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  1. 1. Standard Bank Principal Investment Management Prospects for Alternative Investments in Emerging Markets 2009
  2. 2. Standard Bank: Principal Investment Management (PIM) 2  Standard Bank is a global emerging markets bank headquartered in South Africa. It is the largest bank in Africa present in 17 countries throughout the continent and a further 16 countries outside of Africa including strategic relationships in Russia, South East Asia and China. The Group has total assets of $162bn (Dec-08) and employees of circa 50,000  The PIM division is responsible for Standard Bank’s investing activities in emerging market private equity and alternative investments. It has over US$3.3bn of AUM and is organised into 4 business areas:  Private Equity: AUM $1.1bn – proprietary investments and joint venture funds  Debt Funds: AUM $700m – FMFM brand covering EAIF, GuarantCo and CMDF  Real Estate: AUM $1bn – joint ventures and strategic asset management  Distressed Debt: AUM $500m – portfolios and single credits  Total team size over 150 staff located in London and target markets  Core geographies/regions in line with the SBG geographic footprint : Africa, South Africa, Nigeria, Turkey, Brazil, Russia, Islamic Asia, GCC and SE Asia  Unique relationships with DFIs and Donor Groups who are stakeholders or investors in funds, including: DFID, SIDA, SECO, DGIS, FMO, DEG, DBSA, KfW, IFC, ADB, IDB, AfDB
  3. 3. Standard Bank: Private Equity 3  PE Funds under management exceed US$1.1billion  Proprietary activity of $700m with local teams in SA, Nigeria, Brazil, Turkey, Russia  JV managed funds with third party capital of over $450m including:  South East Asia Strategic Assets Fund - $150m – investing in infrastructure  Islamic Asia Infrastructure Fund - $262m – investing in infrastructure  GCC Energy Fund - $67m – investing in power and energy  Deal sizes up to $50m of equity, typically minority shareholdings and exits in 3-5 yrs  Target sectors include:  Fast Moving Consumer Goods  Retail  Specialised manufacturing  Non-bank financial services  Infrastructure, including: power, transportation, PPPs, telecoms, logistics and associated industries  Resources, including: mining and oil/gas
  4. 4. Standard Bank: Debt Funds – Frontier Markets Fund Managers (FMFM) 4  FMFM - is a division of Standard Bank Plc and is the main adviser to the Emerging Africa Infrastructure Fund and to GuarantCo.  FMFM currently has over $700 million of AUM and a team of 12 based in London  Emerging Africa Infrastructure Fund (“EAIF”): $500 million dedicated debt fund for sub-Saharan Africa  Provides long term debt and mezzanine financing for privately owned infrastructure projects  Capitalised by 5 European government agencies, 3 DFIs and SBG and Barclays  Lend up to 15 years and $40 million per transaction  20 transactions to-date covering power, telecoms, transport, water, infrastructure within mining  GuarantCo: $200 million fund which provides credit enhancement for local currency debt issuance by private, municipal and parastatal infrastructure sectors in all low income countries  Provides partial credit and risk guarantees • Cover for senior, mezzanine or capital markets instruments; maturity extensions, coupon or principal strips  In progress- SSA Debt Capital Markets Development Fund: US$200 million Fund investing in a range of private debt instruments in Africa, ie a mix of African corporate debt securities, issued in both local and hard currencies
  5. 5. Why EMs - Generally 5  Too big to be ignored  BRICs and Turkey, ME, SA, Nigeria, Malaysia, Indonesia sizeable share of global GDP  Increasing share of global alternative investment  Large, young, growing and urbanising population  Growth in disposable income and middle classes  High relative GDP growth  External debt as a percentage of GDP has fallen improving sovereign credit worthiness and encouraging investment.  Growth has been driven by significant increases in consumer spending and domestic investment.  Consumer focused businesses including fast moving consumer goods, retail, specialised manufacturing, IT, leisure, media and financial services all experiencing strong growth  Improving operating environment  Highly qualified business leaders often with developed world experience  Improving liberalisation, governance, legal systems, sanctity of contract and market conditions  Increased exit opportunities and ability to achieve downside investment protection  Increased trade sale opportunities with increasing interest from global players in emerging markets  Improved liquidity in local stock markets  Natural resources and Infrastructure  Substantial deposits of natural resources supported by strong demand from global economies  Acceptance of the importance of infrastructure to grow and need for governments to engage with private sector
