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PRIVATE EQUITY:

DIFFERENT VIEWS October 21th, 2014

International Workshop

09:30 PE Cost of Capital: an Appraisal

Alain Coën, ESG-UQAM, Montréal

10:15 Complementary Strategies in PE

Jean Plamondon, Idinvest, Paris

11:15 PE Fund Exit Strategies

Didier Folus, Université Paris Ouest

Emmanuel Boutron, Université Paris Ouest

12:00 Government-sponsored Venture Capital

Yann Alperovych, EM Lyon Business School

Lunch Break

14:15 PE funds & Family Businesses

Céline Barrédy, Université Paris Ouest

Alexandra Dawson, Concordia University

15:00 Euroquity & Transeo Initiatives

Christine Margrève, Sowalfin, Liège

16:00 PE in Emerging Markets

Halil Kiymaz, Rollins College, Crummer B.S., Orlando

16:45 “Social” Private Equity

Michel Vandevoir, Meso Impact Finance, Luxembourg

Contact:

Pr. Didier Folus, [email protected]

Emmanuel Boutron, [email protected]

Find CEROS @ www.ceros.fr

Salle 659-660

Pôle Léonard de Vinci – La Défense

Université Paris Ouest Nanterre La Défense

2-12, avenue Léonard de Vinci

92400 Courbevoie – France

http://www.u-paris10.fr/plan-d-acces-pulv-52950.kjsp

Private Equity Funds and Family BusinessCÉLINE BARRÉDY, UNIVERSITÉ PARIS OUEST

ALEXANDRA DAWSON, CONCORDIA UNIVERSITY (MONTREAL, CANADA)

CEROS WORKSHOP

PARIS, 21 OCTOBER 2014

AgendaIntroduction

Research gap and contribution

Aim of the project

Preliminary findings

Next steps

Why Family Business (FB)?

Prevalent form of organization worldwide

◦ 90% of all firms worldwide (Aldrich & Cliff, 2003)

◦ Advanced and emerging economies (Gedajlovic, Carney, Chrisman, & Kellermanns, 2012)

Not only small firms

◦ Many are small (99.5% of all firms in the EU are SMEs, Small and Medium Sized Enterprises)

◦ But also medium and large (La Porta, Lopez-de-Silanes, & Shleifer, 1999)

◦ 44% of publicly listed firms in Europe are family controlled (Faccio & Lang, 2002)

◦ 33% of S&P 500 firms in the USA are family controlled (Anderson & Reeb, 2003)

Key players in global economy

◦ FBs often outperform their nonfamily competitors

• In terms of market value (Anderson & Reeb 2003 ; Villalonga & Amit 2004) ; operational and financial performance (Lee, 2004 ; McConaughy and al., 1998 ; Sraer et Thesmar, 2004)

• Also in France (Allouche & Amann 1995; 2000)

◦ “Major source of oxygen for the combustion of entrepreneurship” (Rogoff and Heck, 2003: 559)

Meeting of two worlds?

Provides finance for business ideas or potentially high growth unquoted companies in return for an equity stake

Objective: to obtain high returns, over a 5–10 year period

France is the 3rd market

Retirement of Baby Boomer generation (born 1946 – 1964)

Large number of business transfers worldwide

E.g., in Canada 30% (or 310,000) ofbusiness owners will exit ownershipor transfer control of businesseswithin 5 years; and 50% in the next 10years, 50% (or 550,000)

Private Equity Family Business

• Increasing role of PE funds in Europe (Bancel, 2009)

• In Europe, FBs are the single largest receiver of PE in some of the major economies, including France, UK, and Italy (CMBOR, 2005)

• 35% of the LBOs concerns family firms in 2011

Also in France: about 700, 000

transfers expected within the next 10

years. An increase of 50% between

2012-2013

What does PE do?

1) Effect on value

Agency theory : Fama & Jensen (1983), Ang et al. (2000)

◦ FBs tend to reduce agency costs (no separation of ownership and management), but potentially different agency costs

◦ Family members cooperate and communicate easily

Resource-based view theory : Habbershon & Williams (1999, 2003)

◦ Family interactions with the business create the familiness

2) Effect of family ownership on target performance in LBOs

Entrenchment theory: Shleifer & Vishny (1997)

◦ Risk of conflict between blockholders and minority shareholders

Agency theory: Vilalonga & Amit (2004)

◦ Family ownership creates new kinds of conflicts

What does PE do?

3) Effect of PE on target firm

PE firms implement new corporate governance, improve decision making and organizationalefficiency (Wright 2009; Sapienza 1992; Sapienza et al. 1994)

Auditing and monitoring (Beuselinck & Manigart, 2007), financial counseling (Mitchell et al., 1997 ; Stephany, 1998)

Empirical evidence: positive role of PE on performance (Wright, 2010)

What does PE do?

