RRC Overview

Pennam Partners Revenue Royalty Certificate Funding

Transcript of RRC Overview

Page 1: RRC Overview

Pennam Partners Revenue Royalty Certificate Funding

Page 2: RRC Overview

Pennam Partners Revenue Royalty Certificate Funding

BackgroundThe Revenue Royalty Certificate (“RRC”) funding is generally a non-dilutive flexible funding pathway that provides financing solutions to companies without the need of traditional governance controls or forced exits typical of venture capital, private equity or mezzanine debt transactions.

Traditionally, this funding mechanism has been used in the music, pharmaceutical and oil & gas industries. Significant upside in topline can be produced in these industries, hence the ability to leverage off their topline to fund their activities.

This alternative funding mechanism is now being used in various forms by both investors and firms that have recognised the merits of using the RRC. For instance, the RRC can be used for traditional businesses, intellectual property firms and even with charities. While the use of the RRC for a charity is an extreme case, there have been instances where a charity has been able to bring forward its funding projects by selling a percentage of its future donation income to socially-driven investors.

By selling RRCs to raise capital, small and mid-sized businesses are successfully filling the capital gap between friends and family financing and sourcing from the traditional capital markets. RRCs compare favourably to conventional debt and equity securities for the small to mid-sized bus iness sec to r where , under norma l

Bioniche, a life science ASX-listed company, was able to raise US $20m by incorporating elements of the RRC in the funding injection. This translated in Bioniche providing 2% of its future revenue to the investor. CharacteristicsIn the funding continuum, the RRC ranks in between debt and equity and has characteristics of both debt and equity depending on the type of transaction and the associated funding terms.

The RRC may have the following features:• Little or no equity release;• Generally no director’s guarantee;• Secured or unsecured;• May have a ceiling and floor caps;• Not reliant on enterprise valuation; and• Return is not profit driven.

How can we help?Pennam Partners can provide assistance to firms or investors who are contemplating to use revenue royalty certificate as part of their funding process. Our scope of services in relation to the RRC would include:

• Providing assistance in sourcing and securing funding from RRC investors. We have developed a relationship with a U.S. based Exchange specialising in RRC funding. We also have healthcare and life science funds that are interested in undertaking RRC funding;

• Structuring a capital injection transaction to make it fit within the RRC parameters and providing related advice to best implement this alternative funding mechanism; and

• Modelling the impact of using the RRC on your cash flow and P&L.

By way of an illustration, a simple RRC scenario would be: An investor provides $5M to Pharma Pty Ltd in exchange for 8% of their future topline revenue from the sale of their products, paid monthly, for the next 7 consecutive years. After the 7 year period ends, the investor intends to have recouped the principal outlay plus a return commensurate with the assessed risk associated with the investment.

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circumstances, investors struggle to achieve liquidity, fair valuation, and exit timing.

One of the most high profile uses of the RRC mechanism is the Bowie bonds bought by Prudential Insurance Co in the late 90s. David Bowie effectively converted his revenue streams from his albums into a lump sum cash inflow.