公司私募股权管理及财务知识分析

1SOUTHERNAFRICAPRIVATEEQUITYROUNDTABLEOctober2021GeoffBurnsBarnellanEquityAdviceLtd2PRIVATEEQUITY(PE)FUNDSGLOSSARY

CarriedInterest–shareofthegainontheFundpaidtotheManagerBlindPool–wherethereislimitedvisibilityontheportfoliotobeacquiredExit–realisationoftheholdingsinaninvesteeGeneralPartner(GP),PEManager–managementcompanythatraisesPEfundsGrossIRR–IRRoftheinvesteeportfolioonly.NetIRRisthereturntoInvestors(seebelow)Hurdlerate–anannualpercentagereturnreceivedbyInvestorsbeforetheGPgetsthecarriedinterestPrivateEquity(PE)–generictermforinvestinginprivatecompaniesofwhichVentureCapital,MBOsandDevelopmentCapitalaresubsetsInterimIRR–IRRoftheFundmeasuredonactivitytodate,egactualcashflows+NAVInvestee–portfoliocompanyofaPEFundIPEVC–InternationalPEandVentureCapitalGroup,establishedmainvaluationguidelinesIPO–InitialPublicOffering(orlisting)onarecognisedstockexchangeIRR=InternalRateofReturn,thediscountrate/%agereturnwhereNPViszeroLimitedpartner(LP)–Investor-surrendersdecisionmakinginreturnforlimitedliabilityand(usually)taxbreaksMBO–managementbuyoutNetIRR–theIRRactuallyreceivedbytheinvestor,afterallcostsofmanagementandfundexpensesNetPresentValue–thepresentvalueoffuturecashflowswhendiscountedatasetrateSME–SmallandMedium-sizedEnterprisesSystemicrisk–risktothefinancialmarketsorsystem,asopposedtoaparticipant,whichcannotbediversifiedawayVintageofFund–theyearinwhichafundfirstclosesWHOLEAGENDA–PRIVATEEQUITY(PE)RISK?SESSION1:PEasanassetclass:history,definitions,use,riskandreturn,summaryriskcontrolHowdoPEfundswork?UsingstructurestomitigateriskSESSION2:HowPEisimplemented?UsingdisciplinestocontrolriskManagerselection3SESSION1.EmergingMarketPrivateEquity(EMPE)ASANASSETCLASS1.1HistoryandbackgroundIntroductionandHistory,RiskperspectiveUseofPEinportfoliosReturnsBreaktodrawbreathandanswerquestions!1.2.ControllingRiskthroughthefundstructureFundstructureHowtheyworkRiskmitigationAlignmentandconflictsJcurve45INTRODUCTIONANDHISTORYEARLYHISTORY14thcentury–MoravianProtestantmovementCEurope15thcenturyFlorence–deMediciMORERECENTHISTORY–19thcenturyIntroductionofinvestmenttrustsFinancingofUSrailroadsMODERNHISTORY–1975onwardsGlobalexpansionfromUS,thenUK,thenEuropeIntroductionoflimitedpartnerships1970/80sEmergingmarketPEfromearly1990sDefinitionofaprivateequityinvestor-

someonewithdeeppocketsbutveryshortarms!6WHATISPRIVATEEQUITY?EquitiesnottradedonpublicmarketsPEisgenerictermcoveringVentureCapital(earlystage/startups),ExpansionandBuyOutcapitalHighergrowthsmallercompanies,agility/flexibilityHigherrisk(smallerfirms,cyclicalexposure,lessdefensiveness,managementdepth)CanincludesomelargecompaniesaswellasSMEsHoldingperiodsof3-7yearsEMPEisquiteanewassetclass7

OVERVIEWOFGENERALINVESTMENTRISKS

CommontoALLinstitutionalequityinvestment

Systemic:‘uncontrollableexternalities’‘Alphaexposure’toupsideanddownsideStrategic:failuretoachievepolicyobjectives(desiredexposure)Financial/Counterparty:lossofmoney/underperformancevbenchmarkduetoinvestmentactivityand/orfraud,causedbyfailingsinthemanagement(ofcompanyorfund),organization/processLiquidity:mostlydifficultinsmallcaporfrontiermarketsReputation:riskacceptedinthelistedarena?8POTENTIALADDITIONALPERISK

