Profile 20 October 2009 LGC Capital ”Our genesis, our vision our identity”

Profile20 October 2009

LGC Capital ”Our genesis, our vision our identity”

The genesis of our purpose and vision

Market opportunity analysis

Our service offering

Our project risk management approach

Our functional structure and partnerships

Our methodologies

Our charging models and pricing

3

What is our core purpose?

This seeks to answer the question “Why was LGC Capital formed, what is the reason for its existence?”

What are we really GOOD at?

• Turning ideas into practice/realised value

• Understanding strategy

• Corporate finance• Understanding

technology• Financial and

mathematical modelling

• Innovation• Corporate law

Our true intentions and goals

• To get involved in as many high-growth-potential businesses as possible

• To create sustainable value in the businesses that we are involved in

• To generate substantial annuity income

Our core purpose / mission

• Harnessing entrepreneurial and intrepreneurial energy and turning it into realised value

• Assisting viable businesses to achieve sustainable breakthrough growth

• Turning around failing businesses

“Our core purpose is to turn vision into value”

4

What are our core values and philosophy?

What do we deem to be the non-negotiables we expect from all our people if we are to deliver on our core purpose?

Our philosophy is the main driving force behind our approach toward our work

“No problem can withstand the assault of sustained thinking”

François-Marie Arouet known as Voltaire (1694 – 1778)

• Quest for true excellence in what we do

• Creativity and innovation• Integrity• Excellent customer service

5

What are our visionary goals?

What target do we set for ourselves? What is our burning platform?

We aim to have commercialised or have

transformed 10 companies to achieve 50% above

average sustainable growth rates in 5 years

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What do we aspire to, what is our vision?

Our vision

To help create great South African

companies

Our core purpose

“Our core purpose is to turn vision into value”

Our values and philosophy

Quest for true excellence in what we do; creativity and innovation; integrity &

excellent customer service“No problem can withstand the assault

of sustained thinking”

Our visionary goals

“We aim to have commercialised or have transformed 10 companies to achieve

50% above average sustainable growth rates in 5 years”






Our methodologies


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We have analysed the source of funding for South African businesses through the various stages of development and compared it to international markets

Type of SME Start-up phase

Growth phase

Stable state and exit

Traditional small business

Family, friends, savings, equity in property

Asset backed finance, factoring, bank debt, trade finance

Not often required but debt is used when required

High potential with growth aspirations

Angel finance, team finance, some venture capital

Venture capital, private placement of equity, asset backed finance, some bank debt

Venture capital, high-yield debt markets

Exit via IPO

Attractive with high tech information and life sciences

Angel finance, venture capital corporations

Venture capital corporates, asset backed finance

Corporates, bank debt

Type of SME

# of SMEs in category

Start-up phase

Growth phase

Stable state and exit

Comment

Traditional small business

Small number

Family, friends, savings, equity in property

Asset backed finance, factoring, bank debt, trade finance

Not often required but debt is used when required

The majority of the companies are white owned and some Indian

Emerging enterprise from PDI communities

High number

Few resources available – dependence on external funds

Many of these companies have not made it significantly through all the stages

Attractive with high tech information and life sciences

Small number

Angel finance, team equity, venture capital corporations

Venture capital corporates, asset backed finance

Corporates, bank debt

This category generally has highly skilled people and tends to be white male dominant

SME growth phases and funding cycles in the UK1 SME growth phases and funding cycles in South Africa1

Source: 1.SMES’ ACCESS TO FINANCE IN SOUTH AFRICA – A SUPPLY-SIDE REGULATORY REVIEW, The Task Group

of the Policy Board for Financial Services and Regulation

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We have further sought to determine some of the key reasons and implications for the funding challenges faced by businesses in their various development stages

Capitallow High

low

high

Skill

Interaction between supply and demand for SME finance1

Ste

p 1

Imp

rove o

rgan

isati

on

al

skills

Step 2Capital formation

A study conducted by the Global Entrepreneurship Monitor (UCT) found the ff impediments to entrepreneurial

activity in SA 3

• Shortage of capital (81%)• Business planning (68%)• Insufficient information knowledge (75%)• Quality of employees (57%)• Marketing of products/services (57%)

• The Task Group of the Policy Board for Financial Services and Regulation developed the graph and commented as follows:

– Task Group suggested that the diagonal arrow shows the ideal progression, however, it believed that such progression would not be achievable on a large scale, because of the immensity of the SME sector and the logistic impossibility to accompany each of them on the difficult path to a high-skill high-capital status.

