Table of Contents Executive Summary... 3 Corporate Information... 3 Overview of the Company... 5 Investment Opportunities and Rationale... 5 Investment Policy... 15 Market Research... 18 Conclusion... 19 Targeted Investment Returns... 19 Shareholders... 19 Capital Raises on Listing on the SEM... 19 Investments... 19 Risks... 23 Personnel... 25 Key Service Providers... 26 SWOT Analysis... 26 Structure Diagram... 27 Financial data and assumptions underlying the financial data... 27 Annexure A Curricula Vitae of Board Members... 32 Annexure B Financial Summary of AEMPF II... 36 2
Executive Summary Avanz Growth Market limited ( AGM or the Company ) was incorporated and began operating on 24 July 2017 in Mauritius and holds a category 1 Global Business License in accordance with the Mauritian Companies Act 2001 and the Financial Services Act 2007 of Mauritius. The Company s registered office address is c/o Intercontinental Trust Ltd, Level 3, Alexander House, 35 Cybercity, Ebene 72201, Mauritius. The Company s shares are not currently listed on any exchange. It is envisaged that the Company will list its shares on the Official Market of the Stock Exchange of Mauritius Ltd ( SEM ). The initial shareholder of the Company is Intercontinental Nominees Ltd, which owns 100% of the ordinary shares of the Company (1,000 ordinary shares) and the sole initial beneficial owner is Mr. Hany Assaad. On incorporation, the Company was capitalised by its initial shareholder in an amount of US$1,000. The Company anticipates raising up to US$100 million in its first capital raise after its listing on the SEM. The first investment to be made by the Company is planned to be a US$58 million commitment in Avanz EM Partnerships Fund II. AGM seeks to provide investors access to higher returns in Emerging Markets through strategic private equity investments. Emerging Markets are expected to contribute a greater portion of global growth than Developed Markets in the near future. This growth is driven by the favourable demographics in targeted regions, such as the growing consumer base, a younger working population and global integration. This growing consumer base is driving growth in industry sectors such as consumer goods and services, financial services, healthcare, education, communication and information technology, environment services and agribusiness. Another feature of Emerging Markets is that economic growth is more prominent in companies operating in the private equity markets rather than public markets, indicated by the significant inflow of private capital to Emerging Markets. Emerging Markets offer good relative value as the entry prices for acquiring private companies are more attractive and revenue growth rates are often higher than their counterparts in Developed Markets. AGM focuses on specific industry sectors where private capital has a significant impact on growing businesses, and where traditionally the smaller end of the market has less access to debt. The experienced Board members of AGM believe diversification inherently reduces risks and exposure to a single country, region or political event. In addition, diversification across industry sectors and a wide set of fast growing companies enhances the downside protection in an Emerging Markets portfolio. The Company envisages that the capital invested could reach upwards of 150 underlying portfolio companies, and is therefore a unique investment proposition for investors to consider. Corporate Information Overview of AGM Name of Company: Registration number: Registered Address: Avanz Growth Markets Limited 149016 C1/GBL c/o Intercontinental Trust Ltd ( ITL ) Level 3, Alexander House 35, Cybercity Ebene 72201 Republic of Mauritius 3
Regulatory Bodies: Constitutive Document: Constitution Date of Incorporation: 24 July 2017 Financial Services Commission ( FSC ) and, once listed, the Stock Exchange of Mauritius Ltd ( SEM ) Company Secretary Intercontinental Trust Ltd Level 3, Alexander House 35 Cybercity, Ebene, 72201 Mauritius (Postal address same as physical address) Independent Financial Advisor BDO & Co (Registration number C07051864) 10 Frère Félix de Valois Street Port Louis Mauritius (Postal address same as physical address) SEM Authorised Representative & Sponsor and Mauritian Transaction Advisor Perigeum Capital Ltd Level 4, Alexander House 35 Cybercity, Ebene, 72201 Mauritius (Postal address same as physical address) Mauritian banker Barclays Bank Mauritius Limited 2 nd Floor, Barclays House, 68 68A Cybercity, Ebene, 72201 Mauritius (Postal address same as physical address) Legal advisor as to Mauritian law Uteem Chambers 4 th Floor, Les Jamalacs, Building Vieux Conseil Street, Port Louis Mauritius (Postal address same as physical address) Independent Auditor PricewaterhouseCoopers 18 Cybercity, Ebene, Reduit 72201 Mauritius (Postal address same as physical address) Directors of the Company Hany Assaad Haydee Celaya Beatrice Lan Kung Wa Smitha Algoo Bissonauth Mauritian Registrar and Transfer Agent Intercontinental Secretarial Services Ltd Level 3, Alexander House 35 Cybercity, Ebene, 72201 Mauritius (Postal address same as physical address) Title Executive Director Non Executive Director Non Executive Director Non Executive Director 4
Overview of the Company Avanz Growth Markets Limited is an investment holding company focused on Emerging Markets private equity opportunities. The Company has been established with the objective of acquiring quality investments with a view to achieving significant capital appreciation and returns. While the nature of private equity investments is that they are illiquid, they are income producing and they provide an opportunity to generate higher returns than investing in the public markets across Emerging Markets. AGM is established to provide access to a broad number of investment opportunities across Emerging Markets, which may include funds of funds, primary private equity funds, private equity investments in the secondary market and direct co investments in companies. Diversification by geography, industry sector and currency are key investment attributes. The Company is led by individuals with significant experience and a successful track record investing capital in Emerging Markets, such as Africa, Latin America and Emerging Asia. In addition, the Company will only consider investments in companies and in funds with proven track records and a comprehensive knowledge of the sector/s in which they operate. The