1. DEBT AND EQUITY FINANCE IN THE SOUTH WEST – THE
OPTIONS EXPLORED
Gavin Poole, partner
2. Programme
• Welcome
• Introductions
• Speakers
• Q&A
• Networking and refreshments
• Close
3. Supporting the Institute of Directors
• South West region:
• Bath, Wiltshire, Bristol, Devon, Cornwall, Dorset, Gloucestershire and Somerset
• IoD South West Director of the Year Awards: closing date: 30th March 2012
• Next events:
• meet Simon Walker (IoD Director General)
• visit to Honda car and engine factory
• successful women in business
• networking events
• See IoD website for further details
4. Premier South West Law firm
Legal Week Regional Law Firm of the Year 2011
Nationally recognised for our sector expertise
Depth and breadth of capability in over 25 areas of law
Over 350 staff including 250 lawyers and 52 partners
Offices in Truro, Plymouth, Exeter, Taunton, Bristol
5. Context
• The London Stock Exchange
• Main exchange
• 2010: 89 new admissions. £10bn raised
• 2011: 76 new admissions. £12.9bn raised
• AIM
• 2010: 43 new admissions. £6bn raised
• 2011: 45 new admissions. £3.8bn raised
• Western Morning News deals review 2010-11
• ↓ Equity deals
• ↓ Deal values
• ↑ Bank funded deals
• ↑ Exits by investors
• ↑ Expectation of equity backed deals in 2012
• New entrants
• Peer-to-peer – Crowd – Grant – Banks – and more
• Overseas
• Increasingly complex landscapes and matrices
6. Our speakers
• Richard Davis
• Senior manager
• Devon and Cornwall
• Lloyds TSB Commercial
• Bruce Colley
• Consultant
• Pegasus Funding Resources
• Paul Oldham
• Regional director
• South West and South Wales
• Business Growth Fund plc
7. Debt Finance
Richard Davis
Senior Manager - Lloyds TSB Commercial
IoD Devon & Cornwall - Foot Anstey seminar 28th March 2012
8. Wide range of financing options
Overdrafts Business Term
Growth Loans
Fund
Loan Business
Guarantee Angels
s Schemes
Asset Regional
Finance Growth
Fund
Invoice
Discountin Crowd
g& Cube
Factoring
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9. The right mix of options
For example ;
Asset Finance Invoice Term Loans
Discounting &
Factoring
Business Growth Fund
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10. BUT
For a business the best form of finance
to support growth by far is ;
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11. The right mix of options
Invoice
Asset Finance Discounting & Term Loans
Factoring
Business Growth Fund
RETAINED PROFITS
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12. Debt Finance
The lending story;
Advantages / disadvantages
• Types of debt finance:
- General
- Specialist
• Costs including NLGS
14. Advantages of debt compared
to equity
• Generally cheaper and usually less complicated
• The owner's ownership interest in the company is not diluted
• A lender has no direct claim on future profits of the business
• Repayments can be forecasted and planned for
• Interest tax deductible
15. Disadvantages of debt compared
to equity
• Loan debt must be repaid on terms agreed at the outset
rather than performance related
• Cash requirement may restrict investment
• Weakens rather than strengthens Company balance sheet
• Security required which may involve personal assets pledged
as collateral
16. The right mix of options
Invoice
Asset Finance Discounting & Term Loans
Factoring
Business Growth Fund
RETAINED PROFITS !!!
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17. Enterprise Finance Guarantee
Scheme
• Loan facility between £25,000 and £1m.
• Up to 10 years repayment
• Must meet eligibility criteria
• Viable business proposition but lacks security (including
personal security)
• Personal Guarantee required
• Government Guarantee for 75% of loan
18. Two EFG examples
• Profitable family Retail business established for over 30
years.
• Sold to employee with £25k stake from him and EFG
loan of £100k
• Software business developing new product
• £60k EFG loan for IT equipment and 2 new staff .
19. Export Finance – What’s involved
Receivables and Cash / Capital
Post Shipment Orders from
Finance Buyers/LC.
Receivables Order Goods
Import/Pre-
Shipment
Finance
Delivery/Shipment
Receive Goods
of Goods
Import/Pre-
Letter of Credit Shipment Loan
- Pre-Shipment
Finance
20. Import finance – an example
• Wholesale & retailer of stationary
• Funding through CID line – including export lines
• New large order received from major retailer
• Goods sourced from suppliers in Far East
• Suppliers require payment when goods on water
• Additional $320K required – but current facilities fully
utilised
• CID funding only available when goods delivered and
invoice raised
21. Import finance – an example
(cont)
• Seller sends documentary collection to LTSB
• As goods ‘pre-sold’ we pay collection using Import Loan
and release documents to customer against Trust
Receipt
• Goods cleared & delivered to end buyer
• Invoice raised and discounted – proceeds repay Import
Loan
• Works from the Bank’s point of view because we control
the payment to supplier and retain ownership of stock
until purchased .
