pcp - finance - pe introduction (7 may 2015)

Understanding Private Equity

Prestige

Prestige Capital Partners No. 10 Anson Road #15-14 International Plaza, Mobile: (65) 93801162 Singapore 079903 Email: [email protected]

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UNDERSTANDING EQUITY FINANCING

What Is Equity Financing?

Equity financing is raising funds by selling a portion of your business to investors. In

exchange for the funds, they take a share in your business and profits.

Equity financing or funding is a good option for start-ups who have little assets to put up

as collateral for loans.

Established businesses may also want to attract investors who can bring financial

expertise or strategic partnerships to the table.

Types of private equity

Private equity investments can be divided into the following

categories:

Leveraged buyout, LBO or simply Buyout: refers to a

strategy of making equity investments as part of a

transaction in which a company, business unit or business

assets is acquired from the current shareholders typically

with the use of financial leverage. The companies

involved in these transactions are typically more mature

and generate operating cash flows.

mailto:[email protected]

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Venture capital: a broad subcategory of private equity that refers to equity investments

made, typically in less mature companies, for the launch, early development, or

expansion of a business. Venture capital is often sub-divided by the stage of

development of the company ranging from early stage capital used for the launch of

start-up companies to late stage and growth capital that is often used to fund

expansion of existing business that are generating revenue but may not yet be

profitable or generating cash flow to fund future growth.

Growth capital: refers to equity investments, most often minority investments, in more

mature companies that are looking for capital to expand or restructure operations, enter

new markets or finance a major acquisition without a change of control of the business.

Other strategies

Other strategies that can be considered private equity or a close adjacent market include:

Distressed or Special situations: can refer to investments in equity or debt securities of a

distressed company, or a company where value can be unlocked as a result of a one-

time opportunity (e.g., a change in government regulations or market dislocation).

These categories can refer to a number of strategies, some of which straddle the

definition of private equity.

Mezzanine capital: refers to subordinated debt or preferred equity securities that often

represent the most junior portion of a company's capital structure that is senior to the

company's common equity.

Real Estate: in the context of private equity this will typically refer to the riskier end of the

investment spectrum including "value added" and opportunity funds where the

investments often more closely resemble leveraged buyouts than traditional real estate

investments. Certain investors in private equity consider real estate to be a separate

asset class.

Secondary investments: refer to investments made in existing private equity assets

including private equity fund interests or portfolios of direct investments in privately held

companies through the purchase of these investments from existing institutional

investors. Often these investments are structured similar to a fund of funds.

Infrastructure: investments in various public works (e.g., bridges, tunnels, toll roads,

airports, public transportation and other public works) that are made typically as part of

a privatization initiative on the part of a government entity.

Energy and Power: investments in a wide variety of companies (rather than assets)

engaged in the production and sale of energy, including fuel extraction,

manufacturing, refining and distribution (Energy) or companies engaged in the

production or transmission of electrical power (Power).

Merchant banking: negotiated private equity investment by financial institutions in the

unregistered securities of either privately or publicly held companies.

Can All Businesses Use Equity Financing?

Equity funding is only suitable for partnerships and companies. Sole-proprietors are one-

person businesses. The owner is the sole investor.

Investors in a partnership can be silent or active partners. Silent partners contribute funds

but do not take part in the running of the business.

Investors in a company are known as shareholders. Shareholders are not involved in

business operations.


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Questions to ask yourselves for Private Equity:

1. Does your company have high growth prospects and are you and your team

ambitious to grow your company rapidly?

2. Does your company have a product or service with a competitive edge or unique

selling point?

3. Do you and/or your management team have relevant industry sector experience? Do

you have a clear team leader and a team with complementary areas of expertise,

such as management, marketing, finance,

etc?

4. Are you willing to sell some of your company’s

shares to a private equity investor?

If your answers are “yes”, private equity is worth

considering. If “no”, for other sources of capital and

advice call Prestige Capital for further advice.

How Much Of My Business Should I Sell?

It all depends on how much money you need to

raise. You should always establish clearly how

much money you need before approaching investors.

o For instance, if your company's share capital is S$100,000 and each share is worth

S$1, then you have 100,000 shares. If you need to raise S$20,000, you can sell

20,000 shares to an investor.

If you're a start-up, you should also be prepared to raise several rounds of funding. Each

round may require you to give up more and more of your shares. Start-ups sometimes

have to give up as much as 50% of their business.

A common concern of businesses is losing control of the company by selling away too

many shares. It is a legitimate concern.

o Although shareholders do not interfere in the daily operations, they can exercise

some control over the business.

o For instance, a company cannot increase their share capital unless at least 75% of

the shareholders agree to it.

