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Conference on Entrepreneurship in Africa ( UK 2011) : TLG Capital presentation

Conference on Entrepreneurship in Africa ( UK 2011) : TLG Capital presentation

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  • 1. Improving Business Growth Through Investment Afsane Jetha COO, TLG Capital July 2011
  • 2. Executive Summary  TLG Capital (“TLG”) is a Frontier Markets investment company. Set up in September 2009, TLG: o Focuses on Growth Capital investments with an emphasis on AfricaFirm o Invests across the capital structure to optimise returns and minimise riskOverview o Focuses on sectors that cater to consumers and so leverage the rise of the consumer class in the markets in which it operates  TLG’s investment philosophy is driven by two key themes: o Growth capital in the “missing middle space” – In sub-Saharan Africa, businesses without collateral have limited access to funding from banks.Investmen Micro-finance organisations are too small to facilitate their needs. TLGt operates in this vacant middle space, where investing in transactions less than US$15mPhilosophy o Transmigration of technology to sub-Saharan Africa – Particularly from India, a market that has thrived despite being beset by similar issues in terms of governance, infrastructure, bureaucracy and income inequality 2
  • 3. Executive Summary (Cont’d)  Africa Investments o Quality Chemicals Industries Ltd - East Africa’s first pharmaceutical company. It manufactures life-saving anti-malarial and AIDS generic drugs, based in Uganda o Sweden Ghana Medical Centre - West Africa’s first European-standard cancer treatment facility o Vero Food Industries Limited - Uganda rice and mineral water plant, set to become one of the premier factories with the capability to produce 42,000 bottles of mineral water a day and has capacity to produce 2,500 tonnes of milled rice per hourPast o The Snapper Hill Clinic - based in Monrovia it is one of the only medicalInvestments facilities that survived the Liberian civil wars and is one of only five family medicine practices in a city of 4 millionInclude o Iroko Financial Products Limited - a financial services institution, acting as a Debt Capital Markets agent for sub-Saharan African companies seeking debt finance and providing a link to international investors  Ex-Africa Investments o Compagnie Fluviale du Mekong – The oldest luxury river cruising company in Cambodia o Re-feel –India’s largest and fastest growing printer cartridge refilling chain. The company is now leveraging its network of over 150 outlets across 80 cities to expand into the laptop aftermarket and repair industry 3
  • 4. Differentiated Investment Strategy  Growth capital investments in African businesses capitalising on the rising consumer classInvestment  Investments in joint ventures with international firms that can “migrate” profitably to Africa Themes  Investments that contribute to the economic development of countries in which TLG invests  Geographies with favourable political, macro-economic and currency trends: o Ghana, Uganda, Rwanda, Kenya, Nigeria, Tanzania, Liberia and selected others o TLG has the right of first refusal to potential new equity deals sourced via Iroko  Cash-flow generative businesses with potential for both capital appreciation and income yield  Focus on sectors that are relatively under-served and do not require high capital expenditure, such as healthcare, services, IT, media, retail, and hospitality, rather than telecoms and infrastructure  Focus on mid-sized firms (no investments > US$15m), which are relatively starved for financingInvestment  Work with best-in-class local and international partners to reduce risk Criteria  Use capital structure to optimise risk-reward trade-off o Debt element to provide security and yield, and to incentivise disciplined management o Convertible or equity component to capture potential upside o Avoid outright majority stakes to ensure management is sufficiently motivated  Protect investment through negative control and board representation  Consider broader Environmental and Social Governance criteria for all investments 4
  • 5. The Africa Story and Opportunity 5
  • 6. Why are foreign companies interested in investing in African SMEs?  The land size of Africa is larger than the USA, China, India, Japan and all of Europe combined  More than 1 billion people live in Africa making it the second most populated continent in the world  Africa contains 99% of the world’s chrome resources, 85% of platinum, 70% of tantalum, and 54% of the world’s gold  At present Africa holds 3% of the world’s GDP; it is expected to jump to 15% within the next few years and is predicted to grow by 63% between 2008 and 2020  Africa now boasts more than 100 domestic companies with revenue greater than US$1bn.  Capital flows to the continent increased from just US$15bn in 2000 to US$87bn in 2007: Africa offers the highest rate of return on investment of any region in the world.Source: The True Size of Africa: Kai Krause, McKinsey Global Institute, Foreign Policy Magazine December 2010 6
