G Davies - Business Funding in tough times

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BEN event - Business funding in tough times - 9th Feb 2010

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G Davies - Business Funding in tough times

  1. 1. What do private equity investors look for?
  2. 2. Agenda <ul><li>Introduction </li></ul><ul><li>How is private equity different from venture capital </li></ul><ul><li>What private equity investors look for? </li></ul><ul><li>What private equity offers investee companies </li></ul><ul><li>An example transaction – e2 train </li></ul><ul><li>Conclusions </li></ul>
  3. 3. Introduction <ul><li>Your presenter: </li></ul><ul><li>Guy Davies </li></ul><ul><ul><li>Managing Partner </li></ul></ul><ul><li>WestBridge Capital </li></ul><ul><ul><li>Experienced private equity provider </li></ul></ul><ul><ul><li>Investing £1m to £5m in profitable SMEs across the UK </li></ul></ul><ul><ul><li>Offices in Cardiff and Reading </li></ul></ul>
  4. 4. Agenda <ul><li>Introduction </li></ul><ul><li>How is private equity different from venture capital </li></ul><ul><li>What do private equity investors look for? </li></ul><ul><li>What private equity offers investee companies </li></ul><ul><li>An example transaction – e2train Limited </li></ul><ul><li>Conclusions </li></ul>
  5. 5. What is private equity? <ul><li>“ Private equity is medium to long-term finance provided in return for an equity stake in potentially high growth unquoted companies” – defined by the BVCA </li></ul><ul><li>Generically (our definition): </li></ul><ul><ul><li>“ venture capital” (VC) refers only to investments in early stage and expanding companies (seed expansion) </li></ul></ul><ul><ul><li>“ private equity” (PE) refers to investment into established profitable companies (buy-in, buyout and development capital) </li></ul></ul>
  6. 6. What is private equity?
  7. 7. How do private equity fund managers earn returns for their investors? <ul><li>Relative source of value creation depends on the type of fund </li></ul><ul><li>Debt is an increasingly important source of value creation as transaction size increases </li></ul><ul><li>Venture capital returns typically do not rely of debt repayment </li></ul>
  8. 8. Agenda <ul><li>Introduction </li></ul><ul><li>How is private equity different from venture capital </li></ul><ul><li>What do private equity investors look for? </li></ul><ul><li>What private equity offers investee companies </li></ul><ul><li>An example transaction – e2train Limited </li></ul><ul><li>Conclusions </li></ul>
  9. 9. What do private equity investors look for? <ul><li>Businesses that they can develop with management to make more valuable – hands on supportive approach </li></ul><ul><li>Typically value creation comes from </li></ul><ul><ul><li>profit growth </li></ul></ul><ul><ul><li>increase in sale multiple compared to acquisition multiple </li></ul></ul><ul><ul><li>repayment of debt </li></ul></ul><ul><li>Look to earn an IRR of 30% and 3x money multiple </li></ul>
  10. 10. Illustrative business <ul><li>Acquire a business for £8m </li></ul><ul><li>Improve its performance over 4 years </li></ul><ul><li>Sell the business in year 4 for a slightly higher multiple </li></ul><ul><li>Use a combination of bank debt and equity to earn a target returns </li></ul>£000 Year 0 Year 1 Year 2 Year 3 Year 4 Acquisition price 8,000 Profits 1,500 1,600 1,900 2,000 2,200 Multiple 5.3x 6.0x Sale price 13,200
  11. 11. What do private equity funds look for? <ul><li>An identifiable competitive advantage or USP </li></ul><ul><li>A sizeable market for the companies product/service </li></ul><ul><li>Strong cash flows </li></ul><ul><li>Prospects for significant growth within 5 years </li></ul><ul><li>Management ability to exploit the opportunity and control the company through its growth stage </li></ul><ul><li>Potential reward that justifies the risk </li></ul><ul><li>Potential financial return on the investment that meet their investment criteria </li></ul><ul><li>Clear exit route </li></ul><ul><li>More details in the WestBridge Brochure </li></ul>
  12. 12. Agenda <ul><li>Introduction </li></ul><ul><li>How is private equity different from venture capital </li></ul><ul><li>What do private equity investors look for? </li></ul><ul><li>What private equity offers investee companies </li></ul><ul><li>An example transaction – e2train Limited </li></ul><ul><li>Conclusions </li></ul>
  13. 13. What private equity offers investee companies <ul><li>Experience of successfully scaling businesses </li></ul><ul><li>Non Executive Director (s) </li></ul><ul><li>Rigour of review through monthly Board Meetings </li></ul><ul><li>Acquisition experience </li></ul><ul><li>Utilisation of contracts and networks to develop the business “smart money” </li></ul><ul><li>Input in to growth planning and creation of milestones for management to meet </li></ul>
