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CIS and Eastern Europe Business Forum November 3, 2006  Private Equity Investments in the CIS November  2006
<ul><ul><li>Fund investment manager with offices in Omaha, Moscow and Almaty </li></ul></ul><ul><ul><li>Investment team ha...
Investment Projects Poultry Processing Champagne Bottling Benefits of Commodity Trading Packaging Dairy Products Kazakh Re...
<ul><li>Investment fund is set up as limited partnership </li></ul><ul><li>Specific contractual terms and investment focus...
Investment Team <ul><li>The first ingredient in establishing a successful private equity fund is the investment team. </li...
<ul><li>Sector: Food, agribusiness and related consumer  products investments, which includes sectors  such as food and be...
<ul><li>Investments have been made in five different countries of the former Soviet Union </li></ul><ul><li>The largest co...
<ul><li>Investment team has invested in eight companies since 1997 </li></ul><ul><li>Investments have been made in several...
Investment Climate <ul><ul><li>Political stability </li></ul></ul><ul><ul><li>Good macro economic performance </li></ul></...
Food Sector Opportunity <ul><li>Excellent business growth and efficiency improvement opportunities are available to those ...
Growth in Large-Scale Grocery Retail <ul><li>Consumers are significantly increasing food purchases at large-scale stores <...
<ul><li>No shortage of investment opportunities in the region – the issue is to identify growth sectors and excellent mana...
Due Diligence <ul><li>Backgrounds of owners/managers of potential investments </li></ul><ul><li>Market sector study and an...
<ul><li>Experience has shown Agribusiness Management that several key factors are important to consider when investing in ...
Deal Structuring <ul><ul><li>Majority ownership stakes or control positions </li></ul></ul><ul><ul><li>Control of key stra...
<ul><li>Investment team actively participates on a “hands-on” basis: </li></ul><ul><ul><li>Investment officers work closel...
<ul><li>Evaluate the ability to exit as part of the due diligence process </li></ul><ul><li>Plan to exit an investment in ...
API Business Locations Agribusiness Management Company
Chicken Kingdom <ul><li>Summary Information: </li></ul><ul><li>Industry Segment   Poultry </li></ul><ul><li>Initial Invest...
Chicken Kingdom  (continued) <ul><li>Current Status: </li></ul><ul><li>Chicken Kingdom has become a strong brand name in M...
<ul><li>Summary Information: </li></ul><ul><li>Industry Segment   Beverage </li></ul><ul><li>Initial Investment   February...
KLP Soft Drinks  (continued) <ul><li>Current Status: </li></ul><ul><li>Business is closed </li></ul><ul><li>Prior to Closu...
<ul><li>Experienced investment team able to create operational improvements, profitable growth and increasing cash flow </...
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  1. 1. CIS and Eastern Europe Business Forum November 3, 2006 Private Equity Investments in the CIS November 2006
  2. 2. <ul><ul><li>Fund investment manager with offices in Omaha, Moscow and Almaty </li></ul></ul><ul><ul><li>Investment team has worked together for over nine years </li></ul></ul><ul><ul><li>Business areas include: </li></ul></ul><ul><ul><ul><li>Private equity investment funds </li></ul></ul></ul><ul><ul><ul><li>Real estate development and investment </li></ul></ul></ul><ul><ul><ul><li>Commodities trading to assist NGO’s </li></ul></ul></ul><ul><ul><li>Active hands-on approach of involvement with portfolio company management teams </li></ul></ul><ul><ul><li>Provides hands-on financial guidance, business discipline/control, and strategic planning assistance for portfolio companies </li></ul></ul><ul><ul><li>Deal flow, monitoring, and exit opportunities enhanced by extensive industry contacts, both international and local </li></ul></ul>Agribusiness Management Company
  3. 3. Investment Projects Poultry Processing Champagne Bottling Benefits of Commodity Trading Packaging Dairy Products Kazakh Real Estate Glass Bottle Manufacturing
  4. 4. <ul><li>Investment fund is set up as limited partnership </li></ul><ul><li>Specific contractual terms and investment focus </li></ul><ul><li>General Partner and Fund Manager (usually related) </li></ul><ul><li>Limited Partners (the investors) have limited Liability </li></ul><ul><li>Investments are made in private, non-public companies </li></ul><ul><li>Fund Manager assists portfolio company management in developing the business </li></ul><ul><li>Limited life of 8-10 years; 4 year investment period </li></ul><ul><li>Target investment projects with potential for high returns and cash multiples </li></ul><ul><li>Annual management fee, declining in later years, plus a percentage of the long-term profits (carried interest) </li></ul>Characteristics of a Private Equity Fund
  5. 5. Investment Team <ul><li>The first ingredient in establishing a successful private equity fund is the investment team. </li></ul><ul><ul><li>Significant experience – investment, financial and business </li></ul></ul><ul><ul><li>Locals involved on the investment team </li></ul></ul><ul><ul><li>Strong education backgrounds </li></ul></ul><ul><ul><li>In-country office locations </li></ul></ul><ul><ul><li>Investment/business track record </li></ul></ul>
  6. 6. <ul><li>Sector: Food, agribusiness and related consumer products investments, which includes sectors such as food and beverage processing, packaging, distribution and storage </li></ul><ul><li>Emphasis: Early-stage growth and expansion capital for established businesses </li></ul><ul><li>Instruments: Equity and equity-like securities </li></ul><ul><li>Structure: Majority ownership or control positions </li></ul><ul><li>Investment Size: $5-$20 million </li></ul><ul><li>Target Countries: Former Soviet Union, primarily Russia, Ukraine and Kazakhstan. </li></ul><ul><li>Diversification: Diversified by region, country, and sector </li></ul>Investment Strategy A coherent and consistent investment strategy is a second necessary ingredient in establishing a private equity fund
  7. 7. <ul><li>Investments have been made in five different countries of the former Soviet Union </li></ul><ul><li>The largest concentration of investment is in Russia </li></ul>API Portfolio Investments by Country (% of Investment)
  8. 8. <ul><li>Investment team has invested in eight companies since 1997 </li></ul><ul><li>Investments have been made in several important food and agribusiness sectors </li></ul>API Portfolio Investments by Sector (% of Investment)
  9. 9. Investment Climate <ul><ul><li>Political stability </li></ul></ul><ul><ul><li>Good macro economic performance </li></ul></ul><ul><ul><li>Growth in consumer incomes and rising consumer confidence </li></ul></ul><ul><ul><li>Structural reform in key areas, e.g., taxes, shareholder rights and currency policy </li></ul></ul><ul><ul><li>Industry sector with solid growth as well as good prospects for the future </li></ul></ul>Investment climate in the region is important to the success of the investment program (i.e. the “wind” at your back)
  10. 10. Food Sector Opportunity <ul><li>Excellent business growth and efficiency improvement opportunities are available to those with sector expertise and investment capital </li></ul><ul><ul><li>Significant improvement in consumer purchasing power </li></ul></ul><ul><ul><li>Food processing one of the fastest growing sectors </li></ul></ul><ul><ul><li>Critical capital shortage in the food sector </li></ul></ul><ul><ul><li>Assets often available at low valuations </li></ul></ul><ul><ul><li>Strong demand for quality local food products </li></ul></ul><ul><ul><li>Consumers want modern and convenient food products </li></ul></ul><ul><ul><li>Economic growth extending beyond Moscow and St. Petersburg </li></ul></ul>
  11. 11. Growth in Large-Scale Grocery Retail <ul><li>Consumers are significantly increasing food purchases at large-scale stores </li></ul><ul><li>Declining sales and fewer locations for open air markets and kiosks; 34% decrease in grocery outlets since 2000 </li></ul><ul><li>Large food retailers are expanding to regional cities </li></ul>
  12. 12. <ul><li>No shortage of investment opportunities in the region – the issue is to identify growth sectors and excellent management </li></ul><ul><li>Maintain a high profile in the region and the industry </li></ul><ul><li>Proactively work with sources to develop investment projects </li></ul><ul><li>Strong deal flow from various proprietary and other sources (more than 600 projects reviewed for API): </li></ul><ul><ul><li>Existing portfolio company management teams </li></ul></ul><ul><ul><li>Strategic agribusiness companies </li></ul></ul><ul><ul><li>Local business contacts and entrepreneurs </li></ul></ul><ul><ul><li>Accounting and law firms </li></ul></ul><ul><ul><li>Investment and commercial bankers </li></ul></ul><ul><ul><li>Multi-lateral financial institutions </li></ul></ul>Deal Flow
  13. 13. Due Diligence <ul><li>Backgrounds of owners/managers of potential investments </li></ul><ul><li>Market sector study and analysis of competition </li></ul><ul><li>Current and prospective financial condition of the business </li></ul><ul><li>Legal status of assets, government relations and business contracts </li></ul><ul><li>On-site review of plant, equipment and other facilities </li></ul><ul><li>Extensive business review and analysis </li></ul><ul><li>Financial projections and assumptions </li></ul><ul><li>Exit possibilities </li></ul>Analysis of key business, financial and legal points to determine if a potential deal meets all investment criteria Key areas of review and investigation:
  14. 14. <ul><li>Experience has shown Agribusiness Management that several key factors are important to consider when investing in the former Soviet Union: </li></ul><ul><ul><li>Partner with trustworthy local management teams with a proven track record </li></ul></ul><ul><ul><li>Invest in established early-stage businesses in growth sectors </li></ul></ul><ul><ul><li>Gain majority control; alone or with other like-minded investors </li></ul></ul><ul><ul><li>Enter into well-defined shareholder legal documents </li></ul></ul><ul><ul><li>Attend to financial details, particularly GAAP financials </li></ul></ul><ul><ul><li>Minimize hard currency exposure </li></ul></ul><ul><ul><li>Portfolio company management team has its own capital at risk </li></ul></ul><ul><ul><li>Use performance-based incentives for management </li></ul></ul><ul><ul><li>Potential to develop significant scale and market share </li></ul></ul>Investment Factors to Consider
  15. 15. Deal Structuring <ul><ul><li>Majority ownership stakes or control positions </li></ul></ul><ul><ul><li>Control of key strategic, capital and Board decisions </li></ul></ul><ul><ul><li>Direct significant management decisions </li></ul></ul><ul><ul><li>Control the cash – Fund financial officers have signatory authority on bank accounts </li></ul></ul><ul><ul><li>Create transparent financial conditions </li></ul></ul><ul><ul><li>Application of performance benchmarks/hurdles </li></ul></ul><ul><ul><li>Equity participation for key management (in addition to their own capital at risk) </li></ul></ul>
  16. 16. <ul><li>Investment team actively participates on a “hands-on” basis: </li></ul><ul><ul><li>Investment officers work closely with portfolio company management to develop and implement business strategy </li></ul></ul><ul><ul><li>Chief Financial Officer and Controller establish financial and accounting controls at portfolio companies </li></ul></ul><ul><ul><li>Investment officers implement a program of frequent contacts with company management to discuss business operations </li></ul></ul><ul><ul><li>Quarterly reviews held in Moscow with senior management </li></ul></ul><ul><li>Quarterly or semi-annual reports to investors </li></ul><ul><li>Annual investor meeting; helpful to alternate locations </li></ul>Investment Monitoring