Prestige Assist Entrepreneurs for Private Equity

Prestige Capital Private Equity Division provides

consultancy and administrative services to businesses

in Singapore and Asia regions.

They are set up by Prestige Capital with the support of

Equity Funds, Investors and Lenders.

They can advise you on how to value your company

when selling shares to investors.


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Private equity firms generally receive a return on their investments through one

of the following avenues:

an Initial Public Offering (IPO) - shares of the company are offered to the public, typically

providing a partial immediate realization to the financial sponsor as well as a public

market into which it can later sell additional shares;

a merger or acquisition - the company is sold for either cash or shares in another

company;

a Recapitalization - cash is distributed to the shareholders (in this case the financial

sponsor) and its private equity funds either from cash flow generated by the company or

through raising debt or other securities to fund the distribution.


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Investment Criteria General

In providing later-stage financing to growing companies, Prestige’s investors looks for

companies that are growing rapidly, executing a merger or acquisition, or engaging in an

ownership transition – generally an event in the life cycle of the company creates the need

for mezzanine capital.

Company Characteristics:

Companies seeking mezzanine financing to support growth scenarios must have proven

track records, strong management, and a sustainable competitive advantage. Successful

candidates typically have revenues ranging from $20 million to $100 million, positive cash

flow, and earnings of approximately 15% of sales. Generally, such companies are closely-

held private firms some of which may have institutional equity investors, while others will

have been initially financed by founders, and/or other individuals. However, Prestige’s

investors will also finance companies that have obtained prior funding in the public markets.

Start-up companies that have not

yet attained revenue, or do not

meet our overall criteria, are not

appropriate for this form of

financing, which emphasizes

financial metrics based on current

cash-flow and balance sheet

stability.

Industries:

Prestige’s investors look for

opportunities to finance

companies in the following

industries and sectors:


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1) Late-Stage Technology,

2) Health Care Services,

3) Business Services, and

4) Specialty Manufacturing

5) Financial Services

6) Consumer Products

7) Infrastructure Services

8) Retail and Distribution

9) Real Estate

10) Media

11) Transportation and Logistics

12) Environment Services

13) Supply Chain Management

14) Energy

15) Telecom

Companies operating in these areas tend to have strong growth characteristics, which may

require the form of growth capital provided by Prestige’s investors.

Market, Management and Model:

Prestige’s investment team evaluates companies based on factors pertaining to the

perspective portfolio company’s market, management and business model. These factors

include:

Market:

An addressable market of at least $500 million.

A market with a growth rate that exceeds the nation GDP.

A market and operating space that the Prestige’s team knows and understands.

A market with a low concentration ratio of businesses operating in the space.

An identifiable exit strategy for the company in that market.

Management:

A CEO and management team with strong industry knowledge and prior

experience: 1) operating in the industry, 2) addressing the target market, and 3)

running a successful business together.

A team whose financial interests are aligned with those of investors.

A team whose commitment is evidenced by their own financial investment in the

enterprise.


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Model:

A business model that is capital efficient.

A business model based on recurring revenue, high contribution margins, a proven

product or service, a scalable platform, and a sustainable competitive advantage.

A business model that addresses the following competitive forces: rivalry, threat of

substitutes, buyer power, supplier power, and barriers to entry.

Investment Size:

Prestige’s investors provide financing for a company that generally ranges between US$25

million to US$150 millions. Prestige’s investors will invest with a syndicate of like-minded

institutional investors and will lead, co-lead, or co-invest in an investment round.

Geography:

Prestige’s investors primarily head quartered or regional HQ in the Asia Pacific region. In this

region, the core focus for financing is in ASEAN countries, where the Prestige Principals have

substantial experience and business contacts.

Investment Criteria for Financial Services:

The sector itself encompasses a diverse range of businesses, ranging from diversified global

financial institutions such as Citigroup and HSBC, to international business services

companies like MMC or Accenture, through to countless regional, national, and local

players. Prestige’s team has a broad range of expertise spanning industry, consulting, and

investment banking that enables Prestige, both to identify opportunities and to work deeply

with portfolio companies across the sector.

Marketplace trends and drivers

The long-term trends impacting the financial services sector include the continued impact

of global liquidity, industry globalisation and consolidation, deregulation and rapid financial

innovation. These trends have provided a strong tail wind to drive growth and profitability

across the industry over the past five years.

