Private equity geared to black SMES “SOLVING THE MISSING EQUITY GAP” PRESENTATION TO

1. Black Swan Capital 11 Private equity geared to black SMES “SOLVING THE MISSING EQUITY GAP” PRESENTATION TO Portfolio committee on economic development “access to finance” 24th November 2010 12/3/10 Black Swan Consulting Riz Hendricks

2. Black Swan Consulting RECESSION AND OPPORTUNITY 22 • The recession has had a domino effect on the cash flows of companies within key viable sectors, which has seen debtors and creditors days being extended beyond 90 days, • Smaller players in a sector have folded due to the above which leaves the top 4 or 5 players with market access and opportunity to take market share of these competitors, which have left the sector. • But the consequents is unemployment and the demise of the manufacturing sector e.g. Furniture, engineering • There are now possibilities of key mergers and acquisitions of complementary business. • But most importantly a recession allows an investor the opportunity, to buy at realistic entry multiples, one now sees medium sized family owned business seeking equity partners that would not previously consider selling any equity. Black Swan Consulting

3. Black Swan Consulting RECESSION AND OPPORTUNITY 33 • The other opportunity is that the BBBEE scorecards are now being vigilantly applied by all listed companies and they have vetted their supplies (BBBEE Verifications) which leaves many currently non compliant white owned business at risk of losing key long term contracts. BBBEE and the recessions also bring opportunity as explained below: • Leading from the above, 51% or even 100% owned Black SME’s, now need strategic equity partners as to gear their business to the new flood of potential orders from the corporate sector. • Which, leads to job retention and creation over time. • The Black Swan fund sees an opportunity to back black owned SME’s along the corporate procurement supply chain, as strategic equity partners with funding between R2m – R5m per transaction. Black Swan Consulting

4. Black Swan Consulting Job Creation and Private Equity 44 • From our experience, Equity Partners are the best mentors and coaches for growing a business, as it sets down the ground rules of strict corporate governances, and offers effective real-time interventions compared to that of a secured loan. • Loan finance, is not appropriate to saving and creating world class manufacturing SMEs, patient focused capital is required. • Khula, needs to consider regional private equity funds which target key sectors – as identified by DTI. Black Swan Consulting

5. Black Swan Consulting Pitfalls One of the private equity firm’s positive contributions to your business might be to help you avoid liquidation. They can help you spot the danger signs of troubled times ahead and avoid business Pitfalls. PE investors are Hands-on 55 • A “hands-on” or active approach aims to add value to your company. • In addition to advising on strategy and development, the private equity firm will have many useful business connections to share with you. • The private equity firm aims to be your business partner, • Someone you can approach for helpful ideas and discussion. • A hands-on investor is particularly suited to a company embarking on a period of rapid expansion. Black Swan Consulting

6. Black Swan Consulting THE CURRENT SITUATION – Black SME’S 66 • 100% or 51% black owned companies have access to larger markets – Procurement Gates have been opened – BBBEE Codes (Turn over: R4m – R50m) • But, they cannot grow due to the lack of access to the appropriate capital structures. • Partially empowered white companies, 26% owned or QSEs,(R5m –R35m) per the codes still dominate the market. • BBBEE buy-ins have entrenched white owned companies along the procurement chain, and thus Black owned SME’S still cannot compete. Black Swan Consulting

7. Black Swan Consulting Private equity Market failure – SMES 77 • There is currently a missing equity financing gap R2m to R5m, investment gap that targets black 100% or 51% owned SMEs. (T/O R4m to R50m) • The Business Partners Khula start up fund caters to the R3m, and below start up SME, will this be successful during a recession, • What is the cost to Khula and to the entrepreneur? • 5% management fee on R100m, R5m (R25m over 5 years normally the life of the fund) • What is the cost to the entrepreneur 30% IRR? And can they exit Business partners after 5 years. • What are the financial benefits to Khula? Black Swan Consulting

