Development Capital
February 2007
Proventus is moving to meet what we believe to be an important, unfilled need among mid-size European companies that want to initiate expansion or restructuring, but are unable to acquire bank financing and unwilling to dilute current ownership to fund such initiatives.
To date, Proventus has made a number of investments in development capital. Examples of Proventus' projects include:
- Nordic Broadcasting Oy
Proventus became a major shareholder in the leading commercial broadcasters TV4 in Sweden and MTV in Finland in 2005 via the ownership in the holding company Nordic Broadcasting. In March 2007 Proventus ceased to be a shareholder but continues its active role as a financial partner by extending a subordinated loan to Nordic Broadcasting. The funds will be used to bolster the group’s long-term competitiveness in the future media arena; the television industry is an industry in flux, which is being fundamentally affected by changing media consumption behaviour, internet proliferation and deregulation. Proventus has secured standard financial covenants and board representation in both operating companies.
- Telecom equipment, undisclosed
Proventus extended a loan to a fast growing Swedish manufacturer of high-tech telecom equipment in July 2006. The cash enables the company to continue its rapid international expansion while keeping focus on R&D activities. Proventus provided a three year bullet loan of EUR 3 million, which can be extended to a total of EUR 5 million. Proventus has secured standard financial covenants and has additional down-side protection based on a floating charge.
- Consumer loans, undisclosed
In June 2006, Proventus extended a dated subordinated loan to a fast growing financing company in Sweden. The company offers unsecured loans to households in Scandinavia and has seen rapid growth over the last few years. As the operating company is required to maintain a capital adequacy ratio, the growth would eventually have forced the owners to invite external capital or sell part of the portfolio. Instead, Proventus provided a SEK 50 million subordinated loan that was structured to be included in the capital base. The down-side protection is provided by safeguards in terms of financial covenants.
- Real estate, undisclosed
In mid-2005, Proventus provided acquisition financing to a listed real estate company in addition to its bank financing. The facility is based on a five-year structurally subordinated term loan of SEK 20 million. The “loan to value” is higher than typically seen in this type of real estate projects (approximately 90 per cent), but justified by high cashflows and low risks of vacancies.
- Gothia Financial Group
Proventus provided a subordinated loan to Gothia Financial Group, a Swedish financing company specializing in buying portfolios of defaulted consumer debt and collecting for its own books, in early 2005. The family-owned company wanted to continue aggressive expansion without external equity investors. Proventus provided a five-year term loan of SEK 50 million. The loan was subordinated to all other debt, and secured only by an extensive package of financial covenants. In connection to Gothia Financial Group being acquired by B2 Holding ASA in August 2006, the Proventus loan was repaid according to the terms of the loan agreement.
- Microdrug
In 2000, Proventus invested in preferred equity in Microdrug AB, a private company engaged in the development and marketing of advanced medical drug delivery systems. The company has developed favourably and now holds a number of patents and other intellectual property. Rather than being divested to a larger pharmaceutical company early, Microdrug has chosen to develop into a stand-alone research company. Proventus has continued to support the company as initiatives have proven to create additional value.
- Comtax
In 2000, two Swedish private individuals agreed to acquire Comtax, a Swedish software company that develops and markets an international tax optimization program aimed at multinational companies. The company had a unique product with high cost savings potential for clients, and the new shareholders believed that increased investments in marketing and product development could yield significant returns. Proventus backed the new shareholders through a package of convertible loan and equity. The down-side protection of the investment is provided by the shareholders’ agreement stipulating inter alia Proventus’ board representation.
In the future we intend to increase our investments in this area.
We see development capital as a major investment opportunity, targeting capital needs that cannot currently be financed because of conservative loan policies of banks and others. The present European market for subordinate capital is in relative terms just one fifth of what it is in the US. We think there is a significant need for a more active market of this kind and aim to take part in developing it.
Our ambition is to grow into that gap in the market, by becoming a problem solver for those mid-size companies in need of capital. We don’t have a single formula for our relationships with potential borrowers, but will try to find the right mix of active participation and capital structure for each individual case. What is important to us is keeping a close working relationship with management and owners, so that we can anticipate changing needs as they may arise.
Proventus looks for partnerships with the owners of the companies that we lend to. In contrast to those investments in which we take an active role in a well defined process of change, we look for companies with a good cash flow generation capacity, and in less challenging circumstances, that are well run, and are looking for funds for e.g. expansion and restructuring. Unlike most lenders, Proventus’ experience in change management gives us the know how to become active partners should the need arise in the case of financial targets not being met.
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