Company conducts its business from Mauritius because of the business friendly environment, the spread of double tax agreements that Mauritius has with many of the jurisdictions in which the Company will invest and to allow access to a global investor base. Consequently, the Company s Board of directors comprises a number of Mauritian resident directors. The Company s reporting currency is the US Dollar, with the financial year end being 31 December of every year. It is envisaged that the listing on the SEM will provide access to a global investor base of banks, asset managers, high net worth individuals and other sources of capital who view Mauritius as an attractive investment destination. The listing on the SEM will provide investors, both institutional and private, the opportunity to benefit from the income streams and capital appreciation of the Company. Investment Opportunities and Rationale Emerging Markets 1 Investing in Emerging Markets private equity in today s environment offers investors the opportunity to benefit from the growth in business activities driven by GDP growth. Emerging Markets constitute the majority of high growth markets and are forecasted to grow faster than Developed Markets for several decades to come. Until 2020, growth rates for countries in the Emerging Markets are expected to outpace that of Developed Markets countries with expected average growth for Developed Market countries of 2 percent compared to 5 percent in Emerging Markets countries 2. 1 There are 152 emerging and frontier markets as defined by the International Monetary Fund ( IMF ), which includes all Emerging Market and Developing Economies. The IMF uses a flexible classification system that considers (i) per capita income level; (ii) export diversification so oil exporters that have high per capita GDP would not make the advanced classification because around 70% of exports are oil; and (iii) degree of integration into the global financial system. IMF member countries are either Advanced Economies or Emerging Market and Developing Economies 2 World Economic Outlook, April 2017 database. 5
Global Growth Forecasts Gross Domestic Product (GDP) Percent Change Year over Year ( Constant Prices 2015 to 2020) GDP Percentage Change Year over Year 8 7 6 5 4 3 2 1 0-1 -2 2015 2016 2017 2018 2019 2020 Year Advanced economies Emerging and developing Asia Latin America and the Caribbean Sub-Saharan Africa Source: International Monetary Fund, World Economic Outlook Database, April 2017 Despite overall slower average GDP growth post 2009, the global economy will continue to be largely driven by growth in Emerging Markets which, according to the International Monetary Fund ( IMF ), accounted for over 70 percent of global growth in 2015. 3 Potential headwinds from external factors i.e. slowing China growth and increasing U.S. interest rates are not expected to sustainably derail the positive outlook for Emerging Markets. While Emerging Markets are on a secular positive trend, volatility is expected across different markets over time. Given Emerging Markets are made up of over 50 percent of the world s population and include diverse economies from China to Kenya and Mexico, some markets may be growing at high rates when others are doing poorly. The key in such a large market is to target investment opportunities carefully and diversify accordingly. In Emerging Markets, different countries are implementing economic reforms such as Brazil, India and Indonesia, that are presenting structural improvement opportunities. Unless the world sees a jump to more protectionism, many economists believe that these markets offer increased opportunities for asset allocators who can assess and understand the risks while being able to pursue those opportunities. AGM has been established to hold investments in private equity in Emerging Markets. There are approximately 25 countries targeted by AGM, out of the 152 classified at Emerging Markets, for private equity investments because these select markets have the requisite environment to enable profitable investments, such as: the rule of law, adequate business activities including active companies and entrepreneurs, growing local demand for products and services, 3 World Economic Outlook January 2016. International Monetary Fund. 6
access to managerial talent, and an exit environment to enable the sale of investment holdings in companies. The following map shows the 25 targeted countries. Target Markets Generally, the primary regions being covered of Africa, Latin America and Emerging Asia complement each other with a variety of features that distinguish the markets and offer distinct investment opportunities. Region Favorable Demographics Global Integration Private Equity Industry Africa Emerging Asia Latin America Growing consumer base Low dependency ratios 4 Young population Large population Growing middle class consumers Low & falling dependency ratios Ageing population Growing consumer base Falling dependency ratios Young population Small/medium economies Strong commodities exporters Growing regional players Large economies Strongest exporters Substantial commodities importers Largest global players Medium economies Strong exporters Growing global & regional players Shortest history Handful of established fund managers Growing regional focus Growing # of new entrants Longest history More established fund managers Greatest # of fund managers for selection More country focused Medium term history Growing # of proven fund managers Growing regional focus Large # of new entrants Pace of Pro Business Reform Highest Moderate Slower 4 Dependency ratio is the ratio of the population aged 0 14 and 65+, as compared to the population aged 15 64. The child dependency ratio is the ratio of the population aged 0 14, as compared to the population aged 15 64. The old age dependency ratio is the ratio of the population aged 65+, as compared to the population aged 15 64. All ratios are presented as number of dependents per 100 persons of working age (15 64). Source: United Nations World Population Prospects. 7
