recent trends in alternative financing instruments

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Recent trends in Alternative Financing Instruments Financing African SMEs April 25, 2007 UNECA - Zanzibar Tshepidi Moremong Aureos Southern Africa Fund

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Page 1: Recent trends in Alternative Financing Instruments

Recent trends in Alternative Financing Instruments

Financing African SMEs April 25, 2007

UNECA - Zanzibar

Tshepidi MoremongAureos Southern Africa Fund

Page 2: Recent trends in Alternative Financing Instruments

Aureos Capital

COSTA RICA

EL SALVADOR

LONDON

SOUTH AFRICA

NIGERIA

MOZAMBIQUE

ZAMBIA

TANZANIA

KENYA

SRI LANKA

MAURITIUS

GHANA

PAPUA NEW GUINEA

DOMINICANREPUBLIC

THAILAND

PHILLIPINES INDONESIAVIETNAM

INDIA

SENEGAL

• Global Emerging markets SME Private Equity Fund Manger

• Formed in 2001 as a joint venture between CDC Capital and Norfund

• Inherited 14 pioneering country specific funds across the globe 9 of which are in Africa

• 17 funds currently under active management with a total committed capital of over US$450 million

• Sub-Saharan Africa US$140 million of new committed capital

• Aureos West Africa Fund: US$50 million

• Aureos East Africa Fund: US$40 million

• Aureos Southern Africa Fund: US$50 million

Page 3: Recent trends in Alternative Financing Instruments

Strategic Overview

AUREOS CAPITAL LIMITED, MAURITIUS

SOUTH EAST ASIA - $50- Manila, Philippines*- Bangkok, Thailand - Jakarta, Indonesia- HCMC, Vietnam

Over US$450 million under management

WEST AFRICA - $50m

- Lagos, Nigeria *- Accra, Ghana- Dakar, Senegal

CENTRAL AMERICA - $36.3m

- San Jose, Costa Rica *- San Salvador, El Salvador- Santo Domingo, DR

Aureos Advisers Limited, London

SOUTHERN AFRICA - $50m

- Johannesburg, RSA *- Lusaka, Zambia- Port Louis, Mauritius

SOUTH ASIA - $70- Bangalore, India- Bombay, India- Colombo, Sri Lanka*

EAST AFRICA - $40m

- Nairobi, Kenya *- Dar es Salaam, Tanzania- Kampala, Uganda

PACIFIC ISLANDS - $20m

- Brisbane, Australia *- Port Moresby, PNG- Suva, Fiji

Legend: ACTIVE FUNDS / Existing offices / New offices* Regional hub

CHINA - $100m

- North East

Page 4: Recent trends in Alternative Financing Instruments

Investment Guidelines

• Expansion Capital• Management Buy-Outs & Buy-Ins• Public to Private Transactions• Select Privatisations

Investment Types

Investment Size

Instruments

EquityStake

Currency

• US$0.5million – US$5million

• Equity/ Quasi-Equity/ Loans

• 10% - 49% with the ability to take control

• Board seat

• Ability to exit within a reasonable timeframe: 3-6 years

Across all Sectors

Exit

• US$/ Local Currency

Page 5: Recent trends in Alternative Financing Instruments

Key Issues in Financing SMEs

• Limited track record

• Lack of proper financial records

• Inadequate business plan

• Insufficient management capacity/ skill

• Poor management of funds

• Under capitalisation

• Insufficient assets for security/ collateral

• No corporate governance structures

Limited Access To Capital

Page 6: Recent trends in Alternative Financing Instruments

SME Traditional Sources of Financing

• Entrepreneurs own resources

• Family and Friends

• Limited access to bank debt

• Business Angels

• Private equity/

venture capital

Page 7: Recent trends in Alternative Financing Instruments

Private Equity

• Dividends only paid on profits

• Holders of equity are business partners – not just financing

• Long-term funding – payback through exit

• Equity can be leveraged

• Dilution of owners equity

• Shareholders will demand greater disclosure

• Shareholders may “interfere” with day to day operations

• Dividends not tax deductible

• If business successful – unlikely for business owner to launch share buy-back

Advantages Disadvantages

Page 8: Recent trends in Alternative Financing Instruments

Key Take Aways

• Sub-Saharan Africa Private Equity (excluding SA) as an Asset Class and Industry is still in its nascent years but growing