However, during 2006/07 a dislocation, which began in

the US sub-prime mortgage sector, began to spread to

the wider global money markets. Although many parts of

the industry – for example, insurance – have been

relatively unaffected by this, tightening liquidity has placed

smaller businesses that rely on the wholesale financial

markets under pressure.

In business services, the main drivers continue to be the

implications of outsourcing and globalisation. Companies

are looking to outsource more of their non-core functions,

and are increasingly seeking partners that are able to fulfil

these functions across their entire office network. This has

led to strong organic growth within the sector, as well as

consolidation as business services firms strive to meet their

clients’ needs around the world.

Strategy


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The team pursues different strategies for financial services and business services, reflecting

the unique dynamics of each sector. In the financial services arena, we aim to target

businesses with strong brands and existing customer bases and expand the number of

products that we offer these customers. In business services, we believe that as the market

tends to be characterised by relative fragmentation there exists a substantial opportunity to

build and develop businesses of scale through organic growth and acquisition. Our goal is

therefore to acquire strong platforms that can be used to drive growth both within their own

markets and overseas.

Outlook

The trends underlying both the financial services and business services industries mean that

they are likely to continue to deliver good growth into the future, and present attractive

investment opportunities for the Prestige’s Investor. Within financial services, continued

industry consolidation is likely to present a flow of opportunities as large groups seek to exit

non-core businesses and geographies. Continued turbulence in the capital markets may

also create opportunities as firms seek strategic partners to help them through the downturn.

In business services, globalisation and consolidation will continue to present opportunities for

investment in the sector.

How Private Equity partner? Supporting management

PE collaborates with vendors and management teams to create long-term value for all

concerned. PE participates actively on the boards of all the portfolio companies. PE role is

to provide expert resources, either from within our international firm or from its network of

advisors. All of PE portfolio companies are independently managed. PE is focused purely on

private equity and PE does not trade in and out of companies for short-term gain. PE takes

a long-term view, and is prepared to work with management through the inevitable ups

and downs of business life to achieve the shared objectives.

PE knows that a strong management team with powerful equity incentives will create a

dynamic, challenging and enterprising spirit within established companies, enabling them

to achieve even greater success.

PE offers corporate and family sellers:


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A quick and efficient means of realising non-core assets, while also giving vendors the

chance to remain invested alongside, PE is highly sector focused; therefore they

understand the businesses that the funds are buying and they appreciate the promoter’s

position in the industry sector. PE has a proven track record of structuring and executing

international buyouts, which require an understanding of different cultures, legal systems

and local market conditions

PE offers management teams:

The chance to run their own company; a successful management buyout delivers freedom

to management that generally results in increased operational speed, reduced levels of

bureaucracy and enhanced performance.

A clear and focused shareholder base that enables management to get on with the job of

building the company without the distractions associated with other forms of corporate

ownership. PE gives management the chance to manage within a supportive and focused

strategic framework.

Equity Debt Financing

Integrated Approach

Investment Fund integrated management approach to private markets investing includes a

combination of direct, secondary and primary investments in private debt. Investing in this

manner allows the firm to take maximum advantage of market opportunities for the benefit

of its clients. Specifically, the firm is able to leverage its large global network to source,

analyze and execute a broad array of attractive investments in each asset class and across

the globe. As a result, the Fund has the tools required to construct portfolios that can more

effectively mitigate J-curves, provide earlier distributions and enhanced liquidity and reduce

underlying fees.


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Directs. Direct private debt investments are private investments directly into the debt of

selected operating companies, typically together with the management of the company.

Being a successful mezzanine investor since 1999, the company’s investment professionals

concentrate on providing financing to high quality assets in stable industries and strive for

the best risk/return profile in order to increase profitability on behalf of their clients.

The financing provides a significant contribution to the company’s long term value creation

and hence result in stable returns during the time of investment and additional returns

components at the time of exit. Mezzanine financing is such a possible financing

instrument.

Mezzanine debt is a hybrid financial instrument often employed in buyouts, growth financing

and other private equity transactions. By combining the characteristics of debt and equity

instruments, mezzanine debt provides borrowers with financial flexibility and investors with

attractive risk-adjusted returns and current cash flow.

Major advantages of investing in mezzanine capital are:

Yield to maturity of more than 10%


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No duration risk due to LIBOR-based pricing

Relatively low credit risk due to high equity contribution and lower leverage

Low correlations to bond markets and interest rates

Together, these features can create compelling investment opportunities, combining the

relative security of a debt instrument, attractive cash flow characteristics and the potential

to participate in the profits of the borrower. Current coupons generate running income,

typically at attractive yields – reducing risk by shortening the duration of the loan.

