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Sources of finance available to Irish SMEs and how to access them13 May 2014Michael NearyPartner, Corporate Finance

2014 Grant Thornton Ireland. All rights reserved 2014 Grant Thornton Ireland. All rights reserved.1Overview of presentation TopicTimePresentation on SME financing8.30 9.55Break9.55 10.10Case Study 10.10 11.00 2014 Grant Thornton Ireland. All rights reserved.2Introduction 2014 Grant Thornton Ireland. All rights reserved 2014 Grant Thornton Ireland. All rights reserved.3Economic outlook for Irish SMEs Positive NegativeCurrent Account SurplusGDP forecast to increase by 2.1%Irish bond prices to continue to fall relative to BundsUnemployment continuing to fallUpcoming stress testsIncrease in spreads despite record low interest ratesLack of recovery in domestic economyContinued recovery of house prices

2014 Grant Thornton Ireland. All rights reserved.

4Match Finance to Business StageR&DStart-upEarly GrowthFast GrowthSustain GrowthMaturityFoundersBusiness AngelsVenture CapitalPublic SectorDebtCorporate VenturingPublic Listing/IPOPrivate Equity 2014 Grant Thornton Ireland. All rights reserved.5

Banks - SME-orientated funding schemesNational Pension Reserve Fund Irish Strategic Investment FundPrivate equity fundsISEQ

Where can SMEs tap into finance?BankPEGovt 2014 Grant Thornton Ireland. All rights reserved.6Bank funding 2014 Grant Thornton Ireland. All rights reserved 2014 Grant Thornton Ireland. All rights reserved.7Bank funding for SMEsBank of Ireland pledged 12 billion to SMEs over the next five years"very much open for business"

AIB: Range of SME funds launched in 2013200 million EIB SME loan fund200 million renewable energy fund50 million agri loan fund

2014 Grant Thornton Ireland. All rights reserved.8Advantages of dealing with the banks No Equity Cheaper than alternative sources of funds Can be used as part of a package Development of a partnership Full range of products

2014 Grant Thornton Ireland. All rights reserved.9Disadvantages of dealing with the Banks Over leverage risks Restrictions on receipt of funds "Slow no"Risk adverse nature of banking Inflexible 2014 Grant Thornton Ireland. All rights reserved.10Private Equity 2014 Grant Thornton Ireland. All rights reserved 2014 Grant Thornton Ireland. All rights reserved.11Private equity providers active in IrelandSME orientatedBlueBayCarlyle Cardinal CapitalHighland Capital Partners Broadlake Capital MML Growth Capital Greencoat Capital Proventus Capital Partners 2014 Grant Thornton Ireland. All rights reserved.12National pension reserve fund FundNPRF Commitment3rd PartyTotalFocusSME Equity Fund Better Capital50m50m100mTurnaround fundSME Equity Fund Cardinal 125m125m250mSME equitySME Credit Fund Blue Bay200m250m450mLoans to larger SMEsCIC Technology Fund72m36m72mChina-Ireland tech growth capitalInnovation Fund Ireland125m125m250mEarly stage and high-growth Local Venture Capital Funds81m320m401mHigh growthSilicon Valley Bank36m72m72mTechnology innovation sectorIrish Water250m-250mIrish waterIrish Infrastructure Fund250m66m316mIrish InfrastructureIrish Forestry35m187m223mInvestments in Irish ForestryPPP Schools Bundle 314m121m121mSchoolsPPP N1118m165m165mRoadsCommitted to Date1,257m1,517m2,670m 2014 Grant Thornton Ireland. All rights reserved.13Lily O' Brien'sFirst deal for Carlyle Cardinalc. 15 millionManagement likely to remainRevenues rose 40% in 2012Exports to 16 countries, inc UK, US and Aus. Strong online presenceOperating profit of 1.5m in 2012Increase from 285k in 2011.

2014 Grant Thornton Ireland. All rights reserved.14SMEs Examples of deals involving private equity houses

AcquisitionMBO

2014 Grant Thornton Ireland. All rights reserved.What are Private Equity looking for? Businesses with capacity to grow A deleveraging, acquisition, growth capital or shareholder reorganisation opportunity Strong management Good MIS and strong cash flows Value creation opportunities

2014 Grant Thornton Ireland. All rights reserved.16Venture capital fundsAtlantic BridgeBOI Seed and Early Stage FundAIB Seed Capital FundEnterprise IrelandInvestecDeltaSeroba Kernel 2014 Grant Thornton Ireland. All rights reserved.17Dealing with PE/VC Advantages Assist with Involved in setting business strategy / direction Flexible and alternative form of finance / capital structures mezzanine, junior loans Increases refinance, acquisition or cash extraction capability Incentive structures for management teams Possible solution to succession issues Access to new markets or expertise

2014 Grant Thornton Ireland. All rights reserved.18Deal with PE/VC Disadvantages Owners giving up equity New board directors / greater corporate goverence More financial information requirementsExit timeline Due Diligence requirements

2014 Grant Thornton Ireland. All rights reserved.19Accessing finance 2014 Grant Thornton Ireland. All rights reserved 2014 Grant Thornton Ireland. All rights reserved.20What documentation is required for raising finance?Typical requirements:Business planFinancial projections/assumptionsManagement teamUnique product or serviceFinancing strategy