FB and PE

ISSUES

No succession planning in FBs or planningstarts too late

Lack of awareness of options

◦ “Keeping in the family” is preferred route

◦ Only 30% make it to the secondgeneration, and only 12% persist to thethird (Family Firm Institute, 2013)

Information asymmetry (PE perceive FBs asinefficient and bedrock for conflict)

ADVANTAGES

Family firms offer a vast potential deal pool

Continuity of the firm and, in some cases,sustained family presence in the business(Dawson, 2011; Dreux, 1992; Howorth et al.,2004)

Opportunity for PE to increase firm’s valuethrough reduced agency costs (Barrédy et al.,2013; Dawson, 2011), stricter governancesystems (Jensen, 1993) and changes inorganizational structure and managerialpractices (Markides, 1998; Reid, 1996)

Canadian data: PE*Size of Canadian Buyout and Private Equity market

◦ Deal values total $12.3 billion in 2013, up 5% from 2012

◦ 320 transactions

Sectors

◦ Manufacturing, natural resource sectors lead deal-making

◦ Largest transactions in retail, healthcare, oil and gas

Geography

◦ Québec leads in transactional volume in 2013 (37%), followed by Ontario (27%)

◦ Ontario leads by value (48%, vs. Québec 29%)

*Source: Thomson Reuters (from CVCA website)

Size:

3rd market in the world after USA et UK

6 482 M€ invested in 2013

Small transactions (75% of transactions concern SMEs)

35% of deals concern family business

Sector:

Majority in industry, services, transports and retail

Geography:

The majority of investments are in Ile-de-France

French data: PE*

AgendaIntroduction


Aim of the project


Next steps

FB literature (management/entrepreneurship)

◦ Limited research on nonfamily routes to succession (Birley & Westhead, 1990; Dawson, 2011; Howorthet al., 2004)

◦ Previous FB research has focused almost exclusively on internal succession (Howorth et al., 2004) and has highlighted reasons why FBs may NOT want to open their capital to outside investors

PE literature (management/finance)

◦ Previous research has focused on startups and, when it has focused on mature businesses, it has seldom taken into account the family nature of the ownership of the target

◦ Previous research has analyzed the role played by PE funds and their influence on the performance and the governance of targets firms (Barrédy et al., 2013; Cotter et Peck 2001; Cumming et al., 2007; Sapienza, 1992; Sapienza et al., 1994; Wright 2009; )

◦ Literature on investment criteria (Shepherd, 1999; Shepherd et al., 2003; Zacharakis & Meyer, 2000; Zacharakis and Shepherd, 1999, 2001), but limited understanding of PE investment motivation in FBs (Dawson, 2011)

◦ Limited understanding of heterogeneity of PE in the management and finance literatures

Background and gap in the literature

Contribution

Typology of PE firms based on their FB investment motivation and objectives

◦ “Typologies present a particularly attractive form of theorizing” (Delbridge & Fiss, 2013: 329)

Drivers of investment: PE investment in FBs and FBs searching for PE

PE

• Prior research has focused on venture

capital and startups

• Reduce agency costs and improve

governance mechanisms (Dawson, 2011)

• Other reasons to invest in FB?

• 5-7 year time span

FB

• Little is known here

• Succession and/or growth

• PE as preferred/last option?

• Preserve continuity of FB (in many cases)

• Long term

PE investors’ activities can be divided into five steps (Tyebjee & Bruno, 1984)

◦ Deal Origination → Deal Screening → Deal Evaluation → Deal Structuring (Price - Equity % to investor(s) and incumbent owner(s) – Covenants – Leverage) → Post-Investment Activities (“The assistance to the venture in the areas of recruiting key executives, strategic planning, locating expansion financing, and orchestrating a merger, acquisition or public offering”)

Context

◦ Institutions

◦ Industry level: Build-up strategies? M&A? Portfolio management?

Firm level

◦ Does family stay or go?

◦ Are there differences between family and nonfamily firms with regard to number (and %) of new management brought in (Management). What about Governance?

◦ Goes hand in hand with baby boomers/FB owners retiring

PE investments

Draft theoretical model (work in progress)

AgendaIntroduction


Theoretical framework

Aim of the project


Next steps

PHASE I

Create a typology of PE firms based on their investment behaviours

Theoretically derived classification (Doty & Glick, 1994)

◦ Identify and define constructs that can be quantified

◦ Articulate relationships among constructs

◦ Develop testable hypotheses

PHASE II

Analyze the motivation of PE and FB engaging in deals

◦ Increase value of the PE investment / succession or growth of the FB

◦ PE: Stake size, financing strategy (e.g., by industry), portfolio strategy

◦ FB: Succession, growth, stake size (pre- and post-deal)

AgendaIntroduction


Aim of the project


Next steps

Exploratory interviews in Quebec2 counselors of the Ministère de l’économie et des finances (Québec) (Dionne et Temblay)

Président du fonds Desjardins (Miron)

Président du fonds ACE (Lazure)

Directeur de Portefeuille FSTQ (Nadon)

Objectives :

◦ Understand how PE works in Quebec

◦ Start a typology of PE funds

◦ Evaluate the role of FB in PE investments

General learningsFamily transfer is unfavourable in terms of taxation

◦ Non exemption on 750 000$

◦ Institutional brainstorming because family SMEs lose their skills and competencies

Sums invested by salaries in cooperative and solidarity funds are tax exempted◦ Good opportunity for those funds with lower pressure on returns

