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Oscar Karlsson Portfolio Manager at Evli Fonder AB since June 2011. Responsible Manager for: Evli Sverigefond & Evli Aktieindexfond Sverige. Previous work experience: M&A-analyst at PwC, Risk Analyst at Citibank. 2008-2009 MSc Banking and International Finance, Cass Business School 2005-2008 BSc Economics, Uppsala University http:/spara-investera-innovera/bloggplatsen.se


Introduction & Background

Historical Review of Entrepreneurial Investing.

When Do You Need to Know About Company Valuations?

Who Are Investors in Entrepreneurial Companies?

How Do These Investors Differ?

Exploring the Investment Process: ◦ 1. Screening ◦ 2. Valuation ◦ 3. Due Diligence ◦ 4. Deal Making


The Code of Hammurabi, a Babylonian law code, dating back to about 1772 BC was the first legal framework for investments, regulation personal debt and collateral.

From that point and onwards, investments were mainly carried out by Governments and King’s around the world.

It is assumed that the world’s oldest Limited Liability Company was Stora Kopparbergs Bergslag i Falun when the Bishop in Västerås acquired 12,5% of the company in 1288.

The Amsterdam Stock Exchange is considered the oldest in the world, established in 1602.

The origin of the New York Stock Exchange can be traced to 1792, when the Buttonwood Agreement was signed by 24 stockbrokers. Anthony Stockholm was elected the Exchange's first president.

The new financial markets created a distribution-platform for risk-capital which funded much of the industrial revolution and led to the creation of investment magnates such as the: Rotschild’s, Carnegie’s and Rockefeller's.


Yale’s Chief Investment Officer, David Swensen constructed a portfolio with a high degree of equities over bonds.

He was one of the first institutional investors to be interested in Alternative Assets, such as: Venture Capital, Private Equity, Hedge Funds and Real Estate.

A Portfolio Constructed According to Swens en: 

20 % Domestic Equities (often cheap index-funds)

20 % International Equities (often cheap index-funds)

15 % Fixed Income

20 % Real Estate

25 % Private Equity & Venture Capital This created a substantial increase in awareness and interest for Private Equity and Venture Capital among institutional investors world-wide!


Start-up

1st or 2nd round of Venture Capital

Acquiring/divesting company

Bank Financing

Initial Public Offering


Differences:

Private Angels

Venture

Private

Publicly

Capital

Equity

Listed

Time Horizon:

Differ, but often long

Fund Size:

Often <10m USD

50-500m USD

500-1000m USD

500m USD +

Due Diligence:

Based on personal

Mostly Strategic

Commercial,

Often covered by

relationships & gut feel

and HR

Financial,

5-10 analysts

Individuals

3-5 people

Operational & HR 5-10 people

5-10 people

Organization:

7-10 yrs

3-5yrs

Daily Traded


Screening is practically done through databases such as: Bloomberg, Reuters, Factset, Allabolag etc.


Company Valuation Range: 250m USD

Fundamental Valuation Models (DCF-model etc)

Comparable Multiples: P/E  EV/EBIT  P/B  P/S

Market Size/Share-Potential

300m USD

The price range above is an indication of the company value, but the due diligence process and individual owners opinion and pride often have more impact on the final price of the company than the actual valuation.


HENNES & MAURITZ AB

Perpetual Growth Method

Assumptions

33 229 146 967 155 980 302 947 18 959 321 906 1 461 232,40 220,38

Terminal Year NPV of Free Cash Flow + Terminal Value Enterprise Value + Cash and Near Cash - Total Debt - Minority Interest Total Equity Value Shares Outstanding Current Price Theoretical Value per Share Premium / (Discount Price)

WACC

Override

10,12%

Growth Rate

2,00%

2,00%

EBITDA Multiple

14,52x

14,52x

24,31%

24,31%

-0FQ

-0FQ

Tax Rate Reported Period

EBITDA Multiple Growth Method

Bloomberg 10,12%

Terminal EBITDA + Free Cashflow + Terminal EBITDA Value Enterprise Value + Cash and Near Cash - Total Debt - Minority Interest Total Equity Value Shares Outstanding Current Price Theoretical Value per Share Premium / (Discount Price) Theoretical Perputual Growth

(5,17%)

49 837 146 967 275 933 422 900 18 959 441 859 1 461 232,40

302,50 30,17% 5,38%

Assumptions Street Inputs - Scenario 1 Sales yoy growth EBIT Margin CAPEX growth

2013 6,69% 17,71% (20,48%)

2014 10,67% 17,92% (5,49%)

2015 10,51% 18,08% (6,76%)

2016 11,22% 16,07% (9,80%)

2017 10,57% 15,41% (6,60%)

2018 9,97% 14,87% 7,17%

2019 12,97% 13,82% (3,01%)

2020 9,05% 20,67% (2,99%)

2021 9,05% 20,67% (3,00%)

2022 9,05% 13,11% 0,20%

Master Table Sales yoy growth EBIT Margin CAPEX growth

2013 6,69% 17,71% (20,48%)

2014 10,67% 17,92% (5,49%)

2015 10,51% 18,08% (6,76%)

2016 11,22% 16,07% (9,80%)

2017 10,57% 15,41% (6,60%)

2018 9,97% 14,87% 7,17%

2019 12,97% 13,82% (3,01%)

