INVESTMENT PRACTICES A F S R DUE D , S I N...

INVESTMENT PRACTICES: ASSESSING FINANCIAL AND SOCIAL RETURNS;

DUE DILIGENCE, STRUCTURING INVESTMENTS AND NEGOTIATING TERMS

Presented By Anthony Williams, Vice President Meridian Management Group, Inc. Community Development Venture Capital Alliance Community Development Venture Capital Workshop March 20, 2015 Embassy Suites Conference Center, Washington, D.C.

Presentation Contents

Overview of Meridian Management Group, Inc. (“MMG”)

Funds Under Management MSBDFA

MMG Ventures, L.P.

Community Development Ventures, Inc.

Assessing Financial & Social Returns Measuring Social Benefits

Loan Characteristics Report

Historic Portfolio Status Report

Underwriting & Due Diligence Marketing and Deal Flow Generation

Preliminary Screening

Developing a Risk Profile

Due Diligence Process

Mechanics of Pricing

Structuring Investments & Negotiating Terms Investment Vehicles

Generating Term Sheets

Deal Examples

Summary

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MERIDIAN MANAGEMENT GROUP, INC.

Fueling Dreams

And Shaping New Realities That Lead

To Jobs and Economic Empowerment

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MISSION

To create wealth via the efficient

Deployment of capital to

Underserved markets

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Who Are We?

An urban-based, African-American owned and operated, private for-profit fund management and development firm, formed in 1995, with particular expertise investing in small and minority business markets.

Management with more than 125 years combined expertise in the market

Long-standing working relationship among partners

Proven track record of success

Commitment to excellence

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What We Do

• Fund Development and Management • MMG contracts to create and manage innovative debt and equity

funds that target small and minority businesses.

• Management and Technical Assistance • MMG contracts to provide portfolio management and intense

management and technical assistance required to help the small and/or minority businesses develop and grow into economic engines that lead to jobs and economic empowerment.

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MERIDIAN MANAGEMENT GROUP, INC. Funds Under Management “The Model”

Meridian Management Group, Inc.

Fund Manager

MMG Ventures, L.P.

$31.1 Million

Return on Investment Driven Private For-Profit

Entity

Investment Geographic Area

Mid-Atlantic with National Capabilities

Regulated and Audited by the U.S. Small Business

Administration

Maryland Small Business Development Financing

Authority

$7.65 Million

Economic Impact Driven State Fund

DBED Agency


State of Maryland

Oversight by the Maryland Legislative Auditors and

Department of Business & Economic Development

Community Development Ventures, Inc.

$14.5 Million

Economic Impact and Return on Investment

Driven Non-Profit 501(C) 3


Maryland Distressed Communities

Audited and Regulated by the U.S. Treasury and Various Foundation

Funders

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Assessing Social & Financial Returns

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Social Return Metrics Social Index 1. Total Number of Investments

2. Number of Failed Investments

3. Net Number of Investments

4. Industry

5. Empowerment Zone

6. Enterprise Zone

7. Other MD Distressed Area (HUB, CDFI)

8. CDVI Investment

9. Public and Private Leverage

10. Venture Capital Imported

11. Bank Loans

12. Pre-Investment Employment (New)

13. Total Employment (All)

14. Female Employees (All)

15. Minority Employees (All)

16. MD Distressed Area Employees (All)

17. New Jobs Created (All)

18. Low Income Jobs Created (All)

19. Ex-Public Assistance Jobs Created (All)

20. Average Wage

21. % Jobs w/Health Insurance

22. % Jobs w/ Dental Insurance

23. % Jobs w/ Retirement Benefits

24. % Jobs w/ Disability Coverage

25. % Jobs w/ Child Care Assistance

26. % Jobs w/ Educational Assistance

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Social Return Metrics (Continued)

27. % Unskilled Jobs 28. % Semi-Skilled Jobs 29. % Skilled Jobs 30. % Managerial/Professional Jobs