Secondaries. Secondary investments at the Fund involve acquiring single or portfolios of

operating companies on the secondary market. The Fund offers other market participants

an exit possibility in a market which is highly liquidity-constrained.

The Fund has been a successful secondary investor since 1998, investing in private debt

since 1999 and focusing on value investing in the private debt secondary market. The Fund

has significant experience and a global team to value underlying assets on a bottom-up

basis and assess the value creation strategy of each individual company.

Primaries. Primary investments are investments in newly established private debt partnerships

where underlying portfolio assets are not known as of the time of investment.

On a primary basis, the Fund selectively provides discretionary capital commitments to

operating partners. In doing so, the Fund provides its clients with access to a diversified

bucket of assets across all major markets and product types.

The Fund has one of the largest teams dedicated to primary investments. When making a

primary investment, the Fund grants investment decision–making rights to its local partners,

who in turn make portfolio investments within a set of defined parameters. Since there is

limited control over the investments, primary due diligence requires a detailed assessment

of the partner's historical track record, as well platform capabilities to evaluate future

opportunities. The Fund sits on over 230 advisory board committees and regularly interacts

with top-tier limited and general partners from its 15 offices around the globe.


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Investment Process


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EQUITY INVESTMENT IN VARIOUS STAGES OF COMPANIES

Identifying the right investor for your start-up depends on what type of business you have and

what stage it is in. Overview

Selling a portion of your business in exchange for cash is one of the best ways for start-ups

to raise money. Friends, family and other people who know and believe in you may be willing to invest. In

exchange for their investment, they get a share in your company and its profits. There are various types of investors: Angels, Venture Capitalists and Private Funds. Angels

are the most likely to invest in start-ups. IDENTIFYING INVESTORS The type of investors you need will depend on what stage of development your business is in. Basic Guidelines

Identifying the right investor depends largely on the stage of your business. Start-ups, for instance, will have better success with Angel investors. Businesses with proven

growth potential may find Venture Capitalists more willing to listen. Once you have identified a target investor, take the time to find out everything about the

investor. The more you know, the easier it will be to pitch for his/her funds. Start-Ups In The Seed Stage

You've conceived a new idea or concept. You need funds to set up the business, turn

your idea into a product, rent an office and hire the right people.

You are enthusiastic and passionate about your idea. Your success lies in being able to

sell the idea to potential investors. Start-Ups in this stage are referred to as "Seeds". Having been just planted, you have no

track record but lots of enthusiasm and ideas. Challenges In Finding Investors

Thousands of ideas are hatched every day. Investors know that it takes a lot of drive,

energy, effort and time to turn an idea into a successful business. Unless you are an established entrepreneur, you will find it hard to raise money from

professional investors, such as venture capitalists.

Most businesses at this stage are self-funded. The founders dig into their savings, credit

lines and personal resources to give birth to their ideas.

Start-Ups At A More Advanced Stage Compared to a Seed start-up, your business is in a slightly more advanced stage.

o Your products or services may already be developed.

o You have some interested customers. o You have generated some revenue. o You may even have turned a profit.

A typical investment that you may need at this stage could range from S$500,000 to

S$5,000,000. Challenges In Finding Investors Even at this stage, it may still be hard to interest investors. You are still in the "development"

stage and professional investors are more interested in companies who are expanding.


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Biotechnology, nanotechnology and IT start-ups will find more ready investors than those in

other industries. That's because investors are looking for high-growth sectors. They also look

at products or services that have the potential to be sold globally.


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Businesses With Proven Growth Potential Businesses at this stage are already bringing in revenue. They may be close to breaking

even, or even be profitable. The business could be described as being in a stage of adolescence, in terms of

experiencing a growth spurt. It has enough funds to operate but, in order to grow, the business needs new funds to

increase market share and take advantage of new opportunities. At this stage, the business shows early signs of success. Additional investor funds and

management expertise will help the company grow bigger, faster. Challenges In Finding Investors Your business is attractive to investors, who may be willing to invest 4 to 5 times the

company's profit level or 2 to 3 times its revenue.

The main challenge is choosing the right investor. Venture capitalists can inject funds and bring management expertise. However, they tend

to seek an active role in the daily running of the business. Private funds provide cash but not networks or strategic partners that the business may

need. Other companies who are interested in your products or market share may also invest in

your business. However, they may really be interested in acquiring you at a later stage.

Established Businesses

Your business has a proven track record and is profitable. Daily operations are smooth with few hiccups. You can easily get bank loans for long-term

and short-term needs. However, these loans may not cover your projected needs as you seek to expand your

business overseas or to become the market leader.

