Your SlideShare is downloading. ×
0
Building a Critical Mass of Sustainable Emerging-Market SMEs The Role of Private Equity Noah Beckwith, Partner, Aureos Adv...
1)The Myths of Investing in Emerging-Market SMEs… <ul><li>SMEs are inordinately risky </li></ul><ul><li>Management and gov...
2)…The Myths Debunked <ul><li>Illiquidity is  not  the problem – IPOs, buy-backs, trade sales, other exits all possible </...
Towards a reformulated SME investment strategy Revenue / Profit <ul><li>Regional investment strategies: </li></ul><ul><ul>...
Transaction Structuring: A Cash Flow Focus is Key <ul><ul><li>Deal structures that generate a high proportion of returns t...
Sample Transactions – Avance Ingenieros Avance Ingenieros <ul><li>Opportunity to invest with leading player in a homebuild...
Sample Transactions – Aluminios de Panam á Aluminios de Panamá <ul><li>Production bottlenecks and limited working capital ...
The Aureos Latin America Fund: Building Critical Mass in Emerging Market SMEs <ul><li>Andean companies looking northwards ...
Conclusion <ul><li>Why private equity? </li></ul><ul><ul><li>SMEs require ‘patient capital’ </li></ul></ul><ul><ul><li>Fin...
 
Upcoming SlideShare
Loading in...5
×

Building a Critical Mass of Sustainable SMEs in the Emerging Markets through Private Equity Investment.

836

Published on

Noah Beckwith, Partner – Economics and Development - Aureos - UK

Published in: Economy & Finance
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total Views
836
On Slideshare
0
From Embeds
0
Number of Embeds
0
Actions
Shares
0
Downloads
26
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide

Transcript of "Building a Critical Mass of Sustainable SMEs in the Emerging Markets through Private Equity Investment."