– The danger is to grow the bottom-right quadrant (low-skills high-capital), which would be an area of systemic risk for the financial sector and should be viewed a “no-go area”.

– The task group suggested a progression whereby the emerging enterprises are first provided with more skills (step 1), so that they will be able to formulate a qualified demand for capital and then progress to step 2

• The South African Private Equity sector has a tendency toward later stage investment. South Africa’s early stage investment at 6% of total unrealised portfolio at cost at by 31 December 2008 is lower than North America’s (11%) and Europe’s (9%)2

• Entrepreneurship and SME growth are significantly stymied by key skills shortages as skill level is directly proportional to the capacity to raise capital

• A method to systematically assist new business and SMEs in the various stages of development with key skills would vastly increase their rate of success

• There needs to be more early stage investment in high growth potential enterprises, but this cannot happen if the risk is significantly increased. Therefore a method to limit or manage risk is necessarySource:

1. SMES’ ACCESS TO FINANCE IN SOUTH AFRICA – A SUPPLY-SIDE REGULATORY REVIEW, The Task Group of the Policy Board for Financial Services and Regulation

2.Global trends in venture capital 2008 survey, Deloitte3.Global Entrepreneurship Monitor South African Report 2007

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There are significant driving forces behind creating an organised method of rescuing failing businesses 1

Driving force

Rationale

Political Given the strong representation of organised labour in the South African government, government has sought to transform the liquidation industry in favour of national interest through job preservation and business rescue. This point has become even more pronounced in light of the current economic downturn.

Economic

The South African economy contracted by 1,8% in 4th quarter 2008, and by 6,4% in 1st quarter 2009. If more businesses that could be rescued are left to fail the contraction of the economy could be even more severe

Social The unemployment rate in South Africa is approximately 25% , Gini co-efficient at 0.58 is amongst the highest in the world, it makes sense to develop a systematic approach toward reversing the trend, job preservation is one of them

Legislative

The thinking from the points discussed above is manifested in the still to be promulgated Chapter 6 of (Business Rescue) the Companies Act No. 71 of 2008 designed to save companies and jobs

Resulting approach and implications

• Business rescue is a largely non-judicial, commercial process similar to informal creditor workout :

– The process is however formalised following the filing of a board resolution (or application to court to commence the proceedings) and each significant step in the process may allow intervention from affected parties by application to the court.

– This, however, remains an engagement amongst the business rescue practitioner/service provider, affected persons (being shareholders, creditors and employees (individually or through their representative trade unions) of the company in devising a business rescue plan to rescue the company

• Section 128(1)(b) ‘‘business rescue’’ means proceedings to facilitate the rehabilitation of a company that is financially distressed by providing for -

(i) the temporary supervision of the company, and of the management of its affairs, business and property;(ii) a temporary moratorium on the rights of claimants against the company or in respect of property in its possession; and(iii) the development and implementation, if approved, of a plan to rescue the company by restructuring its affairs, business, property, debt and other liabilities, and equity in a manner that maximises the likelihood of the company continuing in existence on a solvent basis or, if it is not possible for the company to so continue in existence, results in a better return for the company’s creditors or shareholders

• The major benefits of the approach are:• Breathing space provided by moratorium, and right to cancel or

suspend contracts• Cram-down of dissenting creditors, binding holdoutSource:1.Venture Capital in South Africa, Blue Catalyst

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Our analysis points to significant opportunities in the market

There is a real market need to provide the key skills required by entrepreneurs and small businesses to:– Raise much needed capital – Commercialise or grow their businesses

The skills and capabilities required to commercialise new businesses is very similar if not the same as those required to grow existing corporate businesses. Therefore, there is a real opportunity to provide key commercialisation skills to established corporations looking to grow beyond existing marketsThere is a need to manage and reduce risk for private equity investors, particularly the risk associated with early stage investment The change in company law has created a real opportunity in providing business rescue servicesThe real driving force behind value creation is strategic capability, specifically:– strategic thinking and – strategic execution

• Strategic thinking and capability• Business model design and

engineering• Financial modelling• Business process analysis,

design and optimisation• Knowledge of company law• Financial management• Business management and

leadership• Capital raising• Corporate law

Arising market opportunity Skills required to exploit market opportunity






Our methodologies


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Therefore, our integrated service offering coupled with our unique skill set as well as a creative charging model meets a genuine need and gap in the market. Our services are...

