Raising Capital From Overseas Family Offices
Raising capital abroad may sound to some deal sponsors like an enormously costly proposition with high risks and low probabilities of success, yet the ease of capital movement in today’s global capital markets and the overseas’ interest in investing in high-quality, long-term strategic plays has made international capital raises significantly easier than the past. Still, if one tries to follow a domestic capital raise playbook for an international capital raise, the results are likely to be disappointing. With the right four-component, non-traditional capital raising approach, raising capital abroad – even in the billions – can be surprisingly less painful, less risky, and far more likely to succeed than even some domestic traditional efforts. This short white paper outlines the key differences between the two mentioned approaches and the key elements of a non-traditional capital raise in today’s global investor markets.
Unlike a traditional domestic approach that is likely to fail, a four-element, non-traditional capital raising approach is the most certain way to gain access to these overseas investors.
Traditional versus Non-traditional Capital Raising Approaches
Although many financiers understand how to raise capital internationally from a theoretical perspective, most do not have much practical experience raising capital outside of their domestic or industry-specific markets. What may be surprising though, is of the many trillions of dollars in capital that gets raised each decade, approximately 25% is raised - an amount equally to at least $1 trillion annually - in a way that one might call non-traditional; outside of domestic-to-domestic and outside of industry-peer-to-industry-peer settings.
To explain this point further, please accept for a moment that there can be both traditional and non-traditional capital raising efforts (even though it is getting harder to claim that there still is a traditional method). In a traditional method, deal sponsors present an investment opportunity package to investors; and through a fairly standardized deal dissection, due diligence and transaction process; a deal gets consummated. As deals get larger, the sophistication may increase and the complexity of the discovery, due diligence and transaction processes may expand, but essentially the deal process and deal style remains the same. In such settings, sponsors and investors tend to live under the same laws, have the same cultural underpinnings to their business standards and negotiating behaviours, share a common baseline knowledge of the industry and its best practices, and have a deal style that can be called similar. In such traditional settings, deals are packaged, presented, negotiated and closed with efficiency, speed, and upfront costs.
In a non-traditional raise, deal sponsors must do more upfront to package and present their deals but luckily, overseas investors tend to pay more. Cross-border deals, international deal syndications and overseas private placements tend to fall into this theoretical category of non-traditional raises. What makes these raises very different is that deals are not packaged, presented, negotiated or closed like they are in a traditional deal. It is not just a question of shifting around the deal package contents, but a challenge of introducing new elements, new analysis and additional deal rationale that are not included in domestic traditional deal approaches. For starters, in many instances the deal sponsor may have a sophisticated knowledge of the industry, its best practices and customary deal types while the investor may not. The deal sponsor may live under different laws, different business cultures, have a different negotiating approach and even have different financial structuring requirements (as is the case with accessing Shariah financing). It is almost never a matter of getting an introduction and getting on a plane to present a “traditional” deal package. It is a different package, a different approach, a different pitch, and to be honest, most often a different person making the pitch.
“These things never work. It will be six months down the road and we have done a bunch of work and we still won’t have any money.”
Often when we are introducing the idea of raising money abroad to business owners, their bankers or their lawyers, someone involved will inevitably raise the point that “these things never work.” To this we first need to point out that foreign direct investment statistics prove conclusively that the reality is very different. Foreign capital is going into good deals in North America every single day. The United States has been the world’s largest recipient of foreign direct investment (FDI) since 2006. With the world’s largest market, skilled and productive workers, a highly innovative environment, appropriate legal protections, a predictable regulatory environment, and a growing energy sector, the United States offers an attractive investment climate for investors. The U.S. manufacturing sector draws a considerable share of FDI dollars, led by pharmaceuticals and petroleum and coal products. Outside manufacturing, wholesale trade; mining; non-bank holding companies; finance and insurance; and banking receive the greatest shares of foreign investment.
It is also our experience that nine times out of ten, when someone objects to raising money abroad, it is because they do not understand the differences, they fear the uncertainty, or have yet to be shown a plan that is materially different. The purpose of this article is to explain the difference, remove some of the uncertainty, and offer a pragmatic plan forward.
Bottom line: Why bother with a non-traditional approach?
