Recent trends in Alternative Financing Instruments


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Recent trends in Alternative Financing Instruments

  1. 1. Recent trends in Alternative Financing Instruments Financing African SMEs April 25, 2007 UNECA - Zanzibar Tshepidi Moremong Aureos Southern Africa Fund
  2. 2. Aureos Capital COSTA RICA EL SALVADOR LONDON SOUTH AFRICA NIGERIA MOZAMBIQUE ZAMBIA TANZANIA KENYA SRI LANKA MAURITIUS GHANA PAPUA NEW GUINEA DOMINICAN REPUBLIC THAILAND PHILLIPINES INDONESIA VIETNAM INDIA SENEGAL <ul><li>Global Emerging markets SME Private Equity Fund Manger </li></ul><ul><li>Formed in 2001 as a joint venture between CDC Capital and Norfund </li></ul><ul><li>Inherited 14 pioneering country specific funds across </li></ul><ul><li>the globe 9 of which are in Africa </li></ul><ul><li>17 funds currently under active management with a total committed </li></ul><ul><li>capital of over US$450 million </li></ul><ul><li>Sub-Saharan Africa US$140 million of new committed capital </li></ul><ul><ul><ul><li>Aureos West Africa Fund: US$50 million </li></ul></ul></ul><ul><ul><ul><li>Aureos East Africa Fund: US$40 million </li></ul></ul></ul><ul><ul><ul><li>Aureos Southern Africa Fund: US$50 million </li></ul></ul></ul>
  3. 3. 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
  4. 4. Investment Guidelines <ul><li>Expansion Capital </li></ul><ul><li>Management Buy-Outs & Buy-Ins </li></ul><ul><li>Public to Private Transactions </li></ul><ul><li>Select Privatisations </li></ul>Investment Size <ul><li>US$0.5million – US$ 5 million </li></ul><ul><li>Equity/ Quasi-Equity/ Loans </li></ul><ul><li>10% - 49% with the ability to take control </li></ul><ul><li>Board seat </li></ul><ul><li>Ability to exit within a reasonable timeframe: 3-6 years </li></ul>Across all Sectors <ul><li>US$/ Local Currency </li></ul>Investment Types Instruments Equity Stake Currency Exit
  5. 5. Key Issues in Financing SMEs <ul><li>Limited track record </li></ul><ul><li>Lack of proper financial records </li></ul><ul><li>Inadequate business plan </li></ul><ul><li>Insufficient management capacity/ skill </li></ul><ul><li>Poor management of funds </li></ul><ul><li>Under capitalisation </li></ul><ul><li>Insufficient assets for security/ collateral </li></ul><ul><li>No corporate governance structures </li></ul>Limited Access To Capital
  6. 6. SME Traditional Sources of Financing <ul><li>Entrepreneurs own resources </li></ul><ul><li>Family and Friends </li></ul><ul><li>Limited access to bank debt </li></ul><ul><li>Business Angels </li></ul><ul><li>Private equity/ </li></ul><ul><li>venture capital </li></ul>
  7. 7. Private Equity <ul><li>Dividends only paid on profits </li></ul><ul><li>Holders of equity are business partners – not just financing </li></ul><ul><li>Long-term funding – payback through exit </li></ul><ul><li>Equity can be leveraged </li></ul><ul><li>Dilution of owners equity </li></ul><ul><li>Shareholders will demand greater disclosure </li></ul><ul><li>Shareholders may “interfere” with day to day operations </li></ul><ul><li>Dividends not tax deductible </li></ul><ul><li>If business successful – unlikely for business owner to launch share buy-back </li></ul>Advantages Disadvantages
  8. 8. Key Take Aways <ul><li>Sub-Saharan Africa Private Equity (excluding SA) as an Asset Class and Industry is still in its nascent years but growing </li></ul><ul><li>SSA PE terrain requires negotiating “ pothole-ridden ” roads </li></ul><ul><li>Notwithstanding the above, significant opportunities with above average returns </li></ul><ul><li>Through partnerships we can improve the terrain encouraging further participation </li></ul>
  9. 9. SSA Private Equity Industry (excluding SA) <ul><li>Business Angels and family investors have formed the foundation </li></ul><ul><li>for the PE market </li></ul><ul><li>European and US Development Financial Institutions contributed </li></ul><ul><li>to the“first” wave of private equity/ venture capital funds across </li></ul><ul><li>Sub-Saharan Africa </li></ul><ul><li>Majority “First” wave funds country specific </li></ul>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
