Raising Capital for SMEs
In my last Opportunities Update we observed that with the elections over – and the incumbent government achieving such resounding victory - everyone could breathe a sigh of relief that the uncertainty around other parties' policies have disappeared.
Pleased to meet you
Hope you guess my name
But what's puzzling you
Is the nature of my game
Rolling Stones - Sympathy for the Devil - Live at Glastonbury 2013
In my last Opportunities Update we observed that with the elections over – and the incumbent government achieving such resounding victory - everyone could breathe a sigh of relief that the uncertainty around other parties' policies have disappeared.
In previousl newsletters I’ve been through the services TBK Capital provides and you can see these in two of our newsletters on this subject - Choosing the Best Loan and Lender and Money for Business.
Well now businesses seeking capital – in all its forms including financial instruments like Convertible Notes - can also breathe a sigh of relief. The uncertainty around – and the ability to - obtain equity partners without huge regulatory expense has become far clearer.
The 1st of April this year marked the start of a new era for New Zealand's financial markets, with Phase 1 of the Financial Markets Conduct (FMC) Act coming into effect. Phase 2 began days ago on 1 December 2014 and introduced significant changes for many market participants. See press release here.
Equity Crowdfunding
Recently the FMA’s new “Equity Crowdfunding” licences were awarded, opening another way for SMEs to raise capital. TBK Capital has entered into a partnership with one of these to raise capital for SMEs that suit this type of funding.
Businesses suitable for equity crowdfunding include those that can harness the benefit of a public offer of shares. For example, there may be a marketing benefit from a public offer, particularly for a consumer products business. Offering to the public allows your customers and potential customers to invest. And there can be efficiency benefits from setting the terms of the offer and offer period from the outset. Recent examples include The Patriarch, Renaissance Brewing, and CarbonScape. Some offers add “perks” for the investor – like the ability to buy their products at a discount.
However the ability to raise capital by this method is somewhat restricted. The amount that can be raised is limited to a maximum of $2 million per company within a rolling 12 month period. The business raising the funds inevitably ends up with a relatively large number of small investors, which is of course a feature of equity crowdfunding. This is great for many businesses as more shareholders laud their products. We have however received inquiries from businesses where they feel a large number of shareholders is undesirable.
Cornerstone Shareholders
As distinct from licensed Crowdfunders, TBK Capital is a “wholesale” broker and now the new regulations which came into effect on 1 December 2014, widen the requirements for the wholesale investor exception and therefore the ability to partake in the Offers TBK Capital make available. To read the new regulations see our website.
The businesses we work with are usually looking to find a key cornerstone shareholder who may be seeking some form of active participation – be that a seat on the board of the company or even a “merger” and these fit the above categories of investors.
For those looking for large expansion of their business early “private” capital raising in this manner – possibly together with equity crowdfunding - will ultimately assist businesses to reach the level where they can attract an exit strategy such as a trade sale or “liquid” equity via the NZX, ASX or other listed exchanges.
A good example of this is Imersia which raised $1,200,000 from a small group of inventors here prior to a planned Series A capital round out of the U.S.
Try before you Buy
I’ve always been a fan of Convertible Notes as a form of investment, yet they do not seem to be that common here in New Zealand.
Bill Payne, a prominent angel investor well known in the U.S. spent five months in New Zealand in early 2010, hosted by BNZ, FoRST, NZVIF, The ICEHOUSE and the University of Auckland Business School, assisting a range of organisations with the development of NZ’s angel investment market.
That same year the New Zealand Venture Investment Fund (NZVIF) engaged PriceWaterhouseCoopers to prepare a guide for the “Use of Convertible Notes for Seed and Early Stage Investment in New Zealand”. Bill made some comments on the report in which he disapproved of this type of investment for Start Ups as “At exit we angels end up leaving too much money on the table.” A fair point if the Angel Investors had already invested in ordinary shares and therefore ranked below the Convertible Notes.
