Emerging Markets Private Equity Review - EMPEA · For many smaller GPs, their largest challenge is getting their fund’s lifecycle started. ... Emerging Markets Private Equity Review

Amidst a global economic slowdown, emerging markets continue to offer investors the greatest growth opportunities. Yet investors are faced with difficult choices: while they seek to diversify away from developed-market assets due to higher risks associated with debt and regulation, risk and regulation continue to be the primary inhibitors to greater investment in emerging markets. It appears investors are at a standstill.

We believe this “new normal” presents enormous opportunity for private equity investors in emerging markets, a sentiment shared by the record-setting 875 delegates at this year’s Global Private Equity Conference. However, we’re not Pollyannaish in our beliefs; despite our outlook, we remain sensitive to investors’ legitimate concerns regarding regulation and risk, and we’ve undertaken two initiatives to tackle them head-on.

The first is our recent release of the EMPEA Legal & Regulatory Guidelines. The Guide-lines, an effort spearheaded by our Legal & Regulatory Council, are a global resource that identifies the key elements of legal and tax regimes that could foster greater private equity investment. I encourage readers to visit our new website, www.empea.org, to learn more about them as a tool for your own discussions with regulators.

In addition, EMPEA’s Legal & Regulatory Council has been developing tools to help fund managers reduce operating risks. This issue features guidance from leading law firms on corruption issues, laying out a number of real-world scenarios GPs are likely to encounter through the lifecycle of their funds.

For many smaller GPs, their largest challenge is getting their fund’s lifecycle started. Our preliminary Q2 statistics show that fund managers raised under US$8 billion be-tween April and June. Two funds—Capital International Private Equity Funds (CIPEF) VI and Kohlberg Kravis Roberts & Co Asia Fund II—account for US$6 billion, or 75%, of the total funds raised. The data demonstrate a continued bifurcation in the market: record-breaking closes for very large funds, and a slowing fundraising environment for smaller GPs.

Given the deal flow and opportunity set within lower market segments, we believe smaller and mid-size funds merit greater attention. So this year we launched a new Fundraising Masterclass to provide smaller fund managers with tools to help them secure LP commitments, and to free up time to focus on their core competency: sourcing and executing deals. We’ve summarized here the key recommendations from our Master-class faculty.

The development of the secondaries market could help unlock capital for smaller GPs. In this issue, John Stephens, Managing Director of Pomona Capital, discusses the emer-gence and importance of secondaries as a vehicle for providing LPs greater transparency into PE fund managers, a “margin of safety” in pricing and a means of attaining liquidity with their portfolios. EMPEA Board Member Okechukwu Enelamah touches on the liquidity of private equity portfolios in an interview that I encourage all members to read.

As the summer heats up and turmoil in sovereign debt and public equity markets ratch-ets higher, we will continue to push forward on the issues of risk and regulation across the emerging markets. There will be a lot to discuss when we next meet in London the week of 22 October for Capital Impact: Private Equity in Emerging Markets 2012 and our fourth annual Private Equity in Africa leadership summit, as well as another Fundrais-ing Masterclass. I look forward to seeing you there.

Sarah Alexander, President and CEOEmerging Markets Private Equity Association

Viewpoint

Emerging Markets Private Equity Review

spotlightAnti-Corruption: Guidance for EM PE Practitioners 3

Fundraising Do’s and Don’ts: Lessons from EMPEA’s Inaugural Fundraising Masterclass 6

Highlights from the 14th Annual Global Private Equity Conference 8

Features Guest Commentary: Emerging Market Secondaries Come of Age: An Analysis by Pomona Capital 12

Inside Perspectives: An Interview with African Capital Alliance’s Okechukwu Enelamah 16

Impact Case Study: Sanitas Group 20

News aNd dataEM PE Performance 22

Notable Exits & IPOs 23

A Publication of the Emerging Markets Private Equity Association

Volume VIII, Issue 2, 2012 July 2012

About EMPEA

The Emerging Markets Private Equity Association (EMPEA) is an independent, global membership association whose mission is to catalyze private equity and venture capital investment in emerging markets. EMPEA’s 300 members share the belief that private equity can provide superior returns to investors, while creating significant value for companies, economies and communities in emerging markets. Our members include the leading institutional investors and private equity and venture capital fund managers across developing and developed markets. EMPEA leverages an unparalleled global industry network to deliver authoritative intelligence, promote best practices, and provide unique networking opportunities, giving our members a competitive edge for raising funds, making good investments and managing exits to achieve superior returns.

Publication Editorial Team

EditorsNadiya Satyamurthy, DirectorMike Casey, Senior Associate

Additional Editorial and Research ContributorsJennifer Choi, Vice President of Industry and External AffairsTed Hickey, Manager, Data ProgramNeeraj Borle, AnalystJeff Schlapinski, AnalystSam Verran, Analyst

1077 30th Street NW • Suite 100 • Washington, DC 20007 USAPhone: +1.202.333.8171 • Fax: +1.202.333.3162 • Web: empea.org

EMPEA’s Board of Directors

Teresa Barger, Vice ChairmanManaging Director, Cartica Management LLC

Thomas C. BarryPresident and CEO, Zephyr Management, L.P.

Michael CalveyFounder and Senior Partner, Baring Vostok Capital Partners

Okechukwu EnelamahChief Executive Officer, African Capital Alliance

Paul FletcherSenior Partner, Actis

Jason GloverPartner, Simpson Thacher & Bartlett LLP

Roger S. LeedsProfessor, Johns Hopkins University, SAIS

H. Jeffrey Leonard, ChairmanPresident and CEO, Global Environment Fund

Piero MinardiManaging Director, Gávea Investimentos

Arif NaqviFounder and Group CEO, Abraaj Capital

Sanjay NayarChief Executive Officer, KKR India Advisors Pvt. Ltd.

Robert PettyManaging Partner and Co-Founder, Clearwater Capital Partners

André RouxChief Executive Officer, Ethos Private Equity

Jean Eric SalataChief Executive and Founding Partner, Baring Private Equity Asia

George W. SigulerManaging Director and Founding Partner,Siguler Guff & Company

Sev VettivetpillaiChief Executive Officer, Aureos Advisers Limited

Pote VidetManaging Director, Private Equity (Thailand) Co., Ltd., an affiliate of Lombard Investments

Rebecca XuCo-Founder and Managing Director, Asia Alternatives Management

John ZhaoFounder and Chief Executive Officer, Hony Capital

© 2012 Emerging Markets Private Equity Association

All rights reserved. Emerging Markets Private Equity Review is a publication of the Emerging Markets Private Equity Association. Neither this publication nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior permission of the Emerging Markets Private Equity Association.

SubscriptionsFor subscription or single issue purchase, visit empea.net or email [email protected]. Subscription for one year is US$2,450. EMPEA members receive the Emerging Markets Private Equity Review for free.

Advertising OpportunitiesThe Emerging Markets Private Equity Review offers readers an analytical and factual look at private equity investing in emerging markets. The EM PE Review features include regional and country market analysis, an overview of current trends in the industry, benchmark data from Cambridge Associates, and guest articles from leading thinkers and practitioners. Its readership comprises a broad array of private equity fund managers, institutional investors, service providers, and other key stakeholders in the industry from nearly 60 countries.

Advertising opportunities are available for upcoming issues. For more information, please contact Holly Freedman via e-mail at [email protected] or by phone at +1.202.333.8171.

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Emerging Markets Private Equity Review July 2012 3

Anti-Corruption: Guidance for EM PE Practitioners

Since 2010, authorities in the United Kingdom and the United States have significantly stepped up enforcement of their respective anti-corruption laws. Both the Serious Fraud Office (SFO) in the United Kingdom and the U.S. Department of Jus-tice (DOJ) have made it clear that private equity funds will be held accountable for the conduct of their portfolio companies, whether or not the behavior occurred prior to the investment or with the PE investor’s knowledge. Specific areas of concern include high risk sectors and/or countries and third party rela-tionships, particularly the use of intermediaries.

During a webcast on 29 March 2012, members of EMPEA’s Legal & Regulatory Council provided the following guid-ance on a number of likely scenarios confronting investors in emerging markets.

Fundraising and Hospitality

Question: In entertaining an on-site delegation conducting fund due diligence, what are the limits to the hospitality that a fund manager can extend?

Guidance: These questions often arise in the context of fundraising from sovereign wealth funds and public pension funds. Even if the entertaining in question relates to a fund manager’s portfolio, e.g., a golf outing at a resort owned by the fund manager, if the hospitality being extended could be viewed as extravagant or improperly influencing a business decision, it should be avoided. Laura Friedrich of Shearman & Sterling advises that “while a site visit at the course may be appropriate, hosting the entire delegation for a round of golf would be questionable.”