Challenges In Finding Investors Your business has become too large for individual investors and investment funds. At this point, your business has the potential to become a multi-national corporation. The only way to raise the capital you need to take your business to the next level may be

to take the business "public", by listing the company on the stock exchange and raising

funds from shares sold to the public.


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EQUITY FINANCING CHECKLIST

Due Diligence Checklist Choose which checklist (s) applies to your project and complete it.

FOR ACQUISITION OR REFINANCE PROJECTS

FOR REAL ESTATE DEVELOPMENT & CONSTRUCTION PROJECTS

FOR BUSINESS PROJECT FINANCING

Please write a Y next to each item which is already available, N next to items which are not

yet available indicating in column C the date by which they will be available. For items

which you deem irrelevant to your project, write NA, and explain why it is irrelevant.

I – Acquisition or Refinance Projects Column A Column B

( Y, N. NA) Column C Date

No. Document item Available By

1 Executive Summary (send together with completed

checklist)

2 Descriptive summary of business activity, specialty,

service, etc., areas of service or business influence,

length of time in this business, the overall market, and

your unique competitive advantage. Please include the

purpose and amount of the funding request and

include what cash you have invested and how much

more cash you have available to be invested.

3 Personal Financial Statements of the Owner, general

partner/Applicant and principals (dated within 60 days

of submittal). A financial statement (on all Principals who

own at least 10% of the project) must be submitted for

individual borrowers, the principal officers/owners of a

corporate borrower, or the general partners, if the

borrower is a partnership. Also, we need the Profit/Loss

Statement of any entity involved who is also a borrower.

4 Resumes of each Principal, general partner, and key

management person who is not a principal

5 Historical Profit/Loss Statements for the last 3 years and

current year to date. (Income statements and Balance

Sheet)

6 Listing of all current debt, leases, monthly payments,

rates, due dates, etc.

7 5-10 year projected income and expense pro-forma

statement (for new and existing business).

8 Detailed Use of Funds from loan/investment.

9 Current listing of A/R and A/P aging schedules

10 Listing of equipment and inventories, FIFO value and

current market value and book value.


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11 Any additional material that may be in the owners’

possession that may be helpful in evaluating value of

the project; i.e. appraisal, aerial photos, feasibility study,

etc.

12 Letter of Intent of potential Users

13 Pro-forma Profit/Loss/income/Expenses

14 Personal References on Principals

II – Real Estate Development and/or Construction Projects Column A Column B

( Y, N. NA)

Column C

Date


1 Executive Summary Y

2 PROJECT DESCRIPTION A. Brief written history of property ownership including

acquisition dates and purchase price, or to be purchased

and your control of the property, with emphasis on strong

points of property or surrounding developments; the purpose

and amount of funding request; include what cash you

have invested and how much more cash you have

available to be invested.

B. Color rendering of proposed development (if available).

D. Sample floor plans, with the rooms labeled, and exterior

dimension only.

E. Unit breakdown: type, size, number, price, for entire

development and per phase if phased development.

F. Site utilization showing basic "foot print" of development. G. Area map showing location of property.

3 APPLICANT 1. Personal Financial Statements of the Owner, general

partner/Applicant and principals (dated within 60 days of

submittal). A financial statement (on all Principals who own at

least 10% of the project) must be submitted for individual

borrowers, the principal officers/owners of a corporate

borrower, or the general partners, if the borrower is a

partnership. Also, we need the Profit/Loss Statement of any

entity who is also the borrower.

4 RESUMES of each Principal, general partner, and key

management person (s) who is not a principal

5 ECONOMICS

1. Detailed development budget itemized by major cost

categories (with all hard and soft costs, including land shown

in budget) for entire development and by phase if phased

project; detailed breakdown of the Use of Funds 2. Copies of signed letters of intent to lease, or copies of

signed pre-sale deposits (if any).


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3. Itemized breakdown of cash equity invested in project to

date and including those additional amounts of equity to be

invested prior to or at loan funding. 4. Projected Proforma income and expense budget at

stabilized occupancy and cash flow (for rental properties

only). 5. Information on all existing property indebtedness including

any amounts to be subordinated and terms thereof. 6. Appraisal or feasibility study, if available.

6 MARKETING 1. Outline of marketing program, with projected absorption

and price schedule (for subdivisions, etc., not for income

producing or rental properties).

7 GOVERNMENT APPROVALS 1. Zoning requirements, and evidence this project is

conforming. 2. Status and timing of state and local government

approvals required for construction of the project.


possession that may be helpful in evaluating value of the

project; i.e. appraisal, aerial photos, feasibility study, etc.


