Raising Financing from the Private Capital Markets

Do you need to finance a change in the ownership of an existing company, development of a hotel property, management buy-out or other capital raise? Don’t take the following approach when looking to raise money…

“We need to raise 10 to 50 million dollars. The project’s a great idea but we can only give you an overview. We’ve been working it on our own for the past year-and-a-half. We’ve been told we have to get the money together in 3 weeks or we may lose out! You help with raising money and you’ve got relationships with private capital sources. If you can introduce us to investors, we’ll give them a fair return and we’ll ‘guarantee’ it. Can you help?”

If you’re looking to raise money and your opportunity does not meet the criteria of banks or other traditional lenders, the private capital markets may be a suitable alternative as a source of debt, equity or hybrid financing. Not everyone is familiar with raising capital in this environment, but lack of familiarity can severely reduce the chances of a deal successfully going forward. We recommend that you consider the following questions in order to avoid some of the ‘red flags’ from the preceding scenario.

Do You Have The Resources To Make This Happen?

Don’t take the funding process lightly and definitely don’t leave things to the last minute. You will need to budget resources, including time and money, to go through the process.

• It can take quite a bit of time to assemble the necessary documentation for investor due diligence, manage your internal agreements and structure of your team, vet potential capital sources, manage investor communications, structure a potential transaction, and then of course, close.

• At different stages of the process you will likely need investment banking, legal and other areas of advice. Your investment-banking provider will be useful early on and will help you explore deal structure, put together capital‑raising documents and may be a source of introductions to potential capital providers. Your legal advisor will assist with drafting robust deal documents. Other advisors may help you mitigate risk in areas that fall outside the investment banker’s area of expertise.

What Is The Level Of Your Commitment?

Investors will want to know that the opportunity is more important to you than it is to them – expect investors to make independent inquiries into your character and other important attributes. Sophisticated investors will also often expect you to put ‘skin in the game’ – this demonstration of your commitment provides a level of reassurance that you will be less likely to walk away if things become challenging.

If multiple members of your team are needed to make the opportunity a success, investors will want to know that these parties have been identified and are on board. They may seek some sort of reassurance that the team won’t fall apart and that there are replacement candidates and / or a process in place in case a team member does choose to exit.

Does Your Proposed Deal Make Sense From An Investor’s Perspective?

Capital sources want to maximize their returns while mitigating risk. This perspective informs their assessment of proposed terms and deal structure. In order to successfully raise the capital that you desire, it is critical that you understand how the ‘other side of the table’ views a potential financing transaction.

Investor considerations may include:

• Is the opportunity big enough to be worth my time?

• Are expectations clearly defined and are the goals realistic and supportable?

• Is there transparency and good governance?

• Can the team behind the opportunity credibly make this work?

• What risks can I identify and how can they be managed?

• Can I bring other non-financial benefits (relationships, industry or technical perspective, etc.) to the deal?

• How much money overall will be going into the opportunity and proportionally how big would my contribution be?

• How much money would I need to provide and when would it need to be available?

• How will the money be used?

• Is the proposed return sufficient given my perception of the risks?

• How will I get paid back and how long will it take?

• Who else is participating?

• How are my interests going to be protected?

• How will I be able to exit?

Do You Understand The Regulatory Environment?

As you raise funds, it is important that you don’t run afoul of regulatory requirements. Your investment banker or professional advisors should be able to provide guidance and assist with compliance. The regulatory authority is a key stakeholder, providing a framework that encourages transparency, appropriate conduct by all parties and licensing of professionals, enabling a functioning marketplace for the transfer of private capital.

Note whether or not your offering must be restricted to ‘qualifying’ investors. In Bermuda, these investors may be defined as having at least one of the following characteristics:

• Personal income of at least 200K or family income of at least 300K in the preceding two years, with the expectation of meeting those criteria in the current year

• Shared net worth with spouse of at least 1M (fair market value of assets minus liabilities)

• Appropriate knowledge and experience to evaluate merits and risks of the investment and invests at least 100K in the transaction

What Attributes Are You Looking For In A Capital Source?

Something to remember is that successful deals are about more than just the availability of money – fit is critical. In order to understand whether or not a potential capital source is appropriate to your needs, we recommend conducting your own due diligence on potential investors to get a feel for their specific investment criteria, the level of desired participation from an operating / oversight perspective, etc.

General questions to consider when assessing capital sources may include:

• Is the investor a fit from a character and behavioral perspective? Do they require excessive amounts of your time? Are they unnecessarily intrusive? The investor will likely have greater transparency to your operations than an arms-length relationship would – any confidentiality or competitive concerns should be addressed along with the likelihood of investor behavior hampering your ability to achieve your goals

• What is the investor’s motivation and do their expectations regarding repayment, control, input, etc. fit with your plan?

• Will the investor provide additional non-monetary value including relationships, technical expertise, etc.?

Kumi Bradshaw is President of Firm Advisory Ltd.

T: +441 295 3301 E: kumi@firmadvisory.com

Firm Advisory Ltd. helps “business owners measure, grow and harvest the value in their companies”.

Download a free copy of the ebook ‘Value Architecture: A Guide To Making Better Business Value Decisions’ at http://bit.ly/TEuYH1 or email us at support@firmadvisory.com for a free copy.

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