HEATMAPFinancial-executionLiquidity

Infrastructure

LitigationReputationSystemic-cycle9PERISKPERSPECTIVEWhatgreaterrisksarewetaking(comparedtootherassetclasses)?Liquidity.Cannotrealiseinvestmentatwill.MediumSystemic.Cycle–SMEsensitivitytoeconomicandmarketcycles=morevolatilereturns.MediumFinancial:executioninPEmoredifficult.High‘Infrastructure’(financial,bureaucratic,judicial)canbemoredifficultforprivatefirms.Medium/LowLitigation:legalredresssoughtbycreditors,suppliers,governmentsetc.Low

Reputation:damagecausedbyissuesderivedfromtheabove.Low10WHYBOTHER?ExploitmarketimperfectionsSMEgrowthpotentialLowcorrelationwithotherassetsReturnsreflecttherisk?Potentiallongtermhighrewardforadditionalrisk11RISK!1213SPECTRUMOFRISK-INVESTMENTJudgment

Evidence

CDO’s/JunkPrivateEListedequitiesRealEstCorpbondsGov’tbondsJudgementdependanton:?! Analysis!analysisandliquiditycreditratingsecurityvalueHIGHRISK LOWRISK14SPECTRUMOFRISK-PEJudgment EvidenceStartupsearlystage expansionMBO assetbackedJudgementdependanton:Projections marketandtrackrecordanalysissecurityvalueHIGHRISK LOWERRISK15SPECTRUMOFRETURN–INVESTMENT(net$based)12-25% 7-15% 5-12%3-7%2-4%

PrivateEListedequitiesRealEstCorpbondsGov’tbondsReturndependanton:Stagesector/geographysector/geogcreditcountryHIGHRISK LOWRISKReturnsaretargetednettoinvestorsbasedonanapproximatehistoryofdevelopedmarkets16SPECTRUMOFRETURN(GROSS)

-PEBYSTAGE30-45% 25-40% 20-30%17-25%12-20%Startupsearlystage expansionMBO assetbackedDependanton:Projections marketandtrackrecordanalysissecurityvalueHIGHRISK LOWRISKReturnsaretargetedgrossportfolioreturnsbeforefundcosts17COMPANYLIFECYCLEEarlystagefirmswithnegativecashflow.RequireR&Dandstartupcapital,highrisk.>30%IRRGrowthstage,expansioncapital,mediumrisk20-30%IRRMaturephase,buyoutandacquisitionfinance,exgrowth,cashgenerativewithdebtcapacity,lowerrisk.17-25%IRRHighriskLowerRiskBROADDEALTYPEDEFINTIONSVentureExpansioncapitalBuyoutandacquisitionfinancingMezzanine(‘shareholderloans’toSMEs,orunsecureddebttomidsized/largefirms)Typesofinvestmentinstrument–equityandquasi-equityordebt/preferenceallusedPrivateInvestmentintoPublicEquity(PIPE)Fundsmayfocusononeareaorbequitegeneralistindealtypeorsector18WHYUSEPEINPORTFOLIOS?CorrelationlowwithotherassetclassesLongtermasset,ratherlikerealestateStabilisingeffectoflessvolatilepricingovershorttermPotentialhigherreturn19MANAGERSELECTIONPErequiresspecialistskillsandresourceFormanyinstitutionsthisistooexpensiveIfso,subcontractmanagementrequired–usefundoffundsInSouthAfricaPEindustrywelldeveloped,favourableconditions,goodchoiceoffundsRestofSouthernAfrica,wherefundsareavailable,theninvestment/executionisthekeytosuccess2021NETRETURNSACHIEVEDBYPEFUNDSReturnsto31March2021 3year 5year 10yearEmergingMarketsPE&VC 9.9 13.7 7.7WEuropeVC&PE (3.6)13.514.0MSCIEMindex (listedequities) 5.5 16.0 10.1MSCIWorldindex (5.4)2.9 (0.0)EMPEbetterthanWorldandclosetoEMlistedindicesReasonableresultgiventheCrunch(EMPEwastopin2007)Caveat-notastrongbenchmark.EMPEisonly307fundsAfricasamplesizetoosmalltobeincludedinthestatisticsWidedispersionofPEreturnsinternationallyandbetweenquartiles(EMPEtopquartilebeatsMSCIindex)Source:CambridgeAssociates–pooledendtoend$netreturnsafterallcostsSOUTHAFRICARETURNSGrossreturnsofindependentlymanagedfundsinSAfrominceptiontoend2021(netreturnsnotavailable):22GrossIRR%5year10year<101-10-201-20-301230-4021>401-Source:KPMGandSAVCA2021SAPEsurveySOUTHAFRICARETURNS-CONCLUSIONSSmallsamplebutindicates:2/3areproducingstrongindexbeatingreturns(>20%grossIRR)Topquartile=stellarreturnsOnlyonemaybeafailureonpresentinformation(<10%grossIRR)Longertermrecordedreturnstendtoimproveasfundsaredivested(years6-10normally)23EVIDENCEFROMTHEIFCAlltheirPEfundssince2000:Diversifiedglobalportfolioincluding>20%inAfrica/MENANetIRRtoDecember2021=18%(topquartile)SMEinvestmentsnotsignificantlyriskierthanlargeones,exceptwellbelow$2mdealsizeIRRofminoritypositiondealsnotsignificantlydifferentfrommajorityheldonesFirsttimefundsproducedsimilarreturnstononfirsttimeonesContrarytotraditionalviewonPEriskSource:IFC.TheCaseForEmergingMarkets,March202124BUT….AlthoughgoodPEfundreturnscanresultfromexcellentselectionWHATISTHEREQUIREDRISKPREMIUMOVERLISTEDS?Is15-18%netactuallygoodrelativetotheriskWhatisthepremiumrequiredtopersuadeWesternLPstoinvestinAfrica.Differentfromlocalriskpremium?RiskpremiumforAfricanLPstoinvestinWest?!!(DuetorecentpoorreturnsinWest)25Precrunch2006-25%netfromAfrica.Today?26Source:EMPEA