According to Friedrich, “the whole point here with hospital-ity is to use one’s judgment, and to not do anything that could be considered over the top.”

Pre-Bidding

Question: How should a PE investor (or a PE-backed portfo-lio company) react to an offer from a consultant for details on the bid evaluation criteria?

Guidance: The key is to have a policy in place, notes Sam East-wood of Norton Rose, that takes into account the human aspects of these scenarios. “Specifically, there need to be assurances that reporting such incidents won’t be career dam-aging, that there won’t be repercussions for costing the firm or the portfolio company an opportunity,” says Eastwood.

The recommended response—to decline by referencing company policy against offers that would give an unfair

business advantage—will flow from the existence of a spe-cific rule and sufficient training to ensure employees can identify the correct mode of conduct. Employees should also be aware that offers can take various forms—money, information or some other form of quid pro quo.

Pre-Acquisition Due Diligence

Question: To what extent is a private equity manager liable for the actions taken by its investees pre-acquisition?

Guidance: Strictly speaking, portfolio companies don’t fall under the U.K. Bribery Act’s “associated person” definition but the U.K. SFO has made clear that private equity manag-ers will be held responsible. In the United States, the ABB Vetco case serves as a cautionary tale of actions taken by U.S. authorities against a U.K. company related to an affili-ate’s conduct in Nigeria prior to the investment.1

But it’s “not necessarily the case that you should run at the first sign of bribery,” suggests SJ Berwin’s Shaistah Akhtar.

Exhibit 1: Top 10 FCPA-related Enforcement Actions (SEC and DOJ), as of April 2012

1. Siemens(Germany):US$800millionin20082. KBR/Halliburton(USA):US$579millionin20093. BAE(UK):US$400millionin20104. SnamprogettiNetherlandsB.V./ENIS.p.A

(Holland/Italy):US$365millionin20105. TechnipS.A.(France):US$338millionin20106. JGCCorporation(Japan):US$218.8millionin20117. DaimlerAG(Germany):US$185millionin20108. Alcatel-Lucent(France):US$137millionin20109. MagyarTelekom/DeutscheTelekom

(Hungary/Germany):US$95millionin201110. Panalpina(Switzerland):US$81.8millionin2010

Source: FCPAblog.com.

1 In 2004, engineering and services company Vetco UK and its German par-ent were acquired by a consortium of PE firms. Vetco UK’s affiliates involved in oil exploration in Nigeria were found to have paid bribes totaling US$2.1 million to Nigerian Customs Service officials and US$1 million to officials of a Nigerian government agency approving oil exploration contracts. Vetco UK pleaded guilty to FCPA violations and sought an opinion release from the DOJ that included certain remedial requirements, e.g., internal controls, etc. However, the bribes continued and in 2007, Vetco UK and two of its affili-ates were found guilty of FCPA violations. As part of that plea agreement, the three companies paid US$26 million in fines, independent monitors were imposed and various conditions attached that were binding on any subsequent sale of Vetco.

On 29 March 2012, EMPEA hosted a professional development webcast on Anti-Corruption Policies: What Every EM PE Practitioner Should Know, featuring perspectives from Norton Rose, Shearman & Sterling, SJ Berwin and White & Case. In this article, Jen Choi, EMPEA’s VP of Industry and External Affairs, shares some of the findings from the webcast.

Emerging Markets Private Equity Association4

Guidance for Anti-Corruption, continued

“Issues often come up—facilitation payments to get things done or a contract obtained more quickly than normal. It’s up to the Investment Committee to determine whether there is a systemic risk,” says Akhtar. Is this a historic and self contained issue or a continuing practice? Should a self-report be made to the authorities? The decision to continue or walk away depends on the seller’s or management’s will-ingness to deal with the issue and mitigate the private equity investor’s future exposure, through warranties, indemnities and covenants in the acquisition documents (see Exhibit 2 for recommended elements of a due diligence process).

Instructing an Agent

Question: Should a private equity fund use an agent or advi-sor recommended by an investor being targeted during a fund raise?

Guidance: Third party business relationships require consid-erable attention during the diligence process and vigilance on an ongoing basis. “In certain jurisdictions, you’ll often hear that you must go through a particular individual to get access to a certain investor,” observes Shearman & Sterling’s Friedrich. “That should raise a private equity manager’s hack-les and the manager should seriously consider whether it’s worth having that investor in the fund,” she advises.

At what point can a private equity manager be assured that a diligence exercise is complete? The U.K.’s Ministry of Jus-tice (MOJ) provides a list of detailed questions that must be asked to establish whether an agent is reputable and not involved in any corrupt activity, as well as verification of the answers being received. The MOJ also instructs investors to

vigorously test the commercial rationale for hiring an agent in the first place. The lack of an audit trail and documenta-tion of due diligence around use of agents could trigger additional scrutiny, notes SJ Berwin’s Akhtar.

Facilitation Payments

Question: Should an employee stopped at border control patrol pay an unpublished cash fee?

Guidance: While exemptions for facilitation payments exist under the FCPA, i.e., to expedite a routine process such as the filing of documents, there is zero tolerance for such payments under the U.K. Bribery Act. Basic guidance is that any unofficial payment is considered a bribe, no matter how small, and the request should be refused. An anti-bribery policy should, however, allow for payment in cases where an employee’s safety could be at risk, for example, if stopped at a temporary road block by armed police officers who appear threatening.

Similarly, employees should decline requests for chari-table contributions from, or for political contributions to the campaigns of, any public or government official that could influence a decision benefiting the firm or a portfolio company.

Post-Acquisition Vigilance

Question: Board documents for a portfolio company reveal management’s awareness of suspicious travel expenses paid by a subsidiary to local officials, potentially tied to the award of key sales contracts. What should a fund manager do?

Guidance: The individual sitting on the portfolio company’s Board should immediately consult with the compliance office to determine next steps, including any necessary remedial actions, direct liability or criminal activity that must then be reported to the authorities or returns from the investment recoverable as proceeds of the crime.

The obligation to be vigilant does not end at the close of the deal. “A corporate culture that reinforces ethical behavior is a key component of effectively managing risk across the enterprise,” said Mr. Carlo V. di Florio, Director, SEC Office of Compliance Inspections and Examinations, in a recent speech, alluding to the fact that assessments of corporate culture among the general partners, senior investment pro-fessionals and principals of private equity funds are a core component of the SEC’s FCPA investigations today.

EMPEA Members can access a replay of the Anti-Cor-ruption webcast through the EMPEA website at http://www.empea.org/events-education/webcasts/.

Exhibit 2: Recommended Elements of a Diligence Process

Provideanti-briberydiligencechecklisttoseller’scounsel

Consultpublicsourcesforbriberyallegationsrelatedtoanypersonsassociatedwithprospectiveinvesteecompany

Conductreferencechecksamongbusinesspartnersandindependentinquiriesintothebusinessethicsofpotentialinvestee

Instructforensicaccountant’sexaminationoffinancialcontrolsystemsandrecordsforunexplainedorsuspiciouspayments

Makeexternalinquiriesofknowledgeablestakeholders,e.g.,localembassystaff

Includecovenantsininvestmentagreements

– Commitmenttointroduceeffectiveanti-briberypolicyorenforceexistingpolicy

– Requirementtocarryoutdiligenceoninvestee’semployeesandassociatesandincludecontractualprotectionswhereappropriate

– Reportingandmonitoringprocedurestoenabletheprivateequityfund’smonitoringofcomplianceandrequireremedialactiontobetakenwherenecessary


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Capital InternationalPrivate Equity Fund VI (CIPEF VI)

$3,000,000,000

Global emerging markets private equity

March 2012

The undersigned served as the exclusive global placement agent and strategic advisor


Fundraising Do’s and Don’ts: Lessons from EMPEA’s Inaugural Fundraising MasterclassIn response to the growing bifurcation in the fundraising market between larger and smaller funds, EMPEA hosted its inaugural EM PE Fundraising Masterclass on 17 May, to provide GPs with tools and best practices for raising funds. Featuring expert faculty from MVision Private Equity Advisors and Debevoise & Plimpton LLP, this unique event offered over 60 attendees—including first-, second- and third-time fund managers—with the opportunity to engage directly with presenters through interactive seminars and extensive question and answer sessions.

The day kicked off with a DFI Seminar featuring faculty presenters who commit to fund managers active in all emerging market regions. Senior representatives from ADB, AfDB, CDC Group plc, EIB, EBRD, FMO, IFC and OPIC shared their perspectives on the characteristics they look for in fund managers and the terms they prefer to see in LPAs. In response to audience questions, DFIs dug into the key decision criteria they use, including team composition and compensation models, how they evaluate a GP’s ability to generate deal flow and how they assess fund managers’ capabilities to create value in portfolio companies.

