Transcript Varun Maharaj – TTIFC Risk Capital

Risk Capital
A Public-Private Partnership
to Invest in Expansion-Ready SMEs
Varun Maharaj, CEO, Trinidad & Tobago IFC
TTCSI Services Week – SME Financing Workshop
November 4th, 2014, Trinidad Hilton
© 2013 Trinidad and Tobago International Financial Centre Management Company Limited. All rights reserved.
Why Risk Capital
• SMEs are essential to economic growth and diversification.
• However, SMEs can’t realize their full potential due to internal
and external impediments.
• Venture Capital has not performed well at the SME level in
developing countries.
• Trinidad and Tobago IFC is addressing the gap in SME
financing in order to:
–
–
–
–
–
to create new jobs,
broaden the entrepreneurial base in Trinidad and Tobago,
improve standards of business practice,
facilitate the creation of new products and services, and
generate greater financial inflows from exports.
© 2013 Trinidad and Tobago International Financial Centre Management Company Limited. All rights reserved.
What is Risk Capital
• Public-Private partnership investment funds to finance
SMEs.
• Investment involves a combination of a low interest loan,
revenue participation through royalty payments and
purchase of equity in the SME with an agreement to
repurchase.
• Investments will be a blend of debt and equity financing.
• Financing based on projected cash flows rather than
collateral value.
© 2013 Trinidad and Tobago International Financial Centre Management Company Limited. All rights reserved.
SME Fund – Not Venture Capital or Bank Loan
SME Fund
Bank
Venture Capital
Return
Based on interest on Based on interest Heavily dependent on
loan
and
royalty on loan.
business being sold to
payments.
third party or listed on
Stock Exchange.
Targets
SMEs
at
the SMEs that are Relatively
large
expansion-stage.
subsidiaries
of companies at later
larger businesses. stages in the business
life cycle.
Funding
• Based
on At
least
100%
feasibility
of collateral coverage
business
and required for loan.
potential
for
revenue growth.
• 100%
collateral
not needed.
© 2013 Trinidad and Tobago International Financial Centre Management Company Limited. All rights reserved.
Based on potential for
future capital gains to
allow for exit at high
multiples
of
initial
purchase price.
Overview of SME Fund
© 2013 Trinidad and Tobago International Financial Centre Management Company Limited. All rights reserved.
SME Fund – Roles and Responsibilities
Key Players
Roles and Responsibilities
•
•
•
Provide long term loan.
Provide funding for Business Assistance Facility.
Set investment policy.
•
•
•
Provide equity capital.
Hire fund managers.
Select Investment Committee Members.
•
•
•
•
Select SMEs to receive financing.
Perform due diligence.
Negotiate and close investments.
Provide hands-on assistance to SMEs.
Business Assistance Facility
•
Provide consultancies, training, and other forms of
assistance to SMEs.
SMEs
•
Work with Fund Manager to prepare and/or revise
business plans.
Government
Private Investors
Fund Managers
© 2013 Trinidad and Tobago International Financial Centre Management Company Limited. All rights reserved.
SME Fund – Benefits
Key Players
Government
Private Investors
Fund Managers
SMEs
© 2013 Trinidad and Tobago International Financial Centre Management Company Limited. All rights reserved.
Benefits
• Interest earned on loan to fund.
• Economic Development.
• Returns above current market rates.
• Reduction of liquidity in banking sector.
• Return will consist of interest on loan and
royalty payments.
• Addresses risk/return trade off.
• Compensation consists of fund management
fee, annual performance bonus and carried
interest.
• Access to suitable and affordable funding.
• Access to funding not tied to availability of
collateral.
• SME owners and investors share common
objectives.
SME Fund – Exit Strategy
• SME owner(s) repurchase(s) shares from SME Fund at a
predetermined multiple of initial equity investment
• SME acquired by another company or listed on a Stock
Exchange.
– If this happens SME Fund has a “tag along” right. This gives the
Fund the right to sell its shares at the same price as the SME
owner(s).
© 2013 Trinidad and Tobago International Financial Centre Management Company Limited. All rights reserved.
SME Fund – International Experience
Program
Leverage
Ratio
Investment Terms
Total Invested
by Government
Total
Private Investment
AUD
360,000,000
AUD 283,000,000
IIF - Australia
2:1
IIF receives 10% of
profits after return of
capital
SBIC – United
States
2:1
2% above 10-year
Treasury Notes
US$ 2.2 billion
in FY 2013
US$ 3 billion +
in 2013
ECF – United
Kingdom
2:1
3% interest
£ 200,000,000
£ 100,000,000 +
US$
100,000,000
US$ 250,000,000
Yozma - Israel
if successful, fund
repurchases
40% of total
government shares at
cost
Source: Tom Gibson, Principal, SMEthink
© 2013 Trinidad and Tobago International Financial Centre Management Company Limited. All rights reserved.
SME Fund Example
The Investee
First Year Sales
2,500,000
Sales Growth (post-investment)
Expansion Financing Requirement
Current Balance Sheet Equity
EBITDA Margin
Royalty-Based Loan
Grace Period
Negotiated Terms
© 2013 Trinidad and Tobago International Financial Centre Management Company Limited. All rights reserved.
Year 3
Year 4
Year 5
100%
25%
20%
20%
2,500,000
500,000
25%
The Investment
Equity Investment
Year 2
250,000
Post-Investment
Equity
Fund's
% of Shares
750,000
33%
2,250,000
2
Base
Interest Rate
2.5%
Base Royalty
Equity Buy-Back
% of Gross Sales
Multiple
2.5%
3.0
SME Fund Example – Repurchase by SME Owner(s)
Flows
1
2,500,000
2
5,000,000
3
6,250,000
4
7,500,000
5
9,000,000
Principal Payments on Loan
0
0
750,000
750,000
750,000
Interest Payments on Loan
56,250
56,250
56,250
37,500
18,750
Royalty Payments
Equity Repurchase Proceeds
62,500
125,000
156,250
187,500
225,000
750,000
19%
15%
62%
52%
78%
118,750
506,250
181,250
1,068,750
962,500
600,000
975,000
900,000
1,743,750
506,250
0
Gross Sales
Debt Service Coverage Ratio (% EBITDA)
Flows to SME Fund
-2,500,000
Investee's EBTD
-500,000
(after all payments to SME Fund)
Returns
SME Fund's Gross IRR
Investee's Gross IRR
© 2013 Trinidad and Tobago International Financial Centre Management Company Limited. All rights reserved.
12.5%
132.9%
SME Fund Example – Sale to Third Party
Flows
Gross Sales
0
1
2
3
4
5
2,500,000 5,000,000 6,250,000 7,500,000 9,000,000
Principal Payments on Loan
0
0
750,000
750,000
750,000
Interest Payments on Loan
56,250
56,250
56,250
37,500
18,750
Royalty Payments
62,500
125,000
156,250
187,500
225,000
Investee's Equity Sale Proceeds
4,500,000
2,250,000
Investor's Equity Sale Proceeds
Debt Service Coverage Ratio (% EBITDA)
Flows to Investor
Business's EBTD Margin after All Payments to
Investor
19%
15%
62%
52%
44%
118,750
181,250
962,500
975,000
993,750
506,250
1,068,750
600,000
900,000
1,256,250
Investee' Share of Sale Price
Returns
SME Fund's Gross IRR
18.9%
Investee's Gross IRR
141.5%
Realization Multiple for Investor
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1.3
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Trinidad and Tobago IFC
Amplifying Your Advantage
[email protected] | www.ttifc.co.tt
© 2013 Trinidad and Tobago International Financial Centre Management Company Limited. All rights reserved.