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Improving Business Growth Through Investment
Afsane Jetha
COO, TLG Capital
July 2011
Executive Summary
FirmOverview
Investment Philosophy
TLG Capital (“TLG”) is a Frontier Markets investment company. Set up in September2009, TLG:
o Focuses on Growth Capital investments with an emphasis on Africa
o Invests across the capital structure to optimise returns and minimise risk
o Focuses on sectors that cater to consumers and so leverage the rise of theconsumer class in the markets in which it operates
TLG’s investment philosophy is driven by two key themes:
o Growth capital in the “missing middle space” – In sub-Saharan Africa,businesses without collateral have limited access to funding from banks.Micro-finance organisations are too small to facilitate their needs. TLGoperates in this vacant middle space, where investing in transactions lessthan US$15m
o Transmigration of technology to sub-Saharan Africa – Particularly fromIndia, a market that has thrived despite being beset by similar issues interms of governance, infrastructure, bureaucracy and income inequality
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Executive Summary (Cont’d)
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Past Investments Include
Africa Investments
o Quality Chemicals Industries Ltd - East Africa’s first pharmaceuticalcompany. It manufactures life-saving anti-malarial and AIDS generic drugs,based in Uganda
o Sweden Ghana Medical Centre - West Africa’s first European-standardcancer treatment facility
o Vero Food Industries Limited - Uganda rice and mineral water plant, set tobecome one of the premier factories with the capability to produce 42,000bottles of mineral water a day and has capacity to produce 2,500 tonnes ofmilled rice per hour
o The Snapper Hill Clinic - based in Monrovia it is one of the only medicalfacilities that survived the Liberian civil wars and is one of only five familymedicine practices in a city of 4 million
o Iroko Financial Products Limited - a financial services institution, acting as aDebt Capital Markets agent for sub-Saharan African companies seeking debtfinance and providing a link to international investors
Ex-Africa Investments
o Compagnie Fluviale du Mekong – The oldest luxury river cruising companyin Cambodia
o Re-feel –India’s largest and fastest growing printer cartridge refilling chain.The company is now leveraging its network of over 150 outlets across 80cities to expand into the laptop aftermarket and repair industry
Differentiated Investment Strategy
Investment Themes
Growth capital investments in African businesses capitalising on the rising consumer class
Investments in joint ventures with international firms that can “migrate” profitably to Africa
Investments that contribute to the economic development of countries in which TLG invests
Investment Criteria
Geographies with favourable political, macro-economic and currency trends:
o Ghana, Uganda, Rwanda, Kenya, Nigeria, Tanzania, Liberia and selected others
o TLG has the right of first refusal to potential new equity deals sourced via Iroko
Cash-flow generative businesses with potential for both capital appreciation and income yield
Focus on sectors that are relatively under-served and do not require high capital expenditure, such as
healthcare, services, IT, media, retail, and hospitality, rather than telecoms and infrastructure
Focus on mid-sized firms (no investments > US$15m), which are relatively starved for financing
Work with best-in-class local and international partners to reduce risk
Use capital structure to optimise risk-reward trade-off
o Debt element to provide security and yield, and to incentivise disciplined management
o Convertible or equity component to capture potential upside
o Avoid outright majority stakes to ensure management is sufficiently motivated
Protect investment through negative control and board representation
Consider broader Environmental and Social Governance criteria for all investments
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The Africa Story and Opportunity
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Why are foreign companies interested in investing in African SMEs?
The land size of Africa is larger than the USA,
China, India, Japan and all of Europe combined
More than 1 billion people live in Africa making it
the second most populated continent in the world
Africa contains 99% of the world’s chrome
resources, 85% of platinum, 70% of tantalum, and
54% of the world’s gold
At present Africa holds 3% of the world’s GDP; it is
expected to jump to 15% within the next few years
and is predicted to grow by 63% between 2008
and 2020
Africa now boasts more than 100 domestic
companies with revenue greater than US$1bn.
Capital flows to the continent increased from just
US$15bn in 2000 to US$87bn in 2007: Africa
offers the highest rate of return on investment of
any region in the world.
