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Risk Capital A Public-Private Partnership to Invest in Expansion-Ready SMEs Varun Maharaj, CEO, Trinidad Risk Capital A Public-Private Partnership to Invest in Expansion-Ready SMEs Varun Maharaj, CEO, Trinidad & Tobago IFC TTCSI Services Week – SME Financing Workshop November 4 th, 2014, Trinidad Hilton © 2013 Trinidad and Tobago International Financial Centre Management Company Limited. All rights reserved.

Why Risk Capital • SMEs are essential to economic growth and diversification. • However, Why Risk Capital • SMEs are essential to economic growth and diversification. • However, SMEs can’t realize their full potential due to internal and external impediments. • Venture Capital has not performed well at the SME level in developing countries. • Trinidad and Tobago IFC is addressing the gap in SME financing in order to: – – – to create new jobs, broaden the entrepreneurial base in Trinidad and Tobago, improve standards of business practice, facilitate the creation of new products and services, and generate greater financial inflows from exports. © 2013 Trinidad and Tobago International Financial Centre Management Company Limited. All rights reserved.

What is Risk Capital • Public-Private partnership investment funds to finance SMEs. • Investment What is Risk Capital • Public-Private partnership investment funds to finance SMEs. • Investment involves a combination of a low interest loan, revenue participation through royalty payments and purchase of equity in the SME with an agreement to repurchase. • Investments will be a blend of debt and equity financing. • Financing based on projected cash flows rather than collateral value. © 2013 Trinidad and Tobago International Financial Centre Management Company Limited. All rights reserved.

SME Fund – Not Venture Capital or Bank Loan SME Fund Bank Venture Capital SME Fund – Not Venture Capital or Bank Loan SME Fund Bank Venture Capital Return Based on interest on Based on interest Heavily dependent on loan and royalty on loan. business being sold to payments. third party or listed on Stock Exchange. Targets SMEs at the SMEs that are Relatively large expansion-stage. subsidiaries of companies at later larger businesses. stages in the business life cycle. Funding • Based on At least 100% feasibility of collateral coverage business and required for loan. potential for revenue growth. • 100% collateral not needed. © 2013 Trinidad and Tobago International Financial Centre Management Company Limited. All rights reserved. Based on potential for future capital gains to allow for exit at high multiples of initial purchase price.

Overview of SME Fund © 2013 Trinidad and Tobago International Financial Centre Management Company Overview of SME Fund © 2013 Trinidad and Tobago International Financial Centre Management Company Limited. All rights reserved.

SME Fund – Roles and Responsibilities Key Players Roles and Responsibilities • • • SME Fund – Roles and Responsibilities Key Players Roles and Responsibilities • • • Provide long term loan. Provide funding for Business Assistance Facility. Set investment policy. • • • Provide equity capital. Hire fund managers. Select Investment Committee Members. • • Select SMEs to receive financing. Perform due diligence. Negotiate and close investments. Provide hands-on assistance to SMEs. Business Assistance Facility • Provide consultancies, training, and other forms of assistance to SMEs • Work with Fund Manager to prepare and/or revise business plans. Government Private Investors Fund Managers © 2013 Trinidad and Tobago International Financial Centre Management Company Limited. All rights reserved.

SME Fund – Benefits Key Players Government Private Investors Fund Managers SMEs © 2013 SME Fund – Benefits Key Players Government Private Investors Fund Managers SMEs © 2013 Trinidad and Tobago International Financial Centre Management Company Limited. All rights reserved. Benefits • Interest earned on loan to fund. • Economic Development. • Returns above current market rates. • Reduction of liquidity in banking sector. • Return will consist of interest on loan and royalty payments. • Addresses risk/return trade off. • Compensation consists of fund management fee, annual performance bonus and carried interest. • Access to suitable and affordable funding. • Access to funding not tied to availability of collateral. • SME owners and investors share common objectives.