Commercialisation solutions– We commercialise viable business ideas and help entrepreneurs and business people

realise their vision of creating new businesses

Breakthrough-growth solutions– We provide business, product and channel strategy development assistance to

businesses that are seeking to extend their product lines as well as channels to market to increase profit

Business rescue and turn-around solutions– We provide assistance to businesses that are struggling or are in distress on practical

means to sustainably return them to profitability

Strategy consulting– We help business leaders to make decisions on various key strategic issues such as,

mergers and acquisitions, investment, capital raising etc

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Fund business

Provide management

oversight

We bridge the gap between the traditional entrepreneurial and private equity spaces

Idea generation

Consider alternatives

Consider viability and formulate plan

Review viability, research,

determine skill and resource gaps

Build financial models and

develop investment case

Review and manage risk

Review and define strategy; refine

business model; re-engineer business

Traditional entrepreneurial space Traditional venture capital space

Idea/business refinement and reengineering

•Our intervention increases the probability of entrepreneurial/business success

•We manage and reduce risk for investors

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Approve and fund project

Provide management

oversight

We apply the same entrepreneurial thinking to established corporate businesses that are seeking to create new value

Idea generation

Consider alternatives

Consider viability and formulate plan

Review viability, research,

determine skill and resource gaps

Build financial models and

develop investment case

Review and manage risk

Review and define strategy; refine

business model; re-engineer business

Traditional management approach to new value creation

Traditional board expectations to new venture capital space

Idea/business refinement and reengineering

•Our intervention increases the probability of new venture success in established businesses

•We manage and reduce risk with a board perspecite






Our methodologies


17

We have developed a project risk assessment model to help us to consistently determine which projects we should engage in

We would not engage in projects where we don’t believe we have a high degree of success, we therefore have developed qualification criteria for projects. We

would only engage in projects that score a minimum of 70% in our risk assessment model

Criteria Rationale Weight

High growth prospects

If a project is deemed not to have high growth prospects it by definition does not align with the objectives of our organisation

20%

Measurability

We will only engage in projects where we are able to reliably measure the impact of our intervention. There has to be a direct correlation between our intervention and the bottom line

25%

People risk Much of the success of a project rests in the people involved, it therefore becomes important to assess the ff factors:

• The integrity of the people involved• Skills and management capability• General chemistry• How receptive would they be to

suggestion

40%

LGC skill/focus

If a project requires skills we do not have or cannot acquire easily there is increased project risk

15%

• Initial contact with prospective client

• Initial information gathering and research

• Initiate projects•Constantly

evaluate project risk using project management methodologies

Pre engagement Project phaseProject risk assessment






Our methodologies


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Organisation functional structure

LGC Capital

Commercialisation, Strategy and growth centre of excellence

Business rescue centre of excellence

Capital raising

Knowledge exchange

Strategic delivery partners

Strategic delivery partners

Strategic funders






Our methodologies


21

We apply an iterative intellectual model to refine our thinking around commercialisation and breakthrough-growth projects

Ideas

Strategy

Operational planning

Flo

w

Fe

ed

ba

ck

Financial modelling and planning

Practical plane

Operations, execution and managementPractical plane

Corporate strategyConceptual plane

We understand the unique alignment between the opportunities that exist in the conceptual space and the constraints that make for a

successful venture in the practical space -Thus the LGC model for value creation

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The building blocks of our review analysis and development model for commercialisation, breakthrough growth and turn-around projects

Client Business Strategy DesignThe key elements giving the client a sustainable advantage over

competitors

Business value chain

• Materials purchasing and shipping

• Manufacture• Warehousing• Logistics• Distribution• Suppliers

After sales

• After sales requirements• After sales approach

Distribution

• Distribution strategy• Distribution partners

Marketing

• Marketing strategy• Business development

strategy• Product choice and

pricing• Market sizing

Competitor and environmental analysis

• Who are the competitors?

• What are the key environmental drivers?

• What are the implications on client strategy?