CURRENCYRISKNotofcourseanissuefordomesticinvestorBalanceofexportersanddomesticbusinessesgoodRegionalfundslooktodiversificationandlongtermnatureoffundstomitigateFundsdonottrytohedge,duetocostoflongtermhedgesanduncertaincashflows27SUMMARYSESSION1.1PEhasadditionalriskstothoseoflistedequitiesItisstillearlydaysfortheassetclassEMPEhasanimportantroleinaportfolioTheriskscanbeidentifiedandmitigated,tocapturehigherreturnOftenundertakenbysubcontractPEManagerRiskisconcentratedinexecution–soselectionofrightPEFundManageriskey28SESSION1.PEASANASSETCLASS1.1HistoryandbackgroundIntroductionandHistory,RiskperspectiveUseofPEinportfoliosReturnsBreaktodrawbreathandanswerquestions!1.2.ControllingRiskthroughthefundstructureFundstructureHowtheyworkRiskmitigationJCurve2930FLOWOFFUNDSDRIVERBusinessangelHNWindividualsGovts,agencies(DFIs),Banks/Pensionfirms,InsurancecompaniesLimitedPartnerships(LP)PrivateEquitymanagers(GP)Smallandmediumenterprises(Investee)Otherfunds,retailRetailsavings31MOSTTYPICALFUNDTYPELIMITEDLIFELIMITEDPARTNERSHIPSFUNDS–proventobemosteffective.WHY?InvestorsreluctanttocommitmoneytooneManagerformorethan10years,buthappywithsuccessivefundsongoodperformanceLimitedpartnershiporeasilyliquidatedcompanystructureCommitmentonwhichannualfeeispaid,butcapitaldrawndownasneeded(IRRefficiency)InvestmentonlyallowedforfourorfiveyearsThereaftercapitaltobereturnedasrealisationofinvestmentsoccurMinimumeconomicFundsizec$20mandsonotsuitableforPEdealsizesbelowc$200,000(fundeconomics)Partnershiphastaxtransparencyinmanyjurisdictionssocanpool(‘commingle’)differentinvestortypesSTANDARDFUNDSTRUCTURE32LIMITEDPARTNERSInvestees

Fund

Management/GP/AdvisorFeesAdvice/mgtCapital/expenses/returnsInvestment/returnsAdvisoryCttee33HOWDOPEFUNDSWORK1

