Profile20 October 2009
LGC Capital ”Our genesis, our vision our identity”
The genesis of our purpose and vision
Market opportunity analysis
Our service offering
Our project risk management approach
Our functional structure and partnerships
Our methodologies
Our charging models and pricing
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What is our core purpose?
This seeks to answer the question “Why was LGC Capital formed, what is the reason for its existence?”
What are we really GOOD at?
• Turning ideas into practice/realised value
• Understanding strategy
• Corporate finance• Understanding
technology• Financial and
mathematical modelling
• Innovation• Corporate law
Our true intentions and goals
• To get involved in as many high-growth-potential businesses as possible
• To create sustainable value in the businesses that we are involved in
• To generate substantial annuity income
Our core purpose / mission
• Harnessing entrepreneurial and intrepreneurial energy and turning it into realised value
• Assisting viable businesses to achieve sustainable breakthrough growth
• Turning around failing businesses
“Our core purpose is to turn vision into value”
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What are our core values and philosophy?
What do we deem to be the non-negotiables we expect from all our people if we are to deliver on our core purpose?
Our philosophy is the main driving force behind our approach toward our work
“No problem can withstand the assault of sustained thinking”
François-Marie Arouet known as Voltaire (1694 – 1778)
• Quest for true excellence in what we do
• Creativity and innovation• Integrity• Excellent customer service
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What are our visionary goals?
What target do we set for ourselves? What is our burning platform?
We aim to have commercialised or have
transformed 10 companies to achieve 50% above
average sustainable growth rates in 5 years
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What do we aspire to, what is our vision?
Our vision
To help create great South African
companies
Our core purpose
“Our core purpose is to turn vision into value”
Our values and philosophy
Quest for true excellence in what we do; creativity and innovation; integrity &
excellent customer service“No problem can withstand the assault
of sustained thinking”
Our visionary goals
“We aim to have commercialised or have transformed 10 companies to achieve
50% above average sustainable growth rates in 5 years”
The genesis of our purpose and vision
Market opportunity analysis
Our service offering
Our project risk management approach
Our functional structure and partnerships
Our methodologies
Our charging models and pricing
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We have analysed the source of funding for South African businesses through the various stages of development and compared it to international markets
Type of SME Start-up phase
Growth phase
Stable state and exit
Traditional small business
Family, friends, savings, equity in property
Asset backed finance, factoring, bank debt, trade finance
Not often required but debt is used when required
High potential with growth aspirations
Angel finance, team finance, some venture capital
Venture capital, private placement of equity, asset backed finance, some bank debt
Venture capital, high-yield debt markets
Exit via IPO
Attractive with high tech information and life sciences
Angel finance, venture capital corporations
Venture capital corporates, asset backed finance
Corporates, bank debt
Type of SME
# of SMEs in category
Start-up phase
Growth phase
Stable state and exit
Comment
Traditional small business
Small number
Family, friends, savings, equity in property
Asset backed finance, factoring, bank debt, trade finance
Not often required but debt is used when required
The majority of the companies are white owned and some Indian
Emerging enterprise from PDI communities
High number
Few resources available – dependence on external funds
Many of these companies have not made it significantly through all the stages
Attractive with high tech information and life sciences
Small number
Angel finance, team equity, venture capital corporations
Venture capital corporates, asset backed finance
Corporates, bank debt
This category generally has highly skilled people and tends to be white male dominant
SME growth phases and funding cycles in the UK1 SME growth phases and funding cycles in South Africa1
Source: 1.SMES’ ACCESS TO FINANCE IN SOUTH AFRICA – A SUPPLY-SIDE REGULATORY REVIEW, The Task Group
of the Policy Board for Financial Services and Regulation
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We have further sought to determine some of the key reasons and implications for the funding challenges faced by businesses in their various development stages
Capitallow High
low
high
Skill
Interaction between supply and demand for SME finance1
Ste
p 1
Imp
rove o
rgan
isati
on
al
skills
Step 2Capital formation
A study conducted by the Global Entrepreneurship Monitor (UCT) found the ff impediments to entrepreneurial
activity in SA 3
• Shortage of capital (81%)• Business planning (68%)• Insufficient information knowledge (75%)• Quality of employees (57%)• Marketing of products/services (57%)
• The Task Group of the Policy Board for Financial Services and Regulation developed the graph and commented as follows:
– Task Group suggested that the diagonal arrow shows the ideal progression, however, it believed that such progression would not be achievable on a large scale, because of the immensity of the SME sector and the logistic impossibility to accompany each of them on the difficult path to a high-skill high-capital status.