  • 7. Africa: A Continent of Growth & Opportunity Stronger Fundamentals Africa in the Global Picture Inflation, % per annum Compound Annual real GDP growth 2000-2008 25% 22.0%  For many Africa represents the ‘final World 3.0% 20% frontier’ in investment;, yet much Africa also LatA… 4.0% 15% 8.0% CEE 4.8% represents one of the most dynamic growth 10% Africa 4.9% 5%  Since 2000 African economies have grown ME… 5.2% 0% healthier as governments lowered inflation, Asia… 8.3% 1990s 2000s trimmed foreign debt, & shrunk budget 0.00% 5.00% 10.00% deficits Government Debt, % GDP African Annual Real GDP in US$bn100.0% 1,700 81.9%  FDI in Africa has increased to US$62bn in 80.0% 1,500 59.0% 1,300 2008, mainly from China, large multinationals 60.0% 1,100 900 (Bharti) and private equity. The rate of return 40.0% 700 on FDIs in Africa is higher than any other 20.0% 500 0.0% region (i.e., CDC – 12%) 1980s 1990s 2000 2001 2002 2003 2004 2005 2006 2007 2008 1990s 2000s  Though risks remain there is a trend towards Budget Balance, % GDP FDI Annual Rate of Return, % increasing economic liberalisation and 20% 0.0% 15% integration into the global economy, as well -1.0% Africa -2.0% Asia as improving economic capabilities 10% -3.0% -1.8% LatAM 5%  McKinsey Global Institute Africa Report MENA -4.0% predicts the continent’s collective GDP to -5.0% -4.6% 0% 1990s 2000s 95 96 97 98 99 00 01 02 03 04 05 06 07 grow by 63% from 2008 to US$2.6tr by 2020 Source: McKinsey Global Institute, World Bank, African Development Bank, International Monetary Fund 7
  • 8. Africa: A Continent of Growth and Opportunity Investment and Growth Perception versus Reality  FDI in Africa has increased from US$9bn to US$62bn in 2008,  Preconceived notions about the African economic landscape and mainly from Chinese investments, large multinationals (such as its viability as an investment destination are actually some of the biggest obstructions to a healthy investment environment Bharti) and private equity investments. The rate of return on FDIs in Africa is higher than any other developing region  Across African markets and political spheres there is a great deal of variety, highlighting the need for a similar philosophy in terms of investment: with diversity through sectors and regions Foreign Direct Investment, net inflows (% of GDP) minimising the scale of risk involved 5 Global Corruption Perception Index (CPI) Ranking, Sub-Saharan Africa and BRICS, 2008-2009 4 2008 2009 3 Botswana 36 37 Mauritius 41 42 2 South Africa 54 55 1 Ghana 67 69 Brazil 80 75 0 China 72 79 1990s 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 India 85 84  Growth rates across sub-Saharan Africa were gathering Sub-Saharan Africa 117 116 momentum as the global financial crisis struck. However, as of Nigeria 121 130 Q4 2010 growth has largely returned, and economies such as Sierra Leone 158 146 those belonging to Ghana, Angola and the Democratic Republic Kenya 147 146 of the Congo are predicted to be among the fastest-growing in Russia 147 146 the world Angola 158 162Source: IMF World Economic Outlook Database, April 2010, McKinsey GlobalInstitute, World Bank Global Economic Prospects, June 2010, Note: GDP measuredin constant 2005 USD. Growth rates over intervals are compound average, 8UNSTAD
  • 9. Rise of the African Consumer 9
  • 10. The Rise of the African Consumer and Middle Class Shifting Consumer Trends Rising Consumer Spending Many sectors targeted through private equity in 2009 and 2010  The gradual urbanisation of Africa is tied with rising income. In are closely linked to the rise of the middle class. These are areas 2008, roughly 85m African households earned US$5k or more, such as hospitality/retail, healthcare, industrials/manufacturing, spending half their income on items other than food. services, financial services and media/telecoms. The combined Households with discretionary income spending are expected to total investment for these sectors totalled US$839m between increase by 50% over next decade, reaching 128m January 2009 and July 2010. In comparison, Africa’s traditional  Food and beverage spending is projected to increase more than magnet for foreign investment, natural resources, accounted for any other consumer category US$137m for the same time period Private Consumption Growth, 2000-08 (US$) Increasing Affluent African Population, 2000-2008 India $222bn Global (>US$20k) Brazil $247bn 6% 8% 12% 12% 14% 17% Consuming Mid Class Africa $274bn 18% (US$10-20k) 21% 24% Emerging Consumers Russia $451bn 29% (US$5-10k) 32% China $662bn 29% Basic Consumer Needs (US$2-5k) US$bn African Sectors’ Revenues Forecasts 35% 3,000 25% 18% Destitute (<US$2k) Estimated Annual Rev, 2020 2,620 2,500 Growth, 2008-20 2000 2008 2020 2,000 1,380 1,500 980 Africa’s consumer facing sectors (consumer goods, telecoms, 1,000 520 540 500 banking, etc) are already growing 2-3x faster than OECD 500 110 220 200 130 countries. African households spent US$860m in 2008, more 0 than Russian or Indian households Consumer Resources Agri Infrastructure TotalSource: Source: McKinsey Global Institute, World Bank, Boston Consulting Group, Fitch Ratings, African Development Bank 10
