Investing in innovative companies How Private Equity think

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1 Investing in innovative companies How Private Equity think Christer Nilsson Director 3i Nordic Date: (see also Nordic section) 1

2 2 I will cover Innovations? What is Private Equity? What is 3i? Investing in Sweden? The PE-model

3 3 My professional experience University degrees: Mechanical Engineering and Finance Finance: 10 years in Private Equity Industry: 20 years R&D, manufacturing, M&S, executive management Value creation in portfolio companies - board member in: Current: HTC; Atle Industri, Sectra Engineering: DIAB (advanced mtrl), Alimak Hek (construction hoists) IT: Dotcom, Martinsson, Avitec, Syncron Medtech: CellaVision, NeoPharma Consumer brands: Hardford (Naturell, LdB) Seen Ups and Downs Automotive: Accra

4 HTC Sweden

6 What is an innovative company? If these paintings represents three different companies. Which If these one paintings do wish represents to be part of? three different airlines. Which one will you choose? 6

7 What is an innovative company? If these paintings represents three different airlines. If Which these paintings one will you represents choose? three different companies. Which one do wish to be part of? 7

8 What is an innovative company? Statistic response If these paintings represents three different companies. 42 % 46 % If these paintings represents three different airlines. 11 % 6 % Which one do wish to be part of? 12 % Which one will you choose? 83 % Mondrian Picass o Mondria n Kandinsky Picasso Mondria n Kandinsk y 8

9 Well served mature market with low growth 9

10 BIG 5 = Niche opportunity

11 Fragmented market 11

12 Fragmented market 12

13 Disruptive market - technology, business model 13

14 Great companies re-innovate all the time Product & Service Process 14

15 Innovative companies 1. Business model how the enterprise makes money 2. Networking enterprise s structure/ value chain 5. Product performance basic features, performance and functionality 6. Product system extended system that surrounds an offering 7. Service how you service your customers Finance Process. Offering Delivery Business model Networking Enabling process Core process Product performance Product system Service Channel Brand Customer experience 3. Enabling process assembled capabilities 4. Core process proprietary processes that add value Rewarding innovation is multidimensional Source: Larry Keely, Doblin Analytics 8. Channel how you connect your offerings to your customers 9. Brand how you express your offering s benefit to customers 10. Customer experience how you create an overall experience for customers 15

16 Innovative companies Finance Process. Offering Delivery Business model Networking Enabling process Core process Product performance Product system Service Channel Brand Customer experience?? Apple 10? Types of Innovation? IKEA 9 Types of Innovation?? Mapping multifaceted innovations Google 9? Types of Innovation 16

17 Financing innovative companies Finance Process. Offering Delivery Business model Networking Enabling process Core process Product performance Product system Service Channel Brand Customer experience Hi Volume of innovation efforts Last 10 years Effort is Concentrated in Product Innovation Lo Source: Larry Keely, Doblin Analytics 17

18 Financing innovative companies Finance Process. Offering Delivery Business model Networking Enabling process Core process Product performance Product system Service Channel Brand Customer experience Hi Cumulative value creation Last 10 years But value is created across a broad spectrum Lo Source: Larry Keely, Doblin Analytics 18

20 20 Financing of companies You can finance your business in different, mixed ways Generated profits You own private savings Family and friends Soft loans, grants Bank loan Leasing Suppliers & Customers Business Angels Private Equity and Venture Capital.. Shopping for cash Build your financial strategy!

21 21 Different roles in the value chain... Growth/Buyout Capital

22 22 How to define Private Equity Risk Capital unsecured capital (equity) Public Equity listed companies Private Equity (PE) Equity capital to unlisted companies Business Angels Private investors providing finance and business expertise in early stages. Venture Capital (VC) Minority investment in early phases with active engagement Growth Capital Minority investments in medium size companies Buy-out Majority investments (buy-outs) of companies/bu

23 PE fund structure at investment Bank Funds 15% Insurance companies Funds of funds Pension funds 23% 10% 15% Company A Corporate Investors 4% PE fund 1 100m Company B Governments 8% Company C Private individuals 7% 2% Academic Institutions Management Company

24 PE fund structure a company is sold Reporting Reviews Meetings Company A PE fund 1 100m Company B Company C Management Company

25 PE fund structure a company is sold Buyer Reporting Reviews Meetings Company A PE fund 1 100m Company B Company C Management Company

26 PE fund structure a company is sold Bank funds *15% Insurance companies Funds of funds New owner Pension funds *23% *10% *15% Company A EXIT Corporate Investors *4% PE fund 1 100m Company B Governments *8% *X% Company C Private individuals *7% *2% Academic Institutions Management Company

28 3i our purpose To invest in talented, ambitious management and to work in partnership with them to build value and realise the full potential