– The danger is to grow the bottom-right quadrant (low-skills high-capital), which would be an area of systemic risk for the financial sector and should be viewed a “no-go area”.
– The task group suggested a progression whereby the emerging enterprises are first provided with more skills (step 1), so that they will be able to formulate a qualified demand for capital and then progress to step 2
• The South African Private Equity sector has a tendency toward later stage investment. South Africa’s early stage investment at 6% of total unrealised portfolio at cost at by 31 December 2008 is lower than North America’s (11%) and Europe’s (9%)2
• Entrepreneurship and SME growth are significantly stymied by key skills shortages as skill level is directly proportional to the capacity to raise capital
• A method to systematically assist new business and SMEs in the various stages of development with key skills would vastly increase their rate of success
• There needs to be more early stage investment in high growth potential enterprises, but this cannot happen if the risk is significantly increased. Therefore a method to limit or manage risk is necessarySource:
1. SMES’ ACCESS TO FINANCE IN SOUTH AFRICA – A SUPPLY-SIDE REGULATORY REVIEW, The Task Group of the Policy Board for Financial Services and Regulation
2.Global trends in venture capital 2008 survey, Deloitte3.Global Entrepreneurship Monitor South African Report 2007
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There are significant driving forces behind creating an organised method of rescuing failing businesses 1
Driving force
Rationale
Political Given the strong representation of organised labour in the South African government, government has sought to transform the liquidation industry in favour of national interest through job preservation and business rescue. This point has become even more pronounced in light of the current economic downturn.
Economic
The South African economy contracted by 1,8% in 4th quarter 2008, and by 6,4% in 1st quarter 2009. If more businesses that could be rescued are left to fail the contraction of the economy could be even more severe
Social The unemployment rate in South Africa is approximately 25% , Gini co-efficient at 0.58 is amongst the highest in the world, it makes sense to develop a systematic approach toward reversing the trend, job preservation is one of them
Legislative
The thinking from the points discussed above is manifested in the still to be promulgated Chapter 6 of (Business Rescue) the Companies Act No. 71 of 2008 designed to save companies and jobs
Resulting approach and implications
• Business rescue is a largely non-judicial, commercial process similar to informal creditor workout :
– The process is however formalised following the filing of a board resolution (or application to court to commence the proceedings) and each significant step in the process may allow intervention from affected parties by application to the court.
– This, however, remains an engagement amongst the business rescue practitioner/service provider, affected persons (being shareholders, creditors and employees (individually or through their representative trade unions) of the company in devising a business rescue plan to rescue the company
• Section 128(1)(b) ‘‘business rescue’’ means proceedings to facilitate the rehabilitation of a company that is financially distressed by providing for -
(i) the temporary supervision of the company, and of the management of its affairs, business and property;(ii) a temporary moratorium on the rights of claimants against the company or in respect of property in its possession; and(iii) the development and implementation, if approved, of a plan to rescue the company by restructuring its affairs, business, property, debt and other liabilities, and equity in a manner that maximises the likelihood of the company continuing in existence on a solvent basis or, if it is not possible for the company to so continue in existence, results in a better return for the company’s creditors or shareholders
• The major benefits of the approach are:• Breathing space provided by moratorium, and right to cancel or
suspend contracts• Cram-down of dissenting creditors, binding holdoutSource:1.Venture Capital in South Africa, Blue Catalyst
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Our analysis points to significant opportunities in the market
There is a real market need to provide the key skills required by entrepreneurs and small businesses to:– Raise much needed capital – Commercialise or grow their businesses
The skills and capabilities required to commercialise new businesses is very similar if not the same as those required to grow existing corporate businesses. Therefore, there is a real opportunity to provide key commercialisation skills to established corporations looking to grow beyond existing marketsThere is a need to manage and reduce risk for private equity investors, particularly the risk associated with early stage investment The change in company law has created a real opportunity in providing business rescue servicesThe real driving force behind value creation is strategic capability, specifically:– strategic thinking and – strategic execution
• Strategic thinking and capability• Business model design and
engineering• Financial modelling• Business process analysis,
design and optimisation• Knowledge of company law• Financial management• Business management and
leadership• Capital raising• Corporate law
Arising market opportunity Skills required to exploit market opportunity
The genesis of our purpose and vision
Market opportunity analysis
Our service offering
Our project risk management approach
Our functional structure and partnerships
Our methodologies
Our charging models and pricing
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Therefore, our integrated service offering coupled with our unique skill set as well as a creative charging model meets a genuine need and gap in the market. Our services are...