  • 11. Financing Options Available 11
  • 12. Risk/Return Landscape of Private Capital in sub-Saharan Africa Bubble Size US$10k US$100 million+ Growth CapitalReturn Large-Cap Banks Private Equity Microfinance institutions Risk 12
  • 13. Microfinance & Bank Loans  Microfinance – Able to offer financing to small businesses but amounts are low (up to a maximum of US$10,000) and currently exist in a competitive market with a large number of small business vying for capital  Banks Availability of Loans within the African Market, 2009 Source of Finances Value of Collateral needed for Loans Requirng Collateral (%) Loan (%) 1.3 Nigeria 78.8 Nigeria 92.8 0.1 Nigeria 138.8 12.7 Kenya 86.1 Kenya 78.3 0.4 Kenya 120.8 7.8 Tanzania 92.6 Tanzania 84.6 0.2 Tanzania 124.1 12.7 Uganda 88.4 Uganda 78 0.4 Uganda 173 18.2 Rwanda 96.7 Rwanda 74.1 0 Rwanda 168.4  Pluses & Minuses:  Bank loans are relatively fluid for SMEs with collateral; timelines are generally a few weeks to a few months  Value-add can be significant, but depends on the bank (i.e., are they helping you in non-financial ways?) ― Collateral needed & high cash interest rates ― Capacity to bear risk (size taps out at US$5-10m for SMEs) ― Covenants and fixed terms do not allow for much flexibility for capital intensive or growing businessesSource: World Economic Forum; The Africa Competitiveness Report 13
  • 14. Growth Capital – What exactly is it? Private equity/growth equity – ranging from small minority to majority stakes in private companies Convertible bonds – a hybrid of debt and equity. Often initially cash interest bearing with potential to convert to equity if business performs Pluses & Minuses Potentially much higher value-added; often investors will place a resource with the company and assist with financing, reporting; will also leverage off investors network of banks and other companies Capital is relatively flexible (often no traditional covenants) Collateral is not always required Cash interest will be lower than traditional bank financing Lower refinancing risk as bond converts to equity after a period if business meeting plan Speed of deployment can be a few weeks to a few months― Sometimes hard to come by growth equity firms (not that many around)― Due diligence can be more onerous than bank loans, especially when there is no collateral― Ongoing reporting requirements can be arduous (but potentially worth while if the eventual view is to list or be sold to large-cap private equity)
  • 15. Growth Capital – Recent Convertible Bond Transactions Convertible bonds were the most common issue type in sub-Saharan Africa in 2009, with convertible bond issues of US$1.4 billion accounting for over 70 percent of the capital market activity. Country Company Year Type Amount Purpose South Africa Aquarius Platinum underwritten 2009 Convertible Bond n/a n/a and managed by Rand Merchant Bank South Africa Emerging Capital Partners into Blue 2010 Convertible and US$15 m Growth Capital Financial Services Common shares South Africa Steinhoff Finance Holding (with 2010 Convertible Bond EUR 390 m n/a Standard Bank) Kenya Emerging Capital Partners into 2009 49% Equity Stake US$25m n/a Wananchi Group Nigeria SeaTrucks Bond Issue 2011 Convertible Bond US$200 m n/aSource: Thomson Reuters
  • 16. Large-cap Private Equity – Transactions Above US$20m At least five US$150m+ funds competing for deals in this space; a few US$500m+ firms emerging as well (Carlyle) Increasingly prevalent in sub-Saharan Africa: – Essar Telecom in Kenya - US$94m (06/09) – Rift Valley Railways in Uganda and Kenya (12/09) – China-focused investor, Hony Capital – investment in Wisco in Madagascar US$100m (02/11) – Helios invested in InterSwitch in Nigeria - US$110m (01/11) Pluses & Minuses: Significant value-add from hands-on management (fine line between management and control) Several firms vying deploy capital - the likelihood of a competitive auction is high (you get a good deal!)― You need to be an established player (track-record, cash flow positive, several years of audited accounts)― Size & scalability (minimum ticket size usually +US$20m)― Increasingly competitive space (good for you if you have a large business to sell!)― Long process (3mos – 12mos+) with extremely arduous diligence process― Viewed as “expensive” in terms of the value you may be giving up (generally these firms take large majority positions)
  • 17. Sector Opportunities 17
  • 18. Sector Opportunities – Consumer Retail and Agri-Business Consumer Retail and Agri-business in Africa The Opportunity Despite Africa holding 60% of the world’s uncultivated arable  Many consumers have moved from the destitute level of income the agriculture sector remains underdeveloped. While this (US$1k/year) to the basic-needs (US$1-5k) level. 221m basic- sector accounted for only US$65m in investments between needs consumers will enter the market by 2015 January 2009 and July 2010 and today there are more funds in  In Nigeria, the collective buying power of households earning SSA focused on agri-business than any other sector US$1-5k a year doubled from 2000-07, reaching US$20bn, ensuring ample space for commercially-focused companies Within consumer markets spending patterns are shifting as more looking to capitalise on this increased collective buying power households gain discretionary spending power. Food and beverage consumption is projected to increase more in  Africa has the potential to increase the value of its annual absolute terms than any other category over the next decade, agricultural output from US$280bn to around US$500bn by 2020 and to US$880bn by 2030. This would increase the rising by US$175bn to US$554bn in 2020 demand for upstream products such as fertilisers, seeds, Real consumer spending has grown 3-5% annually since 2000 pesticides, machinery, while spurring the growth of other types and 90% of households have at least some discretionary of downstream activities such as food processing income Additional available cropland, 2009 Million Hectares Brazil 155 Household Spending 80 Argentina 39400 369 Household Spending, 2008 in US$bn Venezuela 31350 Household Spending Growth, in US$bn, 2008-20 300 Others 75300250 Sudan 72200 175 144 DRC 66150 97 101 Angola 53 101 Zambia 53100 62 51 46 60 590 35 28 30 26 21 Mozambi… 49 50 32 0 Central… 45 Tanzania 38 Consum… Financials Heathcare Housing Nonfood Other Telecom Education Beverages Others 216 Food & Cropland defined as land producing output greater than 40% of maximum yield under rain-fed conditions, excluding forest areasSource: McKinsey Global Institute, UN Conference on Trade and Development, International Finance Corporation, World Bank/Food AfricaOrganisation: Awakening Africa’s sleeping giant 18
  • 19. Sector Opportunities – Healthcare Healthcare in Africa The Opportunity 16.8 Sub-Saharan Africa has of 11% of world’s population, bears  Current consumer demand for healthcare services continues to 24% of the global disease burden and accounts for < 1% of be unmet in most sub-Saharan African countries: health expenditure o In Nigeria, every year 18,500 residents travel abroad to This is slowly changing. There has been a recent rise in seek medical care, exporting US$1bn worth of revenues healthcare sector deals across the continent. Hospitals, health insurance companies and pharmaceutical companies in Kenya, o In Ethiopia, there is only one clinic for every 125,000 Nigeria, Uganda, Ghana and South Africa have all seen a steady  Key investment opportunities tied to reaching scale and support from Private Equity funds. This trend is remarkably investing in quality certification: similar to the growth in the middle class in other emerging markets (such as India) where healthcare has commanded a o Growth of domestic generic pharmaceutical markets similarly high level of a attention o Expansion of product portfolios; large scale Total Healthcare Expenditure in Africa, US$bn manufacturers are more likely to obtain WHO pre- 40 Public Private 35.0 qualification and produce drugs for treatment 30 o Aggregation of country markets into regional markets 21.0 that would create significant scale and replication- pan- 20 16.8 7.1% African scope for manufacturers 8.4 CAGR o Basic medical diagnostics and healthcare services 10 14.0 Total Healthcare Expenditure Distribution in Africa, % 8.4 0 9% Heathcare Provisioning 2005 2016E The private health sector in sub-Saharan Africa is surprisingly large. 13% Distribution and Retail In 2005, total healthcare expenditure reached US$16.8bn of which 60% was financed by private parties 50% Life Sciences 14% Improvements in Africa’s macroeconomic climate will create new Risk pooling demand. Healthcare expenditures are expected to grow 108% from 2005 to 2016, by which time they will have reached US$35bn 14% Medical EducationSource: McKinsey Global Institute, International Finance Corporation, Boston Consulting Group 19
  • 20. Vero Food Industries Limited (VFL) Uganda The Company Investment Thesis The primary focus of the company is the production of mineral  The growing middle class in Uganda has led to higher water and rice demand for such essentials as mineral water and rice, especially given reports of rising levels of contamination Operations started early 2011 and the company is set to be amongst fresh water supplies amongst the largest producers of these products in the region with the ability to produce over 42,000 bottles of mineral  This increased demand for rice in Uganda is estimated at a water a day 210,000 tonnes per year: most of which is currently imported from Asia. With an already evident market, rice The processing plant for rice uses Chinese technology and has produced locally will not struggle to be sold the capacity to produce 2,500 tonnes of milled rice per hour  The expanding regional market for Uganda‘s food has The company intends to tap the increasing regional market for boosted agriculture, and paves the way for the expansion of agriculture with the aim to eventually export to the whole of products produced in Uganda into East Africa the Great Lake Regions  The creation of the East African Community could help The industrial housing is composed of two adjacent structures Uganda fill its description as a potential agricultural measuring 625m2 each. One of the structures currently “breadbasket” for the region; current growing agri- houses the rice processing plant and has adequate remaining businesses have the potential to be the foundations for this for packaging and storage of finished rice prospective growth The Deal Challenges the Company Faced  Entered October 2010 with board seat representation  Start-up operations in “competitive” space  Investment via equity and option to increase stake as the  No access to growth capital business grows 20