Then in early 2011 NZVIF produced a report entitled The Valuation of Early Stage Investments in New Zealand (which featured a Foreword by Bill Payne).
My view is Optional Convertible Notes do provide a good method of raising capital for both early and established businesses. OCNs are where the investor – not the company – has the option to convert to ordinary shares – like all existing shareholders – or receive his investment back in cash. Try before you buy.
The advantage to the business – especially one in the early stage of development or growth – is it does not have to place a “pre-money” value on its shares. If you’d like to discuss this concept further feel free to reply to this email or give me a call.
Talking about OCNs, it so happens we have an offer now – Animation College - which offers this form of investment. See below.
So here’s an update on some of the projects we are currently promoting. TBK Capital has been mandated to raise capital for all of these.
Current Projects
Invest in Education
Animation College is a well known private training establishment - with over 20 years of profitable operation - has major growth plans over the next 5 years. These plans are both organic and acquisition based and the company is looking for working capital to fund the expansion.
Funds raised will be used to complete the development and approval of degree status courses and the marketing of courses to international students. It will also provide a war chest to pursue potential complementary acquisitions.
The investment will involve the issue of Optional Convertible Notes, which will pay an interest rate of 9% per annum, payable quarterly. At the end of their 3 year term, at the option of the holder, the Notes can be;
- converted into the ordinary shares in the PTE’s holding company at an agreed conversion rate, or
- repaid in cash, or
- rolled over for a further 2 years.
Based on the company’s past accounts and financial projections, there is expected to be significant upside for the investor on conversion of the Notes. The first tranche of Notes will be for a total of $1 million with oversubscriptions allowed.
This is a unique opportunity to participate in a business with proven results embarking upon an aggressive expansion strategy.
An IM is available now. Interested parties should contact Andrew Larsen on 09 306 8638 or 027 483 4200 or email at a.larsen@tbkcapital.co.nz.
ASE Woodflow
ASE Woodflow is a new company formed to harvest timber in steep or difficult locations throughout New Zealand using new revolutionary equipment. They know they can extract those sites economically as their method of extraction from difficult locations has already been trialled – over 120,000 tonnes have been harvested via this new methodology.
It has customers requiring timber for flooring and wall products in the United Arab Emirates and in China, one of which has an order requiring 30,000 tonnes of Pinus Radiata logs. The buyer is new to New Zealand and is a flooring company presently sourcing logs from other markets for their products. They have indicated an interest to go to contract for 30,000 tonnes per month, equating to one full log ship, for a two year period. ASE Woodflow also has a contract prepared for a seller of Pinus Radiata logs, a forester who can source trees from forests in the Taranaki and Northland regions.
The company is looking for investor/s to provide the capital to proceed with this initial contract. The amount required to harvest the first order and deliver it FOB to the wharf is $1.5 million.
The estimated revenue from this initial order (circa 50,000 tonnes including the 30,000 tonnes above) is about NZ$110 million, with a pre-tax profit of $21 million (19% of revenue). It is expected this profit will provide sufficient funds to enable the Company to acquire further forest for harvesting against new orders from offshore.
An IM is available soon. If you’re interested reply to this newsletter or give me a call.
iSEE Digital
Digital Out of Home (DooH) advertising is the placement of commercial messages (like TV advertisements) on digital screens in public places. Times Square in New York and Piccadilly Circus in London are two well known examples of DooH. As the well documented decline in "traditional media" advertising revenues continues, the effectiveness of the “Out of Home”’ advertising market is gaining year on year popularity with both clients and media agencies. But New Zealand as an international market for Out of Home advertising has been overlooked due to the small size of our population.
iSEE Digital has taken the lead here and is now New Zealand’s fasted growing “Out of Home” advertising network. It now has over 200 locations throughout the country. Over $2.5 billion per annum is already spent on advertising within this country and iSEE Digital needs only to own a small percentage of that spend to produce spectacular results for the company.