PE firms do not pay attention to the family specificity of family SMEs

Cooperative and solidarity funds pay attention to:◦ Quebecois ownership

◦ Continuity of the business

◦ Employment in Quebec

Lack of knowledge in transfer experience

Typology of PE Funds in Quebec (work in progress)

Private Funds

(ACE)

Solidarity Funds

(FSTQ)

Cooperative Funds

(Desjardins)

Institutional Funds

(CDC, Fonds

d’intervention du QC)

Aims High return expected

Professional

management

Roll-up/Build-up

Counselling

Keep SMEs in Quebec

Growth of Quebecois

SMEs

Transfer

Keep SMEs in Quebec

Growth of Quebecois

SMEs

Transfer

Intervention Growth

Innovation

Mergers

Roll-up

Transmission

Between two owners

Growth

Transmission

Between two owners

Growth

Duration of

investments

10 years (5 years

entering and 5 years

going out)

10 years and more 10 years max

• Capital IQ database

• 1101 deals including PE firms investments

• Between 2009 and 2014

• All deals are made in Canada

Deals Type (private placement, M&A)

Intervention (growth, venture capital, acquisitions)

Date

Deal value

Stake

Private Equity

profile

Name

Fund sponsor

PE country

Preference of investment (Geographic Location, Buy

Out, …)

Location of investment (north America, Europe…)

Stage of development of targets

Target profile Name

Year of foundation

Family business

DATA COLLECTEDDatabase of deals in Canada

1st step: Description of deals in FB targets

• 65 deals concern FB

• 64 FB made deals

• Only one FB target made two deals during the period

• 87 PE firms made deals in FB targets alone or in

syndication with 48% investing also in NFB

• On average, FB targets use fewer than 2 PE firms per

deals

45%

38%

8%3% 2% 2% 2% 2%

1 2 3 4 5 6 7 8

Number of funds per deal in FB

Preliminary results

2nd Step: Description of deals in NFB

• 132 deals concern Non Family Business (NFB)

• 121 NFB made deals

• 8.3% of NFB made two deals during the period

(statistically significant difference with FB)

• 152 PE firms made deals in NF targets alone or in

syndication

• On average, NFB targets use more than two (2,37) PE

firms to make deals è difference with FB not statistically

significant

36%

31%

11% 10%8%

2% 2%0% 1%

1 2 3 4 5 6 7 8 9

Number of funds per deal in NFB

Preliminary results

PE firm profile Significant variable for

PE investing in FB

Significant variable for

PE investing in NFB

PE Type of Investment

Preference

Buy-Out (10%)

Mature (10%)

Succession (10%)

Industry of Investment

Specialization

Industry (1%)

Consumer Discretionary (10%)

Finance (5%)

Material (10%)

Energy (5%)

Consumer Staples (5%)

Utilities (5%)

Localisation of Investments Asia (10%)

All over the world (10%)

Target Life Cycle Specialization

of the PE firm

Sell/ Buy out (5%)

Medium (5%)

PE (10%)

Late (5%)

Early (1%)

3rd Step: Difference of means concerning PE firm profile according to their investment in FB or NFB targets

AgendaIntroduction


Aim of the project


Next steps

Next stepsCreate a typology of funds investing in FB

Create a model explaining the link between the type of fund and the performance of the FB target in terms of economic, financial and familycontinuity

Carry out an international research (Canada, France and Italy) to compare the arguments of the typology and include the institutional dimension

Céline Barrédy

[email protected]

Alexandra Dawson

[email protected]

Contacts:

Thank you for your attention

Private Equity : Different viewsInternational Workshop, Paris

October 21th, 2014

Financing SME’s : key steps : Setting-up/takeover, growth and development ao

innovation/internationalization, SME Selling process :Sowalfin is SME’s partner

Focus on financing aoAcquisitions

Presentation of the SOWALFIN Group & the acquisition financing products

SOWALFIN

v company of public interest

v Set up by the Walloon Government in 2002 to improve accessto finance for start-ups, growth and business transfer in Wallonia

v 3 main products:

1. Guarantees and counter-guarantees to secure bank creditsfor SMEs2. Cofinancing with commercial banks through subordinatedloans3. Equity/risk capital through coordination of the 9 local“Invests” (financial entities active in the field of risk capital andmezzanine finance)

BBusiness ss transfersrs financingggg case

Key y elementss :

v Transfer type (family transfer, MBO, MBI, strategic buyer)

v Deal value

v Personal funds of the buyer

v Vendor loan

v Negotiated warranties with the seller

v Transition period foreseen between the seller and the buyer

v Due diligence (financial, legal, social, environmental)

Analysis Structure

1. Description : name, place of investment, etc

2. Description of activities

3. Investment goal, strategy

4. Financing plan : Expenditure / Financing sources

5. Description of the Bank proposal

6. Valuation of collaterals (mortgage, pledge on businessassets, personal security, …)

7. Financial analysis

8. Financial Criteria's

§SME without financial difficulties: Equity < ½ capital (1/4 lost previous year) – not applicable for young companies (< 3 years)

§Repayment ratio : established / not establishedCash flow – long term liabilities