Private Equity In the past six years, nearly $30 billion of private capital was deployed per year to companies in Emerging Markets demonstrating that adequate investment opportunities exist. The investment opportunities in 2016 were concentrated in consumer services (33%), technology (16%), financials (11%), industrials (16%), and consumer goods (9%), as shown below according to data tracked by the Emerging Markets Private Equity association ( EMPEA ). If the rest of 2017 continues to keep pace with Q1 2017, we could see new records set for total amount invested per year for Emerging Markets private equity. EM Investment Overview Source: EMPEA Industry Statistics Q1 2017 Successful investors who are able to benefit from a combination of lower entry valuations, increased earnings during the investment holding period of a company and higher exit multiples are achieving better returns. According to Cambridge Associates, Emerging Market entry valuations are more attractive for growth capital deals and Emerging Markets are in line with Developed Markets for buyouts. 8
Average EBITDA Entry Multiple by Region Source: Cambridge Associates LLC Private Investments Database (as reported by investment mangers). Note: Data is representative of approximately 200 private equity funds and over 1,000 portfolio companies from Acquisition Years 2006 to 2015. Outliers were identified and excluded. Emerging Markets offer good relative value. Entry valuations are attractive, leverage multiples are significantly lower in Emerging Markets (2.6 versus 4.9 in the U.S. for 2015, according to Cambridge Associates), revenue growth rates are higher in Emerging Markets and corresponding EBITDA growth rates are higher as well, particularly for growth equity deals. 9
Average Annual EBITDA Growth Source: Cambridge Associates LLC Private Investments Database (as reported by investment mangers). Note: Outliers were identified and excluded. In examination of the three main routes of successful exits, a recent study by the Bella Research Group 5, found that private equity backed IPOs occur five times more often in Emerging Markets than they do in Developed Markets, sponsor to sponsor (secondary) sales are more than twice as common in Developed Markets; and trade sales are over 1.5 times more common in Developed Markets, as shown below: Exit Route Shares in Developed and Global Growth Markets, 2005 2014 Source: Bella Research Group. According to the study, trade sales are not as reliant on public equity markets, they tend to be less cyclical and provide more consistent exit liquidity for private equity investors. Many of the portfolio companies due for exit remain too small and underdeveloped for an IPO or a trade sale. By selling the company to another GP in a sponsor to sponsor sale, promising companies can benefit from more time, capital, and 5 Josh Lerner, Andrew Speen, Chris Allen, and Ann Leamon, Private Equity Exits in Global Growth Markets. https://www.abraaj.com/insights/white papers. Web 2 May 2016. 10
expertise before eventually completing an exit. As with trade sales, sponsor to sponsor exits add liquidity to the exit environment. This study found little evidence of any substantive differences between Developed Markets and Emerging Markets exit environments. Both markets exit environments have reacted in concert to the financial crisis and have achieved equivalent outcomes, despite unprecedented volatility in private equity markets. The aggregate exit value in Emerging Markets has increased substantially in recent years, from $27.7 billion in 2013 to $47.1 billion in 2015, with initial public offerings (IPO) being the most common exit route for buyout deals in Emerging Markets since 2009 (see below). Given IPOs are considered the most lucrative form of exit, it is a positive trend we are seeing in the Emerging Markets exit environment. Number and Aggregate Value of Private Equity Backed Exits in Emerging Markets, by type, first quarter 2010 to second quarter 2016 Why Emerging Markets? Emerging Markets have received renewed interest as investors focus on the cyclical positive outlook and the strong long term fundamentals of Emerging Markets as investment return expectations for Developed Markets have been largely reduced. A major reason for the 2016 downward revision of return expectations in Developed Markets has been the growing belief that the aggressive loose monetary policy employed in recent years may not continue indefinitely. At the same time, productivity growth in Developed Markets has slowed down with expansion of capital investments staying behind recent recoveries. These policies are expected to have an adverse effect on growth and investment in Developed Market economies. The low growth in the population of most Developed Markets and the ageing of the existing population lies in stark contrast with the demographics of Emerging Markets, where the majority of young people who are increasingly educated and demanding consumers will exist over the foreseeable future. Globally, the low yield environment will remain a challenge for investors to meet hurdle yields. At the same time, risks have increased in Developed Markets with recent fundamental political changes, refugee crisis and continued terrorism threats. By contrast, Emerging Market countries have experienced a turnaround in sentiment with upward revised growth outlooks. With China expected to continue to successfully manage the transformation of its 11
economy, and commodity prices (mostly energy) having stabilized, Emerging Markets have received stronger than expected capital inflows having reached a two year record high in May 2017. 6 With respect to risks, many Emerging Market countries continue on their path of improving governance, strengthening local institutions and refining macro policy, a mix that supports stability and investor confidence. Despite all the concerns over the much vaunted China slowdown, the Chinese economy remains the single largest contributor to the growth of world gross domestic product. Demographic Dividend and Middle Class Consumers By 2050, the world population is expected to reach 9.7 billion people. Despite marginal increases in population in North America, population growth in Developed Markets will slow, with European and Japanese populations remaining either constant or decreasing by 2050. Emerging Market countries are expected to contribute most of the global population growth primarily from South and Southeast Asia and Africa. The world s youngest population, with a median age of 19 years, lives in Africa and is expected to more than double over the next 35 years. In Asia, India has a large and young population with a median age of 26 years, while China has a median age of 36 years hinting at a declining work force in the future. The increasing supply of the labor force producing goods and services presents an opportunity to drive economic expansion and increase GDP. It is the demographic dividend, growing labor force and urbanization that drive the growing number of middle class consumers in Emerging Markets, which is expected to reach 1.98 billion by 2020 7. Rising Gross National Income (GNI) per capita for the middle income countries is stimulating consumer spending power as GNI has risen to US$4,865 per capita in 2015 up from US$1,823 per capita just 10 years ago. The McKinsey Global Institute estimates the share of world consumption in Emerging Markets will rise to 47 percent by 2025 from 32 percent today with annual consumption increasing to $30 trillion from US$12 trillion in 2012. 