6Source: The True Size of Africa: Kai Krause, McKinsey Global Institute, Foreign Policy Magazine December 2010
Africa: A Continent of Growth & Opportunity
For many Africa represents the ‘final
frontier’ in investment;, yet much Africa also
represents one of the most dynamic growth
Since 2000 African economies have grown
healthier as governments lowered inflation,
trimmed foreign debt, & shrunk budget
deficits
FDI in Africa has increased to US$62bn in
2008, mainly from China, large multinationals
(Bharti) and private equity. The rate of return
on FDIs in Africa is higher than any other
region (i.e., CDC – 12%)
Though risks remain there is a trend towards
increasing economic liberalisation and
integration into the global economy, as well
as improving economic capabilities
McKinsey Global Institute Africa Report
predicts the continent’s collective GDP to
grow by 63% from 2008 to US$2.6tr by 2020
22.0%
8.0%
0%
5%
10%
15%
20%
25%
1990s 2000s
Inflation, % per annum
81.9%
59.0%
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
1990s 2000s
Government Debt, % GDP
-4.6%
-1.8%
-5.0%
-4.0%
-3.0%
-2.0%
-1.0%
0.0%Budget Balance, % GDP
1990s 2000s
Africa in the Global Picture
8.3%
5.2%
4.9%
4.8%
4.0%
3.0%
0.00% 5.00% 10.00%
Asia…
ME…
Africa
CEE
LatA…
World
500700900
1,1001,3001,5001,700
19
80
s
19
90
s
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
African Annual Real GDP in US$bn
FDI Annual Rate of Return, %
Source: McKinsey Global Institute, World Bank, African Development Bank, International Monetary Fund7
Stronger Fundamentals
Compound Annual real GDP growth 2000-2008
0%
5%
10%
15%
20%
95 96 97 98 99 00 01 02 03 04 05 06 07
Africa
Asia
LatAM
MENA
Africa: A Continent of Growth and Opportunity
Source: IMF World Economic Outlook Database, April 2010, McKinsey GlobalInstitute, World Bank Global Economic Prospects, June 2010, Note: GDP measuredin constant 2005 USD. Growth rates over intervals are compound average,UNSTAD
Investment and Growth
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FDI in Africa has increased from US$9bn to US$62bn in 2008,
mainly from Chinese investments, large multinationals (such as
Bharti) and private equity investments. The rate of return on
FDIs in Africa is higher than any other developing region
Growth rates across sub-Saharan Africa were gathering
momentum as the global financial crisis struck. However, as of
Q4 2010 growth has largely returned, and economies such as
those belonging to Ghana, Angola and the Democratic Republic
of the Congo are predicted to be among the fastest-growing in
the world
0
1
2
3
4
5
1990s 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Foreign Direct Investment, net inflows (% of GDP)
Preconceived notions about the African economic landscape and
its viability as an investment destination are actually some of the
biggest obstructions to a healthy investment environment
Across African markets and political spheres there is a great deal
of variety, highlighting the need for a similar philosophy in
terms of investment: with diversity through sectors and regions
minimising the scale of risk involved
Perception versus Reality
2008 2009
Botswana 36 37
Mauritius 41 42
South Africa 54 55
Ghana 67 69
Brazil 80 75
China 72 79
India 85 84
Sub-Saharan Africa 117 116
Nigeria 121 130
Sierra Leone 158 146
Kenya 147 146
Russia 147 146
Angola 158 162
Global Corruption Perception Index (CPI) Ranking, Sub-Saharan Africa and BRICS, 2008-2009
Rise of the African Consumer
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The Rise of the African Consumer and Middle Class
Source: Source: McKinsey Global Institute, World Bank, Boston Consulting Group, Fitch Ratings, African Development Bank
Many sectors targeted through private equity in 2009 and 2010
are closely linked to the rise of the middle class. These are areas
such as hospitality/retail, healthcare, industrials/manufacturing,
services, financial services and media/telecoms. The combined
total investment for these sectors totalled US$839m between
January 2009 and July 2010. In comparison, Africa’s traditional
magnet for foreign investment, natural resources, accounted for
US$137m for the same time period
The gradual urbanisation of Africa is tied with rising income. In2008, roughly 85m African households earned US$5k or more,spending half their income on items other than food.Households with discretionary income spending are expected toincrease by 50% over next decade, reaching 128m
Food and beverage spending is projected to increase more thanany other consumer category
Shifting Consumer Trends
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Rising Consumer Spending
35%25% 18%
29%32%
29%
18%21%
24%
12% 14%17%
6% 8% 12%
2000 2008 2020
Global (>US$20k)
Consuming Mid Class (US$10-20k)Emerging Consumers(US$5-10k)
Basic Consumer Needs (US$2-5k)
Destitute (<US$2k)
Increasing Affluent African Population, 2000-2008
$662bn
$451bn
$274bn
$247bn
$222bn
China
Russia
Africa
Brazil
India
Private Consumption Growth, 2000-08 (US$)
1,380
540 500
200
2,620
520
110 220 130
980
0
500
1,000
1,500
2,000
2,500
3,000
Consumer Resources Agri Infrastructure Total
Estimated Annual Rev, 2020
Growth, 2008-20
US$bn African Sectors’ Revenues Forecasts
Africa’s consumer facing sectors (consumer goods, telecoms,
banking, etc) are already growing 2-3x faster than OECD
countries. African households spent US$860m in 2008, more
than Russian or Indian households
Financing Options Available
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Risk/Return Landscape of Private Capital in sub-Saharan Africa
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Risk
BanksLarge-Cap
Private Equity
Growth Capital
Microfinance institutions
Return
US$10k US$100 million+
Bubble Size
Microfinance & Bank Loans
Microfinance – Able to offer financing to small businesses but amounts are low (up to a maximum of US$10,000)
and currently exist in a competitive market with a large number of small business vying for capital
Banks
Pluses & Minuses:
Bank loans are relatively fluid for SMEs with collateral; timelines are generally a few weeks to a few months
Value-add can be significant, but depends on the bank (i.e., are they helping you in non-financial ways?)