§Solvency in % : see banks (Basel III) :§Takeover min 1/3 Equity , Investments : rating depends aosolvency

§Operating fundEquity + LT liabilities – (fixed assets + receivables > 1 year)

§Need in operating fundStocks + trade receivables + others receivable < 1 year + dtaccruals and deferrals – (supplier + fiscal and social debt + ct accruals and deferrals)

v 9 Investment companies in Wallonia helping creation,development and transfer of SMEs with appropriate financingsolutions (equity, convertible loans, subordinated loans, unsecuredor secured loans)

v Shareholders both private and public – Financing means comingfrom the Walloon Region

v Direct contact with the local investment company

v Business transfers : maximum 1.250.000 €

Local Investment companies (Monitoring ppppp (((((( ggggggg gggggg Sowalfinin)

Introduction

§Facts EU & Belgium SME transfer market in Europe (+Transeo aisbl), focus on Belgium/Wallonia (+SOWACCESS)

§What a potential buyer shouldknow

Introduction

§ SME transfer refers to the sale/acquisition of an SME (small and medium-sized company)

§ EU definition « SME »:”SME” stands for small and medium-sized enterprises – as defined in EU law. The main factors determining whether a company is an SME are:

1.number of employees and

2.either turnover or

balance sheet total.

§ Share deal or asset deal

Introduction

§ Types of transfers:

§ Family succession

§ MBO (Management Buy Out) / EBO (Employee Buy Out)

§ MBI (Management Buy In) - Sale to another entrepreneur (acquisition by an individual)

§ MBI (Management Buy In) - Takeover by an other company (M&A – strategical acquisition)

SME transfer market in Europe

§ Latest figures available from the EU Commission:§ 450.000 firms with 2 million employees transferred each year

across Europe

§ In Belgium, > 300.000 SMEs are managed by +55

§ Set-up of Transeo aisbl in December 2010 : the first European Association for SME Transfer

Transeo background • SOWACCESS in EC Expert Group on matching

platforms (2006)

• Cross-border collaboration and exchange of

good practices between SOWACCESS

(Belgium), MKBase (Netherlands) and CRA

(France)

• Transeo Conference 2009, Belgium, May 2009 -

gathered 200 participants from 18 countries

• Such a success made it clear that further steps

needed to be taken to gather the experts at

European scale

• 2010 : founding of Transeo AISBL, international

non-profit association

What?

• International non-profit association (aisbl) – neutral position

• European Association for SME Transfer : SME transfer refers to the

sale or acquisition of small and medium-sized enterprises (family

succession, MBOs, MBIs, …)

• The association connects

– Private experts

– Public institutions

– Academic researchers

within a high-quality network

• Mission?

• To encourage the exchange of good practices between

experts

• To increase awareness of the business transfer issue at

regional, national and European level

• To work on solutions and projects to improve business transfer conditions at European scale

September 2014 : 40 Members from 14 countries

Transeo working groups

To work on solutions and projects to improve business transfer

conditions at European scale, Transeo Members work together in

thematic working groups:

At present time :

• Mapping working group – country sheets portal

• Academic working group : « scientific flag »

• Matching platforms working group

• Awareness-raising of the seller working group

• SME Valuation working group

Transeo working groups• Mapping working group

First screening to identify the main stakeholders in Member

States, the main SME transfer issues and corresponding good

practices

Including study on « deal-breakers » (technical aspects that

make the business transfer process difficult)

Across the twelve countries under study, the role of the

banks (restricting loans provided to the acquirers : Role of

PE), the complex regulations (diminishing the market

attractiveness) and the culture of secrecy spread amongst

most of the small enterprise owners are perceived as being

the most important obstacles to deal making


• Academic working group

– Transeo Academic Awards: • Objective: to encourage academic research by rewarding the

best academic research papers about business transfer

• 2011-2012 edition: 13 papers collected, 3 awarded, abstracts available on Transeo website, full papers on Transeo Extranet for Members

• 2013-2014 edition: launch Q4 2013

– Transeo Students Awards• Objective: to raise awareness among students by rewarding the

best final dissertations about SME transfer

• 2013-2014 edition: launch Q4 2013


• Matching platforms working group

– Objective? To collect good practices within matching platforms to improve their working, provide outputs for the creation of matching

platforms, work towards more connections between platforms to

increase cross-border transfers

– Outputs:

• Development of a cross-border tool to exchange business

transfer opportunities between Transeo Members


• Working group “Good practices in awareness-raising of the seller

in business transfer”

– Objective: to identify and exchange good practices (tools,

measures, programmes, initiatives, …) to efficiently raise the

awareness of potential sellers

– Q1 2013: launch of the working group among Transeo Members –

Meeting of the working group on 25 March in Brussels

• Working group “Good practices in the Valuation of SMEs”

– Objective: to identify good practices in the valuation of SMEs

(common methods and country specificities)

– Q1 2013: finalization methodology & launch of the working group

among Transeo Members

Transeo as a European

stakeholder

Working with European institutions towards more

successful business transfers

February 2013: Transeo appointed as expert observer

in the EU Commission business transfer expert group

SME transfer market in Belgium

§ 28% of business owners in Belgium +55 years old

/ 90% of Belgian businesses are SMEs

§ More than 300.000 SMEs are managed by +55 (CEFIP Mapping, 2011)