Mounir “Moose” Guen and Lina Russo, Chief Executive Officer and Managing Director, respectively, of MVision provided attendees insights on key factors affecting LP commitment decisions. Guen discussed the importance of diversifying one’s LP base, how to sequence investor pitches and fund closes to sustain momentum, and how to ensure that the fundraising process does not stall. Guen and Russo also explored the reporting and compliance functions that GPs need to have in place to facilitate a smooth fundraise.

Patricia Dinneen, Managing Director with Siguler Guff & Company, and James McGuigan, Private Equity Manag-ing Partner with Capital International Private Equity Funds

EMPEA President and CEO Sarah Alexander introduces the DFI Seminar. Panelists included (from left to right) Yvonne Bakkum, FMO; Mark Kenderdine-Davies, CDC Group plc; Anne Fossemalle, EBRD; Jay Koh, OPIC; Jesper Persson, EIB; Line Picard, AfDB; Duarte Henriques da Silva, ADB; and, David Wilton, IFC.

Geoffrey Kittredge and Andrew Ostrognai, Partners at Debevoise & Plimpton LLP, discuss legal strategies for protecting GP interests and maintaining competitive positioning to LPs.

Mounir “Moose” Guen, Chief Executive Officer of MVision Private Equity Advisors, dis-cusses how to succeed in the current fundraising climate.

EMPEA President and CEO Sarah Alexander moderates the “Lunch & Learn” with Patricia Dinneen, Managing Director of Siguler Guff & Company, and James McGuigan, Private Equity Managing Partner of Capital International Private Equity Funds (CIPEF).

(CIPEF), shared “war stories” and lessons learned from their years in the industry. Having just closed CIPEF VI—the largest global EM-dedicated fund ever—McGuigan relayed that LPs are more sensitive to deal pipelines than ever before. Dinneen agreed, and stressed the growing importance of alignment of interest, transparency and adherence to ESG guidelines.

Marwan Al-Turki, Geoffrey Kittredge and Andrew Ostrognai, Partners with Debevoise & Plimpton LLP, closed the day with a panel covering legal strategies for protecting GP interests whilst maintaining competitive and marketable position-ing to LPs. The faculty presented best practices on an array of topics, including fund structure, documentation, capital commitments, co-investment and parallel funds, and distri-butions. They also discussed the merits and drawbacks of most favored nation clauses in side letters, and how LP term preferences differ across emerging market countries.

EMPEA is planning to host a second EM PE Fundraising Masterclass on the sidelines of our upcoming conferences, Private Equity in Emerging Markets and Private Equity in Africa 2012, held in London 23–24 October. Stay tuned for details on the next opportunity to learn fundraising best practices from industry-leading experts.


EMPEA’s EM PE Fundraising Masterclass Lead Supporters

IFC and EMPEA thank the 14th Annual Global PE Conference’sSponsors, Exhibitors, Partners, and Supporting Organizations


Highlights from the 14th Annual Global Private Equity Conference

Despite the shadows cast by Europe’s economic troubles and concerns of slowing economic growth in many emerg-ing markets, most of the 875 participants attending the 14th Annual Global Private Equity Conference, co-hosted by EMPEA and IFC, were upbeat as they shared strategies and ideas on how to prevail as private equity investors in this new financial landscape. There was a distinct shift from the cautiously optimistic mood on display during last year’s conference to a more nuanced view of today. While the fund-raising climate remains tough (one speaker joked that he was losing hair due to it), many of this year’s delegates believe that now is a great time to be investing in the asset class.

The record-breaking number of attendees—nearly 300 of which were LPs—gave evidence to the fact that pri-vate equity in emerging markets is no longer viewed as a niche strategy, but represents a core component of inves-tors’ portfolios. Held the week of May 14th in Washington, D.C.—the current center of some fierce debates on the role and value of private equity in the midst of the U.S. presi-dential campaign—the conference gave voice to a number of industry leaders making the case that private equity in emerging markets, when executed well, not only serves as an effective vehicle to access the world’s leading growth zones, but can also drive countless associated benefits, such as job creation, the development of local economies, and improved governance and sustainability standards.

The conference was bookended by events designed for the industry’s LP and GP communities. Kicking off the week was the 2nd Annual Institutional Investors-Only Summit, which drew more than 120 limited partners from foundations, endowments, family offices, and public and private pension funds. Participants discussed top-of-mind issues includ-ing potential contagion effects from the United States and Europe, the relative performance of private equity in emerging markets, and the differences amongst developed market, emerging market and frontier market investing. The week closed with EMPEA’s inaugural EM PE Fundraising Masterclass, which focused on providing GPs the tools and best practices they need to raise capital in today’s challeng-ing environment [see page 6 for more information].

A Rethink on Regulation

Placing current rhetoric in the United States aside, there has been a sea change in the attitude of governments and regula-tors across the globe on private equity. As access to capital has dried up over the past year, private equity has emerged as one of the few sources of financing available, particularly for small- and medium-size enterprises (SMEs). Recognizing that SMEs will be a primary driver of employment in many economies, stakeholders have begun to actively encourage a relationship with private equity, rather than merely tolerating it.

On the opening plenary panel focused on global macro-economic and regulatory changes impacting the industry, moderated by EMPEA’s President and CEO Sarah Alexander, the European Private Equity and Venture Capital Associa-tion’s Secretary General Dörte Höppner discussed this shift in sentiment. She pointed to regulatory developments,

Delegates at the 14th Annual Global Private Equity Conference listen to the opening keynote address given by George Magnus, Senior Economic Advisor at UBS Investment Bank and Author of Uprising: Will Emerging Markets Shape or Shake the World Economy?

Conference attendees at networking sessions.


Highlights from the 14th Annual GPEC, continued

including the Alternative Investment Fund Managers Direc-tive (AIFMD) and Solvency II, which caused concern for the industry last year, but noted that the dialogue between the industry and policymakers is changing for the better as the latter realize that some of the regulatory changes put in place are negatively impacting capital flows and subse-quently inhibiting much-needed growth. As a result, many of these regulations are receiving a second look.

The Middle East and North Africa is a prime example of a region where views on private equity are changing. In a panel focused on investing after the Arab Spring, Safia Hachicha, a Director at Swicorp, reported that private equity has been identified in Tunisia as one of the key tools for developing solutions to the challenges the gov-ernment currently faces, including job creation and private sector growth. As the banking sector in the region falters, governments are seeking private equity partners to meet these development objectives. Furthermore, they see pri-vate equity as a vehicle in helping them reach a medium- to long-term goal of regional integration through its ability to transform local business leaders into regional ones.

AfricInvest-TunInvest Group’s Managing Director and Co-Founding Partner Ziad Oueslati echoed these sentiments, observing that the current period marks the first time that governments in the region are actively listening to private equity fund managers, and noted that Algeria and Morocco are following the Tunisian model of creating a more condu-cive environment for private equity practitioners, including through implementing tax breaks. Hisham El-Khazindar, Co-Founder and Managing Director of Citadel Capital, however, cautioned that Egypt has not yet embraced the industry to the extent of its neighbors since the fall of the Mubarak regime. Nonetheless, he relayed that nearly all of Egypt’s politicians recognize the central role that the private sector needs to play in the economy.

Several panelists declared that in addition to changing view-points from a “top-down” perspective, attitudes toward private equity are also transforming from the “bottom-up.” Current and potential portfolio companies no longer see fund managers solely as a source of capital. David Marchick, Managing Director and Global Head of External Affairs for The Carlyle Group, remarked that companies are clamor-ing for expertise, management, higher financial standards, enhanced corporate governance and the ability to become global companies, in addition to the capital.

Robert Zoellick, President of the World Bank, summed up the strength that private equity can bring both directly to a company and more broadly to the economy by invoking the phrase “the power of partnerships.” He pointed to IFC’s pri-vate equity portfolio of approximately US$3 billion across 180 funds in the emerging markets, which is estimated

Left to right: Jeffrey Leonard of Global Environment Fund, Piero Minardi of Gávea Investimentos, Brent de Jong of Zaff, and Philip Bass of Ernst & Young discuss GP strategies for creating value in portfolio companies.

P. Olivier Sarkozy, Managing Director and Head of Global Financial Services Group at The Carlyle Group, shares his views on the financial crisis in Europe and its implications for private equity investors.

Delegates at the 14th Annual Global Private Equity Conference.



to have helped create 300,000 new jobs over the last 10 years, many for women. He stated, “I am convinced that private equity investments can be one of the most powerful and important agents of change for developing countries: boosting local economies and creating jobs; improving governance and sustainability standards in private industry and capital markets; transforming thinking about growth; reducing poverty and creating hope.”