7 When compared to the 77 million baby boomers in the U.S. whose impact on global output and consumption in the developed world shaped equity markets and yields in the 1990s and 2000s, the impact of the evolving Emerging Markets consumer on the global economy is likely to be even more profound. This demographic dividend combined with better healthcare, education as well as higher savings is expected to form the basis for a larger affluent population providing a long term structural boost to economies in Emerging Markets. The population in Emerging Markets, like that in the developed world, are moving to cities where there are greater opportunities. By 2050, more than 70 percent of China, India, Nigeria, and other African countries populations will be urban from under 50 percent today 8. Africa, Latin America and Asia s urbanization rates are significantly higher than the world average and those of Developed Markets. This rapid movement to cities will put strain on infrastructure and services that will require massive investment, but it also represents an opportunity to invest across a wide spectrum of goods and services needed and demanded by these growing urban communities. 6 Capital Economics. Emerging Markets Capital Flows Monitor (Jun.), 17 July 2017. 7 Winning the 30 trillion decathlon Going for gold in emerging markets, August 2012, McKinsey Global Institute. 8 World Population Prospects 2015 Revision. 12
The Case for Mid Market investments Mid sized companies are defined in the context of the economies in which they operate. In Brazil, a midsized company may be one with revenue of $100 $500 million, whereas in Kenya a mid sized company may be one with revenue of $50 $250 million. The main reason to invest in the mid market is that private equity investments in this segment have historically outperformed the larger market segment. The Company believes this is because the vast majority of companies suitable for private equity are to be found in the mid market, yet the majority of the capital that has been raised by private equity fund managers has been in funds that are large in size above $500 million and target the upper end of the corporates. At the top, there are fewer suitable companies and the competition is fierce amongst global and regional players. Investing in the mid market across Emerging Market economies provides access to broad deal flow, a wide selection of managers, fast growing companies, more exit options by having the large global players to sell to among other things and ultimately robust returns. Continued Institutional Reforms and better Macro Economic Management Emerging Markets countries have made significant strides in pro business reform to support entrepreneurship and attract investments. Emerging Market countries have improved key indicators such as inflation and currency stability and typically have moderate levels of indebtedness compared to Developed Countries. Also, with respect to macroeconomic management, Emerging Markets countries have improved key indicators such as inflation and currency stability and typically have moderate levels of indebtedness compared to those in Developed Markets countries. Growth For the first time since the industrial revolution, the collective GDP of Emerging Markets, on a purchasing power parity basis, overtook that of Developed Markets in 2008, and as of 2015, Emerging Markets contributed 58 percent of global GDP (PPP). By 2030, half of the top 10 economies in the world are expected to be from today s Emerging Markets. Despite overall slower average world growth post 2009, the global economy has been largely driven by growth in emerging and developing countries, and according to the IMF, these accounted for over 70 percent of global growth in 2015. 9 In addition to long term secular trends, indicators such as valuations, currency and improving Emerging Markets growth outlook suggest that the current cyclical stage provides an opportune moment to consider or increase investment allocations to Emerging Markets. Valuations Emerging Market valuations are more attractive since they have not increased at the same rate as Developed or US Markets. In Emerging Markets private equity, the focus of successful managers on value creation, growth of companies and increasingly on mergers and acquisitions, is resulting in earnings growth as well as multiple expansion at time of exit. Successful managers who are able to benefit from a combination of lower entry valuations, increased earnings during the investment holding period of a company and higher exit multiples are achieving better returns. 9 World Economic Outlook January 2016. International Monetary Fund. 13
Investing in Private Markets rather than Public Markets The rationale for investing in private markets is that they have demonstrated outperformance over the public markets over a medium to long term horizon and have reasonably compensated investors for the lower liquidity inherent in private markets. This may be attributed to a number of factors, including the access via private markets to a broader range of industries where unlisted companies operate, and access to a large pool of fast growing companies, which are mostly unlisted. There is an increasing number of private mid sized companies seeking expansion capital compared to only a few large companies in Emerging Markets that tend to be listed on the local stock exchanges. Overall, private equity outperformance relative to the public markets was 1,224 basis points (using PME methodology and the MSCI EM Index) 10 as of September 30, 2015, which is shown below. Private Equity has Outperformed Public Markets 1400 1200 1000 1,224 1,262 996 800 600 400 200 0 Average EM Mid Cap Large Cap Source: Preqin and Avanz Capital (Private Equity data), S&P Capital IQ (MSCI Indices). Data as of 30 September 2015, the latest available at the time of the Avanz Capital project. The private equity industry is also relatively nascent in most Emerging Markets countries and is poised for growth given the lack of long term capital in these markets, the positive impact it has on emerging economies, and the growing support provided by governments and local institutions alike. The diversification achieved through a private markets strategy is also a positive aspect as it contributes to downside protection. The Company believes that one of the reasons for outperformance by the private markets is that they provide investors who are looking to benefit from the transformation occurring in these economies with access to the broadest number of investment opportunities both in terms of industries and number of companies. Having a broader selection of investment opportunities allows the Company to build a more robust portfolio of investments that meet the target returns. 10 PME Methodology: Cash equivalents of calls, distributions and terminal NAVs are used to buy/sell MSCI EM index (the index ) (and the S&P Index for the US PME) on each transaction date; terminal NAVs are treated as distributions. The index is a free floatadjusted market capitalization weighted index designed to measure the equity market performance of emerging and frontier markets. The index does not reflect the actual investment strategy of any fund. A comparison to the index is not intended to imply that any fund s portfolio is benchmarked to the index either in composition or level of risk. The index is unmanaged and has no expenses. 14
The public markets in Emerging Markets are not very deep or diversified with relatively few companies listed and actively trading in a limited number of industries. There are 2,827 listed companies in China, while India, which has the largest number of listed companies in the world, has 5,835 companies with only about 20 percent actively traded. Listed companies are a very small proportion of the corporate world in Emerging Markets and most companies seeking expansion capital to support their growth are unlisted and rely on the private equity market as a main source of growth capital also given the lack of long term debt from either the banking system or the capital markets. Investment Policy Objectives, Geographic and Sectoral Focus The Company s primary objective is to become a geographically diverse investment holding entity focused on private equity investments with excellent growth prospects in Emerging Markets. The Company will only consider investments in industry sectors and in particular Emerging Market countries that the Board approves. In time, the Board may develop the objectives and focus in line with evolving economic and market trends and as opportunities in the private equity industry present themselves. The Company does not subscribe to a general Emerging Markets mandate but rather to making strategic investments in selected industries and robust economies. The Company is of the view that the best investment opportunities for private equity in Emerging Markets are in sectors that benefit from the tailwinds of consumption patterns such as consumer goods and services, financial services, healthcare, education, communication and information technology, environment services and agribusiness. The Company provides an opportunity to diversify investments efficiently across multiple regions and a variety of sectors. Investment Strategy The Company s investment strategy is focused on private equity investments in Africa, Latin America and Emerging Asia, in middle market growth capital and buyout opportunities. AGM seeks to invest through primary and secondary private equity fund Investments, funds of funds as well as direct co investments in companies. The Company s investment strategy will develop over the medium to long term, the key areas that the Company is currently focused on are high growth consumer facing industries rather than infrastructure or property investments. The evidence strongly suggests that a mid market strategy such as the one followed by the Company should result in substantially better performance than a strategy focused on large companies. In addition, a well diversified portfolio across regions should provide superior risk adjusted returns. The Company aims to take advantage of the current market dislocation to enter the Emerging Markets at a time when valuations and currencies are attractively priced. Deploying capital into fast growing midmarket companies, particularly in the frontier markets like Africa, at a time when many of the global players are beginning to focus there and the local institutional investors are increasing their allocations to the asset class means that the exit environment will be greatly improved at the time of exit. At present the Company s investment focus does not include investments in Real Estate, Infrastructure, Mining/Extractive Industries or Commodities. 15
The Company will generally invest with managers and funds who subscribe to the United Nations Principles of Responsible Investment Guidelines or who have an appropriate ESG policy. The Company does not invest in any production or trade in any products or activities deemed illegal, subject to international bans, harmful to the environment or harmful to or exploitative of people. Investment Diversification AGM believes industry diversification achieved by investing in multiple regions is an important contributor to lowering the risk of an Emerging Markets investment strategy, while still providing superior returns. Diversification across Emerging Markets is an important component to reducing risks associated with the sometimes volatile and unpredictable developments in these markets, including macro economic and currency risks. AGM investments are selected to provide regional diversification and AGM targets its underlying exposure limits in any one country to 20% and 40% in any one region so as to avoid overconcentration and reduce single country risk. While there are no set targets for industry exposure, given the selection of fund and company investments, AGM s strategy is to achieve diversification by sector across the different geographies it targets. The range of sectoral opportunities differ by region given the natural endowments of each region and the level of development of different industries. The sector