31. % Jobs w/Ownership Opportunities 32. % Jobs w/ Profit Sharing

33. %Jobs w/ Employee Decision Making

34. Local, State and Federal Taxes Paid 35. Annual Payroll

36. Estimated Transfer Payments Avoided

37. Total; Company Sales 38. % Sales Outside E-Zones 39. % Sales Outside Maryland 40. % Sales Outside U.S.

41. Revenue Growth Rate (2008 & 2009) 42. Total Net Income

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Loan Characteristic Report

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Loan Characteristic

Actual

Fund-to-Date

YE 2010

% Fund-to-

Date YE 2010

Industry Diversification (% of Portfolio)

Manufacturing 3 5%

Transportation/Communication 18 32%

Service incl Health Care 22 39%

Retail 2 4%

Wholesale 0 0%

Construction 10 18%

Other 2 4%

Totals 57 100%

Risk Rating - Investment Performance (# in each Category)

0 - Too early to tell 7 6%

1 - Lowest risk, performing well above expectations 3 2%

2 - Low risk, performing above expectations 0 0%

3 - Acceptable risks, performing as expected 17 13%

4 - Acceptable risk, requires additional attention 43 34%

5 - Unacceptable risk, place on "watch" list 18 14%

6 - Unacceptable risk, substantial probability of loss 39 31%

N/A - Paid Off 19 N/A

Totals 146 100%

Investment Exit Plans - (# in each Category)

Internal cash flow 34 31%

Refinancing 6 6%

New investor or sale 68 63%

Public offering 0 0%

Totals 108 100%

Investments Closed Out

# Recent Period N/A N/A

# Cumulative 47 87%

% Repaid from cash flow 10 20%

% Refinanced 11 23%

% Sold or new investor 0 0%

% Public offering 0 0%

% Failures 27 56%

Totals 47 100%

Portfolio Status Report

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Trans.

# Company Name

Date

Approved

Date(s)

Closed

Investment

Amount Structure/Terms Total Interest Total Principal

Total

Distributions Current Balance

1 Company Number 1 21-Apr-98 23-Dec-04 500,000 Series B Pfd. Stock 573,422

Underwriting & Due Diligence

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Strategic Partnerships Co-Investment Opportunities Marketing & Deal Generation

MMG

Small Business

Development Centers (“SBDC”) Regional

Dept. of Business and

Economic Development

Chambers of Commerce

Other VC Firms

Regional Banks

Trade Associations

Community Development Corporations (“CDC’s”)

Other Community

Organizations & Investment

Groups

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Deal Flow

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Business/Entrepreneurs

Strategic Partners Professional Groups

MMG

1. Business Needs Assessment 2. Investment Evaluation 3. Location Commitment 4. Job Hiring Commitment

Management & Tech. Asst.

Funding Assistance Entrepreneur

Training

Deal Screening Process

MMG utilizes its “Deal Screening Form” to analyze each prospective deal

When analyzing a deal MMG considers the following factors: Management Industry Type Market Size Product/Service Location Business Stage Operations Employment

Each Factor is weighted, ranked and allocated points such that the total possible points an application can obtain is 310.

A score of 200 is needed for the applicant to be given further consideration

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A risk profile investigation consists of

Identifying and evaluating potential risks inherent in the business and the likelihood of them becoming a reality

Developing strategies which minimize the likelihood of them becoming a reality and,

Devising measures to mitigate the impact and protect the lender/investor

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Some inherent risks are:

Management

Market

Financial

Economic Swings

Nature of Industry (capital intensive, cyclical, etc.)

Product

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Value Drivers

There are 12 value drivers to evaluate in a company for an investment Customer Base

Recurring Revenue

Product Integration

Gross Margin Trends

Intellectual Property

Human Capital

Management Tenure & Experience

G&A Leverage

Distribution Leverage

Reputation & Operating Tenure

Marketing Effectiveness

Barriers to Competitive Entry

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Due Diligence Process

The initial review of a loan/investment proposal should take 2 to 4 hours to identify items of importance and raise questions regarding: Accounting

Historical Trends and Performance

Major Changes of Direction

Acquisitions

Management

Financial Patterns

Etc.