§ 13% of children of business owners consider workingin the family business (Ernst&Young, 2011-2012)

SME transfer market in Wallonia

§ SOWACCESS is the Walloon organization in charge of SME Transfer

§ 3 missions:

§ SOWACCESS RAISES AWARENESS among entrepreneurs about the need to get prepared for transfer/acquisition of a company & be supported by professionals

§ SOWACCESS MATCHES potential sellers and buyers

§ Federate professionals in M&A recognized for their expertise


§ SOWACCESS principles:

§ Complete confidentiality

§ Complete protection for the seller

§ Collaborating with authorised professionals


§ Beyond Wallonia:§ Belgium - France - Netherlands Platform : Through

SOWACCESS, you can also gain access to takeover opportunities in Brussels, Flanders, the Netherlands and France. This has been made possible thanks to a close collaboration with MKBase (Netherlands and Flanders) and the CRA - Cédants et Repreneurs d'Affaires/Business Buyers and Sellers (France)

§ SOWACCESS is Founding Member of Transeo, the European SME Transfer Association

www.transeo-association.eu

SOWACCESS services for potential buyers

SOWACCESS supports affiliated buyers as follows:

§ by helping them define their project + Seminars

§ by helping them find in our database a company for sale that meets their criteria

§ by guiding them towards professional advisors (our authorised partners) who will be able to support potential buyers and structure their acquisition process

SOWACCESS services for potential sellers

SOWACCESS supports potential sellers as follows:

§ Raise awareness & inform

§ Evaluate " Diagnostic Transmission©”

§ Prepare the company for transfer once the seller’s needs have been identified, by

putting him/her in contact with an experienced professional who will advise him/her throughout the entire transfer process.

§ By helping the potential seller to find a buyer that meets his/her requirements.

What a potential buyershould know

Société wallonne d’acquisitions et de cessions d’entreprises

Start-up or buy?

Start-up

Find the idea

Launch the business

Find a team

Find clients

Find investors

Build the business

Acquisition

Start a search

Access businesses

Find the company

Find financing

Buy the company

Start running it

Can I really become an entrepreneur by buying a business?

How do I become an entrepreneur?

§ Start your own company (cash Investment lower but all to be done)§ Manufacturing, service, internet...§ Science-technology§ Social/impact§ …

§ Start a business unit in an existing company

§ Join a startup as an early employee

§ Acquire a business on your own (Cash investment higher but operatyionnal risks lower)§ Management Buy-in (MBI)§ Management Buy-out (MBO)

Reasons NOT to buy a company…

§ I never really thought about it§ I don’t know how to start looking

§ I don’t have the money to buy a company (PE)

§ I couldn’t find investors to support me (see Euroquity)§ I’ve never run a small company before

§ ...

Buying “big” SME : Advantages :

§ Understand possibilities to improve and make the business grow§ Start with existing assets, clients, employees, cashflow, know-how, …

§ Benefit from a less risky learning period§ Work with an experienced management team§ Earn a decent salary from the startè Experienced team to support you, recurrent cash flow, time to

integrate

What do I need to buy a company?

• I want to have my own business• I want to develop, build something by my ownEntrepreneurial spirit

•I need both knowledge & expertise in marketing, finance, strategy, production, management, …

•I want to use my knowledge/expertise for my own benefit

Expertise, know-how & management

capabilities

• Better to have between ¼ to 1/3 of the total amount (PE)

•Possibility to use leverage – to use existing state support (subordinated loans/guarantees)

Money

• Be wise, keep calm, no entrepreneurs « in heat »! • Better no deal than a bad deal, take the time

necessaryPatience

• Buying a company is exciting, don’t be in a hurry but when your time comes, just go

Dare / Take measured risks / Get started

Questions to ask yourself when buying a company…

• Take stock of your life and yourprojects : private & prof impactsYou

• What kind of company/sector fitsme? ADDING VALUE to Cy : PLANThe company

• What kind of transaction do I want?The

transaction

• Do I go solo or do I take a partner?The team

• My budget : Think of PriavteEquityThe size


§3 stages in deal assessment:

§ First contacts, teasers & memorandums§ Initial investigations§ Due diligence

§Teasers/Memorandums : take measured risks to make a decision

§Initial investigations:§ Build the relationship to have access to information§ Listen & learn as much as possible about the seller/the company for sale§ Find out why the company is for sale§ Be always humble with the seller

The companyHow do I know when it’s the right company?