weights will vary by market as certain geographies are naturally stronger in some sectors than others. Presently the Company considers consumer products and services industries highly attractive in Emerging Markets. Sectors such as healthcare, education and financial services are also attractive. However, investing exclusively in Emerging Asia, for example, may result in an over concentration to certain industries like manufacturing such that, in the event of a downturn in the Developed Markets, could negatively impact returns. Different countries and regions are affected differently by the global economy, some are oil, gas or commodity exporting countries while others are importers; some countries may have currency issues one year while others may have currency issues in another year. Hence, diversifying by geography is essential not only to reduce macro risks but also to mitigate currency risks. In contrast to a typical primary private equity portfolios of between 8 15 underlying portfolio companies, the Company is focused on diversification with a portfolio of ~ 150 underlying portfolio companies. The Company will generally look to invest in assets which are diversified by country, region and continent to provide a better risk adjusted opportunity set for a number of reasons. Investment Criteria The investment criteria meets the investment strategy detailed above as part of the investment policy including: investments in Emerging Markets (i.e. Africa, Emerging Asia and Latin America) excluding any countries or investments deemed high risk by the Board high growth industries with a consumer focus private equity funds, funds of funds, various private equity investments including secondary and direct co investments return generating investments with risk adjusted returns matching a variety of risk / return profiles for example, there is an opportunity to earn a higher return on a niche strategy in China (such as a single strategy in healthcare) versus a large generalist buyout strategy where growth and returns are limited and AGM has the requisite knowledge and unique access to this kind of opportunity; investments in secondary acquisitions of funds, as a different 16
example, can provide a relatively lower risk investment opportunity (as the portfolios are known and tangible) and can provide high IRRs in a short period of time US dollar and Euro denominated investments only only investing with managers who employ strict policies and procedures with respect to diligence undertaken on the people with whom they partner. Investment Sourcing AGM has well established deal sourcing capabilities through its in depth knowledge of the private equity market across Emerging Markets, the network it maintains of fund managers, the knowledge of and relationships with market participants such as investors, asset managers, placement agents, secondaries brokers, investment banks, development finance institutions, pension funds, investment consultants, advisory and consulting firms, audit and accounting firms, and legal firms in the different markets it invests in. The Company will consider, but is not limited to, investment opportunities in industries such as consumer goods and services, telecom, e commerce, healthcare, education, agribusiness, environmental services, and financial services. Investment Process The Company s Board will establish the investment policy parameters and objectives and will review and approve each sale or purchase of investment assets. The Board will also be responsible for evaluating whether investment opportunities adhere to the Company s investment policy and objectives and includes growth and buyout strategies. The Board of directors of the Company will be responsible for negotiating the terms of the investments. The ongoing management of the investee companies portfolios will be the responsibility of the investee companies management team or their management company. Gearing Policy The Company s current policy is to finance its investments by way of equity only. No medium to long term debt is anticipated, but only a limited amount of short term debt for working capital purposes, if needed. Exchange Rate Policy The nature of the underlying private equity investments and long term nature of cash flows do not allow for effective currency hedging strategies. Currency hedging for more than a year is very limited in most markets and the cost of hedging tends to be as high as 3% to 4% for longer than 6 months forwards. Accordingly, the Company seeks to manage currency risk by investing in either US dollar or in Euro denominated investments to better match the US dollar distributions to its shareholders. Distribution Policy Due to the nature of its investments, the Company expects to receive income from its investments in the form of return of capital and dividends from proceeds following successful exits. The board of the Company intends to distribute up to a maximum of 90% of the above amounts after making provision for all expenses (operational and finance costs), capital expenditure and other foreseeable cash requirements. Based on the prevailing circumstances at the time of distribution, the board of the Company will have the discretion to decide on the specific quantum of distributions and will also ensure that any such distributions are in line with all applicable laws. 17
Market Research Industry trends Sluggish global growth and volatile markets are creating greater pressure for investors to look for alternative sources of returns to optimize capital growth. The private equity industry is now well developed in many markets and is sought after by institutional and high net worth investors to capture real growth and returns in global markets and particularly Emerging Markets. Investors seeking outsized risk adjusted returns would be remiss not to consider allocating capital to a geographically diversified strategy for Emerging Markets private equity. The economies of the developing countries and their Emerging Markets are poised to provide increasingly growing numbers of lucrative investment opportunities. Private equity in Emerging Markets has demonstrated outperformance over investing in public markets compensating investors for any illiquidity inherent in the asset class. A strategy focused on mid sized companies diversified across regions and industry sectors has also shown to provide higher risk adjusted returns. Anticipated demand for the Company Shares In light of the