Sustainable Investment in Emerging Market Small and Mid-Cap Enterprises TBLI Conference, 24 TH and 25 TH MAY 2007. Bangkok, Thailand. Liam Cully, Regional Managing Partner, Aureos South East Asia Fund.

Content Aureos Capital - Who we are ? Sustainability - What it means? Aureos Business Principles. An Investment Case. Conclusion.

Aureos Capital - Who we are ?

Sustainability - What it means?

Aureos Business Principles.

An Investment Case.

Conclusion.

1. Aureos Capital Aureos is a global private equity fund manager focused on investing in small and mid-cap enterprises in emerging markets. has 21 offices in 19 countries covering Central and Latin America, Sub-Saharan Africa, South Asia, South East Asia, China, Central Asia and the Pacific Islands. employs 100 professional staff worldwide. has currently US$570m funds under management in 24 active funds. investment size range in US$1m to US$8m.

Aureos

is a global private equity fund manager focused on investing in small and mid-cap enterprises in emerging markets.

has 21 offices in 19 countries covering Central and Latin America, Sub-Saharan Africa, South Asia, South East Asia, China, Central Asia and the Pacific Islands.

employs 100 professional staff worldwide.

has currently US$570m funds under management in 24 active funds.

investment size range in US$1m to US$8m.

2.Sustainability- What it means? In 1987 a definition of sustainability was developed. It is still widely used, although it is interpreted in different ways. World Commission on Environment and Development 1987 Sustainable Development “ Meeting the needs of the present without compromising the ability of future generations to meet their own needs...” Bruntland Report

In 1987 a definition of sustainability was developed.

It is still widely used, although it is interpreted in different ways.

2.Sustainability – What it means? A sustainable investment in the medium to long term must: behave as a good corporate citizen. practice good governance in the areas of ethics, environment, health and safety. practicing these principles can create real value and long term viability of the company. A business to be sustainable must: have a record of profitability. demonstrate a clear path to future profitability. The investor must : leave a company stronger that when it entered not extract returns at the expense of the company’s long term viability.

A sustainable investment in the medium to long term must:

behave as a good corporate citizen.

practice good governance in the areas of ethics, environment, health and safety.

practicing these principles can create real value and long term viability of the company.

A business to be sustainable must:

have a record of profitability.

demonstrate a clear path to future profitability.

The investor must :

leave a company stronger that when it entered

not extract returns at the expense of the company’s long term viability.

3. Aureos Business Principles: w hat are they? Aureos Business practices are governed by 6 principles : Aureos Business Policies Business Integrity Environment Health & Safety Social Openness and honesty in all dealings, while respecting commercial and personal confidentiality; Objectivity , consistency and fairness in treatment of all stakeholders; Good corporate citizenship in dealings with investees and communities; Respect for dignity and well-being of all stakeholders; Respect for environmental and social capital of host countries and commitment to sustainability ; Professional operation in a performance-orientated culture and commitment to continuous improvement. Six Fundamental Principles

Aureos Business practices are governed by 6 principles :

Openness and honesty in all dealings, while respecting commercial and personal confidentiality;

Objectivity , consistency and fairness in treatment of all stakeholders;

Good corporate citizenship in dealings with investees and communities;

Respect for dignity and well-being of all stakeholders;

Respect for environmental and social capital of host countries and commitment to sustainability ;

Professional operation in a performance-orientated culture and commitment to continuous improvement.

3. Aureos Business Principles: w hat are they? Business Integrity Honesty, integrity, fairness, compliance, gifts, use of information... Health and Safety Working conditions, compliance, risk reduction.... Environmental Protection, efficiency, improvement, sustainability. Social Treatment, respect, compliance, conditions, consultation.

Business Integrity

Honesty, integrity, fairness, compliance, gifts, use of information...

Health and Safety

Working conditions, compliance, risk reduction....

Environmental

Protection, efficiency, improvement, sustainability.

Social

Treatment, respect, compliance, conditions, consultation.

3. Aureos Business Principles: Why bother? Good financial and legal sense! £ FINANCIAL Fork Lift Truck damages Oil drum store Minor incident Total: $220k $20k $200k Direct Costs Repair to Fork Lift Truck Repair to storage area Indirect Costs Management Time Compensation Claims Increased Insurance Costs Business Interruption Loss of Good Will Adverse Publicity LEGAL Safety Legislation (safe Workplace), Risk Asses- ment, First Aid, Fire Precautions Environmental Legislation eg air, noise, Effluent, EIA, etc Occupational Health Legi- slation eg dust inhalation noise, manual handling Business Integrity Legislation eg anti-money Laundering, bribery Social Legislation on work hours, employment of child labour, etc Fines? Imprisonment

Good financial and legal sense!