InitiationInvestorsapproachedbyManager(GeneralPartner/GP)withPrivatePlacementorInformationMemorandumNegotiateacommonshareholderandmanagementagreementInitialinvestorsmakecommitmentonasingleday=FirstClosing,butdrawdownisonlyasrequiredOtherinvestorsmayjoininsubsequentclosingson‘equivalentbasis’foruptoayearGPexpectedtoinvestatleast1%Organisationalexpensesoffundupto1%paidbyfundHOWDOPEFUNDSWORK2

OperationDrawDownsagainstCommitmentasneededforupto5years(InvestmentPeriod)Normallyportfolioof8-15investmentscreatedoverthe5yearsCapitaltobereturnedbyyear10(Divestmentphase)ThiscanbeextendedwithpartnerapprovalTheGPcanraisesequentialfundwhencurrentfundisc75%invested,sotheyalwayshavecapitalavailableStructure(orregularfundraisings)ispotentiallywastefulinGPtime,buthelpsincentivealignment,andreducesblindpoolrisk3435HOWDOPEFUNDSWORK3

ExpensesCostsManagementfeespaidonCommitment(1.75to3%-dependantonsize)GPmaybeabletochargeinvesteescertainfees,75-100%ofwhichissharedwithfundFundcarriesallotherthirdpartycosts,eglegalcosts,auditingetcGPgetsa‘carriedinterest’(shareofgain)of20%ofthereturnsafterInvestorsreceivedcostand‘hurdle’(6-10%pa)backHOWDOPEFUNDSWORK4

ProcessInvestmentCommitteemakesinvestmentdecisionsAdvisoryCommittee/Board(ofLPs)meetsuptoquarterlytoreviewconflicts/valuationsReportingquarterlyValuationsatleasttwiceayear,nowoftenquarterlyCapitalorincomereceivedreturnedtoInvestorsimmediately(subjecttominimums)3637TYPICALFUNDCASHFLOWFORINVESTORS$100mFund,$90mdrawndown,IRR20%,2.25multiple

1.2HOWDOFUNDSWORKTOMITIGATERISKAGENDAFlowoffundsThelimitedpartnershipstructureHowfundsworkHowfundsmitigateliquidity,systemic,infrastructure,litigationandreputationriskJCurve38STRUCTUREANDPROCESS

TailormadetomitigateriskRiskcategoryDescriptionMitigationLiquidityNotradabilityofassetFundlifestructureandprocessCycleExposedtoeconomic/financialcycles.Uncontrollableexternalities!Fundlifeandstructure,diversificationandothercontrolsExecutionSession2Investmentprocesscomplex/time-consumingProcessandproceduresatPEManagerlevelInfrastructurePoorprivatesectorandinstitutionalsupportStructure,proceduresLitigationSuppliers,creditors,thirdpartiesFundstructure,corporategovernanceReputationImplicatedbyeventsinfundportfolio(environmental,social,accidentsetc)Fundstructure,delegatedmanagement39LIQUIDITYANDCYCLE/SYSTEMICRISKSClosedendfundprotectstheilliquidassets5yearstoinvest,10yearlifegivesroomformanoeuvreCashstartstoflowbackyear4/5Orderlyinvestment/divestment=maximumopportunitytonegotiategoodentry/exitpricesDiversificationwithinthefundacrosssectors/stages(veryfewsectorspecificfundsinEM)5yearstoinvestspreadscycleriskacrossperiods,sameforexitManagerdoesnotsitoncashSecondarymarket(negotiatedbasis)–IFCannounced$500mfundBut,Investormustaccept‘ringfencing’committedfundsforlongperiod40LIQUIDITYANDCYCLE–SPECIFICPROTECTIONSInvestmentPolicyRestrictionsandProtectionsDiversificationrequirementsSetpolicyCountry/sectormaximumsInvestmentmaximumsperinvesteeOtherrestrictionsEnvironmental,SocialandGovernanceBannedsectorsChangeofpolicyrequiresinvestorsconsentQuarterlyReportingInvesteebyinvesteedetailsValuationseitherquarterlyorsixmonthly