What should I know when assessing businesses

& deals


Do I go solo or do I take a partner?The team

• Motivation, experience, judgement• More horsepower, two networks• Sounding board, confront ideas• More confidence, target a bigger company• Wider skill set, management talent• Less risky, more attractive to investors• Share the bad times & the good times

Advantages of taking a

partner

• Common goals• Complementary & well-defined roles• Similar drive & capacity for work• Willingness to discuss & resolve conflicts• Clear & comprehensive partnership

agreement

Successful partnerships


§ Between ¼ and 1/3 personal contribution§ Can I afford it?§ If no, where do I get the financing

§Bank§Public financing (subordinated loan/guarantee)§FFF§Private Equity§Business Angels§Vendor loan§Escrow account §…

§ …

My budgetThe size

Buyout process timeline

Final thoughts

§ Take your time (1-2 years)§ Be patient & realistic

§ Don’t be arrogant, be humble with the seller & build a personal relationship with him

§ Talk about your takeover project & follow trainings (speak about it with your family + take part in initiatives like the SOWACCESS Clubs Repreneurs for instance)

§ Plan your takeover project

§ Don’t buy a company for the wrong reasons § Don’t buy by default – don’t buy by default, because you have no other solution (lost

your job for instance) – you should feel a minimum as an entrepreneur§ Don’t buy only to become rich (gross/net, …)

§ …

§ Better no deal than a bad deal

§ Fit with the company (love & know the business)

Final thoughts

§ Think about going alone or with a partner

§ Be sure to be supported by professionals/advisers (amongothers, possibility to receive a partial subsidy from SOWACCESS)

§ Confidentiality! Keep things confidential and respect the NDA

§ Stay within your budget (Don’t hesitate to discuss with PE once your BP and clear growth strategy duly prepared)

§ Be prepared for emotions – the transfer process is highly emotional and irrational, especially for the seller

§ Try to figure out why the seller wants to sell…

§ Consider and efficiently manage the post-acquisition period

§ Be always prepared and able to walk away if needed (opt-out / subject to…)

§ …

EUROQUITYPresentation

Private Equity : Different viewsInternational Workshop, Paris

October 21th , 2014

1. Introduction

2. The EuroQuity platform

3. The Communities concept

4. The advisory committee

5. An independent approval committee

1. Introduction

- Essential for Belgian SMEs to diversify sources of funding : not only bank debt but also additional equity through capital increases by new investors in order to ensure growth (internaland external) and internationalisation

- Need to facilitate match between investors (investment funds, business angels, private investors) looking for new investmentopportunities in SMEs and companies looking for equity

2. The EuroQuity platform

- Created by Bpifrance (former OSEO – CDC entreprises) in2008, joined by KfW Bankengruppe in Germany in 2012 andnow extended to Belgium through SOWALFIN in 2014

- Web platform: matchmaking between SMEs looking for equityand investors (investment funds, business angels andindividuals) looking for investment opportunities

- Presence on the platform of advisors (certified auditors,chartered accountants, lawyers, consultants, financialinvestment advisors) who can advise:

- Companies in the preparation and negociation withpotential investors

- Investors in their analysis of projects and investmentproposals

- Free service offered by the 3 Institutions (Bpifrance, KfWBankengruppe and SOWALFIN)

- Before fundraising: awareness and information tools indevelopment (pratical guides, online diagnosis,webconference, trainings)

- Independent and neutral platform at the disposal ofcompanies and investors – No interference, contribution in thediscussions, negotiations and any transactions between users

- Bpi : Amounts raised by companies between 2008 and 2012:EUR 230 million (based on answers to surveys: 15% ofrespondents)

3. The Communities concept

- Communities gather EuroQuity users, mainly companies andinvestors, around a specific theme or topic of common interest.

- Each Community has specific admission criteria, on which entryto the group is allowed. The head of the Community validatesthe request of a user (investor, company, advisor) to join theCommunity.

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Examples for Belgium

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1

Private Equity in Emerging Markets

Halil Kiymaz

Rollins College, USA

MotivationEmerging markets continues to get attention of investors globally

Investments to emerging markets grow sharply as these countries experience high economic growth and resilience to economic downturn

The debate also continues whether the rapid development in PE is fad or will grow to a professional activity

i.e. It took US 40 years to reach the current standards

2

Motivation

Why would PE different in emerging markets compared to developed markets?

Structural differences in PE (Oberli, 2012)

Heavy use of banks in financing

Less leverage in PE in emerging markets

Corporate Governance (Cornelius, 2007)

3

Objective

Present recent private equity developments in emerging markets

Performance of emerging market PE

Discuss whether these trends are likely to continue in future

Are these markets developed enough to support PE ?

Explore the factors making emerging markets more/less attractive for private equity

4

Recent PE Trends Emerging Markets

Global PE Firms numbers

5

Geographic Distribution

N. America53%

Europe27%

Asia/Other20%

% of PE Firmsby Geographic Location

Source: Prequin (www.prequin.com)

Total value of Buyouts by PE funds:(in Billions $)

YearNorth

AmericaEurope Asia Rest of World Total

2006 $450 $179 $18 $23 $670

2007 421 190 28 23 662

2008 87 79 19 8 193

2009 51 29 22 4 106

2010 123 74 19 14 230

2011 128 96 25 17 266

2012 156 70 27 11 264

2013 171 74 19 9 273

6

Small and Smith (2015)

Global PE Investment Volume

7

EM as % of Global PE Fundraising

EM as % of Global PE Investment

8

EM PE Fundraising and Investment

9

Global Penetration

PE Investment Volume in BRICs

10

BRICs appears to be so successful in their PE market developments

High population

Catch-up potential during their transition to modern economies (measured by GDP per capita)

Demaria (2013)– it is unlikely for EM to catch U.S. (legally and culturally) for the development of PE

Emerging Markets PE Performance

12

What are the relevant factors to driving PE activities?

