SOURCES OF FUNDING FOR IRISH BUSINESSES MAY 2015

SOURCES OF FUNDING FOR IRISH BUSINESSES MAY 2015

INTRODUCTION TO PEGASUS CAPITAL SECTION I

ABOUT US Pegasus Capital is a Dublin- based financial advisory firm We advise mid- market Irish companies on a range of transacrons: Raising debt Raising quasi- equity & equity Company disposals, mergers & acquisirons Management buy- out & management buy- in transacrons We typically advise on 8 10 transacrons p.a. ParRcular experrse in high- growth sectors such as technology & lifesciences Page 3

CHOOSING A SOURCE OF FUNDING SECTION II

OUR GENERAL VIEW ON THE FUNDING ENVIRONMENT Debt & equity markets less buoyant than pre- Crisis Companies that are financially strong have mulrple funding oprons Given the size of the market, Ireland is well- represented with equity funds Funding from internaronal sources is available in certain circumstances InsRtuRonal funds prefer to invest in companies with a strong growth outlook High net worth investors have an apperte for invesrng but decision making is more arbitrary and quantums are generally low relarve to insrturonal funds Most insrturonal funds have a preference to invest later in the cycle Funding takes Rme to put in place need to build- in appropriate headroom Page 5

TYPES OF FUNDING AMORTISING 1. DEBT 2. QUASI- EQUITY 3. EQUITY BULLET WARRANTLESS EQUITY WARRANT MINORITY STAKE MAJORITY STAKE HIGHER RISK = HIGHER COST Page 6

DEBT VS. EQUITY DEBT EQUITY ü Lower cost ü Limited loss of control ü Clear repayment schedule ü Strengthens Balance Sheet ü Increases financial firepower ü Provides downside protecron ü Shareholder de- risking û Typically short- term û Degrees of recourse û Not always appropriate û Repaid from cashflow û Expensive û Difficult to raise û Dilutes shareholding û Need to provide an exit û Leverage increases Page 7

OUR SUMMARY VIEW ON THE CURRENT FUNDING ENVIRONMENT AVAILABILITY COST TERMS & CONDITIONS CONVENTIONAL SENIOR DEBT SPECIALIST SENIOR DEBT QUASI- EQUITY EARLY STAGE VENTURE CAPITAL LATE STAGE VENTURE CAPITAL PRIVATE EQUITY (REVENUE < EUR 10M) PRIVATE EQUITY (REVENUE > EUR 10M) Page 8

FUNDING PROVIDER RETURNS VS. RISK TARGET RETURNS DEV. CAP. & MEZZANINE c. 12% + VENTURE DEBT c. 20% PRIVATE EQUITY c. 25% VENTURE CAPITAL 25% + PROPERTY c. 10-12% INFRASTRUCTURE c. 8% - 10% SENIOR DEBT c. 5% RISK Page 9

DEBT & QUASI- EQUITY SECTION III

DEBT AS A SOURCE OF FUNDING The Irish banking environment has improved but challenges remain: Leverage rates remain low Interest rates, while reducing, remain above European levels Debt tenor remains low with limited apperte for long- term funding Page 11

DEBT AS A SOURCE OF FUNDING (CONT D) Summary observarons: Debt < 3.5x EBITDA with a focus on profitability Key considerarons: Type of funding: term debt vs. invoice discounrng vs. asset finance? ConvenRonal bank vs. specialist provider of niche products? Debt mulrple depends on free operarng cashflow? Fixed vs. floarng interest rate? Security & recourse? Tenor? Page 12

QUASI- EQUITY AS A SOURCE OF FUNDING Quasi- equity / mezzanine: Sits where equity would otherwise sit EffecRvely preferred equity in some cases More efficient capital structure reduces average cost of capital Lower availability of convenronal debt has reduced the risk parameters: Overall leverage levels have reduced c. 25% from pre- Crisis peak Many providers will typically only invest in sponsor- led opportunires: 1. To remove funder of last resort risk, and 2. To provide greater comfort on surety of exit Page 13

QUASI- EQUITY AS A SOURCE OF FUNDING (CONT D) Summary observarons: Investment criteria focused on cashflow Reasonably full due diligence requirements Fundraising process similar to an equity fundraising process (For tech & lifescience companies) may be backed by a specific charge over IP Key considerarons: Mezzanine vs. development capital fund? Payment in cash vs. payment in kind? Timing of funding need and buy- back opron? Page 14