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Due Diligence Process Steps

Due Diligence Steps: Review the Business Plan

Entrepreneur Office Visit

Conduct Preliminary Checks on Management

Company Onsite Visit

Structure the investment and perform pricing analysis and discuss with entrepreneur to get approval

Perform detailed comprehensive review and analysis

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The Mechanics of Pricing

The process of pricing a deal Determine the yield or IRR sought

Analyze the industry for growth rates and P/Es

Project the P&L and determine the probable investment horizon

Determine the amount of investment needed

Estimate the Fair Market Value at exit

Determine the amount the investment fund must recoup to achieve the required yield

Estimate what percentage ownership is required

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The Mechanics of Pricing Example

MMG’s required IRR = 20%

Investment Amount = $1,000,000

Future Value of Investment = PV(1+R)^N N=Years to Exit R=IRR Sought PV=Present value of investment

Years to Exit = 5

1,000,000 (1+.20)5

=1,000,000*2.488

= $ 2,488,320 = Future Value of Investment

% Ownership Required = Future Value of Investment/FMV of Company

Future Market Value of Company is an estimate of what the company can be sold for in projected exit year. It is typically determined by a multiple of revenue or EBITDA and in this case = $ 10 million.

% Ownership Required = $2,488,000/10,000,000 = 24.8%

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Investment Structures

Senior Debt Provided when efforts to gain outside participation by a traditional

financial institution fail

Subordinated Debt Provided in conjunction with other capital resources to assume a

greater degree of the underlying identified risks and provide adequate capitalization

Equity Provided in conjunction with other capital resources to address longer-

term growth capital needs

Hybrids or Combinations Hybrids or combinations of each structure above to appropriately and

adequately capitalize each business

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Investment Structures

Factors Influencing Investment Structure Purpose

Repayment Source

Inherent Risks

Collateral Position

Existing Senior Debt Requirements

On-going Need for Cash

Potential Upside

Job Creation

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Deal Examples MID-ATLANTIC BROADBAND MARYLAND

MidAtlantic Broadband Inc., (“MidAtlantic” or the “Company”), is a profitable and cash flow positive facilities-based provider of DSL, T-1, frame relay, local and long distance services to underserved Virginia markets. In addition, the Company compliments its bandwidth services with high margin value-added products such as IT support services, network integration services, virtual private networks (VPN’s), ecommerce solutions, collocation, and managed hosting services. A small portion of the Company’s revenue (less than 8%) is derived from dial up Internet access. The Company was seeking funds to acquire a telecom entity.

Subordinated Debt: $300,000 five year subordinated secured note at the rate of 10% per annum.

Warrants: Warrants for 5% of the fully diluted common stock of the Company. Purchase Price: $1.00. Exercise Price: $0.01 per share.

Progress: The Company acquired the telecom entity with government contracts to provide “triple

play” on several Military bases. The company increased its revenues from $795,000 per annum to $35 million per annum and is now generating $8 million in annual cash flow.

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Deal Examples East Baltimore Enterprises, Inc.

Fair Chance, Inc, (a Maryland non-profit) and its for profit subsidiary East Baltimore Enterprise devised a plan for the revitalization of an emerging business district, just east of downtown Baltimore. The plan is designed to reverse the polarization that has effected the 200-300 block of N. Gay Street, by creating opportunities for new markets, and employment opportunities.

The business venture will incorporate a technology-learning center in the medical, dental, and hospitality industries, along with economic development opportunities for small businesses. This location will also house a food service retail multi-brand franchise of Orion Food Systems, and one ethnic American specialty food station. $650,000 is required for tenant improvements and equipment for the food court.

CDV made a $650,000 loan to East Baltimore Enterprise in the form of Senior Debt. The term of the loan was seven (7) years. Interest accrueed at the rate of 10% per annum. The first year was deferred, accrued and rolled into the principal balance of the loan.

Progress: East Baltimore opened the food court but its operations failed. They repaid the loan

by refinancing using the value of real estate assets pledged.

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Summary

IDENTIFY ATTRACTIVE INVESTMENT OPPORTUNITIES

INVESTIGATE AND ANALYZE THE COMPANY

DETERMINE APPROPRIATE PRICE AND STRUCTURE

CONVINCE MANAGEMENT TO ACCEPT PROPOSAL

ASSIST COMPANY IN ACHIEVING GOALS

LIQUIDATE/SELL THE INVESTMENT AT THE BEST TIME AND PRICE

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INVESTMENT PRACTICES A F S R DUE D , S I N...

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