The answer is three fold:
a) because some deals may not be attractive to traditional investors and have difficulty getting funded using traditional approaches,
b) because though non-traditional processes are uncommon to many financiers, there are experts who specialize in non-traditional capital raising, have good international connections, have the right deal “style” and can make the process work well,
c) because all other things being equal, non-traditional investors have consistently offered to pay the highest prices for deals (the good ones, the bad ones, and even the ugly ones).
What are the four elements of non-traditional approach that supports an effort to raise capital abroad?
Element 1: Making the Case. The long-term strategic Case for the Family or the Nation before making the case for the Individual Investor.
Unlike most North American deals, it is not uncommon to have to present a case for a deal on its far-into-the-future merits and its strategic value for a nation’s people. Three of the venture financing efforts we worked on over the past decade involved exactly this: “Show me the deal that will be my family’s new business for the next century.” The same holds true for presenting a deal to sovereign wealth, state-sponsored investors, or state-owned companies. These organizations may “talk” traditional capital raising but at their core (and in closed-door investment committee meetings), they answer to the rulers of their nations who do not care much for financial returns. The decision makers minds are elsewhere and the challenge is to present one’s deal that appeals to where their minds actually are.
Element 2: Presenting and Explaining the Opportunity: Explaining in detail, the merits of the Business, the Market Situation, and the Market Opportunity in plain language
Our experience is that investors, all the world over – private equity players, sovereign wealth funds, state-owned investment companies – hate to admit they know less about an industry, a market, or a market situation than the deal sponsors. That said, when a thoughtful and very complete business plan is presented, one that educates and informs them so the investor can look smart – they tend to take notice. This is very much the case for non-traditional capital raises abroad. Using plain language and strong visuals – making the deal easy to comprehend and appreciate is part of the task. Obtaining provocative and compelling third party research or better yet, primary research data is often needed to make the case. More vital though than data is the summary of the analysis. One’s ability to encapsulate 500 pages of data into 5 slides and a 15 minute discussion – as that is frequently all the time the top decision makers will spend on understanding the market / investment opportunity.
Element 3: Creating the right deal process: Adapting the Scope and the Process to work within the operating limits of Overseas Investors
To most overseas investors, proximity is important. International and emerging market investors are unlikely to approach an opportunity like an American or European investor where the deal gets done via virtual data rooms and a few one-day visits. It is a face-to-face discussion on their turf. In non-traditional settings there is typically a longer period of senior-level discussion of the merits, the execution and operating risks, the value dynamics and the international politics of the deal, and then a shorter period of discussion on price and terms. In many instances pricing is less important, but protection of reputation is.
Expectations regarding timing also needs to be managed. Time to arrange cash in non-traditional settings is longer. Relative to North American investors, most foreign investors are a little more illiquid and required months, not weeks, to arrange cash for closing. Knowing that overseas investors can rarely move as fast should be factored into creating the right deal process.
Element 4: Adopting the right deal style when Style not Substance, can often make or break the deal when raising capital abroad.
Adapting to a foreign deal style is not difficult if the capital raising team has someone who knows the investment preferences, the capital constraints and the risk tolerances of the target foreign investor. If we have situational awareness, we know what manoeuvring options are available. However, even with situational awareness, there are aspects of diplomacy, beyond-the-deal thinking, and mature poise that can matter as much if not more than the spreadsheets and legal documents. How style plays such a major role is first a matter of language. When bankers are talking to bankers, they can usually find common ground and a common language such that a deal can get done. When bankers talk to billionaires, heads of families, ministers, and heads of state, it is far more difficult to find common ground. Image a non-international 40-year old, fast-talking Wall Street Banker sitting down with a 92-year old, Forbes Top #10 wealthiest, Saudi (who incidentally built the largest Islamic Bank in the world). The chance of a deal discussion getting beyond first round was almost zero.
Does style really change the likelihood of success? In non-traditional capital raises, our experience is yes, absolutely.
Conclusion: With the right approach, with the right team, and with a willingness to arrange and conduct a deal in a manner that overseas investors will recognize and appreciate, it is possible to raise capital abroad in a very systematic, predictable and surprisingly successful manner.