― Collateral needed & high cash interest rates
― Capacity to bear risk (size taps out at US$5-10m for SMEs)
― Covenants and fixed terms do not allow for much flexibility for capital intensive or growing businesses
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96.7
88.4
92.6
86.1
78.8
Rwanda
Uganda
Tanzania
Kenya
Nigeria
Loans Requirng Collateral (%)
168.4
173
124.1
120.8
138.8
Rwanda
Uganda
Tanzania
Kenya
Nigeria
Value of Collateral needed for Loan (%)
74.1
78
84.6
78.3
92.8
18.2
12.7
7.8
12.7
1.3
0
0.4
0.2
0.4
0.1
Rwanda
Uganda
Tanzania
Kenya
Nigeria
Source of Finances
Availability of Loans within the African Market, 2009
Source: World Economic Forum; The Africa Competitiveness Report
Private equity/growth equity – ranging from small minority to majority stakes in private companies
Convertible bonds – a hybrid of debt and equity. Often initially cash interest bearing with potential to
convert to equity if business performs
Pluses & Minuses
Potentially much higher value-added; often investors will place a resource with the company and assist with
financing, reporting; will also leverage off investors network of banks and other companies
Capital is relatively flexible (often no traditional covenants)
Collateral is not always required
Cash interest will be lower than traditional bank financing
Lower refinancing risk as bond converts to equity after a period if business meeting plan
Speed of deployment can be a few weeks to a few months
― Sometimes hard to come by growth equity firms (not that many around)
― Due diligence can be more onerous than bank loans, especially when there is no collateral
― Ongoing reporting requirements can be arduous (but potentially worth while if the eventual view is to list or
be sold to large-cap private equity)
Growth Capital – What exactly is it?
Growth Capital – Recent Convertible Bond Transactions
Country Company Year Type Amount Purpose
South Africa Aquarius Platinum underwritten and managed by Rand Merchant Bank
2009 Convertible Bond n/a n/a
South Africa Emerging Capital Partners into Blue Financial Services
2010 Convertible and Common shares
US$15 m Growth Capital
South Africa Steinhoff Finance Holding (with Standard Bank)
2010 Convertible Bond EUR 390 m n/a
Kenya Emerging Capital Partners into Wananchi Group
2009 49% Equity Stake US$25m n/a
Nigeria SeaTrucks Bond Issue 2011 Convertible Bond US$200 m n/a
Convertible bonds were the most common issue type in sub-Saharan Africa in 2009, with convertible bond issues of US$1.4 billion accounting for over 70 percent of the capital market activity.
Source: Thomson Reuters
At least five US$150m+ funds competing for deals in this space; a few US$500m+ firms emerging as well
(Carlyle)
Increasingly prevalent in sub-Saharan Africa:
– Essar Telecom in Kenya - US$94m (06/09)
– Rift Valley Railways in Uganda and Kenya (12/09)
– China-focused investor, Hony Capital – investment in Wisco in Madagascar US$100m (02/11)
– Helios invested in InterSwitch in Nigeria - US$110m (01/11)
Pluses & Minuses:
Significant value-add from hands-on management (fine line between management and control)
Several firms vying deploy capital - the likelihood of a competitive auction is high (you get a good deal!)
― You need to be an established player (track-record, cash flow positive, several years of audited accounts)
― Size & scalability (minimum ticket size usually +US$20m)
― Increasingly competitive space (good for you if you have a large business to sell!)