8. Black Swan Consulting BLACK SWAN CAPITAL MODEL 88 Benefits to Black SMEs Targets 51% or 100% owned SMEs, along the procurement supply chain, Offers a strategic value add equity partner i.e. 1st round equity investor Cost of equity capital is pegged at 18% IRR (CPI plus 9%) norm is 25% to 40% IRR Entrepreneur can easily buyout Khula – refinancing or another PE fund will be attracted, for 2nd round expansion capital – R10m Black Swan Consulting

9. Black Swan Consulting BLACK SWAN CAPITAL MODEL 99 • Benefits to Khula • Fund targets existing Black SME’s with turn over R4m to R50m, less risk than start up. • Targets an IRR 18%( 2 times money back, after fee deduction. • Fees are on a reducing scale, 6.5% to 3.5% over 5 year period – norm is 5%. • Bswan crowds in other players – Due diligence cost. Black Swan Consulting

10. Black Swan Consulting FEES ON A R20m Fund 1010 • Operating Costs of SME Financiers • Funds are operating with average management fees of about 3%, although many have said that this does not cover their costs for the low values of the committed capital and the relatively large number of deals that they have to manage.   • The Umsobomvu General Fund believes that 5% is more realistic for funds of R100m. Black Swan Consulting

11. Black Swan Consulting Black Swan Capital viability model 1111 Black Swan Consulting

12. Black Swan Consulting Black Swan Value Add 1212 • The uniqueness of this Fund is that the IRR of 18% is pegged for the investee company, which is contrary to PE practise. Black Swan Capital sees itself as a truly social and developmental PE Fund manager in that: • This allows an amicable pricing exit for the entrepreneur; - share buyback can be easily refinanced. • It is an incentive for the entrepreneur, to partner with the fund – cost of capital is clearly defined and he is motivated to achieve his EBITDA warranties. • Thus the fund targets first time SME equity seekers, and allows the company the 5 year investment period, in which to expand and developed into a serious player in its particular sector. • Second round equity financing can be easily attracted, as they could be buying at a discount, NEF or IDC, etc. Black Swan Consulting

13. Black Swan Consulting  Small and medium sized unlisted ventures ( turn over R4m plus)SME that have 25.1% or level 4/5 BBBEE status or ability to meet this levelKey focus Western Cape Sectors: All (see exclusions above )Established SME’s with a 3 year track record and a niche market that require balance sheet restructuring and expansion capital (plant, working capital) due to the recessionInvestment size: R2 million to R5 millionTrading history: Ideally at least two years with profitability.Have a very secure revenue and the ability to meet target return: Profit After Tax margin greater than 8% or potential to reach such a targetEBITDA to turn over ratio of 12% to 15%Entry PE of not more than 2.5 to 3.5 Robust cash flow with an opportunity to use business cash flow to extract payments to ourselves early 1313 •  Small and medium sized unlisted ventures ( turn over R4m plus) • SME that have 25.1% or level 4/5 BBBEE status or ability to meet this level • Key focus Western Cape • Sectors: All (see exclusions above ) • Established SME’s with a 3 year track record and a niche market that require balance sheet restructuring and expansion capital (plant, working capital) due to the recession • Investment size: R2 million to R5 million • Trading history: Ideally at least two years with profitability. • Have a very secure revenue and the ability to meet target return: Profit After Tax margin greater than 8% or potential to reach such a target • EBITDA to turn over ratio of 12% to 15% • Entry PE of not more than 2.5 to 3.5 • Robust cash flow with an opportunity to use business cash flow to extract payments to ourselves early Black Swan Consulting

14. Black Swan Consulting In Conclusion 1414 • Black Swan Capital has submitted a proposal to Khula, but it has been rejected due to the fact that the fund manager is a start up. • We feel that this model has merit in that: • It address a PE market failure • The cost of capital is amicable to the investee company • It’s a viable investment proposition to Khula comparative to its other PE investments Black Swan Consulting

15. Black Swan Consulting CONTACT DETAILS 1515 • Rizahn Hendricks • Cell: 082 941 2910 • E-mail: rizcapital@gmail.com Black Swan Consulting