In Chaos Lie Opportunities

The world today is volatile; and this volatility is not only being accepted, but embraced as a key factor in generat-ing strong returns. Moving away from the wait-and-see approach that dominated the industry’s conversations a year ago, an attitude of rolling up one’s sleeves and getting to work in order to uncover inefficiencies has taken hold.

Perhaps the greatest source of concern today is the uncer-tainty surrounding Europe’s financial health. The afternoon of the second day of the conference featured a seminar devoted to exploring the potential of private equity in the markets of Emerging Europe and Turkey—and managing the fallout from the euro-zone crisis was a core component of the discus-sion. While keynote speakers expressed differing views on the future of Europe, a consensus emerged that opportunities for private equity players undoubtedly exist in the region today.

James G. Rickards, Partner at JAC Capital Advisors and author of Currency Wars: The Making of the Next Global Crisis, voiced optimism that the euro-zone will remain intact. Discussing what he referred to as a “bizarre love tri-angle” among the euro, U.S. dollar and yuan, he argued that China will inevitably come to the rescue of Europe through the purchase of bonds, motivated by not want-ing to be overvalued relative to the euro as well as the U.S. dollar. Conversely, P. Olivier Sarkozy, Managing Director and Head of Global Financial Services Group at The Carlyle Group, was more pessimistic on the outlook for the euro. He pointed to the parallels between the 2008-2009 financial crisis in the United States and the situation in Europe today, with a caveat that the problem in Europe is 10 times larger than the one seen in the United States, while the ability to respond to the core issue—the liquidity of the European banking system—is constrained.

While warning that the depths of the crisis in Europe should not be underestimated, Sarkozy also noted that the situ-ation presents an historic opportunity for private equity. He argued that the banking system in Europe will need to shrink to US$32 trillion in total banking assets compared to US$55 trillion today. The resulting US$23 trillion divesti-ture will present buying opportunities for the asset class as a result of its scope and scale. Further, regulatory restric-

Lars Thunell of International Finance Corporation is interviewed by Josh Lerner of Harvard Business School.

EMPEA members come together at the annual EMPEA Members-Only Reception in Washington.

Left to right: Lanre Akinola of This is Africa, Samir Assaad of Invest AD, Hisham El-Khazindar of Citadel Capital, Safia Hachicha of Swicorp, and Ziad Oueslati of AfricInvest-TunInvest Group discuss the private equity climate in the MENA region post Arab Spring.


tions on banks, through Basel III, Dodd Frank and others, will force capital seekers to look for new capital providers.

Looking beyond Europe, private equity practitioners see opportunities to exploit inefficiencies across the emerging markets. As the industry matures, there is a greater aware-ness that returns can no longer be driven through underlying macroeconomic growth alone—although growth rates in developing markets are expected to continue to trump the developed markets for the foreseeable future.

The Role of Institutions

George Magnus, Senior Economic Advisor at UBS Invest-ment Bank and author of Uprising: Will Emerging Markets Shape or Shake the World Economy?, argued that countries wishing to graduate from the low- to middle-income zone and move into the middle- to high-income bracket will need a “killer app,” which he defines as good governance coupled with high quality institutions—issues which the EMPEA Guidelines seek to promote. For more information on the EMPEA Guidelines, a global resource that identifies key elements of legal and tax regimes that could foster greater international and local capital investment, please go to www.empea.org.

The country that Magnus focused on the most was China. He concluded that the most important issue in the emerg-ing market sphere today is the tension China currently faces between state-owned enterprises, banks, local governments and infrastructure agencies that thrive on underpriced capital and low interest rates on one hand and privately-managed companies who are performing well, but whose prospects are stifled by the dominance of these state-backed players, on the other. In the face of weakening industrial production, deteriorating exports and softness in the property market, Magnus believes that a rebalancing of the economy will happen and that China should put in place

needed reforms now. In particular, Magnus saw opportu-nity in enabling a more competitive market-based economy, fostering entrepreneurship and innovation, and liberalizing the financial system in order to avoid the hardest landing. However, he wondered whether the country has the “great political fortitude and courage” that doing so will require.

Other presenters also noted the challenges weak institutions pose to greater economic growth and, consequently, the private equity industry. The World Bank’s Zoellick stated, “Structural changes are essential to enhance productivity, competition, and innovation for developed and developing countries—whether it’s so that Europe can restore its economic performance, or [so] China can avoid the so-called ‘middle income trap’ and meet its challenges in the coming decades.”

Private equity is in the spotlight in the United States and Europe and is increasingly on the radar screen of emerg-ing economies. The industry needs to be transparent and vocal in showcasing the role it can play in growth and development at both the macro and micro level in emerging markets; how it can be a solution for companies struggling as a result of economic downturns; and the ways in which it can work with governments and regulators to develop stronger institutional frameworks. Doing so will ensure that the spotlight shone upon us will be a favorable one. The industry can and should embrace this moment—it is a unique opportunity that plays to private equity’s strengths in capitalizing on and accelerating growth.

Please mark your calendars for Private Equity in Emerging Markets 2012: Creating Value and Generating Returns, a Capital Impact leadership summit presented by EMPEA and FT Business. The event will be held at the InterContinental Park Lane in London on 23 October 2012.


Delegates pose questions to panelists at the conference.

George Magnus signs copies of his book during the event.

Left to right: Gavin Wilson of IFC Asset Management Company, Andreas Boesenberg of VTB Capital, and Serkan Kizil of Invest AD share their perspectives on how to manage potential fallout from the euro-zone crisis.


Guest Commentary: Emerging Market Secondaries Come of Age

For many investors, the central narrative about private equity in emerging markets seems to be this: fast economic growth plus armies of new consumers hungry for just about everything should result in handsome profits. As GPs and LPs have discovered, however, promising secular trends do not easily translate into returns. History, at least in part, is to blame.

Fifteen years ago, there was essentially no institutional-ized private equity activity in emerging markets. Given this starting point, primary commitments naturally dominated LP activity. Since that time, Thomson Reuters data show nearly 2,500 private equity funds have been formed, and today there are nearly 1,000 managers investing US$100 million or more each across the full range of private equity strategies.

Most institutional private equity activity began through small funds, which fit with the nascent M&A and commer-cial environments where they operated. In fact, according to Thomson Reuters, from 2000 through 2004, the average fund size in emerging markets was less than US$60 million, and by 2011, the average fund size had grown to US$206 million. By contrast, fund sizes in North America are much larger, averaging approximately US$575 million in 2011 (see Exhibit 1). Smaller fund sizes in emerging markets have resulted in smaller average LP commitments as well.

While big deals and large fund closings may dominate headlines, the real story of private equity in emerging mar-kets is at the lower end of the market. According to EMPEA data, funds targeting less than US$1 billion accounted for 89% of all those raised in 2011 by number (see Exhibit 2), and 60% of all capital raised (see Exhibit 3). In the past three years, only four emerging market-focused funds have closed on US$2.5 billion or more. Despite the overall growth of the market, these proportions have remained consistent for the past decade.

Against this backdrop, LPs have committed over US$270 billion to private equity funds in emerging markets since 2005. Every type of institutional investor can be counted

among the LPs actively making primary commitments in these geographies. EMPEA’s recent Global Limited Partners Survey suggests that LPs remain optimistic about emerging markets, and intend to increase their private equity commit-ments to these markets so that they represent up to 20% of their overall allocations.

Enter Secondaries

As the stock of emerging market private equity fund inter-ests has expanded and matured, secondary deal flow has grown too. From nearly zero activity four years ago, the secondary market in 2011 grew to over US$2 billion of deal flow. Given metrics applied to secondary markets in the United States and Europe, deal flow in emerging markets could grow to represent 15–20% of global secondary activ-ity. This figure also is consistent with the emerging markets’ share of global primary fundraising, and reflects a two- to three-fold increase in deal flow over current levels.

The same pressures driving limited partners to sell their inter-ests in U.S. and Western European funds are leading them to sell their interests in emerging market funds. Regulatory change, over-commitments, portfolio rebalancing, changes in investment strategies, liquidity requirements, and efforts

John Stephens, Managing Director of Pomona Capital, argues that as primary fund commitments in the emerging markets have grown, so have deal flow and the opportunity set within the secondar-ies market. Pomona Capital is an international private equity firm with approximately US$7 billion in capital commitments since inception. Since 1994, the firm has analyzed over US$225 billion in secondary transactions and purchased US$2.6 billion in secondary interests in over 500 funds with investments in over 5,000 companies.

Exhibit 1: Average Fund Size, 2011 (US$m)

US$millions

$600

$400

$200

$0

206

EmergingMarkets

575

NorthAmerica

Source: Thomson Reuters.


Exhibit 2: Size Distribution of EM Funds, by Number (2011 Vintage)By number, 89% of EM funds are less than US$1 billion

Exhibit 3: Size Distribution of EM Funds, by Size (2011 Vintage)By value, 60% of EM funds are less than US$1 billion

Emerging Markets Secondaries Come of Age, continued

Numberoffunds

US$Billions

80

60

40

20

0

$40

$30

$20

$10

$0

Source: EMPEA.

Source: EMPEA.

Fundsize

Fundsize

20

<US$100m

$1

<US$100m

14

US$500–999m

$9

US$500–999m

19

US$100–249m

$3

US$100–249m

9

>US$1billion

$14

>US$1billion

22

US$250–499m

$8

US$250–499m

84

Total

$35

Total


to reduce the number of GP relationships are among the pressures that confront limited partners today. These forces have persisted through multiple economic cycles and should continue to support increasing secondary deal flow.

A large and growing inventory of mature fund interests is another factor supporting deal flow. According to EMPEA, roughly US$300 billion of capital has been committed to pri-vate equity funds in these geographies over the past decade. This supply will continue to be supported by new LP primary fund commitments. Emerging markets now appear to be an enduring part of LP’s private equity programs as institutions capitalize on the higher growth rates, growing consumer class, and maturing capital markets often found in these markets.

In addition, secondary opportunities in these geographies can provide an attractive value proposition for private equity investors. When compared to primary commitments, secondaries present funded portfolios that provide greater insight into the potential return of a particular fund. That transparency into—and the shortened duration of—the underlying investments may blunt some of the long-term risks posed by currency, legal, macroeconomic, political and other uncertainties.

Meaningful discounts to NAV can be achieved, which also may further mitigate the unseen risks posed by emerging markets investing. While funds managed by a handful of the most well-established firms can trade at single digit dis-counts, a majority are priced at higher discounts consistent with funds in developed markets.

The Execution Challenge

Yet, while secondary deal flow volumes are growing, sourc-ing and execution can be challenging.

One difficulty facing buyers is the vast distance between owners and assets. On the one hand, a majority of emerg-ing markets fund interests are owned by—and generally are sourced from—limited partners who reside in the United States and Western Europe, and occasionally the Middle East and Asia. While some GPs are involved in the sales pro-cess, many learn about secondaries only after a transaction is initiated by the seller. A global and LP-centric sourcing effort can be beneficial.

On the other hand, the assets being purchased reside within emerging markets; local presence and expertise can help sup-port adequate due diligence. Vast distance also can separate the assets themselves. “Emerging markets” are words, not places, and each market presents distinct cultural, language, legal and other nuances that must be considered when under-writing investments. As a consequence, investors should con-sider combining global sourcing with local execution.

Secondaries also involve specialized expertise. Unlike pri-mary fund of funds investing, secondary purchases require judgments about companies’ future performance and liquidity, with less emphasis on a manager’s likely deploy-ment of blind pools in the subsequent three or four years. Volatility in exit windows, public equity exposures, and cur-rencies are further challenges to be factored into pricing.

Furthermore, the sizes of LP commitments in emerging market funds cross a large range, but on average are con-centrated in smaller interests of US$5 to US$25 million each. As a result, secondary specialists who focus on middle market-sized transactions generally can consider a greater number of the opportunities in these markets.

Conclusion

While emerging market secondaries are a fairly new devel-opment, they are a natural extension of the industry, and one that follows patterns set in the United States and Europe. For secondary specialists, they can present mean-ingful opportunities, particularly when combining global sourcing and local execution to address the emerging mar-kets’ unique characteristics. Given the shorter duration of these investments and the visibility through to exits, sec-ondaries also may be a way for limited partners to mitigate emerging market risks, and to bridge the gap between the long-term secular trends and profits.

Based in Hong Kong, John Stephens is a Managing Direc-tor of Pomona Capital, where he focuses on sourcing and investment analysis for Pomona’s Asia and emerging markets business. Prior to joining Pomona, John was a co-founder of EMAlternatives, LLC, and served as a Managing Partner. He has over a decade of experience investing and advising companies in emerging markets, including with the Global Environment Fund. John received an MBA from Dartmouth College and a BA from the University of Washington.

Emerging Markets Secondaries Come of Age, continued

That transparency into—and the shortened duration of—the underlying investments may blunt some of the long-term risks posed by currency, legal, macroeconomic, political and other uncertainties.

“

“


ZEPHYR PEACOCK INDIA

Zephyr Peacock India is sponsored by Zephyr Management, L.P.For additional information, please contact Mukul Gulati at [email protected] or visit us on the web at www.ZephyrPeacock.com

Providing growth capital to emerging Indian enterprises.

Zephyr Peacock India seeks to make private equity investments target-ing India’s fast growing small and middle market corporate segment. In addition to providing capital, Zephyr Peacock seeks to add value to its portfolio companies by leveraging its global relationships in the inter-national corporate and financial markets. The investment team, based in Bangalore and New York, combines local and international private equity expertise and has many years of investment and operating expe-rience.

Zephyr Peacock India seeks returns by making privately negotiated equity or equity-related investments in small to medium sized estab-lished businesses that will benefit from the rapid growth of the Indian economy, provide sustainable competitive advantages, and benefit from India’s growing importance in the global economy. The Peacock team targets investments in the sectors of financial services, education, con-sumer related businesses, high value-added manufacturing and infra-structure related services. Zephyr Peacock takes influential minority positions by investing between US$5 to $20 million in companies that have proven business models, strong financial performance and are led by strong management teams.


Inside Perspectives: An Interview with Okechukwu Enelamah of African Capital Alliance

You have personally been involved in Africa’s pri-vate equity industry for nearly two decades, starting in South Africa and then focusing on Nigeria and the broader West Africa region. How has the environment for sourcing deals evolved and where do you currently see the greatest investment opportunities?

Deals often come out of important trends in the macro environment. In the mid-1990s, when I was in South Africa, the key development there was economic democratization, following Mandela’s successful democratic presidential election. As a result, blacks became more meaningful partici-pants in the economy and conglomerates began to focus on their core businesses, therefore enabling opportunities for new groups to invest. Taking the same approach to Nige-ria, I saw that the private sector had to, and would, play a meaningful role in the economy as a result of the political democratic process there. When Obasanjo became president in 1999, one of the key thrusts of his government—and one that remains in place today—was the deregulation of key sectors of the economy to allow meaningful private sector participation and leadership.

We have seen a great amount of deal flow coming out of deregulation—one sector in particular from which we have benefitted disproportionally is telecoms. However, the fac-tors driving growth in this sector are not unique to telecoms; we see the same patterns in power, financial services, oil and gas, etc. The main driver is significant pent-up demand for basic services that people require to live a good life in a mod-ern economy. When the public sector dominates, the lack of competition leads to little innovation; but when you let the right players come in, services tend to improve. As the key sectors in Nigeria deregulate, we have brought in private equity capital and expertise, including management, to be part of that process, and the returns have been there to show that the effort has been worthwhile.

In looking at Africa’s broader commercial environment, large corporations certainly offer local private equity players opportunities as potential exit strategies. But what impact, if any, do these corporates have on initial deal flow?

With regard to corporates, one of the biggest trends we are paying attention to is an increase in outsourcing. Historically,

you will find that when an economy is somewhat closed, as was the case in Nigeria, there aren’t many suppliers of services available. For services that were mission critical to companies, whether it was in data or telecoms, firms often did everything themselves. Companies would literally hire people and buy equipment in order to have everything in-house. However, as more established players come into a market, companies are increasingly prepared to outsource these services. It is a great private equity investment to partner with providers of non-core services to big corpora-tions—such services are usually not very capital intensive, so the return on capital tends to be quite good.

One of the best performing investments in our portfolio was a company called Outsourcing Services Limited (OSL). OSL was a joint venture with a South African company for-merly called Gray Securities Services that provided security and asset protection services for large corporates in South Africa and Southern Africa. We invited them to partner with us in Nigeria to perform the same services. We put up less than US$1 million in capital and the company literally grew by leaps and bounds before we sold it after some years for a healthy investment return. But it wasn’t just the capital that was required to generate a strong return; it was putting the company in touch with the market opportunity in Nigeria, including helping them to recruit locally, obtain a license, and deal with all the other local factors. It is not just about the capital, but what comes with the capital.

The enormous amount of recent global investor inter-est in Sub-Saharan Africa has not yet translated into a significant flow of LP capital into these markets. In EMPEA’s most recent LP Survey, political risk ranked as a leading concern for LPs considering investing in the region. What additional factors are deterring investors and how do you address their concerns?