Commercialisation solutions– We commercialise viable business ideas and help entrepreneurs and business people
realise their vision of creating new businesses
Breakthrough-growth solutions– We provide business, product and channel strategy development assistance to
businesses that are seeking to extend their product lines as well as channels to market to increase profit
Business rescue and turn-around solutions– We provide assistance to businesses that are struggling or are in distress on practical
means to sustainably return them to profitability
Strategy consulting– We help business leaders to make decisions on various key strategic issues such as,
mergers and acquisitions, investment, capital raising etc
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Fund business
Provide management
oversight
We bridge the gap between the traditional entrepreneurial and private equity spaces
Idea generation
Consider alternatives
Consider viability and formulate plan
Review viability, research,
determine skill and resource gaps
Build financial models and
develop investment case
Review and manage risk
Review and define strategy; refine
business model; re-engineer business
Traditional entrepreneurial space Traditional venture capital space
Idea/business refinement and reengineering
•Our intervention increases the probability of entrepreneurial/business success
•We manage and reduce risk for investors
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Approve and fund project
Provide management
oversight
We apply the same entrepreneurial thinking to established corporate businesses that are seeking to create new value
Idea generation
Consider alternatives
Consider viability and formulate plan
Review viability, research,
determine skill and resource gaps
Build financial models and
develop investment case
Review and manage risk
Review and define strategy; refine
business model; re-engineer business
Traditional management approach to new value creation
Traditional board expectations to new venture capital space
Idea/business refinement and reengineering
•Our intervention increases the probability of new venture success in established businesses
•We manage and reduce risk with a board perspecite
The genesis of our purpose and vision
Market opportunity analysis
Our service offering
Our project risk management approach
Our functional structure and partnerships
Our methodologies
Our charging models and pricing
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We have developed a project risk assessment model to help us to consistently determine which projects we should engage in
We would not engage in projects where we don’t believe we have a high degree of success, we therefore have developed qualification criteria for projects. We
would only engage in projects that score a minimum of 70% in our risk assessment model
Criteria Rationale Weight
High growth prospects
If a project is deemed not to have high growth prospects it by definition does not align with the objectives of our organisation
20%
Measurability
We will only engage in projects where we are able to reliably measure the impact of our intervention. There has to be a direct correlation between our intervention and the bottom line
25%
People risk Much of the success of a project rests in the people involved, it therefore becomes important to assess the ff factors:
• The integrity of the people involved• Skills and management capability• General chemistry• How receptive would they be to
suggestion
40%
LGC skill/focus
If a project requires skills we do not have or cannot acquire easily there is increased project risk
15%
• Initial contact with prospective client
• Initial information gathering and research
• Initiate projects•Constantly
evaluate project risk using project management methodologies
Pre engagement Project phaseProject risk assessment
The genesis of our purpose and vision
Market opportunity analysis
Our service offering
Our project risk management approach
Our functional structure and partnerships
Our methodologies
Our charging models and pricing
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Organisation functional structure
LGC Capital
Commercialisation, Strategy and growth centre of excellence
Business rescue centre of excellence
Capital raising
Knowledge exchange
Strategic delivery partners
Strategic delivery partners
Strategic funders
The genesis of our purpose and vision
Market opportunity analysis
Our service offering
Our project risk management approach
Our functional structure and partnerships
Our methodologies
Our charging models and pricing
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We apply an iterative intellectual model to refine our thinking around commercialisation and breakthrough-growth projects
Ideas
Strategy
Operational planning
Flo
w
Fe
ed
ba
ck
Financial modelling and planning
Practical plane
Operations, execution and managementPractical plane
Corporate strategyConceptual plane
We understand the unique alignment between the opportunities that exist in the conceptual space and the constraints that make for a
successful venture in the practical space -Thus the LGC model for value creation
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The building blocks of our review analysis and development model for commercialisation, breakthrough growth and turn-around projects
Client Business Strategy DesignThe key elements giving the client a sustainable advantage over
competitors
Business value chain
• Materials purchasing and shipping
• Manufacture• Warehousing• Logistics• Distribution• Suppliers
After sales
• After sales requirements• After sales approach
Distribution
• Distribution strategy• Distribution partners
Marketing
• Marketing strategy• Business development
strategy• Product choice and
pricing• Market sizing
Competitor and environmental analysis
• Who are the competitors?
