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Private Equity Investment as a Source of Financing for Leasing Companies
Natalia Best, Vice-PresidentHorizon Capital
Banking Sector & Leasing Market Business & State RegulationFebruary 21, 2006
Kyiv
Outline
• Private equity as a source of financing– Types of investors and funds – How a private equity fund works
• Practical considerations of working with an private equity fund– Investment process – Valuation and control– Eligibility requirements
• Experience of Horizon Capital
Private Equity InvestmentFinancing Options
Company Needs Financing Options
Replenishment of working capital Short-term loan & retained earnings if profitable
Capacity expansion Debt may be sufficient in case of incremental growth and if the company is profitable,
Equity is required if expansion is aggressive
Expansion through acquisition Equity and/or long-term loan with grace period
Buyout/replacement of existing shareholder
Equity
Private Equity Investment Private Equity Fund vs. Portfolio Investor
Private Equity Fund Portfolio Investor / Hedge Fund
Significant stakes in closely held companies
Small stakes in publicly held companies
Active participant
(usually via BOD)
Passive investor
(buy and hold)
Backs management team and focuses on value creation
Takes advantage of market arbitrage opportunities
Exist after creating value Sells when market recognizes value
Private Equity Investment Private Equity Fund vs. Strategic Investor
Private Equity Fund Strategic Investor
Significant stakes in companies, including minority shareholdings
100% or super majority stakes in the company
Relies on existing management team to increase company value
Brings own management team, business strategy and vision
Participates via representation in the Board of Directors
Participates in day-to-day management
Resells its stake after completion of the investment program
Does not exit
(or exits in exceptional cases)
Private Equity InvestmentTypes of Funds
• Early Stage– Seed investment– Venture capital
• Later Stage– Expansion– Buyout
Private Equity InvestmentBasic Premise
Provide a superior return by:• Selecting appropriate opportunities
– Country/region– Sector/industry– Company
• Creating value post investment• Realizing that value at exit
Private Equity InvestmentSelecting Opportunities• Attractive industries
– Rapidly growing– Fragmented/undergoing consolidation – Barriers to entry are or will be high
• Companies– Professional management teams – Clear vision/strategy– Market leader ot leadership potential– Capitalize on existing and create new competitive advantages– Management and shareholder interest aligned– Clear exit path for investor
Private Equity InvestmentCreating Value
• Participate in corporate governance– Usually at BOD level– Formulate strategy, establish Key Performance Indicators (KPIs)– Not distracted by day-to-day management issues
• Provide access to broad network of contacts, resources and outside expertise
• Focus on long-term value vs. short-term profits• Develop/enhance management team• Improve financing options by
– Lowering risk profile– Strengthening balance sheet
• Monitor KPIs and react to early warning signals
Private Equity InvestmentRealizing of value
• Focus on exit from day one– Networking and communication– Strategic relationships/alliances
• Available exit options– Trade sale to strategic investor– Sale to financial investor – IPO– Dividends– Leveraged recapitalization– Management buyout
Practical ConsiderationsThe Investment Process
• Analysis of company and business plan• Negotiations and sign Term Sheet
– Amount & preliminary use of funds– Corporate governance, shareholders rights, exit mechanism– Conditions precedent– Due diligence budget
• Due diligence– IAS audit– Legal review; preparation of documents– Operational review– Final agreement on business plan, near-term initiatives
• Closing/ Funding
Practical ConsiderationsValuation and Control
• Pre-money valuation will depend on– Risk profile of industry/company/business plan– Likelihood that value will increase– Liquidity
• Necessity for control will depend on– Common vision of the strategy– Alignment of shareholders and managers– Willingness of existing investors to exit the investment together
• PE investor more interested in high rate of return then either valuation or control
Investment Candidates Positive Signs
• Successful track record– Untarnished reputation of company and owners– Previous relationship with reputable business partners and lenders
• Management aligned with investor with same vision and economic incentives
• Legal/ownership structure that ensures– Shareholders’ input/involvement – Investors’ rights protection– Control of profit center
• Financial transparency• Profitable operations or achieving profitability within 12 months of
investment• Willingness to understand and accommodate investor’s needs
Investment Candidates Red Flags
• Previous investment disputes• Lack of transparency • Related party transactions• Misleading information / non-disclosure (it will come out
during due diligence)• Interest in money but not input• Inability to differentiate management from shareholder• Unwillingness to provide exit vehicle or give up control
• Horizon Capital is a private equity fund manager• Originates and manages investments in mid-cap companies
with with outstanding growth and profit potential in Ukraine and Moldova
• Provides expansion and/or buyout capital to management teams with proven track records
• Priority sectors : Financial services FMCG (food and non-food) Industrial Retail
• Funds under management– Western NIS Enterprise Fund
Horizon Capital
• $150 million private equity fund
• Established in 1995; first investment in 1996.
• Significant stakes in mid-size private enterprises in Ukraine and Moldova
• $1-$10 million per investment
• $111 million to 28 companies since inception
• $72 million to 16 companies outstanding
• www.wnisef.org
Western NIS Enterprise Fund
Contacts
Natalia Best
Vice-President
+380 (44) 490-5580
+380 (44) 490-5589 fax
www.horizoncapital.com.ua