Impact Fund Investment Case Study
Budget: $10 – $30 USD
CASE STUDY ASSIGNMENT
Description of XYZ Capital and the XYZ Mandate
XYZ Capital is a private debt impact fund investing at the nexus of Climate Adaptation & Gender Equity in the Food Security, Health Resilience, and Education Technology sectors across Kenya, Uganda, Rwanda, Tanzania, Zambia, Namibia, and Botswana. The Fund targets high-growth, EBITDA-positive SMEs that drive intra-African trade and resilient economic growth. The Fund employs a mezzanine debt strategy, working alongside co-investors to optimize capital structures that help portfolio companies meet growth targets while lowering their overall cost of capital, and control for downside protection and currency risk.
Description of Portfolio Business
The business is a Kenyan dairy processor leading the premium dairy market with 30+ years in the industry and a broad product portfolio, covering Fresh Milk, Yoghurt, Creams, Fine Foods and Others. It sells throughout Kenya with a focus on the Nairobi region and export representing <5% of sales. The organization is looking for USD$1.6 million in growth CAPEX & Working Capital to enable market entry of Long Life market (+60B KES market) at-scale. Growth CAPEX is used to acquire completely new highly automated Ultra High Temperature (UHT) production line that can efficiently produce (up to 5,000 l/h) of long life milk, ambient yoghurt, juices and more
Requirement
Assess the investment opportunities and prepare a mezz debt structure model for the underlying investment instruments and term sheet.
Scope of the mezzanine debt model includes, as per the mandate of the Fund:
• Geography: Kenya (20%), Uganda (20%), Zambia (20%), Rwanda (15%), Tanzania (15%), and regional markets of Namibia (5%) and Botswana (5%)
• Sectors: Food Security (up to 60%), Health Resilience (up to 20%) and Education (up to 20%), with a thematic focus on climate adaptation and gender equity
• Businesses: High growth, and EBITDA positive medium sized businesses
• Ticket size: US $5-10M
• Currency: USD
• Instruments:
o Equity (20% to 40% target allocation)
o Mezzanine (60% to 80% target allocation)
o A blend of equity and mezzanine is possible when the transaction has an equity buy- out component (e.g. exiting current shareholders), and growth financing via mezzanine
o We have flexibility to structure mezzanine equity-like or debt-like, and yet there is consistency in the structures we prefer to employ with typically a self-liquidating structure with a component of cash interest / dividend, PIK, Principal repayment as a bullet convertible to equity at the end of the tenure
o We tailor the structure of the mezzanine to meet the growth stage / expansion plans of the business flexibly
o We must ensure that we run scenario analysis, including bankruptcy for the model
o Security on the mezzanine is a 2nd lien on senior lender, and we may require additional security based on the underlying cash flow of the business when required, covenants, default provisions and other form of security (as needed)
o Can be used for growth and working capital
Mezzanine Instruments Allowed in our mandate:
Description of XYZ Capital and the XYZ Mandate
XYZ Capital is a private debt impact fund investing at the nexus of Climate Adaptation & Gender Equity in the Food Security, Health Resilience, and Education Technology sectors across Kenya, Uganda, Rwanda, Tanzania, Zambia, Namibia, and Botswana. The Fund targets high-growth, EBITDA-positive SMEs that drive intra-African trade and resilient economic growth. The Fund employs a mezzanine debt strategy, working alongside co-investors to optimize capital structures that help portfolio companies meet growth targets while lowering their overall cost of capital, and control for downside protection and currency risk.
Description of Portfolio Business
The business is a Kenyan dairy processor leading the premium dairy market with 30+ years in the industry and a broad product portfolio, covering Fresh Milk, Yoghurt, Creams, Fine Foods and Others. It sells throughout Kenya with a focus on the Nairobi region and export representing <5% of sales. The organization is looking for USD$1.6 million in growth CAPEX & Working Capital to enable market entry of Long Life market (+60B KES market) at-scale. Growth CAPEX is used to acquire completely new highly automated Ultra High Temperature (UHT) production line that can efficiently produce (up to 5,000 l/h) of long life milk, ambient yoghurt, juices and more
Requirement
Assess the investment opportunities and prepare a mezz debt structure model for the underlying investment instruments and term sheet.
Scope of the mezzanine debt model includes, as per the mandate of the Fund:
• Geography: Kenya (20%), Uganda (20%), Zambia (20%), Rwanda (15%), Tanzania (15%), and regional markets of Namibia (5%) and Botswana (5%)
• Sectors: Food Security (up to 60%), Health Resilience (up to 20%) and Education (up to 20%), with a thematic focus on climate adaptation and gender equity
• Businesses: High growth, and EBITDA positive medium sized businesses
• Ticket size: US $5-10M
• Currency: USD
• Instruments:
o Equity (20% to 40% target allocation)
o Mezzanine (60% to 80% target allocation)
o A blend of equity and mezzanine is possible when the transaction has an equity buy- out component (e.g. exiting current shareholders), and growth financing via mezzanine
o We have flexibility to structure mezzanine equity-like or debt-like, and yet there is consistency in the structures we prefer to employ with typically a self-liquidating structure with a component of cash interest / dividend, PIK, Principal repayment as a bullet convertible to equity at the end of the tenure
o We tailor the structure of the mezzanine to meet the growth stage / expansion plans of the business flexibly
o We must ensure that we run scenario analysis, including bankruptcy for the model
o Security on the mezzanine is a 2nd lien on senior lender, and we may require additional security based on the underlying cash flow of the business when required, covenants, default provisions and other form of security (as needed)
o Can be used for growth and working capital
Mezzanine Instruments Allowed in our mandate: