Agusto & Co. RESEARCH, CREDIT RISK RATING, CREDIT RISK MANAGEMENT

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1 RESEARCH, CREDIT RISK RATING, CREDIT RISK MANAGEMENT SYN-CAP MANAGERS LIMITED COPYRIGHT 2011 AGUSTO & CO. LIMITED ALL RIGHTS RESERVED The copyright of this document is reserved by Limited. No matter contained herein may be reproduced, duplicated or copied by any means whatsoever without the prior written consent of Limited. Action will be taken against companies or individuals who ignore this warning. The information contained in this document has been obtained from published financial statements and other sources which we consider to be reliable but do not guarantee as such. The opinions expressed in this document do not represent investment or other advice and should therefore not be construed as such. The circulation of this document is restricted to whom it has been addressed. Any unauthorized disclosure or use of the information contained herein is prohibited.

2 SYN-CAP MANAGERS LIMITED Rating rationale (IM) A INVESTMENT MANAGER RATING Investment management company is considered to have GOOD investment and risk management capabilities Date Issued: June 2011 Expiry Date: June 2012 Previous rating: N/A Analysts: Abisodun Soetan abisodunsoetan@agusto.com Adebiyi Olukoya biyiolukoya@agusto.com UBA House (5th Floor), Marina, Lagos, Nigeria The rating is supported by the experience and qualifications of the investment management team. The two portfolio managers have a combined 33 years financial services experience, with relevant postgraduate qualifications (ACCA, CFA, postgraduate Diploma in Private Equity Investment). The processes for deal selection, monitoring and exit are well governed. Syn-Cap Managers Limited ( SML or the Manager ) have defined criteria for pre-selecting opportunities for investment. The due diligence exercise covers 7 distinct areas, and all investments require the approval of an investment committee comprising the general partners and 2 independent members. Fund administration is outsourced to Augentius Fund Administration LLP, a UK based specialist fund administrator. The relationship is governed by a service level agreement setting out procedures and guidelines for capital calls, distributions, payments and fund reporting. This structure mitigates some of the operational risk that the Manager will otherwise be exposed to. SML s proprietary valuation tools, built in MS Excel; are flexible and allow for scenario testing. However, we note that the process for selecting and analyzing opportunities has limited system interfaces, and that the Manager does not have a formal process for backing up data held on its server. Although the portfolio managers have good private equity and principal investments experience; the rating is constrained by the limited track record of the entity, Syn-Cap Managers Limited. SML was incorporated in 2011 and intends to leverage off the experience of its parent company, Synergy Capital & Advisory Limited. Based on the aforementioned, we believe that SML has demonstrated good investment and risk management capabilities overall. We have therefore assigned an A (IM) rating to the Manager. Agusto & Co Page 2 of 12

3 Manager profile Syn-Cap Managers Limited ( Syn-Cap, SML or the Manager ) is a specialist private equity fund manager, incorporated in June SML currently has paid-up capital of 20 million with plans to increase authorized capital to 750 million in Total Assets under Management (AuM) is expected to be about 7.5 billion at first close of its inaugural fund; the synergy private equity fund ( SPEF or the Fund ). As at June 2011, the Manager was in the process of registering with the Nigerian Securities and Exchange Commission as a fund manager. SML leverages off the experience of its parent company, Synergy Capital & Advisory Limited ( Synergy Capital ), to originate deals. Since its incorporation in 2007, Synergy Capital has worked with 14 companies spread across financial services, technology, business solutions & services, media, oil & gas and the agro-allied industries to raise debt and equity capital in excess of $250 million. What is private equity? Private equity or venture capital is a form of investing in companies, where the venture capitalist actively works with the investee company s management to increase enterprise value. This type of investment is typically done through funds, organized as limited partnerships in which the private equity manager is the general partner. Investment horizons range between 3 and 10 years. Private equity firms seek commitments for capital from investors when establishing a fund. This is a process that can take several months. Once a firm has raised sufficient commitments it may then start to make investments in companies to build its portfolio. Return on investment is achieved through dividends or when portfolio investments are sold. Business structure and staffing Syn-Cap operates a flat organizational structure. There are 2 principals and 2 investment officers responsible for the investment process, from deal selection and review through to deal execution, monitoring and exit. Fund administration (which includes investor relations, fund reporting, capital calls and disbursements) has been outsourced to Augentius Fund Administration LLP ( Augentius or the fund administrator). Agusto & Co Page 3 of 12

4 Augentius is a Private Equity and Real Estate Fund Administrator headquartered in London, UK. The company administers over 300 funds and fund related entities across 4 continents. However, Augentius does not have any prior experience administering funds in Nigeria. The fund administrator has over 110 staff, with well qualified and experienced management. Almost 90% of staff are either professionally qualified or part-qualified. Established processes have been put in place, and systems are well interfaced. Organisational Structure Management team The two founding principals of Syn-Cap Managers Limited have a combined 33 years financial services experience, including 17 years in private equity and principal investments. Ayodele Arogbo is co-founder and principal of SML. He was formerly Managing Director of Synergy Capital, working with companies operating in the oil & gas, media, technology and automobile marketing sectors. Prior to joining Synergy Capital in 2007, Ayo was Vice President at Capital Alliance Private Equity, managing the firm s investments in the oil and gas sector. He has 20 years experience in the financial services sector, 13 of which was gained in banking - where he worked in credit analysis, relationship management and corporate banking. Ayo is a CFA charterholder, an Associate of ACCA, and he holds a B.Sc in Finance from the University of Lagos. Agusto & Co Page 4 of 12

5 Akintoye Akindele is co-founder and principal of SML. He was most recently the Deputy Managing Director of Synergy Capital, where he was responsible for investment structuring, deal sourcing, fundraising, mergers & acquisition and strategy implementation. Prior to joining Synergy Capital in 2007, Akintoye was Vice President in charge of Information Technology and Telecoms investments at Capital Alliance Private Equity where he managed portfolios of companies with combined revenue in excess of $1.5 billion. Akintoye has completed the Senior Executive Management Program at the London Business School, holds a Diploma in Private Equity Investment from Said Business School, Oxford University; and a B.Sc in Chemical Engineering from Obafemi Awolowo University Ile-Ife. He is a CFA Charterholder and member of the United Kingdom Society of Investment Professionals (UKSIP). Investment management Research Deal origination and analysis are carried out by members of the investment team - consisting of the principals and investment officers. The team is well qualified and has an average of almost 6 years private equity and principal investment experience. We consider the qualifications and experience of the investment team to be adequate. The process for selecting and analysing opportunities has limited system interfaces between the different stages. The investment team uses the MicroSoft Office (MS) suite of applications for deal screening, review and analysis. All potential deals are stored on the Manager s network server in MicroSoft Office Excel format. To review deals, SML has developed templates in MS word for the Pre-investment committee (Pre-IC) and investment committee memorandums. The Manager uses proprietary investment valuation tools built in MS Excel. These tools provide SML with flexibility to test various scenarios and when considering potential investments. Overall, we feel the systems used for selecting and analyzing investments are adequate for private equity investments. Agusto & Co Page 5 of 12

6 Deal selection As part of the research process, the Manager reviews potential deals that meet its set criteria, before preparing a pre-investment committee (Pre-IC) review memo. The Pre-IC memo includes information such as the investment case for the opportunity, company and industry analysis, key risks and mitigants, valuations, management character, potential exit routes and other factors considered important in deciding whether to proceed with an opportunity. If approval from the Pre-IC is obtained, then due diligence is carried out. For this, the investment officer works with relevant sector specialists (both internal and external) and the final due diligence report is appended to the investment committee memorandum. The areas covered for the due diligence exercise include: Financial; management and human resources; business strategy and future viability; legal marketing/commercial; technical; operational; and asset title verification. The qualification and experience of the investment professionals is critical to the success of the deal selection and review process. Given the good track record of the portfolio managers, and the strong reputation of the preferred third party advisers; we feel the research process is thorough. Agusto & Co Page 6 of 12

7 Decision making The investment committee comprises SML s 3 general partners, and 2 independent members. The committee members have over 20 years financial services experience on average. They have held senior roles in their respective institutions, and are well qualified with broad experience relevant to investment decision making. The members are: Mr Ayodele Arogbo, General partner Mr Akintoye Akindele, General partner Mr Akinsowon Dawodu, General partner Mr Kofo Majekodunmi, Independent member Mr Amar Khan, Independent member Akinsonwon Dawodu is the country treasurer for Citibank Nigeria Limited. He has over 13 years financial services experience gained in Asset and Liability Management, trading, relationship management, capital and debt structuring. Mr Dawodu has a B.Sc in Accounting from the University of Lagos, and an MBA from Manchester Business School. He is also a CFA Charterholder. Kofo Majekodunmi is an Executive Director at MBC Securities Limited. He has over 23 years financial services experience and has held several senior management positions at FBN Capital Limited and MBC International Bank Limited. Mr Majekodunmi holds a law degree from the London School of Economics & Political Science, and an MBA from Lagos Business School. Amar Khan has almost 40 years financial services experience. His experience covers Europe, the Middle East and Africa, where he has worked in audit, corporate finance, securities trading, general management, commercial and investment banking. Mr Khan is a fellow of the Institute of Chartered Accountants, England & Wales, UK; and he holds an MBA from Cranfield School of Management, UK. In order for the investment committee to approve an investment, a majority of members; including at least 1 independent member, must approve the investment. There is a negotiation and commitment checklist, which should have been completed at this stage. Minutes of the investment committee are recorded and communicated to the fund administrator via . No investments can be made by SML managed funds without the approval of the investment committee. Agusto & Co Page 7 of 12

