Premoney Valuations by Round Class (All Industries) $40 $36 Median Premoney Valuation ($M) $30 $20 $20 $17 $14 $10 $6 $5 $2 $2 $0 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 Later Stage Second Round First Round Seed Round
    • Private Equity Funding Overview • Typical Private Equity Fund Management Team – Total capital under management in excess of $1.0 billion • Significant dry powder remaining in $585 million Fund II – 15 professionals with a wealth of transaction and operating experience • Target platform investments in companies with enterprise values between $50 million and $500 million – Primarily focused on U.S. opportunities – Currently pursuing opportunities across multiple industries, including energy – Create value through buy-and-build strategy – Targeted hold period: 3 – 7 years • Focused on identifying growth companies with embedded franchise value – Sustainable and differentiating characteristics that result in strategic value
    • Private Equity Transaction Structures • PE firms work with management teams to execute change-of-control investments – Leveraged recapitalization is utilized when PE Firm with existing management teams and/or owners • Selling shareholders receive a “second bite at the apple” through rollover equity and stock options – Leveraged buyout is utilized when PE Firm partners with operating executives to acquire a business • Frequently utilized when selling shareholders are retiring from the business • Transaction funding sources typically include some combination of: – Equity from Firm’s fund – Rollover equity – Bank debt – Subordinated or mezzanine debt – Seller financing • Employment agreements and stock incentive plans are typically mutually agreed upon prior to closing
    • Role of Leverage  Debt financing is critical for private equity transactions  Leverage enhances equity returns  Vast majority of mature companies do not have the growth profile required to generate an unlevered equity return that clears the hurdle rate demanded by private equity LP’s  Similar to the real estate market, abundant debt financing was partially responsible for the unprecedented private equity deal volume over the last several years  Lower levels of debt today Lower private equity deal volume  Leverage reduces tolerance for earnings volatility  Private equity firms value growth, but value predictability more  Post-LBO, a company must be able to service its debt and meet its covenants every quarter  Current debt markets are effectively closed for LBO transactions
    • Generalist Approach to Private Equity Investing Necessary Qualities √ X Proven business models that Established companies with Early-stage companies without generate EBITDA strong historical results cash flow Sustainable and predictable cash Companies with strong Construction companies flows contracted recurring revenue focused on short-term at sustainable margins, projects, companies benefiting companies with a proven substantially from a temporary ability to generate revenues in dislocation (e.g. hurricane) in economic downturns the market Ability to survive changes in Companies with products Companies whose revenues commodity prices and/or services that are in and/or profitability are highly high demand regardless of sensitive to changes in oil or commodity pricing levels gas prices Ability to survive changes in Companies whose unit Companies whose revenues legislation or regulation economics (or whose and/or profitability are wholly customers’ unit economics) dependent on controversial or are attractive without expiring legislation or legislative or regulatory aid regulation
    • Partnering with Private Equity Firms • Partnering with a private equity firm can be an attractive liquidity option for talented owner-managers who want to remain with the business – Diversification for estate planning purposes, while retaining “second bite at the apple” – Continuity of operations, leadership, and corporate culture – Continued influence over future strategic direction and identity – Private equity firm brings resources to support growth • Capital for growth • M&A expertise • Recruiting board members and executives • Corporate relationships – Cleaner sale process: competitors and potential competitors do not get access to proprietary information during due diligence • Every private equity firm is different – Before partnering with a private equity firm, do your own due diligence to determine whether that firm would be a good fit for you as a future partner
    • Status of Company
    • Private Placement Memorandum
    • Elements of a Private Placement Deal Deal Structure • “The Deal” • Term Sheet • Pre-money Valuation • Post-money Valuation • Investment Agreement – Representations and Warranties – Covenants and Undertakings – Affirmative Covenants – Negative Covenants – Registration Rights – Preemptive Rights – Ratchets or Anti-dilution Provisions
    • Strategic Choices