• SSA PE terrain requires negotiating “pothole-ridden” roads

• Notwithstanding the above, significant opportunities with above average returns

• Through partnerships we can improve the terrain encouraging further participation

Page 9: Recent trends in Alternative Financing Instruments

SSA Private Equity Industry (excluding SA)

Fund Size (US$m) Vintage

Ghana Venture Capital Fund 6.0 m 1993

Tanzania Venture Capital Fund 8.0 m 1994

Mauritius Venture Capital Fund 7.5 m 1995

Zambia Venture Capital Fund 12.5 m 1996

Takura Venture Capital Fund 6.85 m 1997

Acacia Fund 19.6 m 1997

• Business Angels and family investors have formed the foundation for the PE market

• European and US Development Financial Institutions contributed to the“first” wave of private equity/ venture capital funds across Sub-Saharan Africa

• Majority “First” wave funds country specific

Page 10: Recent trends in Alternative Financing Instruments

SSA 2nd Generation Private Equity FundsFund Committed Capital (US$m)

Pan-African Funds

Emerging Markets Partnership Africa Fund I & II > US$600m

Actis Africa Fund US$550m

Kingdom Zephyr Africa Fund US$102m

Pan-African Infrastructure Development Fund Target US$1 billion

Regional Funds

AfrInvest Fund EUR25m

Southern Africa Enterprise Development Fund US$100m

Helios US$250m

East African Development Bank (SME Fund) US$40m

Aureos Funds (East, West & Southern Africa) US$140m

Business Partners (Madagascar & Kenya) US$+50m

Country Funds (Increasing)

Capital Alliance Fund I (Nigeria) US$35m

CEDA Venture Fund (Botswana) US$40m

BIFM Capital (Botswana) +/- US$50m

Page 11: Recent trends in Alternative Financing Instruments

SSA Govts and Private Equity

Increasingly, Governments are seeing PE/ Venture Capital as the engine to private sector development

NIGERIA• SM Industries Equity Investment Scheme: banks set aside 10% of their PBT annually to invest in SME businesses

BOTSWANA• CEDA Venture Capital Fund was formed in order to invest in VC and PE transactions. Independent private sector manager, with govt. pension Fund capital

• Govt largest pension fund has mandated 2.5% of funds under management be allocated to venture capital

NAMIBIA• Bank of Namibia conducted study to look into VC/ PE Industry and impact on the economy

Page 12: Recent trends in Alternative Financing Instruments

The “Potholes”

• Currency Risk

• Political Risk

• Lack of Information

• Lack of Transparency and Corporate Governance

• Legal/ Regulatory Risk

• Liquidity Risk

• Market Size

Non –enabling environment

but NOTInsurmountable

Page 13: Recent trends in Alternative Financing Instruments

How have we negotiated the Potholes?

Currency Risk

Political Risk

Liquidity Risk

Legal/ Regulatory

Management

Market Size

• “Naturally” Hedged Businesses

• Currency Hedges

• Political Risk Insurance

• Diversify across markets

• Consolidation across markets

• Get money out earlier

• Structure in an exit

• Government intervention

• Relationships, relationships!!

• Bring in Management

• Technical Strategic Partners

• Roll-Outs

Page 14: Recent trends in Alternative Financing Instruments

Partnering to enable financing

• Regulatory & legal reforms Pension reform Judicial system Incentivising VC/PE funds (taxes) Tax amnesty from moving from

informal to formal sector

• Public infrastructure Access to ports, power,

telecommunications etc.