In our experience, the best way to respond to risk is through an understanding of the problem and being able to respond in an informed and disciplined manner. This approach resonates well with private equity, because private equity works best when people play in the markets and sectors they understand and with teams that are hands-on. When you do that, you will find that even in the midst of risk, you can make things work. This explains how, even though there are problems in Africa, people are making money in these markets. That doesn’t

Okechukwu (“Okey”) Enelamah, a Founder and Chief Executive Officer of African Capital Alliance (ACA), spoke with Nadiya Satyamurthy of EMPEA’s Research Department during the 14th Annual Global Private Equity Confer-ence in Washington, D.C. to share his insights on the opportunity set in Africa and offered his advice on how to convert growing LP interest in the region into capital commitments. ACA is a private equity firm investing in West Africa, principally in Nigeria and countries in the Gulf of Guinea. With over US$700 million in fund capital raised

to date, ACA is focused on mobilizing capital, technology and management resources from local and international sources to unlock Africa’s private sector potential.


mean everyone can make money, but those who understand these markets and can address the risks can still get results. It is for this reason that informed LPs will always tell you that they are very big on manager selection.

One of the main limiting factors in Africa is capacity. The capital right now is looking for enough fund managers that understand these markets and have the track record, deal flow and capacity to deploy. Rather than be passive about this problem or moan, my attitude is to throw this challenge back to the industry and say we need to raise our game in terms of the quality of our fund managers. We need to help men-tor and encourage other players to come into our markets. It is not a bad thing to have the bulge bracket firms, first-time funds and the new sector specialized funds come in. It would be narrow-minded to want to limit competition—you need everyone to sell the attraction of private equity as a channel to access the market. We all have a vested interest in bringing in more LPs—and most LPs choose to back more than one manager anyway.

The huge influx of people interested in Africa, but not con-verting, should be viewed positively as the first step in the commitment cycle. When I was in business school, I remember learning about how a purchase happens—the key was to get people into the store and then move them to a purchase. Here it is the same thing, but the cycle is longer. Of the people who actually visit us, the conversion rate is very high: we probably convert 2 out of 3, if not 3 out of 4 LPs. When people talk to me, I focus on what will it take to draw them closer to the market because the reality of Nigeria is much better than the perception. Nigeria is certainly not heaven on earth, but the perception is so bad that it is almost an advantage. When peo-ple come and see the energy, the vibrancy and quality of the people, the fact that businesses are doing well, they generally tend to want to progress to the next step.

In December 2010, we saw Nigeria’s National Pension Commission (PenCom) grant local pension funds per-mission to invest up to 5% of their assets in private equity. However, despite these efforts to unlock local pension capital for the asset class, few of the pension

funds have invested into a Nigeria-focused private equity fund. What still needs to be done to engage these local LPs?

Our number one challenge is developing a greater under-standing of the asset class. Private equity is specialized, and while local investors may like the sound bites associated with it, they still need to know it better before they can commit capital. Most local LPs see private equity as a black box. In response, there has been a huge amount of educa-tion taking place to help them understand the asset class, the players, the track record, the deal flow, etc. Many of these LPs have also engaged the international development finance institutions (DFIs) and other players from outside of their markets to partner with them. The initial results have been positive: we have received about US$45 million from local pension funds into our third fund.

Many of the original requirements set by PenCom were designed to be fairly stringent and conservative in order to be prudent with pensioners’ funds. For instance, regula-tions state that fund managers should employ investment professionals with ten years of experience, which is not very common in Africa. They additionally require fund managers themselves to invest up to 5% of the fund size, which is high for the industry. However, when we as an industry went back to PenCom with our feedback, we were received very well. We expect to see a new set of guidelines coming out that reduce the required fund manager commitment to a more realistic percentage. In addition, regulators are now prepared to accept professional experience that may not be specifically related to private equity, but is nonetheless relevant.

The Nigerian example is not dissimilar from the rest of the continent in the fact that regulations were set up in a very conservative manner. People do not want to lose money; they have more of a risk aversion than an appetite for return. We have to demonstrate to these local investors that, at least on a portfolio basis, funds under experienced fund managers are unlikely to lose money. I have had deals that lost money but have never been in any fund that lost money on a port-folio basis. LPs need to understand that private equity is an

Inside Perspectives, continued

Fund Company Country SectorTransaction

Value (US$m)Transaction

Date Equity (%)

CAPEI GSTelecom SubSaharanAfrica Telecommunications 3.8 Dec-98 40

CAPEI MTNNigeria Nigeria Telecommunications 10.7 Sep-01 2

CAPEI ABCTransport Nigeria/WestAfrica Transportation 2.3 Feb-03 30

CAPEI DormanLong Nigeria OilandGas 2.7 Dec-04 45

CAPEII SwiftNetworks Nigeria Telecommunications 7.8 Jul-06 30

CAPEII CornerstoneInsurancePLC Nigeria Insurance 26 Feb-07 51

CAPEII MTNNigeria Nigeria Telecommunications 15 Mar-07 1

CAPEII eTranzact Pan-African FinancialServices 7.5 Dec-07 32

CAPEIII FirstHydroCarbon Nigeria OilandGas 30 Oct-10 13

CAPEIII UnionBankNigeria Nigeria FinancialServices 75 Mar-11 10

African Capital Alliance: Sampling of Investments to Date


investment vehicle where there is a reasonable probability that they could make their money several times over.

Given the lack of a formal private equity index focused on Africa, how do you measure your performance as an investor in the region, particularly in markets that do not have robust stock exchanges?

The major DFIs that have invested across Africa (IFC, CDC, FMO, EIB, etc.) have the most data. In terms of benchmark-ing and actual investment results, my understanding is that Africa stacks up very well. I’m not someone given to com-petition as a matter of personal philosophy, but I know that we live in a world where relative performance matters. The good news, which is contrarian, is that people who focus on “running their own race” tend to perform well. By just trying to do what I am doing well and encouraging others to do the same, I find I tend to come out ahead.

It is my understanding that the first fund we invested in is one of the best performing funds on the African conti-nent with a return of approximately 15x. There was a huge amount of luck and good timing there, so we don’t take excessive credit for it, but it is still a good result. However, we know there is much room for improvement, so we are trying to strengthen our team quality as well as our profile. Exposure to the LP community is important to becoming more sophisticated. Fund managers need to speak in a lan-guage that the LPs understand and know their customer requirements and needs, rather than just presuming LPs will accept them the way they are.

We want to do our utmost to encourage investors to see that our returns have been there, as have the investment results of the other established players in Africa. In this regard, we are very happy to work with the African Venture Capital Association and Cambridge Associates on the development of an Africa-focused private equity performance benchmark. This information needs to get out in a more robust manner. Investors may say, ‘I wish I was in your first fund or second

fund,’ but they really want to see that this is in your DNA. They want to see that these are the results the market will offer going forward and that it is not just a fluke.

What opportunities and/or challenges is the growing interconnectivity between emerging markets creating for the private equity industry? China in particular is playing a more prominent role in Africa, including in West Africa, through agreements in oil and infrastruc-ture projects, among other ways. What impact, if any, will a slowdown in China have on the region?

Capital flows is one area where we are seeing increasing interconnectivity between emerging markets. The United States and Europe are no longer the only sources of capi-tal; there is a surplus of money in other parts of the world, such as Asia, the Middle East, Russia and Africa, that has become very important to private equity. A second area highlighting greater interconnectivity is sector-specific expertise. For instance, India has been a great provider of healthcare services and they are now taking their expertise abroad and coming to our markets. In the oil and gas sec-tor, services are ramping up with support from China. In terms of intra-Africa connections, we have seen a number of South African companies expand into Nigeria. Finally, we see growing interconnectivity in terms of people: resources, expertise and management. People are now hiring from all over the world.

China has become a factor, but China is not the only game in town. A slowdown in China may lead to a decline in oil prices, which will in turn have an impact on Nigeria. But it is the same way a U.S., European or Japanese slowdown will have implications in the broader context of globalization. Having said this, Africa, remarkably, has not been directly correlated to all of the problems in the West. A slowdown in China may not significantly impact Africa because the growth in Africa is fundamental.

To give an anecdote, we invested in MTN Nigeria in 2001, which was the same year the telecom bubble burst. Some of the LPs in our fund, who were based abroad, expressed concerns about us investing in this sector. We told them that mobile phone services in Nigeria would sell very well, independent of the global slowdown. While they thought we were being insular and not paying attention, the history is there now to prove our case as MTN is one of our most successful stories (although not the only one). The lesson here is that we have a fundamental opportunity in terms of pent-up demand. Growth-led as opposed to momentum investing is what makes Africa so attractive.

Inside Perspectives, continued

The capital right now is looking for enough fund managers that understand these markets and have the track record, deal flow and capacity to deploy. Rather than be passive about this problem or moan, my attitude is to throw this challenge back to the industry and say we need to raise our game in terms of the quality of our fund managers. We need to help mentor and encourage other players to come into our markets.