Economic growth and size of economy (Gompers and Lerner, 1998 and Kolonowaski, 2011)

Groh, Liechtenstein, and Lieser (2014) address country maturity and the ability to sustain PE transactions

Capital Market Developments (Black and Gilson, 1998)

Bank Centered vs. Stock Market Centered

Bank-centered capital markets prove less efficient in fostering the institutional infrastructure that supports deal flow and deal-making

What are the relevant factors todriving PE activities?

Lack of debt financing hinders economic development and created difficulty for start-up activities (Greene, 1998)

Impact of taxes on entrepreneurial activities (Djankov et al. 2008), (Bruce and Gurley (2005) ???

Stronger investor protection promotes PE (Desai, Gompers et al., 2006) and lowers cost of capital (Lerner and Schoar 2005)

Capital Account Liberalization (Cornelius, 2007)

Institutional Developments (Kolonowaski,, 2011)

13

Country Attractiveness of Emerging Markets

Are emerging markets likely to continue to attract PE investments?

PE Country Attractiveness and EMGroh (2015) use the following six variables to measure PE maturity of a country

1) economic activity,

2) depth of the capital market,

3) taxation,

4) Corporate governance and investor protection

5) human and social environment

6) entrepreneurial culture and deal opportunities

14

Regional Attractiveness

Top Countries with PE Attractiveness

Rank 2010 2011 2012 2013 2014

1 U.S.A U.S.A U.S.A U.S.A U.S.A

2 Canada U.K. Canada Canada Canada

3 U.K. Canada U.K. U.K. Singapore

4 Australia Singapore Japan Japan U.K.

5 Hong Kong Switzerland Singapore Singapore Hong Kong

6 Singapore Japan Hong Kong Australia Japan

7 Japan Australia Australia Germany Germany

8 Switzerland Sweden Sweden Hong Kong Australia

9 Netherlands Netherlands Germany Sweden Sweden

10 Germany Germany Switzerland Switzerland Switzerland

15

Country Attractiveness for BRICs

Country 2010 2011 2012 2013 2014

Brazil 34.6 48.7 63 66.1 64

(51) (43) (36) (36) (40)

Russia 38 51.1 60 61.3 63

(48) (41) (43) (40) (41)

India 40.9 61.4 66 69.9 70.7

(38) (30) (32) (29) (28)

China 48.5 72.3 79 77.4 78.4

(28) 20 22 24 (22)

17

ConclusionPE appears to continue developing in emerging markets

Growth is required but not sufficient

Improvement in legal infrastructure

Encourage entrepreneurship

Many of the emerging markets show improvements in their private equity attractiveness

Performance of PE continue to be strong (though highly volatile)

Q&As

[email protected]

• « Impact-focused” holding company - founded in Oct. 2012, in Luxembourg

• Private limited company co-founded with OFWs’ shareholders

• Focus : investments in the financial sector, whose primary purpose is to provide basic

financial services to the underserved people and enterprises (excluding

microfinance) :

- rural banks, cooperative banks …

- non-banks financial institutions (e.g. lending companies)

• Local partners + quarterly visits

2

THE PHILIPPINES, AN EMERGING MARKET WITH A HUGE POTENTIAL FOR GROWTH

3

COUNTRY AT A GLANCE

Population 100 million July 2014

Population rank 12th 2014

GDP growth 7.2% 2013

Inflation 3.0% 2013

Poverty incidence

of population (%) 19.7% 2012

Philippines is Nr 2 after India in the BPO industry (Business Process Outsourcing)

By the year 2050 : 14th to 16th largest economy in the world, according to

Goldman Sachs and HSBC

4

Philippines insight

Newly industrialized country : one of the “Tiger Club Economies”

together with Indonesia, Malaysia and Thailand.

One of the best-performing economies in Asia, with

6,8 % GDP growth rate in 2012 and 7,2 % in 2013 and 7% expected in

2014.

A diversified economy : primary exports include semi-conductors and

electronic products, transport equipment, garments, copper products,

petroleum products, coconut oil and fruits.

5

From mainstream to micro financial services providers

Philippines financial sector focus

Financial

services

providers

Universal

and

Commercial

banks

Rural banks

Financing

companies

Microfinance

institutions

Informal lenders:

pawnshops and

“5-6”

BANKS NON-BANKS

Main types

of services

they offer

Loans

Deposits / savings

Fund transfers / ATM

Loans Microcredit

Savings

Microinsurance

Microcredit

Annual

interest

rate

8% 12% 21 % 120%

Delay in

releasing

the loan

3 months one week 3 to 5 days 3 to 5 days In the day

Requireme

nts

3-year track

record

The loan

can be up to

70% of the

collateral

Small

collateral (6%

of the loan)

and track-

record (if

possible)

