© 2013 Trinidad and Tobago International Financial Centre Management Company Limited. All rights reserved. Risk Capital A Public-Private Partnership to Invest in Expansion-Ready SMEs Varun Maharaj, CEO, Trinidad & Tobago IFC TTCSI Services Week – SME Financing Workshop November 4 th, 2014, Trinidad Hilton

© 2013 Trinidad and Tobago International Financial Centre Management Company Limited. All rights reserved. Why Risk Capital SMEs are essential to economic growth and diversification. However, SMEs can’t realize their full potential due to internal and external impediments. Venture Capital has not performed well at the SME level in developing countries. Trinidad and Tobago IFC is addressing the gap in SME financing in order to: –to create new jobs, –broaden the entrepreneurial base in Trinidad and Tobago, –improve standards of business practice, –facilitate the creation of new products and services, and –generate greater financial inflows from exports.

© 2013 Trinidad and Tobago International Financial Centre Management Company Limited. All rights reserved. What is Risk Capital Public-Private partnership investment funds to finance SMEs. Investment involves a combination of a low interest loan, revenue participation through royalty payments and purchase of equity in the SME with an agreement to repurchase. Investments will be a blend of debt and equity financing. Financing based on projected cash flows rather than collateral value.

© 2013 Trinidad and Tobago International Financial Centre Management Company Limited. All rights reserved. SME Fund – Not Venture Capital or Bank Loan SME FundBankVenture Capital ReturnBased on interest on loan and royalty payments. Based on interest on loan. Heavily dependent on business being sold to third party or listed on Stock Exchange. TargetsSMEs at the expansion-stage. SMEs that are subsidiaries of larger businesses. Relatively large companies at later stages in the business life cycle. FundingBased on feasibility of business and potential for revenue growth. 100% collateral not needed. At least 100% collateral coverage required for loan. Based on potential for future capital gains to allow for exit at high multiples of initial purchase price.

© 2013 Trinidad and Tobago International Financial Centre Management Company Limited. All rights reserved. Overview of SME Fund

© 2013 Trinidad and Tobago International Financial Centre Management Company Limited. All rights reserved. SME Fund – Roles and Responsibilities Key PlayersRoles and Responsibilities Government Provide long term loan. Provide funding for Business Assistance Facility. Set investment policy. Private Investors Provide equity capital. Hire fund managers. Select Investment Committee Members. Fund Managers Select SMEs to receive financing. Perform due diligence. Negotiate and close investments. Provide hands-on assistance to SMEs. Business Assistance FacilityProvide consultancies, training, and other forms of assistance to SMEs. SMEsWork with Fund Manager to prepare and/or revise business plans.

© 2013 Trinidad and Tobago International Financial Centre Management Company Limited. All rights reserved. SME Fund – Benefits Key PlayersBenefits Government Interest earned on loan to fund. Economic Development. Private Investors Returns above current market rates. Reduction of liquidity in banking sector. Return will consist of interest on loan and royalty payments. Addresses risk/return trade off. Fund ManagersCompensation consists of fund management fee, annual performance bonus and carried interest. SMEs Access to suitable and affordable funding. Access to funding not tied to availability of collateral. SME owners and investors share common objectives.

© 2013 Trinidad and Tobago International Financial Centre Management Company Limited. All rights reserved. SME Fund – Exit Strategy SME owner(s) repurchase(s) shares from SME Fund at a predetermined multiple of initial equity investment SME acquired by another company or listed on a Stock Exchange. –If this happens SME Fund has a “tag along” right. This gives the Fund the right to sell its shares at the same price as the SME owner(s).

© 2013 Trinidad and Tobago International Financial Centre Management Company Limited. All rights reserved. SME Fund – International Experience Program Leverage Ratio Investment Terms Total Invested by Government Total Private Investment IIF - Australia2:1 IIF receives 10% of profits after return of capital AUD 360,000,000 AUD 283,000,000 SBIC – United States 2:1 2% above 10-year Treasury Notes US$ 2.2 billion in FY 2013 US$ 3 billion + in 2013 ECF – United Kingdom 2:13% interest£ 200,000,000£ 100,000,000 + Yozma - Israel40% of total if successful, fund repurchases government shares at cost US$ 100,000,000 US$ 250,000,000 Source: Tom Gibson, Principal, SMEthin k

© 2013 Trinidad and Tobago International Financial Centre Management Company Limited. All rights reserved. SME Fund Example The Investee First Year Sales 2,500,000 Year 2Year 3Year 4 Year 5 Sales Growth (post-investment) 100%25%20% Expansion Financing Requirement 2,500,000 Current Balance Sheet Equity 500,000 EBITDA Margin 25% Post-InvestmentFund's The Investment Equity % of Shares Equity Investment 250,000750,00033% Royalty-Based Loan 2,250,000 Grace Period 2 BaseBase RoyaltyEquity Buy-Back Negotiated Terms Interest Rate% of Gross SalesMultiple 2.5% 3.0

© 2013 Trinidad and Tobago International Financial Centre Management Company Limited. All rights reserved. SME Fund Example – Repurchase by SME Owner(s) Flows Gross Sales 2,500,0005,000,0006,250,0007,500,0009,000,000 Principal Payments on Loan00750,000 Interest Payments on Loan56,250 37,50018,750 Royalty Payments62,500125,000156,250187,500225,000 Equity Repurchase Proceeds 750,000 Debt Service Coverage Ratio (% EBITDA)19%15%62%52%78% Flows to SME Fund-2,500,000118,750181,250962,500975,0001,743,750 Investee's EBTD-500,000506,2501,068,750600,000900,000506,250 (after all payments to SME Fund) Returns SME Fund's Gross IRR 12.5% Investee's Gross IRR 132.9%

© 2013 Trinidad and Tobago International Financial Centre Management Company Limited. All rights reserved. SME Fund Example – Sale to Third Party Flows Gross Sales 2,500,0005,000,0006,250,0007,500,0009,000,000 Principal Payments on Loan00750,000 Interest Payments on Loan56,250 37,50018,750 Royalty Payments62,500125,000156,250187,500225,000 Investee's Equity Sale Proceeds4,500,000 Investor's Equity Sale Proceeds 2,250,000 Debt Service Coverage Ratio (% EBITDA)19%15%62%52%44% Flows to Investor118,750181,250962,500975,000993,750 Business's EBTD Margin after All Payments to Investor506,2501,068,750600,000900,0001,256,250 Investee' Share of Sale Price Returns SME Fund's Gross IRR 18.9% Investee's Gross IRR 141.5% Realization Multiple for Investor 1.3

© 2013 Trinidad and Tobago International Financial Centre Management Company Limited. All rights reserved. THANK YOU Trinidad and Tobago IFC Amplifying Your Advantage |