29 3i facts International scale and reputation Leading mid-market private equity group listed on London Stock Exchange since bn total assets under management Over 160 market-facing investment professionals in 12 countries across Europe, Asia and North America Use deep network and knowledge to acquire targets with scope to make significant operational improvements and to create exceptional value. Dedicated sector teams in: Healthcare Technology/Media/Telecoms Industrial Oil & Gas and Power Business Services Consumer As at 31 March

30 What we look for We partner with firms with the following characteristics (or a potential to become) : World class reputation, with a recognised brand Among the leaders in its field An established platform for growth International network, or international aspirations Desire for an active partner 30

31 Internationally connected Europe Beijing Aberdeen Manchester London Paris Stockholm Copenhagen Amsterdam Frankfurt Milan New York Mumbai Madrid Singapore As part of the 3i Group Private Equity business, Buyouts taps into a powerful international network enabling our European portfolio to benefit from our presence in Asia and North America. 3i offices 31

32 14.8bn total assets under management 3i Group AUM 14.8bn Infrastructure Investing in infrastructure assets, primarily utilities, transportation and social infrastructure in Europe, India and North America Private Equity Mid-market investor in majority and minority investments with an enterprise value of up to 1.0bn in Europe, Asia and North America Debt Management A leading European debt management business with a strong fund raising track record AUM 1.7bn 25 investment professionals 15 portfolio companies AUM 8.6bn 131 investment professionals 113 portfolio companies AUM 4.5bn 30 investment professionals 8 managed funds 32

33 3i in the Nordic region 18 investment professionals focusing on Nordic region 12 portfolio companies Leverages from the global 3i network, resources, experience and expertise

34 3i Nordic portfolio companies 34

35 Examples of 3i Nordic exits 35

37 Sweden part of Europe 37

38 38 Sweden a large country km

39 Sweden part of Europe 39

40 40 Sweden a small country 99,87 of all people in the world are not Swedish Actually, we should need a mayor to rule 9m people

41 Large companies vs. our population 41

42 42 Swedish perspective - challanges With the size of the country you can t build a large domestic company We need to go international at an early stage Increased risks Language barriers Exposed to foreign currencies Lack of local network Increased costs to establish sales offices abroad Delays in building volume

43 43 Swedish perspective - positives Early exposed to international cultures customers and business You can learn and use best practices Language barriers - learning languages is a must in Sweden Early learning to adapt to and be flexible Listen to customers Honest and fair in business Great, early training in international group management

45 45 How to value risk Financial Market Operational Legal Immaterial rights People Politics Environment Moral & Ethics PR... Avoid Minimize Manage

46 Valuation History Current Future We expect> 2,5x=20% 5 yrs

47 47 Investment phases 5 years Investment Value creation Exit Venture Minority Growth Majority Growth Exit strategy

48 48 Investment phases - Investment Investment Investment Value creation Exit Investment proposal evaluation Due Diligence (DD) Financial Asset Management Legal Commercial Management assessment Negotiating the Deal Developing Share Purchase Agreement (SPA) and a Shareholders Agreement (SHA) if a minority Exit Verify business plan Build a value creation plan

49 49 Investment phases Value creation Venture Minority Growth Majority Growth Exit strategy Initial Challenges Product s differentiation? Define market and market size? Investment Value creation Exit Choose route to market? Own sales, distribution, licensing etc Develop and test the Business model Find reference customers Build a team to execute business objectives

50 50 Investment phases - Value creation Venture Minority Growth Majority Growth Exit strategy More complexities.. Moving from entrepreneurial to structured Investment Value creation Exit Think before you act Developing operational + sales skills Reshaping management team, board changes International expansion, refine sales channels Building the BRAND Financing strategies and reporting

51 51 Investment phases - Value creation Venture Minority Growth Majority Growth Exit strategy Creating/Growing a business Board work and backing a management team Investment Value creation Exit Build top line sales, controlling cost and capital base with profit focus Operational improvements: Product & process innovations Industrial restructuring, expansion, buy and build Investments and divestments Corporate governance, reporting systems

52 52 Investment phases - Asset Management Venture Minority Growth Majority Growth Exit strategy Investment Value creation Exit Realising value Having exit in mind all the time Owner structure Agreements Potential buyers Timing and alignment with stakeholders Positioning and basis of value Preparing management and company Vendors DD (VDD)

53 53 Investment phases - Exit Timing and preparation All owners, banks and management aligned VDD (Vendor DD) Investment Exit Value expectations Exit Trade sale IPO Sell to management, other owners Bankruptcy Select potential buyers Selection of advisors Investment Value creation Exit M&A, corporate Legal, financial, environment Negotiating the deal Developing a Share Purchase Agreement (SPA)

54 Thank you For further information visit our website You should note that in accordance with our standard practice 3i will not be acting for you and therefore will not be treating you as its regulatory customer. 3i will not be responsible for providing you with protections that would apply if you were a regulatory customer of 3i, and will not be giving you regulated financial advice in relation to any transaction we may carry out with you.