CORPORATE FINANCE ECOSYSTEMS

SESSION 1 = Financial environment

THE FINANCIAL ENVIRONMENT

Very small (individual) companies = financed by owner

Bigger companies finance themselves;
- In direct –> on the financial markets or from private or public investors
- Indirectly –> raising money from intermediates who collect it from their clients
or investors.

The balance between the 2 channels varies according to

- The history and the practice
- The regulation and more generally the legal framework, The characteristics of the
population of companies (large or small, type of business…)

The key players : Banks

⭐ Local or (inter)national: Community State Bank vs Wells Fargo
⭐ Private, public or mutual : BNPParibas, EIB or Sparkassen-Finanzgruppe;
Raiffeisenbank
⭐ Global or focused on some specific sectors: A/B/C/I (in China) before and
after the reform
⭐ Retail, global or investment : Wells Fargo, CitiGroup, Goldman Sachs
Banks are based on 2 basic principles: fractional reserves & conversion
=> Small amount of capital to lend with leverage/ Short term resources to grant
mid-long term credit
With a strong constraint

The key players : Investment funds (PE or VC)

⭐ Local or (inter)national: FRI Auvergne Rhône Alpes (Regional Investment
Fund) or Cinven,
⭐ Fund Providers: Public bodies (BPI France, Temasek, Government Pension
Fund Global (Norway), Financial institutions investing their own funds (Caisse
des dépôts du Québec), Fund managers raising funds from investors (Apax,
Blackstone), Families managing directly their own funds (Créadev, Mulliez
family), Corporates (Intel, LVMH…) or Orange Ventures
 ⭐ Generalist or focused on some specific sectors: Food, Biotech… Merieux
Equity Partners : Health & Food Unigrains (Food) KKR Investment stage: Seed,
growth, Buy-outs, turnaround

Business model
Raise and invest funds + divest regularly
=> Management fees perceived on invested assets
Capital gains shared between managers and investors (carried interest)

The key players : Financial markets (salles de marchés)

- Local or international (according to listed companies or investors): Shanghai
SE or NYSE, Equity, debt but also a lot of other asset classes: CBOT, CME
- Focused on listing or diversified (technology, processing..): Euronext vs LSE
or Deutshe Börse

Business model
● Listing fees from companies
● Market access fees from members
● Commission on trades
● Other revenue (technology and services, clearing…)

The key players : The companies themselves

⭐ The lion’s share of the financing resources
⭐ Older than the banks themselves
⭐ As long as it’s between 2 non parent companies, this way of financing is closely
linked to the business (trade) relations – generally negotiated and fixed when the
parties agree on contract conditions (price list, discount and payment term)
⭐ Is usually used to finance working capital, and considered as management criteria
in some industries (e.g. food retail) or context (e.g. LBO, distress companies)
⭐ Vary accordingly with the local regulation (if it exists) and practices.
⭐ No specific “business model” as it is generally not rewarded but a soft signal for
★ A weak or non efficient financing system,
★ An imbalanced relation between 2 companies or 2 stages in a sector value
chain.
★ A deterioration of the financial situation of the client’s side

GLOBAL VIEW OF THE ECOSYSTEM

What shapes the ecosystem?
A. Economic cycles
- During downturns
- Banks are more conservative and do not hesitate to blacklist some sectors
because of their cyclical exposure or some specific conditions COVID crisis
closed credit for hospitality, tourism and aircraft industry 2009 financial crisis
closed credit for leveraged operations
- The gap between large and small companies increases automatically
- Private equity focus on the management of their portfolio before considering to
invest further
- Market caps shrink, limiting opportunities to raise equity or debt as long as the
former also drives the later.
- Debt market windows are closed or restricted to top level ratings

B. Competition
Between banks – generally depending on their financial situation
Between markets and funds
Between incumbents and newcomers Insurers / pension funds developing a direct
investment policy or inhouse banks to diversify their customers’ base and access to
growth opportunities Fintechs, providing innovative business models or products – But
still marginal expect for consumers credit, insurance and payment solutions (GAFA, Ants
Financial, Tencent, Revolut…) Foreign players entering new markets (Chinese banks in
Europe) – But today still mostly dedicated to Chinese companies and property Funds
expanding from equity to debt…

C. Regulation
The financial sphere is highly regulated or at least carefully monitored by the regulators
(i.e. the shadow banking in China). Generally regulation in increasing after a deep crisis,
and easing a couple of years later, with a purpose of curb the risks in the first case and
unleash growth in the second case (see 1933 and 2010 vs 1986 and 1999, see also
Mifid II and the amendments recently announced by the ESMA) Beyond that, regulation
is also conditioning the competition. Fintech has developed because of the changes
operated in the banks regulation, giving them the opportunity to enter some market
niches. The game changer is however the monetary policy that blurs both regulation and
economic cycle traditional effects Long term low rates “unlimited” access to the credit
With additional safety nets provided to the banks and as a consequence, to their
corporate clients.