  1. 1. Building a Critical Mass of Sustainable Emerging-Market SMEs The Role of Private Equity Noah Beckwith, Partner, Aureos Advisers Limited, London TBLI Europe 2007, Paris
  2. 2. 1)The Myths of Investing in Emerging-Market SMEs… <ul><li>SMEs are inordinately risky </li></ul><ul><li>Management and governance are poor, financial discipline is lacking / non-existent </li></ul><ul><li>Contractual arrangements cannot be enforced </li></ul><ul><li>SMEs are not scaleable </li></ul><ul><li>SMEs cannot compete owing to: </li></ul><ul><ul><li>Dis-economies of scale </li></ul></ul><ul><ul><li>Oligopolistic market structures </li></ul></ul><ul><ul><li>Un-level playing fields </li></ul></ul><ul><li>Capital growth is insufficient to generate returns </li></ul><ul><li>Risk-return reward is unattractive </li></ul><ul><li>Exits are difficult or impossible due to: </li></ul><ul><ul><li>Lack of investor demand </li></ul></ul><ul><ul><li>Market illiquidity </li></ul></ul><ul><li>The private equity model is inappropriate for SME investment in emerging markets </li></ul>
  3. 3. 2)…The Myths Debunked <ul><li>Illiquidity is not the problem – IPOs, buy-backs, trade sales, other exits all possible </li></ul><ul><li>Exit strategies require careful planning from ex ante </li></ul>Exits <ul><li>Track record in SME private equity is misleading </li></ul><ul><li>Risks of investing in private equity can be mitigated </li></ul>Risk-reward unattractive <ul><li>The traditional private equity model must be modified </li></ul><ul><li>A portfolio approach to investing is vital to the sustainability of the model </li></ul>Private equity model Inappropriate for SMEs <ul><li>Absolutely – reliance on capital growth, alone, is dangerous </li></ul><ul><li>A portfolio approach is critical – capital growth, income, income/growth transactions </li></ul>Capital growth prospects are limited <ul><li>Market structures often disadvantage SMEs </li></ul><ul><li>Competitiveness must derive from tailored growth and strategic development plans </li></ul>SMEs are uncompetitive <ul><li>Scalability is achievable but requires context-specific strategies </li></ul><ul><li>Regional growth strategies are vital </li></ul>Scalability <ul><li>Often poor, although not always – a critical part of the investors’ value proposition </li></ul><ul><li>Alignment, deal structures and rights are key </li></ul>Management, governance, financial controls <ul><li>Local professionals, local presence, established networks </li></ul><ul><li>Early stage / venture capital versus late stage – a crucial distinction </li></ul>SME Risk Profile
  4. 4. Towards a reformulated SME investment strategy Revenue / Profit <ul><li>Regional investment strategies: </li></ul><ul><ul><li>De-risk SME funds </li></ul></ul><ul><ul><li>Generate deals and exits </li></ul></ul><ul><li>Domestic demand assumptions are vital </li></ul><ul><li>Investment ranges are critical </li></ul><ul><li>Geared equity structures enhance viability </li></ul><ul><li>Good transactions attract liquidity </li></ul><ul><li>Maintain strategic focus </li></ul><ul><li>Relationships are key – capital is ubiquitous </li></ul>Time Embryonic Growing Expansion Seed Start-Up Maturing MBO/MBI Roll outs/consolidations Replacement Capital Aureos Regional Funds – Product Types
  5. 5. Transaction Structuring: A Cash Flow Focus is Key <ul><ul><li>Deal structures that generate a high proportion of returns through ‘cash flow’, reducing the reliance on the equity multiple </li></ul></ul><ul><ul><li>Fund Managers targeting at least 40% cash flow based deals. </li></ul></ul>Cash Flow Structure <ul><ul><li>Enhances Returns – income and capital </li></ul></ul><ul><ul><li>Less reliance on ‘equity’ multiples (where volatile markets cannot guarantee exit through IPO's / trade sales) </li></ul></ul><ul><ul><li>Enhances our controls </li></ul></ul><ul><ul><li>Protects in downside scenarios </li></ul></ul>Benefits <ul><li>Preferred Common Stock - higher ranking ordinary shares, with investor rights (e.g. preferential dividends; exit and control rights) </li></ul><ul><li>Self-Liquidating instruments - returning a combination of capital and yield throughout the holding period </li></ul>Core Instruments Provide a head start to achieve target returns and reduce the overall risk of the Fund
  6. 6. Sample Transactions – Avance Ingenieros Avance Ingenieros <ul><li>Opportunity to invest with leading player in a homebuilding sector with strong demand driven by long term financing, remittances from abroad and recent conversion to dollar </li></ul><ul><li>Poor bottom line visibility led to an investment structure where fee was tied to top line performance </li></ul>Investment Thesis: 29.9% Expected Return (Mar 07): US$ 5 million Current Valuation (Mar 07): US$ 4 million initially, with an additional $4m after prepayment of initial $3m loan Amount Invested: <ul><li>Receive in excess of 40% yield on equity investment. Have lent company an additional $4m in 2006 which was mostly repaid. </li></ul>Outcome: Leading homebuilder in ES targeting mid/high income buyers Brief description: <ul><li>TBLI Thesis </li></ul><ul><li>Risk mitigation strategies reflect social capital </li></ul><ul><li>Price premium through reputational advantage </li></ul><ul><li>TBLI Thesis </li></ul><ul><li>Extensive consultation with local communities </li></ul><ul><li>Environmental best practice  competitive advantage </li></ul><ul><li>Social best practice  competitive advantage </li></ul>
  7. 7. Sample Transactions – Aluminios de Panam á Aluminios de Panamá <ul><li>Production bottlenecks and limited working capital restricting production to 32% of capacity despite strong demand for its products </li></ul><ul><li>Boom in construction sector in Panama driving local demand </li></ul><ul><li>Construction and hurricanes in Southern US driving international growth </li></ul>Investment Thesis: US$ 3.05 million ($5m committed) Amount Invested: <ul><li>Local demand stronger and more than offsetting weaker int’l (less hurricanes in ’06) </li></ul><ul><li>Company on schedule for CAPEX expansion </li></ul><ul><li>Have already been approached by two interested buyers </li></ul>Outcome: ALPAN: Leading Aluminum Extruder in Panama, SD&W: Window frames manufacturer Brief description: <ul><li>TBLI Thesis </li></ul><ul><li>Environmental best practice enhances brand </li></ul><ul><li>TBLI Thesis </li></ul><ul><li>Reducing macro-risk by investing in domestic producer </li></ul><ul><li>Environmental leadership helps to capture market share </li></ul>
  8. 8. The Aureos Latin America Fund: Building Critical Mass in Emerging Market SMEs <ul><li>Andean companies looking northwards </li></ul><ul><li>Central America companies positioning themselves as intra-regional conduits </li></ul><ul><li>Mexican companies moving southwards </li></ul><ul><li>Winners will be companies best able to adapt to new competitive factors </li></ul><ul><li>Outsourcing of products and services with a “near shore” advantage </li></ul><ul><li>Aging populations in US & Canada  demand for products and services </li></ul><ul><li>Remittances / returning migrants drivers of local consumption </li></ul><ul><li>FTAs to drive consolidation and cross border expansion as companies adjust to new competitive environment </li></ul><ul><li>Not just about opportunities in USA </li></ul>Demographic Trends Beyond geographical competitive advantage Free Trade Agreements Domestic and regional markets as growth drivers <ul><li>Andean companies looking northwards </li></ul><ul><li>Central America companies positioning themselves as intra-regional conduits </li></ul><ul><li>Mexican companies moving southwards </li></ul><ul><li>Winners will be companies best able to adapt to new competitive factors </li></ul><ul><li>Outsourcing of products and services with a “near shore” advantage </li></ul><ul><li>Aging populations in US & Canada  demand for products and services </li></ul><ul><li>Remittances / returning migrants drivers of local consumption </li></ul><ul><li>FTAs to drive consolidation and cross border expansion as companies adjust to new competitive environment </li></ul><ul><li>Not just about opportunities in USA </li></ul>Domestic and regional markets as growth drivers
  9. 9. Conclusion <ul><li>Why private equity? </li></ul><ul><ul><li>SMEs require ‘patient capital’ </li></ul></ul><ul><ul><li>Financing is available – SMEs require ‘financing plus’ </li></ul></ul><ul><ul><li>The whole capitalisation structure must be taken into account </li></ul></ul><ul><li>Why SMEs? </li></ul><ul><ul><li>An ‘under-served’ market segment </li></ul></ul><ul><ul><li>The lifeblood of the emerging markets </li></ul></ul><ul><ul><li>Today’s S’s are tomorrow’s Ms and the future’s Ls </li></ul></ul><ul><li>Why a TBLI thesis? </li></ul><ul><ul><li>Ignore social and environmental criteria at your peril! </li></ul></ul><ul><ul><li>The triple bottom line nexus is even tighter at the SME level </li></ul></ul>
  1. A particular slide catching your eye?

    Clipping is a handy way to collect important slides you want to go back to later.

×