Business support and process design (HR, ERP and IT)•Business process analysis and design•ERP System design and specification•IT infrastructure and connectivity design and specification

•Organisation design•HR policy development•Performance management

Key business agreements•Commercial agreements•Supplier agreements•Partnership agreements

•IP exchange agreements

Financial modelling and execution planning• Market conversion methodology• Sales and expense forecasting• Investment analysis

•Project budget•Execution plan•Funder requirements

•Micro and macro economic considerations

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We apply a phased approach toward the management of breakthrough-growth projects

Review and refine strategies

Review and define environment

Business Process Analysis

Implement the change

Entrench the change

Activities

Deliverables

• Review and refine the organisational strategy

• Define strategic priorities• Understand ideal service

/product offering to operations

• Determine and define the roles of key enablers within the organisational strategy, both now and into the future

Develop project deliverables

• A clearly defined and detailed services strategy aligned with the business objectives

• Detailed benefits case• Refined set of project

deliverables that will serve as the final engagement deliverables

• Review the current infrastructure, systems and suppliers

• Analyse and optimise the current business processes

• New business process Mapping

• Deliver optimal management approach, departmental structure and KPAs

• A stakeholder management strategy

• Defined and documented business processes

• Change management plan

• Roll out new business processes

• Create new internal capacity• Align internal and external

stakeholders

• New systems architecture• New service providers

identified• Entrenchment plan

• Create new internal capacity• Track and measure the

change• Understand the impact of the

change• Develop and repair “snag list”

• A new more efficient and effective business

Phase 1: Strategy Development

Phase: 2 Current situation determination

Phase 3 Create the new environment

Phase 4 Prioritise Skills

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We apply a phased approach toward turn-around projects

Analyse StabiliseRebuild business

• Setup a multidisciplinary Turn-around management team with clear turn-around mandate

• Effect key immediate actions

• Diagnose main factors causing distress

• Determine time-to –failure

• Determine if a successful turn around can be effected

• Determine key immediate actions that need to be taken

• Review and redefine organisational strategy

• Review and redefine business processes, operations, capabilities, management, resources etc

• Review and redefine financial strategy and management approach which may include recapitalisation

• Develop new performance management metrics

Post intervention management

• Periodic review of performance against expectations

• Operational management support

Project Phase 1 Project Phase 2

Pre Analysis

• Get a high-level view on problem and requirements

• Determine extent of problem and size of organisation

• Determine number and level of resources required to execute

• Determine if a successful turn around can be effected and whether to engage on project

• Determine information requirements

• Agree contract terms

Project Phase 3Pre-project phase 2 days

1 day a month for 6 months






Our methodologies


26

We have designed a creative rating model to allow us obtain maximum return from our engagements whilst putting minimal pressure on client finances

Basic Rating Factors

- Project Length- Number and Level of

Resources- Materials

Risk PremiumCalculated from the

LGC project risk assessment model

Payment Terms

LG

C F

ixed

rate

Basic Rating Factors

- Project Length- Number and Level

of Resources- Materials

Tim

e a

nd

mate

rial

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We have developed flexible payment structures that would allow clients to chose the most optimal option based on the situation they face

Payment option Pre requisites Payment structure

Full payment • Contractually agreed scope and

deliverables

• Any changes to the scope would require

new costing

• 50% down-payment on project phase fee at project start

• Balance payment on delivery based on contractually

agreed deliverables

Success bonus

based payment

• LGC will only agree once an assessment is

concluded on the project and client

• Contractually agreed scope, deliverables

and success metrics

• Access to all financial records and audit

reports

• Engaging in the post intervention

management phase

• 40% down-payment on project phase fee at project start

• 20% payment on delivery based on contractually agreed

deliverables

• 40% balance payment plus 30% success bonus both

payable after 60 days of project completion or project

success depending on which comes first

Equity based

payment

• Contractually agreed scope, deliverables

and success metrics

• Access to all financial records and audit

reports

• Engaging in the post intervention

management phase

• A board position in the client business with

financial and performance oversight

• If client has cash they would pay 25% of the resource cost

at the start of the project and 25% of the resource cost on

completion, with the balance of payment being equity

• If client has no funds, 65% of the resource cost would be

payable after fund raising, with the balance of payment

being equity

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Thank you

Profile 20 October 2009 LGC Capital ”Our genesis, our vision our identity”

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Transcript of Profile 20 October 2009 LGC Capital ”Our genesis, our vision our identity”