Yaounde

1
welcome
Yaounde January 21, 2003
2
Alignment of Interest Active Partnerships
Brigit van de Reyt Hang-Wah Man
Equity Department FMO
Yaoundé January 21, 2003
3
Agenda
FMOs Private Equity Department - in a nutshell
1
Active Partner
2
Active Partner - Strategic/Financial Investor
3
Active Partner - Closed End Investment Fund
4
4
FMOs Private Equity Department - in a nutshell
1
Active Partner
2
Active Partner - Strategic/Financial Investor
3
Active Partner - Closed End Investment Fund
4
5
Twofold mission

• development
• To have significant impact on the
  financial-economic, environmental, and social
  development of developing markets, by providing
  private companies with financial means and
  know-how.
• return
• Appropriate economic and financial returns are a
  pre-condition for effective risk partnership and
  continuity.

6
FMOs private equity department

• Since 1997
• Currently 8 professionals
• Portfolio size of EURO 210 million (commitment)
• 50 funds 50 direct investments
• No. funds 34 No. Africa funds 16
• Regional approach
• Opportunistic sector and industry approach
  SMEs

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Geographical spread equity portfolio
EUR 210 million ( portfolio)
8

Private Equity Portfolio
EUR 210 million gross ( portfolio)
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Private Equity policy

• Focus on investments with
• Clear and present economical return (risk versus
  return)
• Solid and focused partners (active partners)
• Strong political backing (friendly environment)
• Ambitious and determined entrepreneurial
  management (growth oriented)

10
FMOs Private Equity Department - in a nutshell
1
Active Partner
2
Active Partner - Strategic Investor
3
Active Partner - Closed End Investment Fund
4
11
Private Equity policy

• FMO will only consider an equity investment if a
  third party is also investing in the same project
  under and against similar conditions. The third
  party must have complimentary skills but the same
  interest as FMO.. Alignment

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Rationale

• As a development finance institutions it is our
  duty to entice third parties to invest in
  emerging markets but furthermore.. with money
  on risk world wide in complex, dynamic and off
  the beaten track environment it is deemed
  extremely unwise if not impossible - to manage
  the risk out of our offices in The Hague.

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Examples of Active Partners

• A major Swiss Financial Institution with
  expertise in life insurance to co-invest with FMO
  in a Chinese life insurer
• A large private equity house with interests in
  peripheral financial sector investment to
  co-invest with FMO in a Electronic Funds Transfer
  Software Developer in South Africa
• A Closed End Investment Fund investing under a
  operational agreement with FMO in several
  projects.

14

Caveat

• Investing with an Active Partner has brought FMO
  many successes butcertain partnerships has
  brought mishap and unintended situations.

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Investments Structures
FMOs Private Equity Department - in a nutshell
1
Active Partner
2
Active Partner - Strategic/Financial Investor
3
Active Partner - Closed End Investment Fund
4
16
Strategic Investor as an Active Partner

• A Strategic Investor will bring
• Operational expertise direct value creation
• Local presence
• Potential exit
• Deep pockets
• Network

17
Strategic Investor as an Active Partner

• A Strategic Investor
• Financial return is not a priority
• Long term investment view and objective

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Strategic Investor as an Active Partner

• Conclusion
• Pre-defined exit mechanism pre-requisite for
  investment with Strategic Investor as Active
  Partner
• Understanding of long term objectives of
  Strategic Investor is essential to avoid a
  difference in expectation in value creation.

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Financial Investor as an Active Partner

• A Financial Investor will bring
• Local presence
• Sector or Industry expertise
• Deep pockets
• Investment objective is highest ROI possible

20
Financial Investor as an Active Partner

• A Financial Investor will bring
• No operational expertise value creation
• No potential exit

21
Financial Investor as an Active Partner

• Conclusion
• Value creation strategy is pre-requisite for
  investment with Financial Investor as Active
  Partner

22
Investments Structures
FMOs Private Equity Department - in a nutshell
1
Active Partner
2
Active Partner - Strategic/Financial Investor
3
Active Partner - Closed End Investment Fund
4
23
Two positions

• A Closed End Investment Fund as Active Partner
  Investing with an Closed End Investment Fund
• The Fund Manager as Active Partner Investing in
  an Closed End Fund

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Modeling / Assumptions for Closed-End Fund

• Assuming
• 9 years life time
• Carried of 20 (for simplicity sake no hurdle)
• Fees of 2 on committed capital
• Investment period of 4 years
• Holding or management period of 5 years

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Closed-End Fund Example 1
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Closed-End Fund Example 2
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Closed-End Fund Example 3
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Observations

• Significant difference in IRR for the Fund and
  IRR for the Fund Holder
• Irrespective IRR for the Fund, Cash Flow
  Fundmanager remains constant
• or.
• Fund Holder eats 100 of the loss, but enjoys 80
  of profit
• Manager enjoys 20 of the profit and.never
  incurs a loss

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Observations (Continued)

• Closed-End nature forces exits against the
  interest of the Fund Holder
• Manager is only receiving a carried interest if
  and when an average project IRR greater than 5
  is realized
• or.
• Manager is better of not exiting if average
  project IRR is less than 5

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Conclusion

• Misalignment of interest between interests of
  Fund Holder and Manager in traditional Closed-End
  Fund structure
• A Closed-End Fund is not (always) striving for
  highest ROI possible
• or.
• Certain checks and balances should be structured
  into a transaction that will guarantee the
  alignment of interests

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Caveat

• Investing with an Active Partner has brought FMO
  many successes butcertain partnerships has
  brought mishap and unintended situations.
• Alignment in Private Equity is not negotiable and
  is a key issue to success.