22. Supporting trade through
government schemes
Designed to help exporters with their cash flow, thus enabling them to fulfil export
orders more easily
The UK Government’s Trade and
Investment White Paper plans to increase
Trade support
Four schemes launched so far:
ECGD Letter of Credit Guarantee
Scheme
ECGD Export Working Capital Scheme
BIS Export Enterprise Finance Guarantee
Scheme (Ex EFG)
Your IBM has access to these
LBG supports all these schemes schemes
23. Cost of Debt Funding
Borrowing linked to:
• Base rate (currently 0.5%)
Or
• LIBOR ( 3 month rate currently 1.04%)
24. National Loan Guarantee
Scheme
• Enables participating banks to offer
1% discount on standard interest rates for
first 5 years of a loan
25. Market expects no change in
base rate until 2014
3mth Libor %
7
6
5
4
3
LBCM Forecast
2
1 Market
Forecast
0
2008 2009 2010 2011 2012 2013 2014
Source: Bloomberg & LBWBM Research
26. National Loan Guarantee
Scheme
• Enables participating banks to offer
1% discount on standard interest rates for
1st 5 years of a loan
• Why is it needed ?
27. Banks wholesale funding costs
have risen as money markets
have tightened
UK banks 5-yr term funding costs (%)
9
8
UK Bank CDS spread
7 3mth Libor spread
UK Bank Rate
6
5
4
3
2
1
0
2005 2006 2007 2008 2009 2010 2011
Source: Bloomberg & LBWBM Research
28. NLGS loans - key details
• Min £25k Max £5m
• 1 to 25 years
• Must be in UK and not for Export only
• Counts as state aid under EC rules so:
- Some sector exclusions e.g. Road Haulage
- Total benefits provided by discount plus any other State Aid
being received must not exceed EC thresholds
- Customers with a current EFG loan excluded
• Subject to above 1% discount applies for 5 years, then
interest rate reverts to standard.
29. Summary
• Debt finance plays a key role
• Right type of finance for the right purpose
• Getting the mix of finance right is
important
41. An exciting and bold initiative to invest growth capital in UK
companies as we come out of recession
• Established by five of the largest UK banks with £2.5bn of capital
• Focuses on growth and expansion funding for UK companies
• Long-term business builder through expertise as well as capital
• Independent, quick and autonomous decision making
• 60+ staff, 6 regional offices, local deal origination, execution and
support
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42. Locations
• The BGF is a national organisation with a regional network of offices
to drive local deal origination, execution and on-going support
Aberdeen Office
Edinburgh Office
Manchester Office
Birmingham Office
Bristol Office London Office
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43. Investment Criteria
• Focus on established UK companies with sales of approximately £5m
up to £100m
• Businesses with past and potential future growth
• Capable management team
• £2-10 million equity requirement
• Growth capital funds can be used for:
• Acquisitions, working capital, R&D, capital investment, overseas
expansion
• Some “cash out” to shareholders but this must be less than 50% of the
BGF investment
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44. Sectors
• Generalist sector focus but heavily growth orientated
• Excluded sectors:
• Some regulated financial services businesses
• Property investment and development
• Some on ethical grounds (e.g. gambling)
• Particularly interested in:
• High-tech manufacturing, software and electronics, leisure &
tourism, renewable energy & cleantech, healthcare & life
sciences, industrial & business services, oil & gas,
outsourcing, and digital businesses
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45. A true partner for families, entrepreneurs and management
• Via board membership of portfolio companies, the BGF will provide:
– guidance on finance and capital structure
– practical support through business partners
– strategic growth guidance
• Involvement at board level not day-to-day operations
• Conservative structures not reliant on debt
• Minority investor
• Long-term investments with flexibility
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46. The BGF will
• Work alongside other investors
• “Plug the gap" between Angel/VCT/Private Investors and Private
Equity
• Exit
Stimulate and grow demand overall for investment into UK SME’s
Private
Equity
Grow
Venture
Capital
Business
Angels
Start-up Friends
& Family
£50k £500k £5m £50m 46
47. Why Is BGF Different?
• Focus on growth capital for SMEs
• Flexible, long-term view on exit
• Flexibility on investment structures – minority shareholder
• Regional office network
• Added value for investee companies
• Focused diligence process and sensible investment timelines
INCREASED CHOICE FOR SMEs
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