No collateral No requirements

Collection Monthly Monthly Monthly Weekly, cash Daily or monthly

Number of

players

36 581 40 191 banks

30 cooperative

banks

25 NGOs

According to

ADB estimations,

around 60% of

the total loan

amounts are

informal

6

A first investment was made in 2013 into a

credit institution in the Philippines with 400

SMEs clients :

- 350 K€ invested in preferred shares over 5

years

- annual return 10 %

- 30 investors including Filipinos

7

Existing

client

Worth of Loan

Releases

Wholesale/Retail 157 45 412 084,55

Distribution 12 3 210 000,00

Services 160 53 451 786,00

Manufacturing 592 172 522 843,77

Agriculture 21 7 910 000,00

Processing 24 3 989 000,00

TOTAL 966 286 495 714,32

New Repeat

Male 169 198

Female 244 355

TOTAL 413 553

LOANS GRANTED

SME SERVED

JOBS GENERATED AND

SUSTAINED

Male

Female

TOTAL

966

413

11 325

SOCIAL PERFORMANCE (SINCE START)

Gender DistributionTOTAL

INDUSTRY SERVED

TOTAL

18 736

7 411

TOTAL

8

9

Projects’ sourcingProjects’ analysis

(due diligence)

Projects’ follow-up & monitoring

Local network of partners

South-East Asia- legal- operating model- market & competition- financials- social / envtl impact

Visit on-site

Risk Management audit

Annual RiskManagement audit

Visit on-site

KPIs

Technical assistance

Investment committee

In-depth analysis

Preselection -investment

opportunities

1. Projects’ sourcing

10

• Local partners (Philippines)

- independent consultants

- professional associations

- financial services providers

- local representations of DFIs

• Exploratory analysis (pre-selection

upon following criteria)

Business model and scalability

Clients served

Ethics/values driving the companyInvestment needs

Partnerships

11

2. Projects’ analysis

(due diligence)

Corporate overview (legal)

Operating Model

Market - Competition

Financial

statements / projections

Social / Envlt

Initiatives

• In-depth analysis(97 questions out of them 81 are risk-related)

• Risk-management audit

Business risk

- marketing and credit

- liquidity (ALM) and market

Operational risk

- organisation and IT

- legal / regulatory

Strategic risk

- governance and reputation

- external factors

12

major NEGATIVE weighting major POSITIVE weighting

LEGAL Company's history 3 years only …

Corp. management Strong management & business skillsMission statement Clear written mission statement

Stakeholders relation Good (still to expand)

OPERATINGOperational capacity Flexible, scalable

MODEL Organisational structure Policies, risk management (still to reinforce), reporting, full integrated MIS expected soon …

Innovation & Dvlpt NPFC's strengthHR management Several employees with a banking background ,

training and incentives

MARKET Customers Customers diversification, clients' rights

& COMPETITION Quality / Reputation High-valuable products & client monitoring

Market Medium market's size that could expand with economic growth ; good sales & promotion strategy

Competition Competition might loom up on the long term (?)

Weak competition so far

FINANCE Financial statements Sound financial statements & projections

Insurance No public liability insurance policy (not required by law in the Philippines)

SOCIAL & ENVIRONMENTAL INITIATIVESLocal development Good to high social / environmental impact Supply chain Social / environmental specifications along the supply-

chain

External factors Favourable regulations from the government for SMEs

Score : 3,44 / 4

PROJECT’S SCORING

(example)

13

3. Projects’ follow-up & monitoring

14

Dimensions Sub-categories Nber of questions

and/or indicators

Total

GOVERNANCE

Governance structures and transparency 4

Relationship with stakeholders 7

Customer relationship (CRM) 3

Legal and related matters 1 15

SOCIAL

Production Operating efficiency 2

Supply chain 3

Human resources Administration of staff and subcontractors 10

Skills management 4

Miscellaneous Civic engagement 1 20

ENVIRONMENT

Internal processes and resources 1 (multiple sub-questions

included)

Products and services 1 2

Grand total = 37

• ESG KPIs

• Risk-management - annual audit

- technical assistance to risk mapping / internal control

Sector : financial intermediaries providing access

to capital and financial services to SMEs and

under-served populations (banks, lending

companies, …)

Investment deals between 200 K€ and 500 K€

Investment approach : participation in equity

(common shares) or quasi-equity (redeemable

preferred shares) with minority stake of 10% to

25%

Investment’s duration : 10 years (2015-2024)

Selection criteria : financial intermediaries

aligning with responsible / ethical business

practices

Target size: 3 mio. € total commitment from private

investors

Investors’ admission : minimum of 125 K€

Expected IRR after 10 years : 10 % net per annum

Expected Investment Available Proceeds : > 250 K€

Investment strategy

Fund’s features

Impact fund – financial services - Philippines

Case study

15

Case study

meso IMPACT

Finance(General Partner)

MIF IMPACT

Limited Partnership

LPs

CBA

SOPARFI

CBA

Investee Investee Investee

Chart of the corporate structure

16

THANK YOU FOR YOUR ATTENTION

www.mesoimpactfinance.com

https://www.facebook.com/mesoIMPACTfinance

private equity: different views€¦ · 15:00 euroquity & transeo initiatives christine...

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