  14. 14. Agenda <ul><li>Introduction </li></ul><ul><li>How is private equity different from venture capital </li></ul><ul><li>What do private equity investors look for? </li></ul><ul><li>What private equity offers investee companies </li></ul><ul><li>An example transaction – e2train Limited </li></ul><ul><li>Conclusions </li></ul>
  15. 15. e2train Holdings Ltd <ul><li>Investment size: c£1.25m investment </li></ul><ul><li>Deal type: MBO </li></ul><ul><li>Nature of business: e-learning software </li></ul><ul><li>No. of employees: 34 </li></ul><ul><li>Investment date: October 2009 </li></ul><ul><li>Deal team: Valerie Kendall, Sandy Smart, Scott Barham </li></ul><ul><li>Funding source: WestBridge Partners, team and HNWs </li></ul>
  16. 16. Deal Timeline & Key Issues <ul><li>WestBridge won because of enthusiasm for deal, and contact base which could deliver the value-add post completion, despite deliverability uncertainty due to lack of established fund </li></ul><ul><li>WestBridge delivered the deal on the same terms as in the agreed offer in June 2009. We did not seek to renegotiate the deal at any point </li></ul>Date September 2008 Deal negotiated between e2train management and vendors February 2009 Introduced to WestBridge by Gambit Corporate Finance March 2009 e2train acquired a small competitor June 2009 WestBridge won exclusivity with management October 2009 Deal completed
  17. 17. Why we liked the opportunity <ul><li>Impressive CEO responsible for strong performance to date </li></ul><ul><li>Management team ambitious and focused on growth opportunity </li></ul><ul><li>Management rolling over all proceeds, and investing further </li></ul><ul><li>Opportunity to broaden share ownership and align interests </li></ul><ul><li>Opportunity for the CEO to grow the board, and further professionalise the business </li></ul><ul><li>Significant growth despite economic recession </li></ul><ul><li>We knew a first rate chairman candidate, who had taken a similar sized software business through next growth phase </li></ul><ul><li>Loyal, blue chip customer base, with no dependency and excellent retention rates </li></ul><ul><li>Recurring revenue streams, and strong pipeline which underpinned future growth </li></ul><ul><li>Operating in a growing and increasingly global market </li></ul><ul><li>Modest acquisition price, and opportunity to structure with minimal external debt </li></ul>
  18. 18. Adding value during the holding period <ul><li>Introduced John Caines, associate partner, as NXC (experience, engagement, team dynamic) </li></ul><ul><li>Started process of improving governance through new board protocols, etc </li></ul><ul><li>Introduced potential customers (Thompson Reuters, Vodafone, VT Group, O2), directly and through fund investors </li></ul><ul><li>Introduced potential channel partners (HLC, Meta Morphose), directly and through fund investors </li></ul><ul><li>Ensuring all board decisions are made with context of future exit </li></ul><ul><li>Work with board to consider organic and acquisition opportunities </li></ul><ul><li>Potential further funding </li></ul>
  19. 19. Exit Strategies <ul><li>Alignment of interest – management and WestBridge </li></ul><ul><li>Maximising value on exit </li></ul><ul><li>1) increase earnings during holding period </li></ul><ul><li>2) increase multiple on exit </li></ul><ul><li>3) increase cash generation during holding period </li></ul><ul><li>Being pro-active about promoting the business </li></ul><ul><li>Expectation of 3 to 4 years, however, flexibility regarding timing </li></ul><ul><li>Using the skills of the corporate finance community </li></ul><ul><li>Professional auction process </li></ul><ul><li>Trade sale …. or maybe secondary buyout </li></ul>
  20. 20. Agenda <ul><li>Introduction </li></ul><ul><li>How is private equity different from venture capital </li></ul><ul><li>What do private equity investors look for? </li></ul><ul><li>What private equity offers investee companies </li></ul><ul><li>An example transaction – e2train Limited </li></ul><ul><li>Conclusions </li></ul>
  21. 21. Conclusions? <ul><li>Private equity is a relevant source of capital to help scale SME companies </li></ul><ul><li>Private equity investors are fund managers who have return targets </li></ul><ul><li>Attractive returns can be earned by managers and investors from deploying capital in the right type of business </li></ul><ul><li>Good quality investors bring more than money – experience and business contacts </li></ul><ul><li>Alignment of interests between managers and investors is key </li></ul>

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