G Davies - Business Funding in tough times

1. What do private equity investors look for?

Introduction

How is private equity different from venture capital

What private equity investors look for?

What private equity offers investee companies

An example transaction e2 train

Conclusions

Your presenter:

Guy Davies

Managing Partner

WestBridge Capital

Experienced private equity provider

Investing 1m to 5m in profitable SMEs across the UK

Offices in Cardiff and Reading

Introduction

What do private equity investors look for?

An example transaction e2train Limited

Conclusions

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

Generically (our definition):

venture capital (VC) refers only to investments in early stage and expanding companies (seed expansion)

private equity (PE) refers to investment into established profitable companies (buy-in, buyout and development capital)

Relative source of value creation depends on the type of fund

Debt is an increasingly important source of value creation as transaction size increases

Venture capital returns typically do not rely of debt repayment

Introduction

Conclusions

Businesses that they can develop with management to make more valuable hands on supportive approach

Typically value creation comes from

profit growth

increase in sale multiple compared to acquisition multiple

repayment of debt

Look to earn an IRR of 30% and 3x money multiple

Acquire a business for 8m

Improve its performance over 4 years

Sell the business in year 4 for a slightly higher multiple

Use a combination of bank debt and equityto earn a target returns

An identifiable competitive advantage or USP

A sizeable market for the companies product/service

Strong cash flows

Prospects for significant growth within 5 years

Management ability to exploit the opportunity and control the company through its growth stage

Potential reward that justifies the risk

Potential financial return on the investment that meet their investment criteria

Clear exit route

More details in the WestBridge Brochure

Introduction

Conclusions

Experience of successfully scaling businesses

Non Executive Director (s)

Rigour of review through monthly Board Meetings

Acquisition experience

Utilisation of contracts and networks to develop the business smart money

Input in to growth planning and creation of milestones for management to meet

Introduction

Conclusions

Investment size:c1.25m investment

Deal type:MBO

Nature of business:e-learning software

No. of employees:34

Investment date:October 2009

Deal team:Valerie Kendall, Sandy Smart, ScottBarham

Funding source: WestBridge Partners, team and HNWs

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

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

Impressive CEO responsible for strong performance to date

Management team ambitious and focused on growth opportunity

Management rolling over all proceeds, and investing further

Opportunity to broaden share ownership and align interests

Opportunity for the CEO to grow the board, and further professionalise the business

Significant growth despite economic recession

We knew a first rate chairman candidate, who had taken a similar sized software business through next growth phase

Loyal, blue chip customer base, with no dependency and excellent retention rates

Recurring revenue streams, and strong pipeline which underpinned future growth

Operating in a growing and increasingly global market

Modest acquisition price, and opportunity to structure with minimal external debt

Introduced John Caines, associate partner, as NXC (experience, engagement, team dynamic)

Started process of improving governance through new board protocols, etc

Introduced potential customers (Thompson Reuters, Vodafone, VT Group, O2), directly and through fund investors

Introduced potential channel partners (HLC, Meta Morphose), directlyand through fund investors

Ensuring all board decisions are made with context of future exit

Work with board to consider organic and acquisition opportunities

Potential further funding

Alignment of interest management and WestBridge

Maximising value on exit

1) increase earnings during holding period

2) increase multiple on exit

3) increase cash generation during holding period

Being pro-active about promoting the business

Expectation of 3 to 4 years, however, flexibility regarding timing

Using the skills of the corporate finance community

Professional auction process

Trade sale . or maybe secondary buyout

Introduction

Conclusions

Private equity is a relevant source of capital to help scale SME companies

Private equity investors are fund managers who have return targets

Attractive returns can be earned by managers and investors from deploying capital in the right type of business

Good quality investors bring more than money experience and business contacts

Alignment of interests between managers and investors is key

Technology

G Davies - Business Funding in tough times