  17. 17. <ul><li>Evaluate the ability to exit as part of the due diligence process </li></ul><ul><li>Plan to exit an investment in 3 to 7 years </li></ul><ul><li>Evaluate the viability of potential exits prior to investing </li></ul><ul><ul><li>Sale to a Western strategic or financial investor </li></ul></ul><ul><ul><li>Sale to a local or regional group </li></ul></ul><ul><ul><li>Sale to the project’s management team </li></ul></ul><ul><ul><li>IPO on either a local or a developed market </li></ul></ul>Exit Strategies
  18. 18. API Business Locations Agribusiness Management Company
  19. 19. Chicken Kingdom <ul><li>Summary Information: </li></ul><ul><li>Industry Segment Poultry </li></ul><ul><li>Initial Investment July 1997 </li></ul><ul><li>Total Investment $22.5 m </li></ul><ul><li>Fund Ownership 88.4% </li></ul><ul><li>Business Description: </li></ul><ul><li>Producer of poultry meat products for the Russian market </li></ul><ul><li>Investment Rationale: </li></ul><ul><li>Severe shortages – domestic production was down 75% since 1990 </li></ul><ul><li>Substantial room for efficiency improvements </li></ul><ul><li>Opportunity to acquire and consolidate businesses at attractive valuations </li></ul><ul><li>Low-cost supply of feed ingredients in Lipetsk vicinity </li></ul><ul><li>Close proximity to the Moscow market </li></ul>
  20. 20. Chicken Kingdom (continued) <ul><li>Current Status: </li></ul><ul><li>Chicken Kingdom has become a strong brand name in Moscow and other areas of European Russia </li></ul><ul><li>Renovation of production and processing facilities in Lipetsk complete </li></ul><ul><li>Lipetsk produces 750,000 birds per week using 14 grow-out locations </li></ul><ul><li>Acquired second location near Bryansk in 2004 </li></ul><ul><li>First Bryansk live bird production in 2006; target capacity 500,000 birds per week in early 2007 </li></ul><ul><li>Advanced production technologies and state-of-the-art equipment at all facilities </li></ul><ul><li>Superior bio-security procedures based on Western production model </li></ul><ul><li>Potential Exit </li></ul><ul><li>Russian IPO or Sale to strategic investor </li></ul>
  21. 21. <ul><li>Summary Information: </li></ul><ul><li>Industry Segment Beverage </li></ul><ul><li>Initial Investment February 1998 </li></ul><ul><li>Total Investment $9.8 m </li></ul><ul><li>Fund Ownership 72.3% </li></ul><ul><li>Business Description: </li></ul><ul><li>Producer of soft drinks under license agreement from A.G. Barr </li></ul><ul><li>Investment Rationale: </li></ul><ul><li>Soft drink market growing fast </li></ul><ul><li>Favorable taste tests in Russia </li></ul><ul><li>Exclusive distribution rights for IRN-BRU </li></ul>KLP Soft Drinks
  22. 22. KLP Soft Drinks (continued) <ul><li>Current Status: </li></ul><ul><li>Business is closed </li></ul><ul><li>Prior to Closure: </li></ul><ul><li>Award winning advertising program created brand identity </li></ul><ul><li>IRN-BRU sold at a premium </li></ul><ul><li>Unit volume was less than plan following 1998 economic crisis </li></ul><ul><li>Ruble devaluation in 1998 hampered ability to meet hard currency costs </li></ul><ul><li>Prices negatively impacted by Coke and Pepsi discounts </li></ul><ul><li>Cash shortage in 2000 reduced production and sales </li></ul><ul><li>Major reduction in operating expenses did not produce profit </li></ul>
  23. 23. <ul><li>Experienced investment team able to create operational improvements, profitable growth and increasing cash flow </li></ul><ul><li>Cohesive investment team; incentives and time together </li></ul><ul><li>Track record of growing and exiting businesses </li></ul><ul><li>Consistent investment strategy supported by internal processes </li></ul><ul><li>Maintain high profile in your sector and region to develop a strong proprietary deal flow </li></ul><ul><li>Economic and market conditions should favor investment in the targeted sector and region </li></ul><ul><li>Growth companies provide high future returns and cash multiples </li></ul>Conclusion Key Considerations in Developing a Private Equity Investment Fund

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