• What are the key environmental drivers?
• What are the implications on client strategy?
Business support and process design (HR, ERP and IT)•Business process analysis and design•ERP System design and specification•IT infrastructure and connectivity design and specification
•Organisation design•HR policy development•Performance management
Key business agreements•Commercial agreements•Supplier agreements•Partnership agreements
•IP exchange agreements
Financial modelling and execution planning• Market conversion methodology• Sales and expense forecasting• Investment analysis
•Project budget•Execution plan•Funder requirements
•Micro and macro economic considerations
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We apply a phased approach toward the management of breakthrough-growth projects
Review and refine strategies
Review and define environment
Business Process Analysis
Implement the change
Entrench the change
Activities
Deliverables
• Review and refine the organisational strategy
• Define strategic priorities• Understand ideal service
/product offering to operations
• Determine and define the roles of key enablers within the organisational strategy, both now and into the future
Develop project deliverables
• A clearly defined and detailed services strategy aligned with the business objectives
• Detailed benefits case• Refined set of project
deliverables that will serve as the final engagement deliverables
• Review the current infrastructure, systems and suppliers
• Analyse and optimise the current business processes
• New business process Mapping
• Deliver optimal management approach, departmental structure and KPAs
• A stakeholder management strategy
• Defined and documented business processes
• Change management plan
• Roll out new business processes
• Create new internal capacity• Align internal and external
stakeholders
• New systems architecture• New service providers
identified• Entrenchment plan
• Create new internal capacity• Track and measure the
change• Understand the impact of the
change• Develop and repair “snag list”
• A new more efficient and effective business
Phase 1: Strategy Development
Phase: 2 Current situation determination
Phase 3 Create the new environment
Phase 4 Prioritise Skills
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We apply a phased approach toward turn-around projects
Analyse StabiliseRebuild business
• Setup a multidisciplinary Turn-around management team with clear turn-around mandate
• Effect key immediate actions
• Diagnose main factors causing distress
• Determine time-to –failure
• Determine if a successful turn around can be effected
• Determine key immediate actions that need to be taken
• Review and redefine organisational strategy
• Review and redefine business processes, operations, capabilities, management, resources etc
• Review and redefine financial strategy and management approach which may include recapitalisation
• Develop new performance management metrics
Post intervention management
• Periodic review of performance against expectations
• Operational management support
Project Phase 1 Project Phase 2
Pre Analysis
• Get a high-level view on problem and requirements
• Determine extent of problem and size of organisation
• Determine number and level of resources required to execute
• Determine if a successful turn around can be effected and whether to engage on project
• Determine information requirements
• Agree contract terms
Project Phase 3Pre-project phase 2 days
1 day a month for 6 months
The genesis of our purpose and vision
Market opportunity analysis
Our service offering
Our project risk management approach
Our functional structure and partnerships
Our methodologies
Our charging models and pricing
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We have designed a creative rating model to allow us obtain maximum return from our engagements whilst putting minimal pressure on client finances
Basic Rating Factors
- Project Length- Number and Level of
Resources- Materials
Risk PremiumCalculated from the
LGC project risk assessment model
Payment Terms
LG
C F
ixed
rate
Basic Rating Factors
- Project Length- Number and Level
of Resources- Materials
Tim
e a
nd
mate
rial
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We have developed flexible payment structures that would allow clients to chose the most optimal option based on the situation they face
Payment option Pre requisites Payment structure
Full payment • Contractually agreed scope and
deliverables
• Any changes to the scope would require
new costing
• 50% down-payment on project phase fee at project start
• Balance payment on delivery based on contractually
agreed deliverables
Success bonus
based payment
• LGC will only agree once an assessment is
concluded on the project and client
• Contractually agreed scope, deliverables
and success metrics
• Access to all financial records and audit
reports
• Engaging in the post intervention
management phase
• 40% down-payment on project phase fee at project start
• 20% payment on delivery based on contractually agreed
deliverables
• 40% balance payment plus 30% success bonus both
payable after 60 days of project completion or project
success depending on which comes first
Equity based
payment
• Contractually agreed scope, deliverables
and success metrics
• Access to all financial records and audit
reports
• Engaging in the post intervention
management phase
• A board position in the client business with
financial and performance oversight
• If client has cash they would pay 25% of the resource cost
at the start of the project and 25% of the resource cost on
completion, with the balance of payment being equity
• If client has no funds, 65% of the resource cost would be
payable after fund raising, with the balance of payment
being equity
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Thank you