  10. 10. SSA 2 nd Generation Private Equity Funds Fund 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
  11. 11. SSA Govts and Private Equity <ul><li>Increasingly, Governments are seeing PE/ Venture Capital as the </li></ul><ul><li>engine to private sector development </li></ul><ul><li>NIGERIA </li></ul><ul><li>SM Industries Equity Investment Scheme: banks set aside 10% of their </li></ul><ul><li>PBT annually to invest in SME businesses </li></ul><ul><li>BOTSWANA </li></ul><ul><li>CEDA Venture Capital Fund was formed in order to invest in VC and </li></ul><ul><li>PE transactions. Independent private sector manager, with govt. pension </li></ul><ul><li>Fund capital </li></ul><ul><li>Govt largest pension fund has mandated 2.5% of funds under management be </li></ul><ul><li>allocated to venture capital </li></ul><ul><li>NAMIBIA </li></ul><ul><li>Bank of Namibia conducted study to look into VC/ PE Industry and impact </li></ul><ul><li>on the economy </li></ul>
  12. 12. The “Potholes” <ul><li>Currency Risk </li></ul><ul><li>Political Risk </li></ul><ul><li>Lack of Information </li></ul><ul><li>Lack of Transparency and </li></ul><ul><li>Corporate Governance </li></ul><ul><li>Legal/ Regulatory Risk </li></ul><ul><li>Liquidity Risk </li></ul><ul><li>Market Size </li></ul>Non –enabling environment but NOT Insurmountable
  13. 13. How have we negotiated the Potholes? <ul><li>“ Naturally” Hedged Businesses </li></ul><ul><li>Currency Hedges </li></ul><ul><li>Political Risk Insurance </li></ul><ul><li>Diversify across markets </li></ul><ul><li>Consolidation across markets </li></ul><ul><li>Get money out earlier </li></ul><ul><li>Structure in an exit </li></ul><ul><li>Government intervention </li></ul><ul><li>Relationships, relationships!! </li></ul><ul><li>Bring in Management </li></ul><ul><li>Technical Strategic Partners </li></ul><ul><li>Roll-Outs </li></ul>Currency Risk Political Risk Liquidity Risk Legal/ Regulatory Management Market Size
  14. 14. Partnering to enable financing <ul><li>Regulatory & legal reforms </li></ul><ul><ul><li>Pension reform </li></ul></ul><ul><ul><li>Judicial system </li></ul></ul><ul><ul><li>Incentivising VC/PE funds (taxes) </li></ul></ul><ul><ul><li>Tax amnesty from moving from informal to formal sector </li></ul></ul><ul><li>Public infrastructure </li></ul><ul><ul><li>Access to ports, power, telecommunications etc. </li></ul></ul><ul><li>Careful privatisation </li></ul><ul><li>Financial/ capital market development </li></ul><ul><ul><li>Less onerous listing requirements </li></ul></ul><ul><ul><li>Different taxation requirements for investors in these markets </li></ul></ul><ul><li>Catalyst for VC development </li></ul><ul><ul><li>VC fund development </li></ul></ul><ul><ul><li>Encourage DFIs to invest in VC </li></ul></ul><ul><li>Technical assistance funds </li></ul><ul><ul><li>Training of management teams </li></ul></ul><ul><li>Provide access to markets </li></ul><ul><li>Tax breaks </li></ul><ul><ul><li>Encourage multinational to “plough” back profits into Africa </li></ul></ul>African Governments Foreign Governments
  15. 15. Case Study: MBO of Poultry Processor Hybrid Poultry - Zambia Transaction Overview Aureos Value Addition Exit Achieved <ul><li>ZVCF invested US $275k in a combination </li></ul><ul><li>of debt and equity for 30% stake in Hybrid Poultry </li></ul><ul><li>2001 follow-on loan to fund expansion </li></ul><ul><li>Improved corporate governance </li></ul><ul><li>Strengthened board </li></ul><ul><li>Improved financial reporting </li></ul><ul><li>Brokered working capital facility with local bank to fund production of maize – used for stock feed </li></ul><ul><li>Exited in 2004 at a US $ IRR of 159% </li></ul><ul><li>and a cash multiple of 5X </li></ul>