  6. 6. Why EMs – Fund Raising and Investment 6  20x increase in funds raised in 5 years – helps fuel growth  62% of LPs anticipate expanding or maintaining commitments to EM PE in 2009 Source: EMPEA
  7. 7. Why EMs – Investment and Fund Raising 7 Investment Fund Raising Year 2007 2008 2007 2008 Western Europe 132,608 75,000 152,000 105,700 US 105,720 NA 325,800 265,600 Asia (incl. JANZ) 41,506 46,911 34,734 46,869 Asia (ex-JANZ) 30,370 28,270 28,668 39,660 <9% Latin America 8,017 6,962 4,419 4,461 CEE/CIS 8,345 6,344 14,629 5,559 Africa 3,362 5,252 2,340 3,218 <1% Middle East 3,500 1,007 5,027 5,898 Emerging Markets 50,480 47,835 59,160 66,517 Global 638,614 NA 543,026 445,026 • EM receive less than 10%-15% of global PE investment and fund raising • Underinvested and misunderstood market = opportunity • Developed markets also have severe overhang of excess funds not invested Source: EMPEA
  8. 8. Why EMs – PE Investment/GDP (2007) 8 3.5% 3.0% PE investment/GDP (%) 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Hu an y ey a ut LD Am ia E/ na a UK ia ic M E Re ea EM U) ia ic o il ia ica US Tu l ia Ro A r o NZ ae ar ric CE di az ss bl tin an EN ss As As rk p r i So OR (E er ex In Eu A ng Ch Isr Ko Br pu Ru Af Ja Ru m M pe W h CE h ec La Cz  Heavily under penetrated  Expect this to change in next 5 years  PE will become a well adopted product in the EM financial tool kit Source: EMPEA
  9. 9. Why EMs – Net Returns (as of 31-12-2008) 9 Index One Year Three Year Five Year Emerging Markets VC & PE (31.81) 4.69 11.83 Latin America & Caribbean PE (13.93) 13.26 14.96 Asia (ex Japan) PE (32.21) (0.76) 4.19 CEE & Russia PE (35.16) 15.52 28.37 MSCI Emerging Markets (53.18) (4.62) 8.02 US VC (16.53) 4.13 7.06 US PE (24.2) 2.58 10.99 Western Europe PE (39.64) 10.02 18.36 S&P 500 (37.00) ( 8.36) (2.19)  Competitive and compelling returns – definitely not a “black box” Source: Cambridge Associates LLC Proprietary Index: pooled end-to-end returns, net of fees, expenses and carried interest.
  10. 10. Why EMs - Survey - Risk Premiums, LP Country Rankings and 2009/10 Funding Outlook 10 LP Risk Premium LP Rankings Increase/decrease Vs Developed Mkts Next 12 months in LP Funding China 6.4% 1 Flat/Down India 6.4% 3 Flat Brazil 6.4% 2 Up CEE (inc Turkey) 6.4% 4 Flat/Down South Africa 7.0% 7 Down Middle East 7.3% 8 Down Latin America (ex Brazil) 7.5% 5 Down Russia/CIS 8.4% 9 Down Sub-Saharan Africa (ex S. Africa) 8.4% 6 Down  77% of LPs expect EM returns to be greater than 16% net (>20% gross)  LP assessment of risk has gone up for all markets except Brazil  Actual risk lower than perceived risk in EM leading to lower competition and higher valuations  Turkey, Brazil up in rankings and Russia down Source: EMPEA/Coller Capital
  11. 11. Looking to the Future…………but First a glimpse at Global PE pre „the Crisis‟ 11 Global Markets Emerging Markets 1. Abundant capital, easy capital raising, plentiful first 1. Besides BRICs EMs never had abundant capital time funds, numerous multi-billion dollar funds 2. Mega deals order of the day, many deals of more 2. Deals typically less than $1bn than $5bn completed 3. Aggressive debt deals, easy covenants, huge 3. Leverage less of a factor in deal structuring gearing, Debt/EBITDA multiples >6x 4. High valuations/prices paid and received thus high 4. Valuations also high but more reasonable IRRs 5. Great exit multiples (EBITDA multiples of >10x) and 5. Exit multiples also high numerous exit alternatives 6. Regular fund distributions to investors 6. Reasonable but relatively lower distributions 7. Buyouts and BRICs in vogue - LPs increase allocations to PE 7. Increased allocations to EMs 8. New themes emerge: green, renewable, infra, 8. On the fringe of new themes resources, Islamic 9. New geographies, products and investors arrive – 9. Classic PE model applies, few new products lots of Africa, mezzanine, SWFs new investors 10.Private equity remains private 10. Ditto