III – Business Project Financing


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Column A Column B ( Y, N. NA)

Column C Date


1 Executive Summary Y

2 Descriptive summary of business activity, specialty,

service, etc., areas of service or business influence,

length of time in this business, the overall market, and

your unique competitive advantage. Please include the

purpose and amount of the funding request and include

what cash you have invested and how much more cash

you have available to be invested.

3 Personal Financial Statements of the Owner, general

partner/Applicant and principals (dated within 60 days of

submittal). A financial statement (on all Principals who

own at least 10% of the project) must be submitted for

individual borrowers, the principal officers/owners of a

corporate borrower, or the general partners, if the

borrower is a partnership. Also, we need the Profit/Loss

Statement of any entity involved who is also a borrower.

4 Resumes of each Principal, general partner, and key

management person who is not a principal

5 Historical Profit/Loss Statements for the last 3 years and

current year to date. (Income statements and Balance

Sheet)

6 Listing of all current debt, leases, monthly payments,

rates, due dates, etc.

7 5-10 year projected income and expense pro-forma

statement (for new and existing business).

8 Detailed Use of Funds from loan/investment.

9 Current listing of A/R and A/P aging schedules

10 Listing of equipment and inventories, FIFO value and

current market value and book value.


possession that may be helpful in evaluating value of the

project; i.e. appraisal, aerial photos, feasibility study, etc.

12 Letter of Intent of potential Users

13 Pro-forma Profit/Loss/income/Expenses



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Business Acquisition Criteria:

A Checklist for Identifying Target Companies You’ve made the decision: You want to buy a business. Before you go any further, it is

essential to describe what you’re looking for carefully enough so that your search efforts are

well directed but not so narrowly that you overlook qualified targets.

Rationale for Creating a Checklist

To this end, you will want to define both the ideal and the essential characteristics of your

target business. This definition gives those making the acquisition decision (the stockholders,

professional advisors, board of directors, etc.) a common blueprint for finding and

evaluating acquisition candidates.

Developing a checklist of acquisition criteria can also reaffirm your goals or bring a part of

your strategic plan more clearly into focus. You may also discover something about your

business or goals you may not have known otherwise.

For example, let’s assume one of your acquisition strategies is to acquire strong

management. As you refine this objective you will probably become aware of previously

unexamined strengths or weaknesses. You may realize a division head known for her rapport

with clients also has strong team-building skills.

As your advisors contact potential sellers, they will need to provide information about what

you’re looking for, along with a description of your company. The acquisition criteria you

develop will form the core of this document.

Developing the Checklist

The first step in developing acquisition criteria is examining your strengths and weaknesses.

While this step may seem obvious, many buyers fail to examine themselves adequately and

consequently develop flawed acquisition criteria.


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Next, review your strategic plan. Where do you see your company in three years? In five

years? In ten? What will it take to get there? If you don’t have a strategic plan, prepare one.

Some business owners are hesitant to articulate a strategic plan because they feel too

constrained by it. However, remember that a good strategic plan evolves as the company,

industry and overall economic climates change.

After you have a realistic and complete picture of your business and a vision of its future, list

the qualities you’re seeking in an acquisition candidate. No candidate will have every

quality you seek, but make your checklist to be as comprehensive as possible. Some of the

items such as the range of acceptable purchase prices will be requirements. Other like the

acquisition of capital assets may be attractive but not essential.

Facts to Consider

Many, but not all, of these qualities will be specific to the industry. While each acquisition is

characterized by a particular set of needs, we have prepared some guidelines to help you

develop yours:

Industry and type of company. Are you looking for a business similar to yours, or do you

want to diversify?

Level of sales and profit margin. Do you want a business with smaller volume and a

higher margin? Would you consider a company with a higher sales volume than yours?

Financial strength. Does the company have undervalued assets? Are there inventories

that can be used as collateral for financing? How much pre-acquisition leverage can

you accept?

Geographic location. Where do you want to buy? Is that the only acceptable location?

Will any efficiencies of scale materialize only if the target is within a certain area?

Purchase price, financing terms. How much can you pay? Do you need seller

financing? Are you looking for an earn-out? What financing resources will you use? How

much value will the acquisition create in the eyes of the lender?

Management strengths and weaknesses. Can your current management assume

responsibility for the target’s operation? Will you need to retain existing management

after the acquisition? Are there specific management strengths you need to

complement your business?

Collective bargaining agreements. Would this acquisition jeopardize your relationship

with a labor union? Will any strain created be healed by the time you renegotiate the

agreement?