“

“



The CompanySanitas Group’s Story

The Role Played by Private Equity

May 2012

The Impact of Private Equity in Emerging Markets

Sanitas was established in 1922 as a chemical pharmaceutical laboratory in Kaunas, Lithuania. Following the Soviet Union’s occupation of Lithuania in 1940, Sanitas was nationalized and the company remained under state control until Lithu-anian independence in the early 1990s. When Sanitas was listed on the Lithuanian Stock Exchange in 1994, the company was the country’s largest drug producer.

In 2003, Lithuanian investment firm Invalda acquired a controlling stake in Sanitas and the company began considering growth beyond Lithuania. In late 2005, Sanitas identified a potential acquisition of a Polish state-controlled pharmaceutical manufacturer undergoing privatization. Established in southwestern Poland in 1945, Jelfa, S.A. manufactured over 100 drug formulations and boasted a significant sales presence in Poland, Russia and Ukraine. While the company’s product portfolio was in need of modernization, Jelfa’s production facilities were highly regarded and included one of the largest ointment plants in Europe.

At the time of its privatization, Jelfa was sev-eral times larger than Sanitas, and in order to finance its acquisition, Sanitas needed to raise additional capital. Jelfa’s sale process was be-

When CVCI Private Equity met the man-agement team of Sanitas in late 2005, it had recently made the strategic decision to focus on the generic pharmaceutical sector in emerging markets. With a surge of patent expirations expected, rising disposable incomes in emerging markets, and high regulatory and technical bar-riers to entry, the sector was attractive for investment. Moreover, CVCI Private Equity had recently successfully partnered with similar companies in Jordan and India, and was in advanced stages of due diligence on other generic pharmaceuti-cal transactions in Turkey and Egypt.

As Sanitas’s integration of Jelfa began, CVCI Private Equity and their consortium partners

identified several high priority areas for value creation. These included rationalizing the company’s promotional spending, cross-selling of products, expanding into new geographies, using reasonable levels of leverage to promote financial discipline, and incentivizing management with equity-linked compensation schemes.

To promote long-term growth, CVCI Private Equity also emphasized expanding the company’s product development efforts and research and development expenditure. This allowed it to shift away from contract manufacturing toward its own pipeline of branded generic products. As a result, the company increased its new product launches from 1–2 per year in 2006 and prior to 5–10 per year today.

Essentials

Company: Sanitas Group (www.sanitasgroup.com)

Country: Lithuania, Poland and broader Central and Eastern Europe (CEE)

Sector: Pharmaceuticals

Business focus: Prescription and over-the-counter (OTC) branded generic products

Size: Revenue of LTL333 million (US$125 million, year ended Dec. 31, 2011), 1,121 employees (January 2011)

Private Equity Fund: Citi Venture Capital International (“CVCI Private Equity”), an international private equity firm focused on emerging markets

Date of investment: April 2006

Investment: EUR20 million (US$26.4 million) in 2006 and EUR30 million (US$42.3 million) in 2008

Impact Highlights

CVCI Private Equity’s investment in Sanitas Group allowed the company to complete its acquisition of Polish drug maker Jelfa, S.A., adding more than 100 formulations to Sanitas’s product offering and giving the company a significant presence in Poland, Russia and Ukraine

CVCI Private Equity supported Sanitas in its post-merger integration of Jelfa and helped the new company increase cross-selling, expand into five new CEE countries and more than double its rate of new product launches

During Sanitas’s partnership with CVCI Private Equity, the company grew its workforce of skilled workers, improved its drug safety standards and increased its development of complex products for which patients have few affordable alternatives

Financial Performance

Case Study: Sanitas Group (CEE)

ing conducted on a rigid timeline. As a result, the company sought capital from a private equity sponsor for execution speed and deal certainty. Having worked with Invalda already, Sanitas was familiar with financial investors and valued the expertise and management support offered by private equity partners.

In April 2006, Sanitas raised equity from a private equity consortium led by CVCI Pri-vate Equity. The consortium also included Amber Trust, a Baltic-focused private eq-uity fund, and the controlling shareholder, Invalda, also participated in the share issue.

In the years that followed, Sanitas and Jelfa integrated their operations to form the Sanitas Group, which then further expanded its sales footprint and eventually reached Latvia, Hungary, Bulgaria, the Czech Republic and Slovakia. In 2008, CVCI Private Equity added EUR30 million (US$42.3 million) to its investment in Sanitas Group by acquiring a portion of Invalda’s stake, thereby becoming the largest shareholder. By 2011, Sanitas Group was a fully integrated specialty pharmaceutical company with over 1,100 employees located throughout the CEE region. From its manufacturing sites in Lithuania and Poland, Sanitas Group produces a portfolio of primarily branded generic products in the dermatology, hospital injectables, metabolic, ophthalmology, urology and OTC segments.

600

400

200

0

100

50

0LTL

(mill

ions

) LTL (millions)

2006 2007 2008 2009 2010

EBITDA (RHS)n Revenue (LHS)

Revenue CAGR: 20%EBITDA CAGR: 138%


The Company View

The Emerging Markets Private Equity Association (EMPEA) is an independent, global membership association whose mission is to catalyze private equity and venture capital investment in emerging markets. EMPEA’s 300 members include the leading institutional investors and private equity and venture capital fund managers across developing and developed markets. Contact us at www.empea.org Email: [email protected] Phone: +1 202 333 8171

Beyond the Bottom LineAs a generic pharmaceutical maker, Sanitas Group offers its patients less expensive thera-peutic alternatives to the original, patented drugs. Because the region’s healthcare ex-penditure is largely based on “out-of-pocket” payments by patients, these cheaper thera-pies allow for greater access to treatment.

Additionally, Sanitas’s shift towards its own portfolio offered greater employment opportunities to the re-gion’s skilled workers. Between 2006 and 2008, total headcount increased from 1,461 to 1,545 employ-ees, with reductions in production employees more than offset by increases in medical reps, regulatory, and R&D departments. Subsequently, the company’s total employment declined as it divested its contract manufacturing business, although it continued to grow in its expansion regions. In Russia, for example, headcount increased from 17 in 2006 to 46 by 2010.

New sales organizations were also added in Hungary, Bulgaria, Czech Republic and Slovakia—increasing headcount in these countries to over 45 employees—and a new hub for regulatory affairs was created in Prague with 16 highly-skilled specialists.

The period under private equity ownership also coincided with the construction of the new Lithu-anian facility offering complex capabilities in hard-to-produce specialized pharmaceutical forms, such as lyophilized injectable products, sterile ointments and eye drops. These are relatively scarce capabili-ties in Central and Eastern Europe and the new site provides access to these products at relatively low cost to patients in the region.

Lastly, one of the first steps undertaken by Sanitas after its acquisition of Jelfa was ending its product-testing on animals.

“Sanitas was a successful transaction for CVCI Private Equity. We backed a strong management team in acquiring a company several times larger. We identified Jelfa’s potential while also understanding the challenge of turning it into a modern sales-focused organization. The management had to face a number of challenges over the time of our investment but they coped admirably and the company was transformed in a very positive way, which resulted in the acquisition by Valeant and a very healthy return for the investors.” Sunil Nair, Managing Partner, CVCI Private Equity

“CVCI Private Equity stood apartfrom the other private equityinvestors through its vital role inintegrating the Jelfa acquisition withSanitas. With CVCI Private Equity’shelp, we integrated Jelfa into theSanitas Group and transformed thecompany from a production-orienteddrug maker to a market-orientedintegrated pharmaceutical company.As a result, the company is morefocused than ever on improving thehealth and well-being of its patients.”

“From the first step to thelast, I found CVCI PrivateEquity to be an extremelysupportive and very involvedshareholder. Together webuilt a modernized andhighly attractive specialtypharmaceutical company.” Saulius Jurgelenas,Chief Executive Officer,Sanitas Group

Reflecting on his partnership with CVCI Private Equity, Saulius Jurgelenas, Sanitas’s CEO until 2011, credited the firm with help in defining the specialty therapeutic focus of the company and initiating discussions with potential partners for in-licensing in order to boost the pipeline.

CVCI Private Equity and their partners were also key in driving a number of other important initiatives, including the harmonization of drug dossiers in line with EU requirements, completed in 2008; the 2008 acquisition of Homeofarm, a niche Polish dermatology company; the completion of a new state-of-the-art manufacturing facility in Kaunas, Lithuania, in 2008; and the divestment of a manufacturing facility in Martin, Slovakia that simplified the corporate structure and reduced involvement in low-value-added contract manufacturing.

During CVCI Private Equity’s partnership with Sanitas Group, the company’s EBITDA margin increased from 17% in 2005 to 31% in 2010, with topline revenue growth of 16% annually

over the same period. Additionally, through its acquisition, restructuring and integration of Jelfa, Sanitas Group became a regional player with a strong presence throughout CEE. This was achieved in spite of a difficult macroeconomic backdrop in the region and liquidity challenges during the global financial crisis.