• Careful privatisation

Financial/ capital market development

Less onerous listing requirements Different taxation requirements for

investors in these markets

• Catalyst for VC development VC fund development

Encourage DFIs to invest in VC

• Technical assistance funds Training of management teams

• Provide access to markets

• Tax breaks Encourage multinational to

“plough” back profits into Africa

African Governments Foreign Governments

Page 15: Recent trends in Alternative Financing Instruments

Case Study: MBO of Poultry Processor

Hybrid Poultry - Zambia

Transaction Overview

Aureos Value Addition

Exit Achieved

• ZVCF invested US $275k in a combination of debt and equity for 30% stake in Hybrid

Poultry

2001 follow-on loan to fund expansion

• Improved corporate governance

• Strengthened board

• Improved financial reporting

• Brokered working capital facility with local bank to fund production of maize – used for stock feed

• Exited in 2004 at a US $ IRR of 159% and a cash multiple of 5X

Page 16: Recent trends in Alternative Financing Instruments

Golden Lay LimitedCountry of Origin: ZambiaScope of Services: Zambia

Date of Investment: 10 Feb 2006

Sector: Agriprocessing

Deal Type: MBI

Investment Size/ Stake: US$4.35m/ 49%

BUSINESS OVERVIEW

• Largest commercial table egg producer and distributor in the Copperbelt of Zambia

• Golden Lay (‘GLL”) controls approximately 15% of the Zambian national market in table eggs

• Company targets the informal sector which distributes product to the end consumer

• At investment produced on average 123,000 eggs per day

• Aureos backed an expert management team to expand capacity of the business and to enter neighbouring markets

NEW DEVELOPMENTS & AUREOS VALUE ADD

• Increased production by 14% by installing a third layer house

• Bio-security measures fully installed.

• Rearing house now registered and recognised as a quarantine facility.

• First year turnover surpassed budget by 17%

• Aureos loan (US $3.36m) refinanced within first 12 months using Barclay Bank loan on more favourable terms

• Proactive social responsibility plan in place: HIV/Aids programme for staff

Projected US$IRR: 36%

Page 17: Recent trends in Alternative Financing Instruments

Case Study: Start Up Mineral Water Producer

Voltic Limited - Ghana

Transaction Overview

Aureos Value Addition

Exit Achieved

• GVCF invested US$700k for a 20% stake in Voltic

• Additional loan advanced for automation of processes

• Assisted in regional roll-out into Nigeria and Togo

• Strengthened board

• Improved depth of management

• Implemented strong financial controls and reporting systems

• Exited in 2003 with a US$IRR of 16.3%

Page 18: Recent trends in Alternative Financing Instruments

Fibrex Angola

Country of Origin: AngolaScope of Services: Angola

Date of Investment: 18 January 2007

Sector: Manufacturing

Deal Type: Buy In

Investment Size/ Stake: US$2.5m/ 33%

BUSINESS OVERVIEW

• Fibrex is Angola’s leading plastics pipe (HDPE & PVC) manufacturer in the country • Aureos invested in Fibrex through a Mauritius SPV, PII which acquired a 99% of Fibrex Angola jointly with DPI International a leading South African plastics pipe manufacturer and a local entrepreneur - Plastip• Aureos, DPI and Plastip acquired the business in order to exploit the current boom in the infrastructure development across Angola post the civil war• Business was a family owned business and thus Aureos is looking to implement strong corporate governance and operational reporting

NEW DEVELOPMENTS & AUREOS VALUE ADD

• Business was taken over in mid January. Production since then has been below expectations due to significant power outages in the country• Generator was also down for two weeks impacting the production of the business• New Managing Director will be in Angola on April 25 th to take over the running of the plant and implement SA industry standard production mechanisms• Streamlined financial procedures and systems under implementation

Projected US$IRR: 32%

Page 19: Recent trends in Alternative Financing Instruments

Aureos Capital aims to be the market leader in the provision of private equity to small and medium-sized enterprises in emerging markets. It realises this strategy with dedicated people and a strong local presence, continuously developing a culture of professionalism and excellence.

Aureos Capital also aims to deliver attractive financial returns and to add value for clients and investors – operating proactively and with integrity to the highest ethical standards.