DEBT RAISING INITIAL DOCUMENTATION REQUIREMENTS 1. Proposal overview 2. Financial profile: Min. 3 years historic and 1 2 years future Detailed use of cash 3. Detailed cashflow: Cash cover ((operarng cashflow tax working cap capex) / (capital + interest)) > 1.2x Interest cover ((operarng cashflow tax working cap capex) / (interest)) > 4.0x Debt mulrple (net debt / EBITDA) < 3.0x 4. Consider bank security oprons Page 15

VENTURE CAPITAL SECTION IV

VENTURE CAPITAL FUNDRAISINGS 4 IRISH LIFESCIENCES & TECH EQUITY FUNDRAISINGS (2009 DATE) 50 AVERAGE FUNDRAISING (EURM, BLUE COLUMN) 3 2 1 45 40 35 30 25 20 15 10 5 NO. FUNDRAISINGS (RED) NO. FUNDRAISINGS > EUR 5M (GREEN) - Q1 09 Q2 09 Q3 09 Q4 09 Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11 Q4 11 Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 Q1 14 Q2 14 Q3 14 Q4 14 0 Page 17

RAISING VENTURE CAPITAL Summary comments: Raise sufficient capital to fund breakeven based on conservarve projecrons Raising equity overseas is challenging in the absence of reasonable scale The majority of acrve funds see the current environment as an investors market Most VC funds only invest in high- growth areas (technology & lifesciences) Terms may be oprmised by maximising the number of credible interested parres High availability of seed funding locally over the past number of years Consider the availability of follow- on funding No short- term cash / liquidity issues Support of exisrng investors Page 18

EUROPEAN VS. US VENTURE CAPITAL ü Generally more entrepreneurial ü ValuaRons frothy in certain segments ü More focused on generarng very high exit values and willing to fund the higher cash burn required to achieve this ü Generally more supporrve of unforeseen challenges ü Proximity = closer relaronship ü Generally give their porzolio companies more Rme to succeed û May require relocaron to the US û Less supporrve if the Company underperforms û Criteria may exclude companies outside US û Capacity may be more limited if the investee company requires significant follow- on funds û Limited value- add if customer base is US centric û Target revenue > US$ 5m for overseas deals Page 19

TYPICAL VENTURE CAPITAL TERMS á QUANTUM OF FUNDING á VALUATION DRAG ALONG â ANTI- DILUTION â LIQUIDATION PREFERENCE â Key considerarons: Confidence in projecrons i.e. trade downside protecron for greater upside? Will the Company require more capital? Strategic or financial investor(s)? Quantum of funding required? Page 20

SAMPLE VENTURE CAPITAL FUNDS ACTIVE IN THE IRISH MARKET DEVELOPMENT CAPITAL LOW APPETITE FOR IRISH DEALS HIGH STAGE OF INVESTMENT SEED Page 21

TYPICAL VC INVESTMENT PROCESS NO. OF PROPOSALS TIMEFRAME COMMENTS c. 1,000 c. 750 c. 500 c. 333 c. 100 c. 50 20-25 Annual investment proposals 5 mins. 20-25% disregarded immediately not in the area of focus 1 hr. AddiRonal 20-25% disregarded a{er an iniral sense- check 1 hr. Post desktop review c. ⅓ of applicarons given consideraron 1 hr. Conf. call with Target to assess opportunity + 2 wks. Internal desk- top & industry research 30 mins. Sponsor- led investment commi}ee review + 3-4 wks. Review Business Plan and internal due diligence IndicaRve Heads of Terms 4-5 variable Full due diligence CompleRon Page 22

KEY STAGES IN A FUNDRAISING PROCESS 1. PREPARATION 2. DOCUMENTATION 3. APPROACH 4. HEADS OF TERMS 5. DETAILED NEGOTIATIONS 6. COMPLETION Formulate the story Assess most appropriate list of potenral investor(s) InformaRon Memorandum / Business Plan Management presentaron Build a book around exisrng investors Target preferred / most likely investors in the first instance Feedback from potenral investors & iniral negorarons Target receipt of indicarve funding proposals Detailed negorarons with preferred party(ies) Financial & commercial due diligence Legal process: SubscripRon & Shareholder s Agreement CompleRon & receipt of funds Page 23

PRIVATE EQUITY SECTION V

PRIVATE EQUITY AS A SOURCE OF FUNDING Private equity is most suitable for: 1. Funding an acquisiron (or merger) 2. Funding a management buy- out or buy- in 3. The outright (or majority) purchase of a company 4. Business expansion e.g. purchase of a new producron facility 5. Debt pay- down (i.e. de- leveraging) replacing exisrng debt with new equity 6. Internal recapitalisaron or other minority stake investment only a limited number of private equity funds will be content with a minority stake 7. Other Balance Sheet restructuring Page 25