CVCI Private Equity was also instrumental in the sale of the company and drove its strategic positioning for a trade sale rather than targeting financial sponsors. CVCI Private Equity and their consortium partners were hands-on with all aspects of executing the sale, from advisor selection through to the final negotiations with buyers.

After five years, CVCI Private Equity formally concluded its partnership with Sanitas Group in May 2011, when the shareholders received an offer of EUR365 million (US$443 million) from Canada's Valeant Pharmaceuticals. CVCI Private Equity returned a total of approximately US$145.0 million to its investors from its combined 2006 and 2008 investments.


According to Cambridge Associates’ most recent quarterly performance benchmark statistics, the Emerging Markets Pri-vate Equity and Venture Capital Index continued its downward trend from Q2 2011. One-year net IRRs across emerging mar-kets fell below zero for the first time since the quarter ending 30 June 2009, dropping from 9.5% to –1.5%.

While five-year and ten-year net IRRs held relatively consis-tent with the previous quarter, three-year returns rose from 11.9% to 18.5%. On a regional level, the Emerging Asia and Latin American & Caribbean one-year IRR indices dropped substantially from 10.9% to –1.7% and from 2.6% to –10%, respectively. While the one-year IRR for the CEE & Russia Index also declined, it remained positive, moving from 14% to 7.7%.

Despite the quarter-over-quarter decline, the Emerging Mar-kets Private Equity and Venture Capital Index continued to outperform its comparable public market benchmark, the MSCI Emerging Markets Index, over a one- and five-year period, while remaining slightly below the public markets over a three- and ten-year period.

EMPEA members have access to the latest Cambridge Bench-mark statistics through our quarterly industry statistics updates, available for download at our new and improved website, www.empea.org. Please contact [email protected] for assistance.

Emerging Markets Private Equity Performance

Exhibit 1: Emerging Markets PE & VC Performance (as of 31 December 2011)

Exhibit 2: Comparative End-to-End Returns by Region (as of 31 December 2011)

50%

40%

30%

20%

10%

0%

–10%

–20%

–30%

–40%

Source: Cambridge Associates LLC Proprietary Index: pooled end-to-end returns, net of fees, expenses and carried interest.

The index is an end-to-end calculation based on data compiled from 376 global emerging markets private equity and venture capital funds (includes funds investing primarily in Africa, emerging Asia, emerging Europe, Latin America and Middle East ex Israel), including fully liquidated partnerships, formed between 1986 and 2011. The Asia Emerging Markets Index consists of 237 funds, the Central & Eastern Europe Index consists of 52 funds, and the Latin America & Caribbean Index consists of 42 funds. Please note that the Emerging Markets Index contains 45 funds that do not fall into these specific regions stated above. Middle East and Africa index is not calculated because of insufficient sample size.

Source: Cambridge Associates LLC Proprietary Index: pooled end-to-end returns, net of fees, expenses and carried interest.

1 Year 3 Year

5 Year 10 Year

% IR

R, n

et

Index One Year Three Year Five Year Ten YearEmerging Markets PE & VC –1.54 18.50 10.12 11.23EmergingAsiaPE&VC –1.66 21.29 11.42 11.38CEE&RussiaPE&VC 7.74 10.63 6.73 15.56LatinAmerica&CaribbeanPE&VC –9.99 15.68 11.11 6.96MSCIEmergingMarkets –18.17 20.42 2.70 14.20USVC 13.18 10.00 5.29 3.27USPE 10.90 15.03 7.22 12.02WesternEuropePE 3.07 11.37 3.28 17.11S&P500 2.11 14.11 –0.25 2.92

Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11


Notable Exits & IPOs Submit news on exits to [email protected]

CountryPortfolio Co. Name PE Firm(s) Sector

Year(s) of Investment

Capital Invested

Transaction Date Exit and Return Details

Brazil BRProperties GPInvestments CommercialRealEstate

20062009 US$49m Apr-12

Sharesaleofremainingstake;totalreturnoninvestmentofUS$127m,representinga2.6x,andIRRof26%

Brazil GrupoQualicorp TheCarlyleGroup Healthcare&LifeSciences 2010 US$913m Apr-12

SecondaryofferingraisedBRL674mwithCarlyledisposingsharesworthBRL602m(US$329m)

China YingdeGases BaringPrivateEquityAsia

Industrials&Manufacturing 2006 US$49m Feb-12 SharesaleofUS$53m;equitystake

reducedto1.7%

ChinaIndustrialandCommercialBankofChina

GoldmanSachsPrivateEquity Banking 2006 US$2.6B Apr-12 Sharesaleof4.4%stakeforUS$2.5B;

equitystakereducedto5%

China GreatviewAsepticPackagingCo.

CDHInvestmentsBainCapital

Industrials&Manufacturing

20052006

US$20mUS$40m Apr-12

Sharesaleof3.1%stakeforUS$22m;equitystakereducedto19%.Sharesaleof4.1%stakeforUS$29m;equitystakereducedto25%.

China LuyePharmaGroup MBKPartners Pharmaceuticals 2008 N/A Mar-12SecondarysaleoffullmajoritystaketoCDH,CiticandNewHorizonforUS$140m

ChinaMeihuaBiotechnologyGroup

NewHorizonCapital

Industrials&Manufacturing 2009 US$95m Jan-12 SharesaleofpartialstakeforUS$93m;

equitystakereducedto10%

Côted'Ivoire PetroIvoire CaurisManagement

PowerGeneration&Distribution 2006 US$4m Feb-12 MBOforundisclosedvalue;totalreturn

oninvestmentof2.3x

CzechRepublic StarBev CVCCapital

Partners Food&Beverage 2009 US$1.2B Apr-12 Strategicsaleof100%equitystaketoMolsonCoorsforUS$3.5B

CzechRepublic

FalconGroup(T-MobileCzechRepublic)

MidEuropaPartners Media&Telecom 2006 N/A Jan-12 DividendrecapitalizationofUS$473m

DemocraticRepublicoftheCongo

AnvilMining EmergingCapitalPartners

ExtractiveIndustries(Mining) 2006 US$10m Mar-12 Strategicsaleoffull1.5%staketo

MMGMalachite

India KotakMahindra WarburgPincusInternational

Banking&FinancialServices 2004 N/A Feb-12

Mar-12

Sharesaleof2.4%stakeforUS$171m.Sharesaleofremaining3.6%stakeforUS$284m.

India Cebbco JacobBallasCapitalIndia

Industrials&Manufacturing 2007 US$7.4m Mar-12 Sharesaleof2.8%stakeforUS$2m;

partialstakeretained

Indonesia TowerBersamaGroup SaratogaCapital Telecom&Internet

Infrastructure 2010 N/A Mar-12 Sharesaleof8.2%stakeforUS$118m;equitystakereducedto17%

Pakistan CER(UchPower) Swicorp PowerGeneration&Distribution 2008 US$100m Apr-12 StategicsaletoInternationalPower

GDFSuez

PeruKunturTransportadoradeGas

ConduitCapitalPartners Oil&Gas 2008 US$88m Apr-12 Strategicsaleofremaining49%stake

toOdebrecht

Russia KasperskyLab GeneralAtlantic ComputerSoftware 2011 US$200m Feb-12 MBOoffull20%equitystake

SouthAfrica SavcioActis;EthosPrivateEquity;OldMutualPrivateEquity

Engineering&Construction 2005 US$190m Feb-12 StrategicsaleoffullstaketoACTOM

SouthKorea KoreaExchangeBank LoneStarFunds Banking&

FinancialServices20032006

US$1.2BUS$800m Feb-12 Strategicsaleofremaining51%stake

toHanaforUS$3.5B

Thailand Dunkin'Donuts/AuBonPainThailand

NavisCapitalPartners Restaurants 2006 US$20m Jan-12

StrategicsaleofmajoritystaketoSubSriThaiforUS$41m;returnof2.45xincludingdividends

Turkey IsiklarHolding ADMCapital Industrials&Manufacturing 2006 US$72.5m Jan-12 MBOoffull20%equitystake

UAE RedingtonGulf GulfGrowthCapital

InformationTechnology 2008 US$65m Jan-12 StrategicsaletoRedingtonIndiaoffull

26%stakeforUS$115m

Disclaimer: This information is intended to provide an indication of industry activity, based on best information available from public and proprietary sources. EMPEA has taken measures to validate the information presented above but cannot guarantee the ultimate accuracy or completeness of the data provided. EMPEA is not responsible for any decision made or action taken based on information drawn from this exhibit.


Documents

Emerging Markets Private Equity Review - EMPEA · For many smaller GPs, their largest challenge is getting their fund’s lifecycle started. ... Emerging Markets Private Equity Review