― Long process (3mos – 12mos+) with extremely arduous diligence process
― Viewed as “expensive” in terms of the value you may be giving up (generally these firms take large majority
positions)
Large-cap Private Equity – Transactions Above US$20m
Sector Opportunities
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Sector Opportunities – Consumer Retail and Agri-Business
Source: McKinsey Global Institute, UN Conference on Trade and Development, International Finance Corporation, World Bank/Food Africa Organisation: Awakening Africa’s sleeping giant
Despite Africa holding 60% of the world’s uncultivated arable
the agriculture sector remains underdeveloped. While this
sector accounted for only US$65m in investments between
January 2009 and July 2010 and today there are more funds in
SSA focused on agri-business than any other sector
Within consumer markets spending patterns are shifting as more
households gain discretionary spending power. Food and
beverage consumption is projected to increase more in
absolute terms than any other category over the next decade,
rising by US$175bn to US$554bn in 2020
Real consumer spending has grown 3-5% annually since 2000
and 90% of households have at least some discretionary
income
Many consumers have moved from the destitute level of income(US$1k/year) to the basic-needs (US$1-5k) level. 221m basic-needs consumers will enter the market by 2015
In Nigeria, the collective buying power of households earningUS$1-5k a year doubled from 2000-07, reaching US$20bn,ensuring ample space for commercially-focused companieslooking to capitalise on this increased collective buying power
Africa has the potential to increase the value of its annualagricultural output from US$280bn to around US$500bn by2020 and to US$880bn by 2030. This would increase thedemand for upstream products such as fertilisers, seeds,pesticides, machinery, while spurring the growth of other typesof downstream activities such as food processing
Consumer Retail and Agri-business in Africa
18
369
144
97
51 46 28 26
101
175
10162
32 35 30 2160
050
100150200250300350400
Foo
d &
B
ever
ages
Ho
usi
ng
No
nfo
od
C
on
sum…
Hea
thca
re
Tele
com
Fin
anci
als
Edu
cati
on
Oth
er
Household Spending, 2008 in US$bn
Household Spending Growth, in US$bn, 2008-20
590
300
80
2163845495353
6672
753139
155
Others
Tanzania
Central …
Mozambi…
Zambia
Angola
DRC
Sudan
Others
Venezuela
Argentina
Brazil
Cropland defined as land producing output greater than 40% of maximum yield under rain-fed conditions, excluding forest areas
Additional available cropland, 2009Million Hectares
The Opportunity
Household Spending
Sector Opportunities – Healthcare
Source: McKinsey Global Institute, International Finance Corporation, Boston Consulting Group
Sub-Saharan Africa has of 11% of world’s population, bears24% of the global disease burden and accounts for < 1% ofhealth expenditure
This is slowly changing. There has been a recent rise inhealthcare sector deals across the continent. Hospitals, healthinsurance companies and pharmaceutical companies in Kenya,Nigeria, Uganda, Ghana and South Africa have all seen a steadysupport from Private Equity funds. This trend is remarkablysimilar to the growth in the middle class in other emergingmarkets (such as India) where healthcare has commanded asimilarly high level of a attention
The private health sector in sub-Saharan Africa is surprisingly large.
In 2005, total healthcare expenditure reached US$16.8bn of which
60% was financed by private parties
Improvements in Africa’s macroeconomic climate will create new
demand. Healthcare expenditures are expected to grow 108% from
2005 to 2016, by which time they will have reached US$35bn
Healthcare in Africa
19
Current consumer demand for healthcare services continues to
be unmet in most sub-Saharan African countries:
o In Nigeria, every year 18,500 residents travel abroad to
seek medical care, exporting US$1bn worth of revenues
o In Ethiopia, there is only one clinic for every 125,000
Key investment opportunities tied to reaching scale and
investing in quality certification:
o Growth of domestic generic pharmaceutical markets
o Expansion of product portfolios; large scale
manufacturers are more likely to obtain WHO pre-
qualification and produce drugs for treatment
o Aggregation of country markets into regional markets
that would create significant scale and replication- pan-
African scope for manufacturers
o Basic medical diagnostics and healthcare services
16.8
8.414.0
8.4
21.0
0
10
20
30
40
2005 2016E
Public Private
7.1%CAGR
Total Healthcare Expenditure in Africa, US$bn
35.0
16.8
50%
14%
14%
13%
9% Heathcare Provisioning
Distribution and Retail
Life Sciences
Risk pooling
Medical Education
Total Healthcare Expenditure Distribution in Africa, %
The Opportunity
Vero Food Industries Limited (VFL)
The growing middle class in Uganda has led to higher
demand for such essentials as mineral water and rice,
especially given reports of rising levels of contamination
amongst fresh water supplies
This increased demand for rice in Uganda is estimated at a
210,000 tonnes per year: most of which is currently
imported from Asia. With an already evident market, rice
produced locally will not struggle to be sold
The expanding regional market for Uganda‘s food has
boosted agriculture, and paves the way for the expansion of
products produced in Uganda into East Africa
The creation of the East African Community could help
Uganda fill its description as a potential agricultural
“breadbasket” for the region; current growing agri-