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21Process of Raising Finance Preparing & Planning Which source best fits?matching principleBankable proposition?well thought out plankey risks identified and understoodhealthy cash-flow & security available for debtIf not bankable, what about equity provider => VC etc?How will funds be repaid?Process of Raising Finance 2014 Grant Thornton Ireland. All rights reserved.22Process of Raising debt/equity Finance - overviewPrepare and planDocument Business PlanInformation Memorandum/Report with Financial ProjectionsApproach potential fundersTerm sheetsDue diligenceFinal legal documentation

Process of Raising Finance 2014 Grant Thornton Ireland. All rights reserved.23Process of Raising debtApproaching lendersGauge interestmeet and present case communicate your knowledgeensure the message in the Plan is communicatedprovide copy of Business Plan and ProjectionsSources of Finance 2014 Grant Thornton Ireland. All rights reserved.24Process of Raising debtTerm sheetsOffers receivedTerm sheet outlines key details:interest costs / marginfeessecurityAssess terms from different fundersSeek clarification if necessary fill gaps

Sources of Finance 2014 Grant Thornton Ireland. All rights reserved.25Process of Raising debtCash-flow assessment trading business

2014 Grant Thornton Ireland. All rights reserved.26Process of Raising debtDue diligence / Independent business report?Financial => focus on figures, cashflow

Legal => assess securities, etc

Sources of Finance 2014 Grant Thornton Ireland. All rights reserved.27Process of Raising debtLetter of offer/ Facility LetterOutlines facilities and interest ratesNotes security requiredOutlines financial covenants (interest cover,DSCR, etc) and general covenantsRepresentation and warranties from borrower

Sources of Finance 2014 Grant Thornton Ireland. All rights reserved.28Dealing with private equity providers:Overview of the process

2014 Grant Thornton Ireland. All rights reserved.29Dealing with private equity providersWhat should an information memorandum contain?Detailed written description of the target (often 50+ pages)Primary marketing document Contents:Company overviewOperations overviewIndustry overviewFinancial information historic and projections

2014 Grant Thornton Ireland. All rights reserved.30Dealing with private equity providersWhat are they looking for?Historical financialsEBITDA; maintainable, repeatableCash-flowstrong working capitalDebtors tidy upProjectionsManagement teamPotential for exit 2014 Grant Thornton Ireland. All rights reserved.31Dealing with private equity providersWhat to expect from an offer letterOffer amountrationalei.e. why the private equity company wants to partner with your firmvaluation of the target company on a cash-free. debt-free basisoutline of how the deal will be financedMaintainable EBITDA Conditions of offer

2014 Grant Thornton Ireland. All rights reserved.32Dealing with private equity providersDue diligencePurpose of due diligenceto confirm the information on which the vendor has based its bidThree possible outcomes:no issues discoveredsome issues are discovered but remediedissues are discovered which cannot be remedied and bring the deal down. 2014 Grant Thornton Ireland. All rights reserved.33Dealing with private equity providersIssues typically arising from due diligenceRevenue recognitionDeferred revenueAccounting policiesAged debtors and provisionsForecasts and assumptionsCapex

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34Dealing with private equity providersClosing the dealPost due diligenceoffer may be revisedDeal may fall through if both parties cannot agree 2014 Grant Thornton Ireland. All rights reserved.35Case study 2014 Grant Thornton Ireland. All rights reserved 2014 Grant Thornton Ireland. All rights reserved.36Case Study I: Software companyBusiness:Irish software company Purpose of funds:Raise growth equity to fund expansionStructure of transaction:Newly issued series B sharesFunds were used for:Repurchase of stock from existing shareholders

2014 Grant Thornton Ireland. All rights reserved.37Case Study I: Software companyIssues/areas of focus for P/E InvestorPipeline sales & customerForecasts/projections & assumptionsManagement experience and plansGrowth and acquisition strategyProduct/technology capability 2014 Grant Thornton Ireland. All rights reserved.38Case Study I: Software companyOutcomeSuccessful due diligence processComfort around risksSolid numbers (projections and assumptions)Quality management team in placeSuccessful deal close 2014 Grant Thornton Ireland. All rights reserved.39Your advisor 2014 Grant Thornton Ireland. All rights reserved 2014 Grant Thornton Ireland. All rights reserved.40The Advisor?What value does the corporate finance advisor add?Would the company secure the same funding if they negotiated on their own? 2014 Grant Thornton Ireland. All rights reserved.41The role of the AdvisorsProvide realistic advice from the start, and advise on the options availableFinancial Projections specialist model- assist management in determining their assumptions- build tailor made model to construct projections based on managements assumptionsBusiness Plan going forward- advise management on writing their business plan- complete the plan into a presentable report suitable for meeting funders requirements 2014 Grant Thornton Ireland. All rights reserved.42The role of the AdvisorsUtilise contacts within funding institutions eg banks, VCsAssist with approaching funders, and presenting teaser document and/or business planDemonstrate stronger points to fundersNegotiating the best terms:Debt => interest margin, etcEquity/VC => level of dilution in exchange for investmentAdvice on comparing terms from different fundersAssist in driving process to completion.

2014 Grant Thornton Ireland. All rights reserved.43Corporate Finance

Michael NearyPartnerT +353 (0)1 6805 797E michael.neary@ie.gt.com

www.grantthornton.ieOur team comprises corporate finance professionals who have extensive transaction experience across a large range of sectors and clients We bring commercial and industry knowledge, analytical skills and technical knowledge to each engagementContact details 2014 Grant Thornton Ireland. 2014 Grant Thornton Ireland. All rights reserved.44

Questions & feedback 2014 Grant Thornton Ireland. All rights reserved.45