Market and market strategy. Is the acquisition designed to increase your market share?

Is there a particular segment of the market you want to capture? Do you want to

diversify your market strategies or expand your market research?

Number and strength of competitors. If the acquisition is for diversification, who are the

target’s competitors? Are they new to the market? Are they gaining or losing market

share?

History and reputation. Is the Acquisition candidate a family business? Will it be difficult

to persuade the owner(s) to sell or the key employees to remain? Are you looking for a

business with a strong reputation for high quality? Do you need name recognition?


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Property, plant and equipment. Do you have idle facilities? If so, are you planning to

acquire targets and liquidate the property, plant and/or equipment to finance the

acquisition? Has the equipment been well maintained? Is it paid for?

Distribution networks. Is this acquisition designed to increase your distribution networks?

Do your networks and those of your target complement each other? Can you combine

networks to lower distribution costs?

Operational efficiency. Are you looking for ways to increase efficiency in an area like

order fulfillment? Do you have a highly efficient operation you could export to the

target?

Liability issues. How will the acquisition affect your product liability insurance? Are there

proposed changes in safety or environmental regulations that affect your industry? Will

the target have difficulty complying? Can the target help you comply with new

regulations?

Trademarks, patents or proprietary technology. Do you want to acquire trademarks or

patents to increase the price you can charge for your products or to increase your

market share? Do you have proprietary technology that would streamline the target’s

operations or provide a low-cost improvement in its product quality?

Research and development (R&D). Do you want to spread the cost of the R&D

investment over a broader product or earnings base? Are you looking for new

developments?

The successful acquisition begins with a concrete description of its purpose and a flexible

yardstick with which to judge potential candidates. These questions can help you develop

an acquisition checklist that will improve your focus. If you are planning an acquisition, call

us early in the process. We can help you develop your acquisition criteria, identify potential

targets and investigate their suitability

How a private equity investor chooses acquisition targets

Private equity investors typically have a charter which sets out well-defined parameters for

investments to be made by the fund, including:

Nature of investments. Some funds like high-growth companies, others prefer

investments with stable cash flow or dividends. Still others prefer turn-around situations.

Geographic scope. Many Asian funds restrict themselves to Asia Pacific countries, the

bolder ones will venture into Central Asia;

Preferred sectors. Some funds are generalist funds that will look at just about any sector;

others focus on one particular sector, such as transportation, infrastructure,

telecommunications, Financial, Energy, real estate, consumer, manufacturing, etc.

Investment size. Most funds will specify a minimum or maximum investment size (e.g.

US$25-US$150 million).

Ownership interest. Some funds insist on control, others will take minority interests.

Fresh equity. Many financial investors are not willing to buy out shareholders, they only

want to inject fresh equity into a company (e.g. to fund growth). Others will consider a


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combination of fresh equity and buying out existing shareholders. Buyout funds will want

to buy 100% of a company.

It is therefore important to find a good match between a private equity fund and a

company. It is likely a waste of time to enter into discussions with a fund if the applicant

company does not fit the fund’s criteria; investing in such a company would put fund

management into breach vis-a-vis its own investors. Business owners should therefore do a

little homework before approaching funds – the investment criteria are usually on the fund’s

website.

The average private equity fund in Asia will typically screen a few hundred investment cases

every year. Not more than a few will actually become the object of an investment. The vast

majority of private equity funds typically have an investment committee that makes all the

investment decisions, and a local person (who may or may not be a member of the

investment committee), who basically becomes the protagonist of the investment to be

made in a particular company, at the level of the committee. Hence the owner of a

business must first convince the protagonist of his investment case. The owner of a business

seldom, if ever, communicates directly with other members of the investment committee.

Hence the written information prepared by the company, most notably the Information

Memorandum prepared by the company, particularly its Executive Summary, may become

an important indirect communication tool with the investment committee.

A financial investor will usually subject a company to an initial due diligence, using its own

internal staff, before obtaining a green light from the investment committee to proceed with

a full due diligence of the firm, using external advisors (at a minimum lawyers, possibly

financial advisors, auditors, tax advisors, technical experts, etc.)

So what does a private equity firm look for in its investment selection:

A solid business opportunity that reflects its acquisition criteria (e.g. growth, size,

geographic parameters, etc.);

Exit strategy – who are the likely buyers for the company? What are the chances for a

successful exit?

A strong management team, who is prepared to stay until the exit of the fund. (An

owner-manager who is cashing out is often too high a risk for the private equity

investor).