D. Technology
Brings competition between the incumbents, and between incumbents and newcomers
Translates into :
- Financial products, giving to almost all companies an access to the most
sophisticated solutions
- Tend to reduce costs and / or processing delay

Banks : A quick focus

Generally a diversified business model where different businesses / clients classes
coexist
Leading to 2 categories of revenue
- Interest based – the bank grants a credit and charges interests. The revenue
recognized depends on the margin on interest (i.e. the spread between the client
and the bank interest rate)
- Commission based – the bank deliver a service and is paid through a
commission

The way banks deliver a credit Example of credit lines Debt with a collateral as a fixed
asset (property, financial assets), or receivables (factoring, bills discount) Open credit
lines: Short term needs: overdraft Long term needs: bonds Dedicated to a specific use
Capex line Factoring Credit lines parameters The yield The total cost (including
commissions) The term (quarter, annual, bullet…) Structured or bilateral Contract
details With or without covenants With or without additional sureties
SESSION 2 = A private company from a financial angle
PRIVATE COMPANY
Private = way a company is controlled and financed.
- Non listed companies
- Companies owned by non public bodies (i.e. states or equivalent)
- Companies controlled by non profit organizations

From an investor POV, there is no divergence between listed and non listed companies,
=> but the level of risk he has to reward.

THE FINANCIAL STRUCTURE

The balance sheet = pictures the wealth of the company at the end of a period (12
months)

The BS breakdowns : ASSETS + LIABILITIES & SHAREHOLDERS EQUITY

Goal : value the company’s financial wealth

The financial BS focuses on the breakdown between : uses categories + resources

categories according to their origin

Both readings are valuable but complementary.

Cash Flow = what you can spend

CF encompasses items that are not directly factored in the Profit&Losses but do have an
impact on the BS
It’s the bridge between the profits and the change in the balance over 2 FY
The main document to analyse = cash flow statement

The cash flow cycle construction principles

Earnings before interest and taxes (EBIT) is an indicator of a company's profitability.
EBIT = REVENUES - COGS - OPERATING EXPENSES
= NET INCOME + TAXES + INTERESTS

Net operating profit after tax (NOPAT) is a financial measure that shows how well a
company performed through its core operations, net of taxes.
NOPAT = EBIT x ( 1 - TAX RATE )

I = Depreciation
P = Price of Asset
Y = Useful life
THE ACCESSIBLE RESSOURCES
★ Large or small company?
★ Healthy or poor financial situation ?
★ Some soft power to strengthen the bargaining power with the different
stakeholders (banks, shareholders, public bodies…)
★ Number of employees (e.g. Fiat in Italy)
★ The technology owned or the fact that the company delivers a critical service (e.g.
EDF in France or former Areva group)
★ Some robust contract clauses that protect the company (e.g Atlantia in Italy)
★ The personal relations of the managers / shareholders with other departments of
the bank (typically the private bank and wealth management)

Obviously, financial resources available is driven by the economic context

In the bull phase of the economic cycle
- The lenders are optimistic regarding the repayment capacity of their clients and
do not have any liquidity concern
- The equity investors have positive anticipations regarding the future value or their
investments, on the back of positive business outlook

In the bear phase

- The lack of liquidity, negative business outlook and credit defaults lead lenders to
raise their credit conditions and amounts – some companies are totally banned
from the market
 - Financial market windows are generally closed (either bonds or equity)

For cyclical businesses, it’s key to anticipate the economic cycles to preserve their
creditworthiness.

Typology of products

Short term resources for short term uses

The factoring can hardly be used to finance industrial equipment
Debts as long as you can refund Or grant a surety
What about debt to fund non cash flow generative companies like startups?
All resources do not have the same cost
Because of the risk
Diversification and close monitoring are key

Who is doing what?

Some simple information on the dashboard of the CFO
■ Banks conditions and proposals (possibility to enlarge the pool)
■ Credit contract clauses
■ Debt maturity and redemption schedule
■ Financial market environment
■ A robust and real time reporting system