businesses have the potential to be the foundations for this
prospective growth
The primary focus of the company is the production of mineral
water and rice
Operations started early 2011 and the company is set to be
amongst the largest producers of these products in the region
with the ability to produce over 42,000 bottles of mineral
water a day
The processing plant for rice uses Chinese technology and has
the capacity to produce 2,500 tonnes of milled rice per hour
The company intends to tap the increasing regional market for
agriculture with the aim to eventually export to the whole of
the Great Lake Regions
The industrial housing is composed of two adjacent structures
measuring 625m2 each. One of the structures currently
houses the rice processing plant and has adequate remaining
for packaging and storage of finished rice
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Uganda
The Company Investment Thesis
The Deal
Entered October 2010 with board seat representation
Investment via equity and option to increase stake as the
business grows
Challenges the Company Faced
Start-up operations in “competitive” space
No access to growth capital
Vero Food Industries Limited (VFL) – Progress since investment and growth plans
Originally due to produce both water and rice once full scale
production began, management found that rice production
caused contamination to the water producing facility. The
decision was taken to launch the water bottling facility first
with the aim in mind to establish the rice facility at a
suitable location in late 2011/early 2012
In H1 2011 there was political unrest in Uganda, which led
to a heightened risk perception from investors; the
defensive nature of the investment (consumer staples) and
the real estate security gave investors confidence
In Uganda over 70% of the work force is employed in some
form of agricultural-based work, and indeed Uganda is often
seen as an agri-business “hotspot” thus VFL is operating in a
highly competitive space. However by employing a
proficient management team and deploying a competent
marketing strategy (thanks to the injection of Growth
Capital) they hoping that they will be able to stay ahead of
those competing in the same space
Synergies between portfolio companies; TLG has facilitated
sharing of best practices between its portfolio companies in
Uganda allowing for time to production to be expedited
Through the Growth Capital investment, the company was able
to scale up the project that was first trailed with water and rice
production in July 2010
VFL has several plans for growth and expansion :
Geographical Expansion: Newly independent South
Sudan looks set to provide a lucrative market for
Ugandan companies looking to expand. Provided the
company is able to move early VFL can capitalise on
serving this new market
Liquid Product Line: At present the company supplies
bottled water and is able to supply pre-formed water
bottles. Within the next year the management is hoping
to scale up production levels, as well as introduce new
water lines – e.g. Vitamin water
Rice production: Rice was always part of the original
plan when launching, and given Uganda’s already
present demand, rice presents an extremely viable
space for the company to move into as it ups its capacity
in the near future
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Uganda
The Company – Growth Plans Threats & Mitigants
Dialysis Centre in Sierra Leone
The WHO Global Report states that there are nine reported cases
daily of kidney related deaths in Sierra Leone, it has also been
reported that 1 in 36 people have chronic kidney disease and that
over 150,000 people will develop some form of kidney disease
every year in Sierra Leone. In many cases the prevalence of
malaria contributes significantly to kidney disease – TLG Capital ‘s
investment into QCIL provides a platform for potential synergies
with drug distribution
Currently residents of Sierra Leone residents are forced to travel
abroad to seek costly treatment leaving a market opportunity in
the healthcare sector in Sierra Leone
The founder has the experience and in-depth country knowledge
to drive the project forward
Investment will provide the much needed capital to finance plans
for expansion and to ensure that the clinic is equipped with the
best modern equipment to service the needs of the clientele
The primary focus of the company is providing care for patients
effected by kidney disease and/or stroke, at present it is the only
clinic in the whole of Sierra Leone that is able to offer such
treatment
The clinic is run by an entrepreneur: an American-trained critical
care nurse with 13 years of training, who recently completed a
course as a dialysis nurse in preparation to run the clinic
The facility will run at international standards in all areas
Running the clinic alongside the entrepreneur is a nephrologist from
Egypt, one resident and one on-call physician, 3 State Registered
Nurses, 9 State Enrolled Community Health Nurses, 5 nurse
assistants and other support staff.
The clinic is located in Freetown, Sierra Leone
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Sierra Leone
The Company Investment Thesis
The Deal
TLG Capital will provide growth capital with the view to create the
only dialysis, imaging and diagnostics company in West Africa
through a buy-and-build strategy
Challenges the Company Faced
Clinic ran out of funds after government funding fell through
No collateral against which to get a long-term bank loan beyond 1
year with reasonable interest rates (i.e., sub 25%)