2020 9,05% 20,67% (2,99%)

2021 9,05% 20,67% (3,00%)

2022 9,05% 13,11% 0,20%

HISTORICAL CASH FLOWS SEK millions Revenue YoY Growth EBIT Margin Tax Rate (%) Tax NOPAT Minority Interests Margin Capex Margin Depreciation & Amortization Margin Net Working Capital Change Margin Free Cash Flow

-5 2007 78 346 18 382 23,46%

(3 522)

PROJECTED CASH FLOWS

-4 2008 88 532 13,00% 20 138 22,75% 27,82% 5 896 14 242

-3 2009 101 393 14,53% 21 644 21,35% 25,87% 5 719 15 925

-2 2010 108 483 6,99% 24 659 22,73% 25,30% 6 327 18 332

-1 2011 109 999 1,40% 20 379 18,53% 24,45% 5 121 15 258

-0 2012 120 799 9,82% 21 754 18,01% 24,31% 5 418 16 336

1 2013 128 877 6,69% 22 830 17,71% 24,31% 5 551 17 280

2 2014 142 633 10,67% 25 554 17,92% 24,31% 6 213 19 341

3 2015 157 628 10,51% 28 504 18,08% 24,31% 6 930 21 574

4 2016 175 320 11,22% 28 174 16,07% 24,31% 6 850 21 324

5 2017 193 843 10,57% 29 880 15,41% 24,31% 7 265 22 615

6 2018 213 172 9,97% 31 690 14,87% 24,31% 7 705 23 985

7 2019 240 817 12,97% 33 292 13,82% 24,31% 8 094 25 198

8 2020 262 601 9,05% 54 284 20,67% 24,31% 13 198 41 087

9 2021 286 356 9,05% 59 195 20,67% 24,31% 14 392 44 803

10 2022 312 259 9,05% 40 951 13,11% 24,31% 9 956 30 995

(4 747) 5,36% 2 202 2,49% 225 0,25% 11 472

(5 506) 5,43% 2 830 2,79% 1 730 1,71% 11 519

(4 812) 4,44% 3 061 2,82% 1 217 1,12% 15 364

(5 103) 4,64% 3 262 2,97% 2 069 1,88% 11 348

(6 071) 5,03% 3 705 3,07% 1 337 1,11% 12 633

(4 828) 3,75% 3 668 2,85% 1 565 1,21% 14 555

(4 563) 3,20% 4 059 2,85% 1 732 1,21% 17 105

(4 255) 2,70% 4 486 2,85% 1 914 1,21% 19 892

(3 838) 2,19% 4 989 2,85% 2 128 1,21% 20 347

(3 584) 1,85% 5 516 2,85% 2 353 1,21% 22 194

(3 841) 1,80% 6 066 2,85% 2 588 1,21% 23 623

(3 726) 1,55% 6 853 2,85% 2 923 1,21% 25 402

(3 614) 1,38% 7 473 2,85% 3 188 1,21% 41 757

(3 506) 1,22% 8 149 2,85% 3 476 1,21% 45 970

(3 513) 1,12% 8 886 2,85% 3 791 1,21% 32 577

13 217

14 105

14 895

13 836

13 705

13 246

12 934

19 308

19 302

12 421


For unlisted companies, compare with previously sold company-valuations!


An Example: ◦ ◦ ◦ ◦ ◦ ◦

Future global users of ”Smartphone A”: 300 million Expected market share: 20% Price per unit: 500 USD Operating Margin: 20% Average time in market: 3 years Time value of money – interest rate: 6%

◦ That gives: (((300*0,2)+(500*0,20))*3)/1,06^3) ◦ Indicated Company Value: 400m USD Several Management Consultancy firms are masterminds when it comes to this!


Commercial Due Diligence ◦

Strategic Overview & Plan

Competitive Landscape

Market Size

Market Growth & Margin Conditions

Top Down & Bottom Up

Market Potential

Financial Due Diligence ◦

Income Statement Examination

Balance Sheet Examination

Cash Flow Statement Examination

Operational Due Diligence

Adjustments Used in DCF-Valuation

Operational Capacity

100 Day Integration Plan

Production Capacity – Further Capex Needed?

Human Resources Due Diligence ◦

Management Review

Organizational Overview

Incentive Structure

Financial Reliability

Right People in Place

These processes are often carried out by accountants- and management consultants


”Find All the Facts – Do Not Ass u me …”


Equity? ◦ Ownership Structure?

Options?

Convertibles?

Preferred Shares?

Debt? ◦ Bank Loan? ◦ Bonds? The optimal financial structure varies from case to case depending on factors such as: 

Sector (Oil Exploration vs Packaging Company)

Ownership Structure

Management Incentives

Bank Relation

Access to Investors etc.


Fund Managers are evaluated and rewarded on their results. If you don’t perform well, you’ll be out of a job. ◦

Fund Managers are therefore often too biased towards ”avoiding disaster” rather than achieving the exceptional return.

Entrepreneurs on the other hand are typically notorious risk takers.

The key to a successful relationship is therefore aligned incentives and time horizons from day one! ◦

This is probably the main reason behind investment failures!


Thank you! Best of Luck with Future Ventures!


Master programme in entrepreneurship – uppsala university