Ukrainian SME Private Equity Fund

(USME)

Idea in Brief• PE fund focused on investment in

Ukrainian SME with significant growth potential

• Fund’s deal flow is generated primarily by communities of successful entrepreneurs representing alumni of leading Ukrainian business school

• Key features: leveraging trusted relationships in BS communities, utilizing multiple related synergies, filling the gap of equity financing for Ukrainian SME

Background• A significant number of successful SME were

created in Ukraine by new generation of entrepreneurs during last 10 – 15 years

• Many SME leaders went through Executive MBA programs of leading Ukrainian business schools (IIB, IMI, KMBS) creating alumni communities of skillful, experienced and trustworthy entrepreneurs

• Recent developments in Ukrainian corporate law created new tools for constraining risks for private investors (even with minority interest)

Assumptions• Economy is still in recession:

– many companies experience lack of resources to support operations and finance development

– equity valuations are at very low level

• Debt financing is constrained, expensive and risky

• Economy will start recovery in 2 – 5 years • Many traditional and new local markets have

impressive growth potential• Some industries have serious export potential• Capital is a key for exploiting opportunities

(particularly for SME)

Equity vs. Debt Financing for SME• Traditionally bank loans is main source of

finance for SME and it will be gradually expanding along with recovery of the economy

• Interest rates will be at very high levels during next 1 – 2 years

• Debt financing is significantly constrained for many types of enterprises and many industries

• Recent crisis showed extreme riskyness of high level of debt for enterprises

• Equity financing is not supposed to replace bank loans but can be suitable and efficient in many cases

Investment Strategy• Relatively mature companies with sales growth potential of

at least 5 times during next 5 years which are:– undercapitalized– bounded in access to debt financing– distressed by downturn– characterized by significant recovery potential as economy will start

to rehabilitate– managed by teams of outstanding entrepreneurs

• Business models:– value proposition with significant demand potential– processes and structures ensuring profitability– sufficient security for key assets

• Size:– pre-money valuation: from $3M to $30M– investment: from $0,5M to $5M– stake: from 10% to 40%

Industries

• Consumer goods: import substitutes or export-oriented

• B2C and B2B services• Industrial goods (unique business model and

value proposition is essential)• Food processing• Retail and distribution• Energy saving goods and services• Information technology

Fund’s Philosophy - Efficient Value Creation based on:

• close continuous cooperation with entrepreneurs – owners of funded companies

• development of products with high consumer value and sustainable market position

• efficient model of corporate governance• principles of integrity, mutual respect,

transparency and responsibility

Deal Structuring

• Private joint stock company (under new Law of Ukraine On Joint Stock Companies)

• Combination of ordinary shares, preferred shares (with special rights) and debt

• Staged financing depending on project’s progress

• Rights for preferred shares:– guaranteed sits in the Board– veto right regarding certain decisions

• Not more than 40% of equity (with remaining stake owned by insiders – controlling shareholders)

Fund’s Characteristics

• Size – min $25M

• Term – 5 years

• J-Curve investment flows

Exit Strategies

• Management Buy-Out (MBO) partially using debt (leveraged) financing when necessary

• Market sale to strategic investor

• IPO is possible for some cases of relatively larger companies providing recovery of normal state of financial market

Fund’s legal structure

• Two funds:– Ukrainian “venture fund” (with creation of an

asset management company or renting a fund from existing company)

– Limited partnership in a common law jurisdiction

Fund’s governance

• Investors’ meeting

• Investment Committee

• International Advisory Board

• Management Team

Management team

• Investment professionals and consultants with extensive relevant experience, reputation in investment, professional and entrepreneurial circles, deep knowledge of PE business and local business conditions