increasing investor appetite for quality international private equity opportunities which are proven and highly diversified, the Company believes that there will be significant demand from investors wanting to subscribe for the Avanz Growth Markets Limited shares. The Company is therefore committed to meeting the demands of this market, and taking advantage of the business relationships, skills, market knowledge and experience of its management team, to fulfil its business objectives. There is little doubt that many investors, especially African investors are seeking to increase their exposure to hard currency investments. Competitive Advantage AGM is unique in the market, due to its investment focus, global diversification and the offering being significantly different from private equity companies and funds listed on SEM. Whilst other private equity managers may be focusing on acquisitions in similar jurisdictions to those targeted by the Company, Management believes the value proposition differentiates itself through its strategic sectoral, growth and value added focus. Marketing Strategy The Company will market itself to targeted qualified investors through its unique investment offering as well as seeking competitive returns on these investments in USD. In order to take advantage of these opportunities, it is necessary for the Company to raise capital timeously to invest in opportunities as they present themselves. As the Company will raise capital through private placements or offering shares to single addresses who will subscribe for shares in the foreign currency equivalent of ZAR 1 million or more as discussed in this, the Company is expected to have sufficient capital to execute on its immediate pipeline. The Company aims to build a solid and reputable track record, based on quality and performance of its initial investments and the directors believe that if this track record is established, any future capital raisings will be met with anticipation. 18
Conclusion The Directors are of the view that there is attractive risk adjusted returns in private equity opportunities in the targeted sectors and jurisdictions, in the form of existing managed funds, secondary and direct coinvestments. Targeted Investment Returns The Company will target investments that can generate in the range of 15% to 20% annualized returns. Shareholders The initial shareholder of the Company is Intercontinental Nominees Ltd, which owns 100% of the ordinary shares of the Company and the sole initial beneficial owner is Mr. Hany Assaad. On incorporation, the Company was capitalised by its initial shareholder in an amount of US$1,000. Following incorporation, the Company intends to raise equity capital with proceeds derived from private placements on the SEM. It is anticipated that the equity funding will be raised from investors in Southern Africa (South Africa, Botswana), East Africa (Kenya, Tanzania) and potentially other international investors. As highlighted above, the Company will seek a listing on the SEM, a well regulated and efficient stock market. The listing will provide the Company with the ability to issue shares to off shore, Southern African and East African investors including to vendors of potential acquisitions, having regard to the strength of managements relationships and the known interest of investors in the targeted geographical jurisdictions. Capital Raises on Listing on the SEM The Company anticipates raising up to $100 million in one or various tranches after its listing on the SEM. It anticipates committing about US$58 million to its first investment. The Company anticipates that the capital would be drawn down at time of commitment by an investor. AGM expects that a significant portion of the capital would be disbursed to underlying investments in the first two years. The Company will consider different options to invest any cash it holds in anticipation of future capital calls made by the investments AGM will hold. Among the options being considered are money market deposits and other fixed income strategies. Investments Avanz Growth Markets Limited s stated investment strategy is to invest opportunistically directly and/or indirectly in Emerging Markets privately held companies. Given that the Company is newly incorporated, the Company does not currently hold any assets. In anticipation of the approval to list on the SEM, the Company has identified its first investment vehicle in line with Avanz Growth Markets Limited s investment policy being Avanz EM Partnerships Fund II (AEMPF II). Below is a summary of this opportunity: AEMPF II Avanz Capital Management LP (ACM) is an emerging and frontier markets private equity investment manager founded by pioneer, seasoned professionals providing tailored solutions to investors. At present 19
AEMPF II consists of Emerging Markets private equity funds (primaries and secondaries), with a committed portfolio of five fund investments and two direct co investments. AEMPF II fund size Vintage year 2015 Investment holdings (to date) AEMPF II value Q1 2017 Broad Emerging Markets focus $250 million 5 PE funds, 2 co investments 120% mark up, gross 6% net IRR Africa, Emerging Asia and Latin America AEMPF II is a vintage 2015 private equity fund and is two years into its investment period, thus the remaining life of nine years is shorter than similar products, and distributions are projected to be paid relatively early for new investors. The chart below outlines how AEMPF II deploys its capital and aims to produce returns in order to achieve its targeted 20% net IRR. As of March 31, 2017, the fund has a net IRR of approximately 6% and is out of the j curve. As shown below, the early years are largely comprised of negative cash flows to buy new invest ments and as the fair value of those investments increase, the average annual internal rate of return (IRR) will improve. 0.8 AEMPF II Capital Flows Per Year % of Commitment Called and Returned 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0 (0.1) (0.2) (0.3) (0.4) 1 2 3 4 5 6 7 8 9 10 11 Inflows % Outflows % For further information relating to the financial performance of AEMPF II since its inception, reference can be made to Annexure B of this. 20
