Week 9

Question 1

Monitoring the investment

Answer 1

• Monthly management pack
• Weekly / daily KPIs and on-line reporting
• Informal reporting and communication
• Seat on board / board minutes
• Consulted on (with right of veto in some circumstances) on key decisions affecting company
• Aims to add value to investment (eg expansion into new markets/overseas, intros to customers and strategic partners)
• Shares best practice amongst portfolio companies
• Acts as a business partner (if “Hands-On”).

Question 2

Board composition and investor involvement

Answer 2

Executive directors: CEO/ FD etc – performance and strategy

Operating board – departmental reps

Non-executive directors (NEDs) – investor rep, independence, add value, guide and influence

Investor rep -
- original deal team: understanding of company and strategy, developed relationships, or
- dedicated, specialist aftercare team: sector, operational skills, impartial

Question 3

Danger Signs

Answer 3

Lack of response to changing environments
Stress/dissent within team
Fixed price contracts
Increasing fixed costs
Cash flow issues
Bank covenant breaches
Failing to meet interest payments
Failing to meet dividend payments
Increasing overseas competition
Over-trading
Deteriorating credit control
Uncontrolled capital expansion
Inaccurate / late management accounts
Autocratic management
Financial impropriety
Early success but no staying power
Over-expansion
High turnover of employees
Extravagant executive lifestyle
Dependence on too few customers/suppliers

Question 4

Dealing with underperformance

Answer 4

• Pre-investment / due diligence shortcomings
• Management shortcomings
• Competitor action
• Failure to achieve plan
• Anticipate problems
• No (bad) surprises!
• Analysis of issues: internal / external
• Take action!

Question 5

How VCs add value

Answer 5

• Sounding board for strategic and development decisions – entering new markets, overseas expansion, acquisitions, hiring new management
• Introductions to potential customers, suppliers, headhunters, acquisition candidates, even other VCs
• Negotiating future financing rounds with other VCs
• Softer skills in coaching and mentoring entrepreneurs and teams
• Provide credibility/status and focus and support
• Studies by EVCA and BVCA confirm the recognition of this support by entrepreneurs and management teams
• No longer just turn up for board meetings!

Question 6

Experience, Aspiration and External Resources - key drivers of success of VCs (EVCA - LBS, CEFS)

Answer 6

LOOK AT MODEL
- Experience
- Reputation
- External Resources
- Business Model
- Entrepreneurial experience

Question 7

Management teams working with PE/VC Firms

Answer 7

Work in true partnership with lead investor - be transparent.

Listen to the VC firms advice and validate it - they can help identify issues ahead of time

Hire the right talent at the right time - don’t compromise on quality of management

Be open to advice from investors

Have a clear plan to achieve sustainable growth in the medium and long term - not just short term

Demonstrate a strong focus on cash management and actively restrain cash spend

Prepare exit strategy early to maximise value for shareholders

External investor = eventually selling your business via trade sale or flotation

Remember that the aim is to achieve maximum long-term value for the ultimate purchaser as well as management and VC.

Question 8

Exits

Answer 8

Trade sale – to another industrial company

Secondary buyout – by another PE institution

Repurchase – of PE firm’s shares by company

Going public – stock exchange listing (eg AIM or Main Market in UK)

Involuntary – receivership or liquidation

Question 9

Trade sale

Answer 9

Welcomed by investors:
- likely to obtain premium from buyer
- competitive bids maximise price achieved
- cash paid for purchase, rather than shares

Potential conflicts with management’s interests

Question 10

Going Public in UK

Answer 10

LSE
- Main Market
- AIM
-High Growth Segment

Aquis Stock Exchange (AQSE)

Special Purpose Acquisition Companies (SPACs)

Question 11

Advantages of going public

Answer 11

• Realisation of owner’s capital
• Finance available for expansion
• Marketable shares available for acquisitions
• Enhancement of status and public awareness
• Increased employee motivation via share incentive schemes

Question 12

Disadvantages of going public

Answer 12

• Possible loss of control/unwelcome bids
• Continuing obligations – costs and management time
• Increased scrutiny from shareholders and press
• Perceived emphasis on short-term profits and dividend performance
• High costs of gaining quotation

Question 13

London Stock Exchange admission criteria: AIM

Answer 13

• No minimum shares to be in public hands
• No trading record requirement
• No prior shareholder approval for transactions (except reverse takeovers)
• Admission documents not pre-vetted by Exchange nor by UKLA in most circumstances (prospectus not required)
• Nominated adviser (Nomad) required at all times
• No minimum market capitalisation

Lighter regulatory process
Companies outside UK looking to list on AIM

Question 14

London Stock Exchange admission criteria: Main Market

Answer 14

• Minimum 10% shares in public hands (reduced from 25%)
• Normally 3 year trading record required
• Prior shareholder approval required for substantial acquisitions and disposals
• Pre-vetting of admission documents (prospectus) by UKLA
• Sponsors (investment bank) needed for premium listing
• Minimum market capitalisation at least £30m (was £700k)

Better liquidity than AIM

Question 15

LSE High Growth Segment

Answer 15

Opened 28 March 2013

• New route to UK IPO market for high-growth companies
• Includes reformed rules on free float, eligibility criteria and reporting requirements
• Acts as “launch pad” for companies seeking full listing