41INFRASTRUCTUREPrivatesectorfacilitation,strengthandfavourability:OwnershipprotectionLawofcontractJudicialredress,efficiencyandtransparencyCompany’sactandlegalframeworkTaxincentives,governmentsupportLimitsonstateandbureaucraticinterventionEncouragementofforeigninvestmentAvailabilityofdebt,liquidityofpublicmarket42LITIGATION/REPUTATIONCORPORATEGOVERNANCEDelegatedinvestmentdecisionstoavoidinvestorliabilityGPhasInvestmentCommitteethatmayhaveindependentsonitGPtakestheliabilitybutindemnifiedexceptfornegligence/fraudAdvisoryBoardofInvestorscontrolsconflicts,valuationsandaudit,andchangetoinvestmentpolicyAbilitytofireGPwithoutcausesubjecttohighvotethresholdOtherdefaultson‘keyman’retention,breachofinvestmentrestrictionsetcGPrestrictionsonabilitytomanagecompetingfunds,overcertaintypesofinvestment(bannedsectors)UndertakingfromGPonenvironmental,socialandgovernancecriteriatobefollowed43POTENTIALADDITIONALPERISK

HEATMAPFinancial-executionLiquidity

Infrastructure

LitigationreputationSystemic-cycle4445OTHERMATTERS-‘J’CURVEIRRmeasuredeachyearinthelifeofaFundSource:CalPERSSUMMARYSESSION1Subcontracttoprofessionalmanagementisneeded–specialistskillsTocommitresourcetotheinvestmentprocess,managerneedscapitalbackingandlongertermstabilityFundpoolsinvestorsinterestsanddiversifiesexposureStructureworkstomitigaterisksSelectionofPEfundmanageriskey(widereturnrangebetweentopandbottomquartile)46SESSION2.IMPLEMENTATIONANDRISKMANAGEMENT47WHOLEAGENDA–PRIVATEEQUITY(PE)RISK?SESSION1:PEasanassetclass:history,definitions,use,riskandreturn,summaryriskcontrolHowdoPEfundswork?UsingstructurestomitigateriskSESSION2:HowPEisimplemented?UsingdisciplinestocontrolriskManagerselection48RISKMITIGATIONREVIEWPolicyanddiversification–portfolioconstruction,diversificationandinvestmentlimits/allocationLiquidity–diversificationacrossvintages/fundtypeCycle–diversificationacrossvintagesFundselection–preandpostinvestmentdisciplinesandprocedures(thisSession)Taxandjurisdiction–offshorelocationsCurrency–diversificationbycountryifregionalLiability–fundstructuresarelimitedliabilitypartnershipsReputation–delegateddecisionmaking49VIEWOFPERISKCHANGEDFROM…50….TO?51POTENTIALADDITIONALPERISK

HEATMAP–NOWTHEHOTTESTBIT!Financial-executionLiquidity

Infrastructure

LitigationreputationSystemic-cycle52PEEXECUTIONHowPEisimplemented?Definitionofexecution/counterpartyriskThemainissuesforFundofFundsAlignmentandconflictsFundofFundlevelriskcontrolMainissuesforDirectPEDirectInvestmentriskcontrolPEFundManagerselectionFocusonthepeopleside53EXECUTIONORIMPLEMENTATIONRISKOverallRiskdefinition:Thepotentialtomakepoorinvestmentdecisions,andtofailtonegotiatestrongfinancialpackages,addvalue,secureagoodexit,andsonotmakeariskadjustedreturnAppliesbothatfundoffundandattheportfoliolevel54THEMAINISSUESENCOUNTERED