Direct Costs

Repair to Fork Lift Truck Repair to storage area

3. Aureos Business Principles: When are they relevant? Deal Origination Screening Investment Management Exit Due Diligence Throughout The Investment Cycle

3.Business Principles and the Investment Process Investees tend to move from a reactive to a more proactive approach to Business Principles Value addition and sustainability are about moving a company along this trajectory! Increase in Organisation Proactivity BP Ignorant Limited compliance May only react to incidents BP Opportunistic See market opportunities Carbon trading Greenness Recycling BP Engaged Listen to stakeholders and adjust strategies BPs managed on a risk basis BP Compliant Meet legislation View BPs as “a necessary evil”

Investees tend to move from a reactive to a more proactive approach to Business Principles

BP Ignorant

Limited compliance

May only react to incidents

BP Opportunistic

See market opportunities

Carbon trading

Greenness

Recycling

BP Engaged

Listen to stakeholders and adjust strategies

BPs managed on a risk basis

BP Compliant

Meet legislation

View BPs as “a necessary evil”

3. Business Principles —f rom ‘do-no harm’ to value addition Sound application of Business Principles can add value to a business, facilitate the exit process, and increase the exit price. Non-compliance Does not meet local standards and nowhere near WB/IFC standards. Management fails to recognise importance of Business Principles Compliance Meets local standards. Management sees Business Prin-ciples as ‘necessary evil’ and as tangential to business. Value Addition Meets local standards, keen to reach international/WB/IFC standards. Formulating practices of good governance, soc + env management. Leadership Company meets and exceeds highest international standards. Company leverages improved governance and soc/env manage-ment throughout value chain. Best Practice High Risk

Sound application of Business Principles can add value to a business, facilitate the exit process, and increase the exit price.

Non-compliance

Does not meet local standards and nowhere near WB/IFC standards.

Management fails to recognise importance of Business Principles

Compliance

Meets local standards.

Management sees Business Prin-ciples as ‘necessary evil’ and as tangential to business.

Value Addition

Meets local standards, keen to reach international/WB/IFC standards.

Formulating practices of good governance, soc + env management.

Leadership

Company meets and exceeds highest international standards.

Company leverages improved governance and soc/env manage-ment throughout value chain.

4. Investment Case – Plastic Packaging Company (PPC) Background PPC founded in 1971 manufacturing single layer plastics and plastic bags. Main customers are multinationals companies. Traditional plastics business difficult with tight margins due to a combination of competition and rising raw material costs. Company is profitable but under pressure. Main shareholder worked for 3M in US for 12 years and possessed considerable experience in commercial application of new products. PPC developed a biodegradable plastic (using tapioca starch) with many traditional applications. Globally there is considerable demand for bio products, however, due to high cost of raw materials, the market failed to grow significantly.

Background

PPC founded in 1971 manufacturing single layer plastics and plastic bags.

Main customers are multinationals companies.

Traditional plastics business difficult with tight margins due to a combination of competition and rising raw material costs.

Company is profitable but under pressure.

Main shareholder worked for 3M in US for 12 years and possessed considerable experience in commercial application of new products.

PPC developed a biodegradable plastic (using tapioca starch) with many traditional applications.

Globally there is considerable demand for bio products, however, due to high cost of raw materials, the market failed to grow significantly.

4. Investment Case – Plastic Packaging Company (PPC) Comparative Competitive Advantage The plastic material is derived from Tapioca starch (abundant in South East Asia) at significant discount to existing biodegradable materials and closely approximates traditional oil based plastics. PPC Bio material Plastic Raw material cost per ton US$1,200 US$3200-3600 US$1400-1500 PPC developed the technology over 10 years and had proven its viability. PPC had produced various product applications on a commercial basis and sold them in the local market. PPC was marketing its products to international companies and had confirmed orders.

Comparative Competitive Advantage

The plastic material is derived from Tapioca starch (abundant in South East Asia) at significant discount to existing biodegradable materials and closely approximates traditional oil based plastics.

PPC Bio material Plastic

Raw material cost per ton US$1,200 US$3200-3600 US$1400-1500

PPC developed the technology over 10 years and had proven its viability.

PPC had produced various product applications on a commercial basis and sold them in the local market.

PPC was marketing its products to international companies and had confirmed orders.

4. Investment Case – Plastic Packaging Company (PPC) Company Need PPC needed funds to expand its traditional business to take advantage of the considerable resources it had invested in the new biodegradable product applications. Banks would not lend and other sources of funding not available. Aureos invested US$4M risk capital in the form of a Redeemable Convertible Bond. The Bond has equity rights attached to it.

Company Need

PPC needed funds

to expand its traditional business

to take advantage of the considerable resources it had invested in the new biodegradable product applications.

Banks would not lend and other sources of funding not available.

Aureos invested US$4M risk capital in the form of a Redeemable Convertible Bond.

The Bond has equity rights attached to it.

4. Investment Case – Plastic Packaging Company (PPC) Why Invest? Established company with history of profitability and significant growth potential. Experienced and capable management team. Pent up demand for reasonably priced bio-degradable products. Technology proven by management and protected by patent. Commercial production of new products completed. Lack of bank and other traditional forms of funding. Investment structured to provide on going income to Fund and thereby reduce the pressure on achieving high capital gains at time of exiting. Management saw the benefits of adopting the Aureos Business Principles and signed up to their implementation prior to the investment.

Why Invest?

Established company with history of profitability and significant growth potential.

Experienced and capable management team.

Pent up demand for reasonably priced bio-degradable products.

Technology proven by management and protected by patent.

Commercial production of new products completed.

Lack of bank and other traditional forms of funding.

Investment structured to provide on going income to Fund and thereby reduce the pressure on achieving high capital gains at time of exiting.

Management saw the benefits of adopting the Aureos Business Principles and signed up to their implementation prior to the investment.

5. Conclusion It is possible for Private Equity to invest sustainably and successfully in small and medium enterprises, however, the traditional forms of finance such as banks and other institutions need to move from security based lending to more innovative approaches. THANK YOU

It is possible for Private Equity to invest sustainably and successfully in small and medium enterprises, however, the traditional forms of finance such as banks and other institutions need to move from security based lending to more innovative approaches.

THANK YOU