It has been placing media agency campaigns for the last 2 years and now has contracts in place to install screens into hundreds more locations throughout the country – and briefs from major media companies to advertise on these networks. These campaigns vary from one to twelve months – the latter being unusually long for the industry.
The interest in Out of Home advertising is increasing rapidly and iSEE Digital is now receiving orders it needs to fulfil, like;
- the “Let’s Understand Dementia” campaign launched by Alzheimers New Zealand in libraries throughout the country.
- the latest repeat order from FCB which rolled out on to more than 100 screens last month.
The company is seeking working capital to fund these and other expansion plans it has over the next 48 months to dominate the New Zealand market. The investment will allow the business to;
- expand its networks,
- engage with more media companies, and
- participate directly with clients who want to utilise the iSEE networks to connect with their target markets.
It is ideally seeking cornerstone shareholder/s to take up 30% of the company by the issue of new shares. The investment required is $1.5 million with 2 seats on the board available.
This is a unique opportunity to participate in a business with proven results and existing clients in relatively virgin territory.
An IM is available now. If you’re interested reply to this newsletter or give me a call.
Hydra Tonics
Hydra Tonics develops science backed niche functional drinks and nutritional supplements. The team behind the business includes well known sports nutritionists and food technologists, bringing credibility to a sector where many so-called “functional beverages” are little more than marketing plays.
Their first offering, Flyhidrate, won ‘Best Industry Innovation’ at the New Zealand Juice and Beverage Awards (2013) and was developed with the University of Otago with co-funding from the New Zealand Ministry of Science and Innovation. Flyhidrate is now successfully sold at airports across Australasia and is purchased by the New Zealand Rugby Union for national rugby teams.
New beverages are in the development pipeline and the infrastructure has been put in place for immediate international expansion, with confirmed expressions of interest from international distributors. A global manufacture partner has been sourced to provide international production facilities. New beverage development will follow a similar B2B business model utilising the sales and marketing budgets of influential distribution partners with established market traction.
The founders, shareholders and consultants have an impressive line up including; a pilot who supplies airlines with specialist foodstuffs; an around the world yachtsman holding a number of product patents; a PhD scholar and dietician who works with the NZ Rugby Union ABS 7s and super 15s teams; and a well known nutritionist and TV personality.
With new packaging formats assisting expansion, turnover is forecast to rise to $2 million in 2015 and $5.5 million in 2016, with 2016 and 2017 EBITDAs of $1 million and $2.5 million respectively.
The business is seeking $1 million in return for 25% equity in the company. Funds raised will be used to upscale production and bring new beverages to market.
An IM is available now. If you’re interested reply to this newsletter or give me a call.
Ambros Group
CleanPaleo is a New Zealand company, which specialises in the manufacture and supply of packaged foods that cater to the Paleo lifestyle. You may have seen their product range as you shop - they are already in more than 120 retailers now.
The CleanPaleo business has shown unprecedented growth in the food industry, and after trading for only 20 months, is already stocking supermarkets, pharmacies, and health/organic food stores here in New Zealand and Australia. They are also in discussions with both major supermarket chains here.
The company is now about to expand its presence globally to take advantage of its first mover status and the lack of competition. They are already recognised as the worldwide leader for their innovative packaged Paleo foods.
CleanPaleo is a wholly owned subsidiary of Ambros Group Limited, also a New Zealand company, which will supply international buyers requesting similar products to the CleanPaleo packaged foods.
The company Edenz NZ Limited has been formed and the brand “Edenz” created for this Asian market. Edenz NZ Limited is also a wholly owned subsidiary of Ambros Group Limited and is already in negotiations with major Chinese, Middle East, and Indian buyers. Revenue from these deals is projected to be more than $5 million over the next 12 months.
The Edenz products have been designed for retailers as well as the hospitality industry, and the company is developing a recipe book with one of the Taj Hotel Group’s head chefs.
The CleanPaleo and Edenz ranges will also begin selling online in China before this Christmas through T-Mall (Alibaba) and WeChat platforms.