FORTHEFUNDOFFUNDSINVESTORFinding:ExperiencedmanagerswithgoodandlongrecordsStableteamswithabalanceintermsofskills(entry,addvalue,exit),experience,andincentivesTeamswhoadapttochangebutstillstaywiththeircorecompetenceAlignedinterests55ALIGNMENTANDINCENTIVESPrinciples:SomecashexposurefromManager,min1%?FocusthatcomesfromlimitedlifeFocusfromrestrictionsonotheractivitiesManagerincentivisedbyshareofgainafterallInvestorsmoneybackplushurdleInvestorsultimatelyhavecontrolthrough‘nofaultdivorce’56GENERALALIGNMENTSOLUTIONS1Keyalignmentissues:Strategy–GPandLPstosharesameobjectivesbecause:-Feessetsomanagerisviablebutnotexcessivelyprofitable-nonewfundsuntilthisoneinvested,restrictotheractivities-no‘faultdivorce’.SupermajorityofinvestorscanclosethefundwithoutcauseRisksharing-CarriedinterestonlyafterInvestor’scostisreturned-’Significantinvestment’infundfromGPShortTermism–discouragedby:-Alldealincomeofanysort100%tothefund-ProperstepdownofmanagementfeeafterinvestmentPeriod57GENERALALIGNMENTSOLUTIONS2Staffingflexibility–limitedby:-keymanclause.BreachofcontractifkeymanagersleaveGP-individualcarriedinterestallocation5.Costscontrolled:-caponorganisationalcosts,-fundadministrationcap-strictcontrolonManagerchargestotheFund6.Incentivesaligned:-economicsmostlygotokeyManagerswhodeliverforthefund-firsttimefundsthesponsorrole/backinginvolvesGPownership-laterfundsshouldseeGPownershipandcarryshifttoManagersHowever,alignmentrequirestherightattitudeandsenseofresponsibility,cannotbeachievedbyTermsonly58TWODECISIONLEVELS591.Fundoffundlevel/fundinvestorlevelexecution2.PEfundlevelexecutionManager/fundselectionFoFlevelInvesteeselectionPEFundlevelManagerqualities,processes,Pipeline,fundstructure,termsInvesteequality:markets,competition,product/serviceUSP,management,reporting,valuation,dealstructuring,valueaddLEVEL1.ADDRESSINGTHEFOFRISKSITEMHowmitigated?LiquiditySecondarypurchasemarketSystemic/cycleCountrydiversification(ifpossible),investmentpolicyrestrictionsFinancialQualityofopportunity,GPrecord,strengthofGPteam,fundtermsoperationandprocessesetcInfrastructurePooledinterests/structureLitigationLimitedpartnershipstructureReputationLimitedpartnershipstructure6061SELECTIONPERFECTION!

HowtoassessPEfundexcellenceOperationalRisk=Managementteam,competence,balance,incentives,alignment,trackrecord,processanddisciplines(50%weight?)MarketRisk=natureoftheopportunity,dealflow,pipeline,competition,networks(20%weight?)[InfrastructureRisk(country/region)=contractandjudicial,liquidity,business,physical,political/economy,exitpotential(10%weight?)]FundSpecificRisk=investmentpolicy/strategy,projectedreturns,fundterms,conflicts,structure,tax,currency(20%weight?)PEFUNDASSESSMENTPROCESSPPMorInformationMemoreceivedQuestionnaireissuedbyInvestorInitialmeetingsorscreening(mayoccurasstage2)Ifpassedscreening,intensivereviewofPPMAcquireaccesstodataroomTakeupinitialreferencesDuediligencevisitdrillingdownintodataareas,interviewingthepartners(individually),meetingotherstaffMayvisitinvesteesofapriorfundorpipelinecompaniesFinalisereferencesGoforapprovalLegalstage6263

OVERVIEWOFINVESTMENTPROCESS

(VERYSIMILARTODIRECT)