  16. 16. Golden Lay Limited Country of Origin: Zambia Scope of Services: Zambia Date of Investment: 10 Feb 2006 Sector: Agriprocessing Deal Type: MBI Investment Size/ Stake: US$ 4.35m/ 49% <ul><li>BUSINESS OVERVIEW </li></ul><ul><li>Largest commercial table egg producer and distributor </li></ul><ul><li>in the Copperbelt of Zambia </li></ul><ul><li>Golden Lay (‘GLL”) controls approximately 15% of the </li></ul><ul><li>Zambian national market in table eggs </li></ul><ul><li>Company targets the informal sector which distributes </li></ul><ul><li>product to the end consumer </li></ul><ul><li>At investment produced on average 123,000 eggs per </li></ul><ul><li>day </li></ul><ul><li>Aureos backed an expert management team to expand </li></ul><ul><li>capacity of the business and to enter neighbouring </li></ul><ul><li>markets </li></ul><ul><li>NEW DEVELOPMENTS & AUREOS VALUE ADD </li></ul><ul><li>Increased production by 14% by installing </li></ul><ul><li>a third layer house </li></ul><ul><li>Bio-security measures fully installed. </li></ul><ul><li>Rearing house now registered and </li></ul><ul><li>recognised as a quarantine facility. </li></ul><ul><li>First year turnover surpassed budget by </li></ul><ul><li>17% </li></ul><ul><li>Aureos loan (US $3.36m) refinanced within first 12 months using Barclay Bank loan on more favourable terms </li></ul><ul><li>Proactive social responsibility plan in place: </li></ul><ul><li>HIV/Aids programme for staff </li></ul>Projected US$IRR: 36%
  17. 17. Case Study: Start Up Mineral Water Producer Voltic Limited - Ghana Transaction Overview Aureos Value Addition Exit Achieved <ul><li>GVCF invested US$700k for a </li></ul><ul><li>20% stake in Voltic </li></ul><ul><li>Additional loan advanced for automation </li></ul><ul><li>of processes </li></ul><ul><li>Assisted in regional roll-out into </li></ul><ul><li>Nigeria and Togo </li></ul><ul><li>Strengthened board </li></ul><ul><li>Improved depth of management </li></ul><ul><li>Implemented strong financial controls </li></ul><ul><li>and reporting systems </li></ul><ul><li>Exited in 2003 with a US$IRR of 16.3% </li></ul>
  18. 18. Fibrex Angola Country of Origin: Angola Scope of Services: Angola Date of Investment: 18 January 2007 Sector: Manufacturing Deal Type: Buy In Investment Size/ Stake: US$ 2.5m/ 33% <ul><li>BUSINESS OVERVIEW </li></ul><ul><li>Fibrex is Angola’s leading plastics pipe (HDPE & PVC) </li></ul><ul><li>manufacturer in the country </li></ul><ul><li>Aureos invested in Fibrex through a Mauritius SPV, PII which </li></ul><ul><li>acquired a 99% of Fibrex Angola jointly with DPI International </li></ul><ul><li>a leading South African plastics pipe manufacturer and a local </li></ul><ul><li>entrepreneur - Plastip </li></ul><ul><li>Aureos, DPI and Plastip acquired the business in order </li></ul><ul><li>to exploit the current boom in the infrastructure development </li></ul><ul><li>across Angola post the civil war </li></ul><ul><li>Business was a family owned business and thus Aureos is </li></ul><ul><li>looking to implement strong corporate governance and </li></ul><ul><li>operational reporting </li></ul><ul><li>NEW DEVELOPMENTS & AUREOS VALUE ADD </li></ul><ul><li>Business was taken over in mid January. Production </li></ul><ul><li>since then has been below expectations due to </li></ul><ul><li>significant power outages in the country </li></ul><ul><li>Generator was also down for two weeks impacting </li></ul><ul><li>the production of the business </li></ul><ul><li>New Managing Director will be in Angola on April 25 th to </li></ul><ul><li>take over the running of the plant and implement SA </li></ul><ul><li>industry standard production mechanisms </li></ul><ul><li>Streamlined financial procedures and systems under </li></ul><ul><li>implementation </li></ul>Projected US$IRR: 32%
  19. 19. 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.