  12. 12. After the Crisis…………what is happening 12 Global Markets Emerging Markets 1. Global deal values down from $600bn in 2007 to 1. Deal values down but not as drastic $250bn in 2008 2. Deal sizes down and fewer deals coming to market 2. Deal sizes marginally impacted but fewer deals 3. Focus becomes value preservation of existing being done investments 3. Value preservation of existing investments key 4. Commitments to new funds down significantly but uninvested capital over $1 trillion 4. Commitments to new funds down significantly 5. Fund distributions down over one yr by over 75% 5. Fund distributions down 6. Reduced prices, more credible valuations 6. Reduced prices, credible valuations 7. Negligible debt, tougher terms, Debt/EBITDA 7. Acquisition leverage less important multiples tumble 8. Fund returns less impacted by mark-to-market 8. Fund returns crash, write-offs and write-downs resulting from mark-to-market takes its toll 9. Less exits 9. Less opportunities for exits, $30bn of pulled exits 10. Investeee companies less impacted as lower 10. Investeee companies run into trouble – earnings and leverage cashflows hit, financing challenges, need for more capital
  13. 13. Emerging Market Themes to Come……of many…………………. 13  Infrastructure is one of the fastest growing sectors for PE funds focused on EMs − Estimates are that up to $2 trillion needs to be spent annually on infrastructure in EMs over the next few years (BRICs account for most of this). − PE fund raising for infrastructure in EM grew from $3.4bn in 2007 to $8.4bn in 2008 and is projected at $20bn for 2009/10 (in developed markets it fell by 26% to $20bn) − Less than 15 dedicated EM PE Infra funds and possibly 100 in western markets − Governments need the private sector to make projects happen therefore PPPs on the up - consequently operating environments also improving − Risk adjusted returns <20%  Debt and Mezzanine Funds − Availability of long term and structured debt very limited at present and local currency funds non-existent − Few debt/mezzanine funds operating in EMs – they are small <$200m and probably less than 10 in number − Demand for non-dilutive, sub-ordinated capital, local currency funding and longer tenors extremely high − Particular emphasis on growth capital for mid-sized corporates − Risk adjusted returns of 12%-20% depending on nature of mezzanine vs senior debt − Fee structures not as aggressive
  14. 14. Emerging Market Themes to Come……of many…………………. 14  Africa − GDP growth of 5-7% since 2001, 2009 forecast at 2% rest of world declining by 1.3%. − 25 yrs ago 3 democracies, today over 40 − Improved governance, economic and central bank management − National debt down from 80% of SSA GDP to 23% in 2008 – so debt cycle broken and GDP freed up for investment and consumption. Improved sovereign credit worthiness and encouraging FDI − Assisted by improved commodity prices in a commodity rich region − Trade has a huge impact. In 1995 $4bn exported to BRICs and in 2007 $48bn – laying foundation for investment and growth − Africa has huge infrastructure needs - SSA for example only generates as much power as the whole of Spain – infra financing gap is over $30bn − Key target countries:  Nigeria - World’s 41st largest economy  2008 GDP of US$214 billion  Population exceeding 140 million (highest in Africa)  World’s 8th largest exporter of petroleum and founding member of OPEC  South Africa - World’s 32nd largest economy  2008 GDP of US$277 billion  Population of 48 million  Developed financial system
  15. 15. Emerging Market Themes to Come……of many…………………. 15  Islamic Funds  Enormous investor liquidity for both equity and bespoke debt products  Growth driven by world's 1.2bn Muslims seeking investments that comply with beliefs  Over 50 countries are members of the Islamic Development Bank  300 Islamic banks and investment firms  Potential size of the Islamic PE industry could exceed $40bn by 2011  Estimated that Islamic banks will hold 40%-50% of Muslims’ savings in 10 years  Shariah compliance for PE investment less complex than perceived  Target countries: GCC, Kazakhstan, Nigeria, North Africa, Pakistan, Indonesia, Malaysia
  16. 16. Conclusion 16  Whilst allocations are being cut globally EMs will become more relevant as a home for alternative investment – investors will allocate more to the sector  BRICs may dominate but second tier countries will become increasingly prevalent  Besides pure private equity expect more distressed, mezzanine and debt funds  Once the post crisis dust has settled and global recession resides expect scaling up by financial institutions and fund managers of EM PE expertise  Debt will remain tough to come by in EMs as with developed markets but will not stop deals happening  Great buying time prevails