8 In our opinion, SML has a competent investment committee, and a robust investment approval process. Risk management and controls Deal monitoring Investment risk management The investment team is well experienced in monitoring private equity deals from inception to exit. They meet weekly to review prospective and existing investments and responsibility for each is clearly assigned to a member of the team. In order to maximize enterprise value 1, SML has a hands on approach to its investments. At the weekly meetings, all prospective deals and ongoing investments are discussed. The agenda is fixed, covering the deal objectives, discussion on the implementation plan for adding value, and immediate action points to achieve set goals. Each deal has a principal who monitors the investment from a governance perspective; and an investment officer monitoring at a management and operational level. An advisory board maintains oversight of fund investments following deal closure. It meets quarterly, and comprises representatives of fund investors and an independent member. In our view, the role and independence of the advisory board has a positive impact on investment risk management. 1 Enterprise value (EV) is a measure of a company s value. The change in EV can be used to estimate return on investment. Agusto & Co Page 8 of 12

9 As a condition for investment, investee companies must provide regular reporting on financial, commercial, technical, due diligence and risk management issues. In addition, the fund administrator provides SML and fund unit holders with quarterly and annual financial reports. The investment valuations used in the reports are prepared by SML s investment principals. We believe that responsibility for carrying out these valuations should be independent of the investment team; however, this concern is mitigated by the fact an annual audit is carried out by a reputable accountancy firm (Ernst & Young). In our opinion, the supervision provided by the advisory board, frequency and level of detail undertaken in the monitoring and reporting processes are good. Operational risk management The Manager does not have a formal process for backing up data held on its server. This can have an adverse effect on the investment process; however, standard fund reporting is carried out by the fund administrator. The data sent to the fund administrator has a robust data protection and business continuity plan. The relationship between Augentius and SML is governed by a thorough service level agreement (SLA). The SLA sets out procedures and guidelines for capital calls, distributions, payments, investor contact updates, quarterly & annual accounts, ad hoc requests and investor transfers. Control over Syn-Cap s funds under management therefore lies with the third party fund administrator, significantly reducing operational risk in our opinion. There is a manual interface between Augentius and SML, with being the medium for communication. SML s financial controller is charged with the responsibility of liaising with the fund administrator. For each function to be performed by Augentius, there is a standard procedure with responsibilities clearly allocated. All accounting and investor records are processed on the Fund Administrator s SunGard Investran TM platform. SunGard is an established software and technology services company with over 20,000 employees and more than 25,000 clients. The Investran platform has track record, and is supported by SunGard. Augentius has also developed a proprietary tool named ART (the Augentius Reporting Tool) which interfaces with the SAP Crystal Reporting platform. The systems in place provide the flexibility to tailor reports for the Manager and for investors in SML managed funds. Agusto & Co Page 9 of 12

10 The systems within Augentius are well interfaced, with minimal manual intervention. The primary servers which are located in London, are replicated real time to 2 separate disaster recovery sites located in Guernsey and Luxembourg. Core systems are backed up every 15 minutes with the data stored on-site; and further back ups are run every night with tapes moved to an off-site storage facility. Following our review, we feel that the segregation of duties and role of the third party fund administrator mitigate operational risk. The systems used by Augentius are robust and well interfaced; procedures are properly defined and its data protection and business continuity plan are excellent. Agusto & Co Page 10 of 12

11 INVESTMENT MANAGER rating: Methodology & Definitions An Agusto & Co INVESTMENT MANAGER rating is based largely on qualitative factors. The factors considered before arriving at a rating for each institution falls under the following criteria. Investment management o The decision making process and buy-sell discipline o The portfolio management, reporting and settlement systems o The quality of research, and analysis of market information Risk Management and controls o Investment risk management o Operational risk management, corporate governance and compliance Rating Methodology To arrive at a rating, the broad categories of investment management, and risk management are scored in terms of: the calibre of personnel; the functionality of the systems; and the robustness of the process and quality of output. The category scores are weighted according to our view of their importance in capturing an investment manager s ability to optimise the risk-return profile of investor funds. The final rating is derived from the weighted score of an Investment Manager. Agusto & Co Page 11 of 12

12 Categories and sub-categories scored Investment Manager Rating [ weight: 100% ] Investment Management [ weight: 50% ] Risk Management [ weight: 50% ] Research Investment risk management Decision making Operational risk management Deal execution Rating Definitions (IM) AAA Investment management company is considered to have EXCELLENT investment and risk management capabilities INVESTMENT MANAGER RATING (IM) AA Investment management company is considered to have VERY GOOD investment and risk management capabilities INVESTMENT MANAGER RATING (IM) A Investment management company is considered to have GOOD investment and risk management capabilities INVESTMENT MANAGER RATING BBB (IM) Investment management company is considered to have ADEQUATE investment and risk management capabilities INVESTMENT MANAGER RATING (IM) B Investment management company is considered to have INADEQUATE to POOR investment and risk management capabilities INVESTMENT MANAGER RATING Agusto & Co Page 12 of 12