Strong corporate governance – good decision structures, reporting systems, and strong

documentation. Private equity investors seek management teams that are highly

motivated, are prepared to agree to ambitious goals, and are prepared to work

extraordinarily hard to achieve significant financial gains. Conversely, if results are not

forthcoming, managers that own shares may find their ownership diluted.

Manageable risks. No actual, pending or potential litigation, or the potential for surprises

on the downside;

After the due diligence, the investment committee (or at least certain members) will usually

review the due diligence report of lawyers and other advisors, and the proposed Sale and

Purchase agreement.

Sometimes private equity firms will purchase what they call “bolt on” investments. Bolt on

investments are do not typically need to satisfy all of the investment criteria (e.g. they may


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be smaller than usual, or management of a bolt-on investment may choose to exit), as the

acquired bolt-on company would be purchased to create synergies with one of their

existing portfolio companies.

For Private Company :

Growth Capital:

Fund directly invests in companies with US$3+ millions of existing EBITDA and; typically invest

US$25 to US$150 million per transaction. Fund is industry and geography agnostic and

prefer emerging market companies. We evaluate industry prospects, management, and

competitive position. Company often combines our investments with a direct listing on the

exchange.

Early Stage Financing:

For companies with less than US$3 million in existing EBITDA, the Pass Through Structure is

often a good alternative for equity requirements of US$3 to US$25 million. We are industry

and geography agnostic. Strong management, a proprietary niche, and appeal to

potential strategic partners are critical elements. The Pass-Through Structure suits a private

company that has noteworthy management or proprietary assets which seek to raise

capital without selling a controlling interest. The Pass-Through Structure places a publicly

traded company in the middle between our investment and the private company. Thus our

investment "passes through” the public entity to the private company. The public company

should have a strategic interest in working with the private company and may be listed on

any exchange worldwide. Cross border relationships are often the most effective for the

public company relationship.


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Direct Listing/IPOs:

We recommend a public listing for companies that can develop after market investor

interest, which is the key to stock trading volume and liquidity. Investor interest can be

generated firstly by investors who already know the company, secondly by investors who

should know the company and lastly by momentum investors. This generally requires existing

EBITDA of at least US$10 million or advanced approvals for a biotech, strong management

and a strong track record of delivering results. We are industry and geography agnostic.

Cash Out to Shareholders:

Company invest based upon a multiple of existing EBITDA and have completed over 30

small cap buy-out transactions on 4 continents. We are industry and geography agnostic,

although focus on emerging markets and out of favour service and manufacturing

industries. Company will buy from 51% or more at the seller’s discretion. We primarily invest

in companies with transaction values of US$20-US$200 million. We specialize in orphaned

non-core subsidiaries of corporate parents, existing small capitalization public companies

lacking institutional support, and management-led recapitalization of entrepreneur-owned

companies. Our small size and flat operating structure enables us to rapidly evaluate and

close a transaction while minimizing disclosure.

For Public Company:

Growth Capital Criteria:

For a publicly traded company traded on any exchange, contact us for an immediate

"Yes". We look at management, fundamental economics, and business prospects.

For exchanges, our specialty is market caps from US$100-US$500 million. We can move

immediately and close most investments in 45 days assuming prompt responses from

the company.

For exchanges, we prefer companies listed on a national exchange (not Catalyst/GEM)

and market caps below US$100 million.

We have invested in almost every sector with the possible exception of real estate stocks.

Our investment philosophy is to invest, hold the stock if it performs well, and leak the stock

slowly into the market if it does not. Occasionally, a company has exceptional growth and

that is the source of our best investment return. We feel it is impossible to predict which

company will be the big winner, although we are very good at quickly evaluating a

company’s prospects. As an example, who the customers are often says a lot about the

company’s operation as well as its gross margins.

Acquisition Financing Criteria:

We look at the enterprise value of the target as a multiple of its existing EBITDA. Acceptable

multiples vary with industry and market conditions. We can accept higher multiples

depending upon the acquirer’s economic fundamentals and its liquidity.

Purchase of Non-Core Assets Criteria:

Company has completed over 30 purchase transactions on 3 continents and look at the

enterprise value of the asset as a multiple of its existing EBITDA. Company will buy from 51%

to 100% interest at the seller’s discretion. Our sweet spot is assets with US$4 to US$50 million


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of existing EBITDA. We are industry and geography agnostic, although the majority of our

purchases have been manufacturing and service operating divisions.


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Please contact our Principal Consultant,

Pat Lim at

(65) 93801162 or (65) 96361182

Email: [email protected]

ID: pat93801162

For Obligation-free consultation



pcp - finance - pe introduction (7 may 2015)

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