Ambros Group Ltd is looking to raise capital to finance its global expansion. The first capital raising will be $4 million in the form of equity, or equity and debt, and will be used to finance expansion in the Australasian market. The funds raised will be used to:
- Purchase and manufacture the required stock to meet current and future orders for CleanPaleo.
- Complete the research and development of their desired CleanPaleo product range.
- Effectively market their CleanPaleo brand and products for launch into Australia, the U.K., the U.S., and Europe.
A cornerstone shareholder would be offered a seat on the board of directors of Ambros Group Ltd.
Subsequent capital raisings will be in several stages to launch entry into the global markets. We expect these to be of interest to corporate or institutional investors. Were the initial investors to participate in these later rounds the current shareholders of Ambros recognise they could end up with a minority interest in the holding company.
An IM is available now. If you’re interested reply to this newsletter or give me a call.
Kiwi Rider
Kiwi Rider is a company formed to introduce a new, spectacular, and very profitable adventure tourism attraction to New Zealand and possibly Australia and Asia. Similar businesses are already earning their operators substantial returns in the U.S., Asia, South Africa and throughout Europe.
The equipment central to the operation has been sourced, and a favourable purchase price negotiated with the U.S. based sole supplier of this particular product. The supplier wants to enter the New Zealand and Australian markets and is keen to negotiate a Sole Purchase and Supply Agreement with Kiwi Rider. A formal MOU between the two is in place now. Kiwi Rider is also now in liaison with the necessary authorities here to acquire the commercial certification and permits for New Zealand.
The company is raising capital through the issue of new ordinary shares for 74% of the company. The other 26% will be owned by the founder, who is experienced in setting up Bungy Jump operations overseas, and will manage the operation.
The funds sought will be sufficient to establish its first operation in New Zealand. The business has the potential to produce a return greater than the full investment after the first full year of commercial operation. Accordingly it could possibly self-fund its expansion in selected locations in New Zealand and possibly Australia and Asia.
Kiwi Rider is now in discussions with parties interested in taking an active majority shareholder role.
The IM is available now. If you’re interested reply to this newsletter or give me a call.
Recently Completed
Imersia
This is a great New Zealand story where investors had the opportunity to participate in a capital raising here prior to a typical “Series A” share round out of Singapore or the U.S. It raised $1,200,000 from several investors. The Offer has now closed fully subscribed.
Freeflow Pipes
This Offer was one which started with OCNs and ended up with several shareholders taking up ordinary shares in the business. The Offer has now closed fully subscribed.
Happy to hear from you
I’m always happy to hear from you if you’d like to comment on the matters raised in Capital Comment – or of course it you’re looking for debt or equity for business or property or would like to invest in either. If we don't get to talk again before Christmas have a Merry Christmas and Happy new year.
The best way to keep in contact is to phone me on +64 9 307 3257 or +64 21 902 901, or simply email john.paine@tbkcapital.co.nz
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None of the above are offers of financial products that require disclosure under the Financial Markets Conduct Act 2013 (Act) and are available only to wholesale investors as defined by that Act. They are intended for distribution only to selected people to whom, under the relevant laws, they can be lawfully distributed. They cannot be distributed in any other jurisdiction, or to any other people. They are not offers or solicitations in any jurisdiction in which such offers or solicitations are not authorised, or in which the person making such offers or solicitations are not qualified to do so, or to any person to whom it is unlawful to make such offers or solicitations. Any representation to the contrary would be unlawful. No action has been taken by any person that would permit a public offering in any jurisdiction where action for that purpose would be required.
Cheers
JP
John Paine B.Sc., Dip BIA
TBK Capital Limited
Level 15, BDO Building
120 Albert Street
Auckland 1010, New Zealand
Phone +64 9 307 3257
Fax +64 9 309 4519
Mobile +64 21 902 901
Email john.paine@tbkcapital.co.nz