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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
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Private Equity Funds and Family BusinessCÉLINE BARRÉDY, UNIVERSITÉ PARIS OUEST
ALEXANDRA DAWSON, CONCORDIA UNIVERSITY (MONTREAL, CANADA)
CEROS WORKSHOP
PARIS, 21 OCTOBER 2014
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AgendaIntroduction
Research gap and contribution
Aim of the project
Preliminary findings
Next steps
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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)
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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
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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
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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?
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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?
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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)
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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)
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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*
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AgendaIntroduction
Research gap and contribution
Aim of the project
Preliminary findings
Next steps
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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
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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
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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
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Draft theoretical model (work in progress)
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AgendaIntroduction
Research gap and contribution
Theoretical framework
Aim of the project
Preliminary findings
Next steps
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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)
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AgendaIntroduction
Research gap and contribution
Aim of the project
Preliminary findings
Next steps
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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
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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
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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
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• 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
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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
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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
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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
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AgendaIntroduction
Research gap and contribution
Aim of the project
Preliminary findings
Next steps
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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
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Céline Barrédy
Alexandra Dawson
Contacts:
Thank you for your attention
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Private Equity : Different viewsInternational Workshop, Paris
October 21th, 2014
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Financing SME’s : key steps : Setting-up/takeover, growth and development ao
innovation/internationalization, SME Selling process :Sowalfin is SME’s partner
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3
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Focus on financing aoAcquisitions
Presentation of the SOWALFIN Group & the acquisition financing products
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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)
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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)
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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
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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)
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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)
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Introduction
§Facts EU & Belgium SME transfer market in Europe (+Transeo aisbl), focus on Belgium/Wallonia (+SOWACCESS)
§What a potential buyer shouldknow
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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
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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)
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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
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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
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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
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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
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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
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Transeo working groups
• 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
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Transeo working groups
• 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
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Transeo working groups
• 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
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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
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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)
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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
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SME transfer market in Wallonia
§ SOWACCESS principles:
§ Complete confidentiality
§ Complete protection for the seller
§ Collaborating with authorised professionals
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SME transfer market in Wallonia
§ 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
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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
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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.
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What a potential buyershould know
Société wallonne d’acquisitions et de cessions d’entreprises
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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
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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)
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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
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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
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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
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Questions to ask yourself when buying a company…
§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
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Questions to ask yourself when buying a company…
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
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Questions to ask yourself when buying a company…
§ 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
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Buyout process timeline
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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)
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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…)
§ …
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EUROQUITYPresentation
Private Equity : Different viewsInternational Workshop, Paris
October 21th , 2014
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1. Introduction
2. The EuroQuity platform
3. The Communities concept
4. The advisory committee
5. An independent approval committee
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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
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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
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- 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)
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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.
- The Community is a kind of label for potential investors who aresearching for new investment opportunities (the company Icould be interested in is already financed by a third party).
- Some examples in France: Investnet (innovative companiesfinanced by Bpifrance), Cap Digital (competitiveness clusterdigital services Île de France)
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Examples for Belgium
Community SOWALFIN Group/Invests managed by SOWALFINconsisting of :
- companies already financed by SOWALFIN, one of itssubsidiaries and/or an Invest, looking for additional equity
- SOWALFIN, its subsidiaries and the 9 Invests
BVA Community managed by the BVA consisting of:
- investment funds members of the BVA and interested in theservice proposed by EuroQuity
- companies already financed by one of those funds looking foradditional equity and for which the fund is looking for a co-investor
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4. The advisory committee
Why an advisory committee?
Get feedback and recommendations from the field in ordre toimprove the service proposed to companies and investors *
Meetings : 2–3/year
* Based on SOWALFIN experience and its technical committee
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5. Independent approval committee*
Advisors’ role : advise companies or investors in the preparation, analysis of investment proposals, negociation and closing.
2 types :
☐ « Regulated » professions: certified auditors, charteredaccountants, lawyers
☐ « Non regulated » professions: consultants, financialinvestments advisors
Why an approval for those « non regulated » professions ?
To ensure competence, experience, professionalism of theconsultant wishing to become a user of EuroQuity and as suchbeing referenced on the platform.
* Based on SOWACCESS experience
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Ethics charter
☐ Advisors referenced on EuroQuity undertake to respect key values :
- integrity
- independence
- quality of service and professionalism
- confidentiality of information
☐ Those key values will be summed up in an ethics charter orincluded in the general terms of use signed for agreement bythe advisors.
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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
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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)
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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
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4
Recent PE Trends Emerging Markets
Global PE Firms numbers
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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
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6
Small and Smith (2015)
Global PE Investment Volume
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7
EM as % of Global PE Fundraising
EM as % of Global PE Investment
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8
EM PE Fundraising and Investment
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9
Global Penetration
PE Investment Volume in BRICs
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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
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11
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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)
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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
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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
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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)
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16
c
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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
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• « 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
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THE PHILIPPINES, AN EMERGING MARKET WITH A HUGE POTENTIAL FOR GROWTH
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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
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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.
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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
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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
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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
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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
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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
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Partnerships
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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
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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)
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3. Projects’ follow-up & monitoring
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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
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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
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Case study
meso IMPACT
Finance(General Partner)
MIF IMPACT
Limited Partnership
LPs
CBA
SOPARFI
CBA
Investee Investee Investee
Chart of the corporate structure
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