Strategy AEMPF II s Strategic Focus is as follows: Benefits Middle market focus Target funds $200 $800 million Companies with revenues of $50 $500 million Top down approach targeting sectors driving growth Primary funds, secondaries and direct co investments Avanz Capital focuses on private equity middle market growth capital and buyout opportunities PE funds below $800m have outperformed the large cap PE compared with public markets Broadest set with >775k companies in Emerging Markets and optimal size for broadest number of exit routes Consumer goods & services, financial services, communication & information technology, healthcare, environmental services, education and agribusiness Improves returns to investors by including short duration secondaries and co investments The greatest strength of the manager of AEMPF II, Avanz Capital Management LP and its affiliates is its team of global investment professionals with more than 125 years of collective experience in 100 Emerging Markets countries. The investment team is complemented by experts and advisors, and supported by dedicated teams in finance and operations, legal and compliance, and investor relations. 21
Summary Team Information Investment Team Name Title Experience Background (years) Haydee Celaya CEO and CIO 35 Head of International Finance Corporation ( IFC ) Global Funds Group and Chair of its investment committee Head of IFC Africa 19 years experience at IFC Hany Assaad Chief Portfolio and Risk Officer Dandan Liu Managing Director Judy MacKay Managing Director Jamie Foran Director 13 SVB Capital 32 CIO of IFC s Global Funds Group Head of IFC s Financial Markets Sustainability Group 24 years experience at IFC 18 CIO of ING Pomona Secondaries, Asia VP and Responsible Officer Pantheon, Asia 20 CFO EMP Global Kenneth Chin Sr. Associate 10 IFC s Global PE Funds Group Experts and Advisors Walid Chammah Advisor >30 Former Chairman of Morgan Stanley International Former Co President of Morgan Stanley George Currie Expert >30 Former Head of Black & Veatch Consulting Middle East & Asia Iván Díaz Molina Advisor 30 Head of Innovation and Professor of Innovation at Grupo GTD, Chile Former Vice President of Pennsylvania Power and Light (PPL) Thomas J. Donohue Sr. Advisor >40 President and CEO of US Chamber of Commerce, Washington D.C. Mario Gobbo Expert >30 Former Head of healthcare investments at IFC Former Managing Director at Natixis Bleichroeder Ray Karaoglan Expert >30 Former Chief Banking Specialist of Central Capital Markets Department at IFC Ginger Lew Advisor Former Senior Advisor to White House Economic Council Director Larry Summers Former COO of SBA, General Counsel at US Dept. of Commerce and Chief Counsel at Dept. of Energy Lord Mark Malloch Brown Advisor >30 Former no. 2 in the UN, previously served in the British Cabinet and Foreign Office Former Vice President at the World Bank Jean Paul Pinard Expert 40 Former IFC Director of Agribusiness Department Martyn Riddle Expert 40 Former Senior Consultant at Hatch Consulting Former IFC Director for Environmental and Social Development Peter Tropper Expert 40 Former CIO of IFC s Private Equity Group Mark Woodruff Expert >30 Former President of AES Corporation for Asia and Middle East and a variety of other roles over 20 yrs. 22
Risks The risks of the Company are all the risks that would typically be associated with investing in private assets across Emerging Markets. The Company understands these inherent risks and will take reasonable and appropriate steps, where possible, to mitigate these risks such as those described below: Political and Economic Risks Each economy in Emerging Markets has different risks relative to each other and, in many cases, the economies are uncorrelated. By diversifying investments across multiple geographic regions, the overall portfolio risk on a political and macro economic level is reduced. There are several ways for the Company and its underlying investment managers to reduce exposure to investors from political and economic risks in Emerging Markets including: Currency Risks understanding political and economic risks in the target countries; diversifying across different countries, regions, industries, companies and economic systems and focusing on appropriate portfolio construction; targeting best in class investors, private equity managers and companies; placing a strong focus on integrity, ethics and good business practices; avoiding investing with or investments associated with politically exposed people; and taking into consideration political and economic risks in the way investments are structured (e.g. type of investment instruments, term, exit routes, and other financial instruments). The Company invests in only USD and Euro denominated investments. However, underlying currency risks exist at several levels and currency fluctuations could impact the total return to shareholders. The Company invests with managers in private equity who take this currency conversion risk in consideration and look for ways to manage this risk, particularly since the investments are medium to long term in nature. The high growth sectors targeted by the managers have the potential to generate returns that not only exceed the average growth of companies in the target country but also would give a high return to foreign currency based investors. Convertibility restrictions and exchange control restrictions are a key consideration when the Company considers appropriate jurisdictions for investment. Reputational Risks Reputational risks related to doing business with high risk individuals and entities are mitigated through strict policies and procedures in undertaking integrity due diligence. Due diligence will be done at the company level and the Company only invests with managers who employ the same/similar strict policies and procedures. The Company monitors on an ongoing basis any issues in the investments that may have an adverse effect on the reputation of the Company and its stakeholders. Expropriation Risks Historically in developing and emerging countries with immature or volatile political systems, one of the biggest risks faced by investors was that of expropriation. The chief concern was the possibility that host governments would seize foreign owned assets. Today, this risk is significantly reduced in the more developed of the Emerging Markets, which include all the target countries of AGM. In a more interconnected world of business and trade, governments have learnt that expropriation is not the most appropriate intervention. The risks are thus more regulatory and not that of outright expropriation. Regulatory risk is carefully assessed for all investments made by AGM and its investment managers. 23