SourcingDeskbasedreviewS&Wandkeyrisks,agreetermsheetScreeningICAndDDfocusDDvisitandDrilldownintoKeyrisksICapprovalRiskmitigationTermsfinalisationandcompletionAdvisoryCttee?MonitoringPortfoliorealisationPOSTDEALPREDEALPEFUNDRETURNS-ANALYSISVariousmeasuresused,asIRRinearlyyearsisnotindicative(JCurveeffect)Investmentrate–amountofcapitalpaidintofundvcommitmentDivestmentrate–amountofcapitalreturnedvpaidinValueofportfoliovpaidin(basedonIPEVCguidelines)Totalvalueofinvestorsinterestvpaidin=cashback+portfoliovalueegMultipleonCostAlsolookattherateofloss=writtenoffportfolioasproportionofpaidinLookatportfoliocompaniestoassesstheirstateofhealthIRRs(grossandnet)Possibletobuildagoodpictureofprogressevenintheearlyyears64CASESTUDYPanAfricanfundof1998vintage–first‘freestanding’fundfortheManager$477mraisedManagerestablished4AfricanofficesInvestedacrossarangeofindustries–9deals,mostsuccessfulweretelecomsandfinancialservicesBy200790%exitedand$1097mreturnedEquivalentto2.3xmultipleoncostGrossIRRofportfolio28%NetIRRtoinvestors21%65TWODECISIONLEVELS661.Fundoffundlevel/fundinvestorlevelexecution2.PEfundlevelexecutionManager/fundselectionFoFlevelInvesteeselectionPEFundlevelManagerqualities,processes,Pipeline,fundstructure,termsInvesteequality:markets,competition,product/serviceUSP,management,reporting,valuation,dealstructuring,valueaddLEVEL2.ADDRESSINGDIRECTINVESTMENTRISKInvesteesarealwaysincorporatedentities(limitedliability)Professionalfundmanager’sprocessIntensiveduediligenceProtectivedealstructures(downsideprotection)Shareholderprotections,minoritycontrolsCreationofcorporategovernancestructureBoardandFundmanagerreviewofprogressatleastquarterlyRegistrationofinvestmentinstrumentswithauthorities67THEMAINISSUESENCOUNTERED

-DIRECTPEFindingtransparentanddynamicentrepreneurswithsoundideasandabletopenetrategrowthmarketsandmakeaprofit!Entryvaluedisaggreementwiththemanagement/sponsorManagementteamswholieabouttheirexitmotivationSecuringa‘good’exit,limitedIPOpotentialorstrategicattractionVolatileconditionsforsmallercompanies,egcurrencyifexporting,commoditisedmarketsandpricingpower,cashflow,debtavailabilityConflicts,relatedpartytransactions,‘informal’managementpractice,misunderstandingsbyentrepreneurwhoowned100%beforethedealManagementinformationdelaysGoodPEManagercanaddressallofthesetosomeextent68RISKCONTROLINDIRECTPE

-MANAGER’SROLEInvestmentprocessDuediligenceDealstructuringInvestmentprotectionsandagreementsCorporategovernanceManagementinformationsystemsAddedvaluepostinvestmentExitmanagement6970THEINVESTMENTPROCESSSourcingofdealsScreeningforthepotentialbestprospectsInitialapprovalfromInvestmentCommitteeDetailednegotiationoftermsHeadsofTermsagreedFullInvestmentCommitteeapprovalDuediligenceundertakenCompletionMonitoring,addedvalueandsupportPreparationforexitNegotiationofexit(IPO,saletotradeinvestor,orMBO)exitSIXKEYFACTORSFORSUCCESSOFINVESTMENTDuediligenceNegotiatingagooddealSecuringinvestorprotectionSecuringgoodflowofmanagementinformationfrominvesteeAddingvaluetotheinvesteeExitmanagement711.DD-SOMETHINGHIDDENUNDERNEATH?2.NEGOTIATINGTHEDEAL733.INVESTMENTPROTECTION744.MANAGEMENTINFORMATION

Likepullingteeth!755.ADDINGVALUE

(powerboostyourhumblesofa?)

766.EXITMANAGEMENT77CELTELCASESTUDYInMay2000,Investment$50millionbygroupofPEfundsPan-AfricanmobileGSMtelecommunicationsprovider,foundedin1998Deregulation,privatizationandexpansionplaninAfricaLeadinvestorandPEgroup:Restructuredboard,newexternaldirectors,improvedcorporategovernanceAdvisedonandhelpedtomouldstrategyProvidedadditionalcapitaltosupporttheacquisitionofKenCellfromVivendiSupportedmanagementindisputeswithregulatorsRegularlyadvisedCeltelonacquisitionsandfinancingstrategiesKeyroleinfindinganddevelopingstrategicpartnerswithexitpotential78CELTELCASESTUDY(Continued)ByexitinMarch2005,theCeltelhadalmost4millionsubscribersin13countries:nichestrategytargetingsmallercountriesLargestmobilenetworkinAfrica,fromnothingin1998Celtel'slicensescoveredoveronethirdoftheAfricancontinentand28%ofthepopulationEBITDAof$200millionbyend2004Averagerevenueperuserwas$252Celtelemployed5,000people,99%ofwhichinAfricaAcquiredbyKuwaititelecomscompanyMTCfor$3.4billio