  • 21. Vero Food Industries Limited (VFL) – Progress since investment Uganda and growth plans The Company – Growth Plans Threats & Mitigants Through the Growth Capital investment, the company was able  Originally due to produce both water and rice once full scale to scale up the project that was first trailed with water and rice production began, management found that rice production production in July 2010 caused contamination to the water producing facility. The decision was taken to launch the water bottling facility first VFL has several plans for growth and expansion : with the aim in mind to establish the rice facility at a  Geographical Expansion: Newly independent South suitable location in late 2011/early 2012 Sudan looks set to provide a lucrative market for  In H1 2011 there was political unrest in Uganda, which led Ugandan companies looking to expand. Provided the to a heightened risk perception from investors; the company is able to move early VFL can capitalise on defensive nature of the investment (consumer staples) and serving this new market the real estate security gave investors confidence  Liquid Product Line: At present the company supplies  In Uganda over 70% of the work force is employed in some bottled water and is able to supply pre-formed water form of agricultural-based work, and indeed Uganda is often bottles. Within the next year the management is hoping seen as an agri-business “hotspot” thus VFL is operating in a to scale up production levels, as well as introduce new highly competitive space. However by employing a water lines – e.g. Vitamin water proficient management team and deploying a competent  Rice production: Rice was always part of the original marketing strategy (thanks to the injection of Growth plan when launching, and given Uganda’s already Capital) they hoping that they will be able to stay ahead of present demand, rice presents an extremely viable those competing in the same space space for the company to move into as it ups its capacity  Synergies between portfolio companies; TLG has facilitated in the near future sharing of best practices between its portfolio companies in Uganda allowing for time to production to be expedited 21
  • 22. Dialysis Centre in Sierra Leone Sierra Leone The Company Investment Thesis The primary focus of the company is providing care for patients  The WHO Global Report states that there are nine reported cases effected by kidney disease and/or stroke, at present it is the only daily of kidney related deaths in Sierra Leone, it has also been clinic in the whole of Sierra Leone that is able to offer such reported that 1 in 36 people have chronic kidney disease and that treatment over 150,000 people will develop some form of kidney disease every year in Sierra Leone. In many cases the prevalence of The clinic is run by an entrepreneur: an American-trained critical malaria contributes significantly to kidney disease – TLG Capital ‘s care nurse with 13 years of training, who recently completed a investment into QCIL provides a platform for potential synergies course as a dialysis nurse in preparation to run the clinic with drug distribution The facility will run at international standards in all areas  Currently residents of Sierra Leone residents are forced to travel Running the clinic alongside the entrepreneur is a nephrologist from abroad to seek costly treatment leaving a market opportunity in Egypt, one resident and one on-call physician, 3 State Registered the healthcare sector in Sierra Leone Nurses, 9 State Enrolled Community Health Nurses, 5 nurse  The founder has the experience and in-depth country knowledge assistants and other support staff. to drive the project forward The clinic is located in Freetown, Sierra Leone  Investment will provide the much needed capital to finance plans for expansion and to ensure that the clinic is equipped with the Challenges the Company Faced best modern equipment to service the needs of the clientele Clinic ran out of funds after government funding fell through The Deal No collateral against which to get a long-term bank loan beyond 1 year with reasonable interest rates (i.e., sub 25%)  TLG Capital will provide growth capital with the view to create the only dialysis, imaging and diagnostics company in West Africa through a buy-and-build strategy 22