PRIVATE EQUITY AS A SOURCE OF FUNDING (CONT D) Choosing a private equity fund: Personal fit? Fund vintage, sectoral focus & experrse? Profile of the Fund s precedent investments? Investment track record (i.e. performance) of the Fund? Key transacron considerarons: ValuaRon? Exit rights / influence / Rmeframe? PotenRal for addironal future diluron? Investment instrument (i.e. equity, loan- note etc.)? InsRtuRonal vs. private investors (vs. combinaron)? Page 26

SAMPLE PRIVATE EQUITY FUNDS ACTIVE IN IRELAND + non- insrturonal sources Page 27

TYPICAL PRIVATE EQUITY INVESTMENT HYPOTHESIS VALUATION & RETURNS Upfront valuaron & exit potenral? MARKET Growth outlook & comperron? COMPANY S FOCUS PosiRoning & market advantage? EXIT OPTIONS Trade or financial acquirers? GROWTH OPPORTUNITY Ramp- up financial scale? TRACK- RECORD Track- record of growth? Page 28

TYPICAL FUND STRUCTURE Limited Partners (investors) + General Partners (fund managers) Investors include pension funds, endowments, Sovereign funds, fund- of- funds, etc. Management fees are typically ~ 1.5% - 2.0% of overall funds raised 80% : 20% split in profits (in favour of LP s) subject to a ~ 8% LP hurdle rate Typical terms: Fund life typically 7-10 years No single investment > 10% of the fund Aim to have 75% of fund invested by year 5 20% - 30% of funds held in reserve for follow- on investment Will typically raise a new fund when 75% of old fund is invested Page 29

T&C S OF PRIVATE EQUITY INVESTMENT Ordinary equity vs. loan note combinaron Minority vs. controlling stake: Control by veto / consent ma}ers Management vs. investor rights & responsibilires InformaRon rights, Board representaron & vorng rights Availability of follow- on funding? Pre- empron & anr- diluron rights Agreement in principle on exit (Rming etc.): Drag & tag along rights RecapitalisaRon oprons (incl. valuaron mulrples) Page 30

GENERAL COMMENTS ON RAISING EQUITY Shareholder s Agreement only likely to be important in the event of a future breakdown in relaronships at which Rme it will be very important Other key considerarons: Venture capital or private equity firms will not give warranres in an exit Future fundraising(s) should not be through different investment instruments Timing of investment process? Due diligence vs. exclusivity Investors will require full clarity on: Use of proceeds & future funding requirements? Exit oprons? Page 31

EQUITY RAISING INITIAL DOCUMENTATION REQUIREMENTS 1. TransacRon drivers 2. Company overview: Landscape & posironing Short- term growth outlook Shareholder & capital structure 3. Financial profile: Min. 3 years historic and 3 5 years future Sales analysis & pipeline Profit bridge 4. PotenRal exit oprons Page 32

FUNDING CASE STUDIES SECTION VI

CASE STUDY 1 Scenario: EUR 5.2m acquisiron Target company is export- focused Target company profitability of EUR 1.0m with > 80% of this converrng to cash Funding oprons: 1. Bank debt available up to EUR 3.2m (local bank @ 5.0% over 3 years) 2. Outside investor (loan note @ 15% or ordinary equity) 3. Vendor financing Page 34

CASE STUDY 2 Scenario: Irish manufacturing company with a EUR 13m funding need (to fund an MBO) EBITDA c. EUR 2.5m, ex- growth but strong cash generaron Bank # 1: Dublin- based bank Specialist sector focus Standard senior debt: Higher equity requirement (EUR 5.5m) 3.0x EBITDA debt Margin of 3% Bank # 2: London- based bank Unitranche debt: Lower equity (EUR < 3m) c. 4x EBITDA debt facilires Accelerated repayment opron Margin of 6% Extended term Warrant Page 35

CASE STUDY 3 Scenario: Private equity to fund an acquisiron Could have used debt but this would have meant be ng the ranch Structure: SHAREHOLDERS 100% CLIENT COMPANY 51% minor cash injecron Preferred opron was to fund the deal through a new subsidiary vehicle Private equity fund holds < 50% and is subject to a buy- out clause Fully ring- fenced PRIVATE EQUITY FUND 49% cash injecron NEWCO 100% TARGET COMPANY Page 36

Q & A www.pegasuscapital.ie donal.oconnell@pegasuscapital.ie 086 3811166

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