SME Fund – Exit Strategy • SME owner(s) repurchase(s) shares from SME Fund at SME Fund – Exit Strategy • SME owner(s) repurchase(s) shares from SME Fund at a predetermined multiple of initial equity investment • SME acquired by another company or listed on a Stock Exchange. – If this happens SME Fund has a “tag along” right. This gives the Fund the right to sell its shares at the same price as the SME owner(s). © 2013 Trinidad and Tobago International Financial Centre Management Company Limited. All rights reserved.

SME Fund – International Experience Program Leverage Ratio Investment Terms Total Invested by Government SME Fund – International Experience Program Leverage Ratio Investment Terms Total Invested by Government Total Private Investment AUD 360, 000 AUD 283, 000 IIF - Australia 2: 1 IIF receives 10% of profits after return of capital SBIC – United States 2: 1 2% above 10 -year Treasury Notes US$ 2. 2 billion in FY 2013 US$ 3 billion + in 2013 ECF – United Kingdom 2: 1 3% interest £ 200, 000 £ 100, 000 + US$ 100, 000 US$ 250, 000 Yozma - Israel if successful, fund repurchases 40% of total government shares at cost Source: Tom Gibson, Principal, SMEthink © 2013 Trinidad and Tobago International Financial Centre Management Company Limited. All rights reserved.

SME Fund Example The Investee First Year Sales 2, 500, 000 Expansion Financing Requirement SME Fund Example The Investee First Year Sales 2, 500, 000 Expansion Financing Requirement Current Balance Sheet Equity EBITDA Margin The Investment Equity Investment Royalty-Based Loan Grace Period Negotiated Terms Year 4 Year 5 25% 20% 2, 500, 000 25% Post-Investment Equity Fund's % of Shares 250, 000 750, 000 33% 2, 250, 000 2 Base Interest Rate 2. 5% © 2013 Trinidad and Tobago International Financial Centre Management Company Limited. All rights reserved. Year 3 100% Sales Growth (post-investment) Year 2 Base Royalty Equity Buy-Back % of Gross Sales Multiple 2. 5% 3. 0

SME Fund Example – Repurchase by SME Owner(s) Flows 1 2, 500, 000 2 SME Fund Example – Repurchase by SME Owner(s) Flows 1 2, 500, 000 2 5, 000 3 6, 250, 000 4 7, 500, 000 5 9, 000 Principal Payments on Loan 0 0 750, 000 Interest Payments on Loan 56, 250 37, 500 18, 750 Royalty Payments Equity Repurchase Proceeds 62, 500 125, 000 156, 250 187, 500 225, 000 750, 000 19% 15% 62% 52% 78% 118, 750 506, 250 181, 250 1, 068, 750 962, 500 600, 000 975, 000 900, 000 1, 743, 750 506, 250 0 Gross Sales Debt Service Coverage Ratio (% EBITDA) Flows to SME Fund -2, 500, 000 Investee's EBTD -500, 000 (after all payments to SME Fund) Returns SME Fund's Gross IRR Investee's Gross IRR © 2013 Trinidad and Tobago International Financial Centre Management Company Limited. All rights reserved. 12. 5% 132. 9%

SME Fund Example – Sale to Third Party Flows Gross Sales 0 1 2 SME Fund Example – Sale to Third Party Flows Gross Sales 0 1 2 3 4 5 2, 500, 000 5, 000 6, 250, 000 7, 500, 000 9, 000 Principal Payments on Loan 0 0 750, 000 Interest Payments on Loan 56, 250 37, 500 18, 750 Royalty Payments 62, 500 125, 000 156, 250 187, 500 225, 000 Investee's Equity Sale Proceeds 4, 500, 000 2, 250, 000 Investor's Equity Sale Proceeds Debt Service Coverage Ratio (% EBITDA) 19% 15% 62% 52% 44% Flows to Investor 118, 750 181, 250 962, 500 975, 000 993, 750 Business's EBTD Margin after All Payments to Investor 506, 250 1, 068, 750 600, 000 900, 000 1, 256, 250 Investee' Share of Sale Price Returns SME Fund's Gross IRR 18. 9% Investee's Gross IRR 141. 5% Realization Multiple for Investor © 2013 Trinidad and Tobago International Financial Centre Management Company Limited. All rights reserved. 1. 3

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