Venture Capital & Loan Syndication

Innovative Sources of Finance

Innovative Sources

• Innovative sources and mechanisms of funding are non-traditional modes of financing

• Finance is made available to the Business Organisations breaking the conventions

• All the innovative sources are evolved in response to the magnified and divergent need for Finance

What are Innovative Sources?

• Non – Traditional

• Tailor Made

• Mobility

• Finance on Demand

Why called ‘Innovative’?

Venture Capital

• Financing a new, growing, or troubled business

• Knowledge of the significant risk associated

• Investment in exchange for an equity stake

• Expects a better-than-average return

Meaning

• Money provided by investors to start-up firms and small businesses with perceived long-term growth potential and substantially high risk , in exchange of an equity stake expecting a better than average return.

Definition

• New Business

• Limited Operating History

• No capital market access

• Perceived long term growth potential

Who opt VC?

• Not necessarily just one wealthy financier

• Ltd. partnerships with pooled investment capital

• Small group of investors

• Affiliate or subsidiary of a;1) Large commercial bank

2) Investment bank or

3) Insurance company

Who can be a Venture Capitalist?

• Commercially Viable

• Identifiable Market

• Strong Management

• Sustainable Competitive Advantage

What do Venture Capitalist look for?

• Participation in Equity

• Long – Term loans

• Participation in Management

• Risky Capital

• Exit Option

Features

Financin

g

Equi

ty

Returns

Participation in Equity

Financing

Equity

Lock – Up Period

Sale of Equity

Long Term Loans

Take part in the Board of Directors

Provide Technical/ Technological Assistance

Recruiting Key Executives

Participation in Management

Overall Failure Rate is 20% - 90%

300 % to

1000% returns

Risky Capital

Financing

Commercial Viabili

ty

Selling of

Equity

Exit Option

The Funding Process

1) Business Plan Submission

2) Introductory Conversation /Meeting

3) Due Diligence

4) Term Sheets and Funding

Types of Funding

1) Seed Capital

2) Start-Up Capital

3) Early Stage Capital

4) Expansion Capital

5) Late Stage Capital

The ‘Apple’ Story..!

Loan Syndication

• Huge financial requirements

• Involvement of greater risk

• Low credit exposure levels

• Mismatching Terms & Conditions

Why loan syndication?

• The process of involving Several different lenders in providing various portions of a loan.

• Borrower requires a large sum of capital that may either be too much for a single lender to provide, or

• May be outside the scope of a lender's risk exposure levels.

• Multiple lenders together provides a single loan on agreed terms and rates through an agent - ARRANGER.

Meaning

• Syndicated loan is one that is provided by a group of lenders and is structured, arranged, and administered by one or several Institutional Lenders or investment banks known as arrangers.

Definition

• When there is huge requirement for fund, such as in case of;

1) Mergers

2. Acquisitions and

3) Buyouts

When a Syndicated loan is opted?

Borrower Arranger Syndicat

e

Parties to a Syndicated Loan

• Point of Contact

• Monitor

• Postman and Record Keeper

• Paying Agent

Duties of an Arranger

Documenting the Loan

• The Borrower appoints the Arranger via a Mandate Letter

• The content varies according to whether;

1. The Arranger is mandated to use its "best efforts" to arrange the required facility or

2. If the Arranger is agreeing to "underwrite" the required facility.

Mandate Letter/ Commitment Letter

• The Mandate Letter will usually be signed with a Term Sheet attached to it.

• The Term Sheet is used to set out the terms of the proposed financing prior to full documentation.

• It sets out the parties involved, their expected roles and many key commercial terms

Term Sheet

Example :

1. Type of facilities

2. Facility amounts

3. Pricing

4. Term of the loan and

5. Covenant package

• Prepared by both the Arranger and the borrower

• Arranger forwards to potential syndicate members.

• Includes description of the borrower's business, management, accounts, details of the proposed loan etc.

• It is not a public document and all potential lenders that wish to see it usually sign a confidentiality undertaking.

Information Memorandum

• Prepared if the syndicate comes to a conclusion and borrower is agreed upon

• It sets out the detailed terms and conditions on which the Facility is made available to the borrower.

• The repayment structure, Interest rates, Covenant stipulations etc are drafted here

Syndicated Loan Agreement

• Made between borrower and arranger

• Borrower has to pay the arranger a specific fee for its specialised services

• Fee letter contains the rates and the conditions and structure of such payments.

Fee Letters

Term Loan Facility

Revolving Loan Facility

Types of Syndicated Loans

Innovative Features

• Realising Capital

• Risk or Portfolio Management

• Regulatory Capital Requirement

• Crystallise a loss

Selling participation in the Loan

• Letter of credit

• Swingline Facility

• Overdraft Facility

Other Features..

What we’ve discussed...

Questions??

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