Member Brief

Sarona Asset Management AGM Report 11 May 2015 Washington D.C.

Background Sarona Asset Management (Sarona) is one of the 300 funds reviewed during an extensive survey of impact investment funds completed by the Centre for Social Innovation & Impact Investing in 2014 and was one of the funds shortlisted for investment. Two Pacific Impact Investor Network (PIIN) members—Phil Swift and Amin Lalji—made a significant investment into the Sarona Frontier Markets Fund 2 (SFMF2) and were invited to attend the Sarona AGM in May 2015.

Fund overview Fund Management Company: Sarona Asset Management Track Record: New fund. Manager has strong track record. Asset Class: Fund of Funds Target IRR: 20% Target Geography: Global, emerging markets Impact Theme: Access to finance—SMEs, Green technology/cleantech, Bottom of Pyramid Fees: 1% MF, 10% carried interest Inception Year: 2012 Ratings: IA50 Domicile (HQ office): Cayman Islands (Canada) Minimum investment into fund (USD): $1 mill USD Committed capital: $126,000,000 USD Target AUM: $200,000,000 USD Status: Open, Committed Capital (CC) Stage: Growth

Investment Thesis Focused primarily on sectors that serve domestic demand (agribusiness, consumer goods, education, financial services, healthcare, light manufacturing, logistics and transportation, professional services, technology) in emerging markets where the middle-income populations that are consumers of these services is fastest growing.

Their strategy is to find top local fund managers in target countries that are typically local but with foreign education and experience, and have a strong understanding of fund structuring Member Brief—Sarona Asset Management AGM Report, May 2015 and mechanisms. Currently they are adding a mentorship program for the purpose of matching successful North American fund managers with frontier market fund managers.

At this time, they are looking for more mature frontier markets and are just starting to invest in and . As of yet they are not looking at Myanmar as too many unknowns remain.

Broad diversifications—through investment in 12 to 18 primary funds they have exposure to over 200 underlying SMEs throughout 90 countries.

Notable LPs Government of Canada (through MEDA), $15 mill CAD OPIC (USA Government), $42 mill USD

A development finance institution has been an LP in all Sarona funds to date.

Arrangement with government LPs provides a first loss reserve to other LPs and higher security on profits for other LPs, making the fund very attractive to investors.

Overview of the AGM The AGM was organized into three parts. The first provided more background on Sarona and reported on financial performance and funds allocated to date. The second focused on the broader context for impact investment with presentations and a panel session with two speakers, while and the third part involved presentations by fund managers that have received investment from Sarona.

Sarona summary With the closing of SMF2, Sarona now has US$200m under management and is targeting $1bn through future funds. The three pillars of their investment strategy are: 1. target frontier markets 2. focus on strong financial returns 3. ensure the funds are committed to deliver on ethical, social and environmental values achieved through negative screens on funds and direct investments. Sarona builds on the success of MEDA, which has been in existence since 1953. Theyprovide advisory services and manage a fund of around $20 mill USD. SFMF 1 expanded the fund by $30 m through a discretionary call to friends and family and SFMF2 established a closed fund focused on institutions with an original target of $150m in committed capital. The involvement of the Government of Canada and OPIC provides other LPs with an attractive opportunity to invest. Sarona operates primarily on a fund-of-funds basis and has identified seven primary portfolio investments in , Mexico, the Middle East and North Africa (MENA), South East

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Member Brief—Sarona Asset Management AGM Report, May 2015

Asia, Brazil and Turkey. Two secondary funds have been identified in MENA and Colombia. Direct investments are also possible, but the team has focused on the fund of funds approach

The team focuses on frontier and emerging markets and specifically on businesses that reflect the growth of middle classes in developing countries. The global middle class is expected to grow from 0.8 bn people in 2009 to 3.9 bn by 2030. The funds are based in countries with a GDP of less than $12,000, with good rule of law and relatively low costs associated with starting a business. The team targets funds that make direct investments where there is a need for capital and for value added services. A number of the General Partners, who spoke later in the day provided examples of how direct intervention in companies alongside the capital investment improved performance.

In terms of asset classes, Sarona looks for good depth of experience in those markets and regions where GDP is growing by 4 to 7%. In terms of the companies identified for investment, they are looking for small and medium sized corporations with growth rates that are higher than GDP. They tend to avoid larger companies because it is harder to add real value and to structure an exit.

In addition, as part of the investment strategy, they look to apply negative screens for environmental, social and governance (ESG) mechanisms.

The first loss reserve feature of the funds was negotiated with development finance agencies. OPIC provided $50 mill USD at low cost with no recourse to the LPs and the Canadian Federal government has provided a first loss reserve of $150 mill CAD of which $53 m has been called to date.

The team has allocated around 50% of the total fund committed and 32% has been invested in seven primary funds and two secondary funds. Through those nine funds they have invested in 39 companies. Their regional exposure is still biased towards South America, which was the original focus of their team, but is being balanced over time. Looking at both Sarona funds in combination, the highest investment into any single fund is into Ambit Pragma (13% of Sarona’s total committed funds). Ambit Pragma is a $4.9 bn USD fund focused on growth stage, small to medium sized companies in India.

Two specific companies that have received investment were described. Masterskill received investment through the Creador fund, which focuses on and Indonesia, and provides healthcare training in Malaysia. Their goal is to improve the quality of healthcare training, rather than making direct healthcare investments on the basis that it is key to improve the quality of healthcare professionals in emerging markets. Creador co-invested with SMART to ensure they had the right mix of expertise. The value-add approach was to improve the operational efficiency of Masterskill and increase student enrollment, either by opening up new facilities or through acquisitions. They are also identifying opportunities to sell non-core assets.

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Member Brief—Sarona Asset Management AGM Report, May 2015

The second company is Kelvin Cold Logistics, which is based in India and supported by a fund called Enda Pragma. Kelvin is one of the top five cold chain logistics companies in India, although they only have 200 trucks. Improving the cold chain for delivery is essential to growth of other enterprises in the market so the investment is strategic. Kelvin Cold Logistics is still a small company relative to those in developed country markets and they do business in a market that is highly fragmented. There are fifty thousand cold chain trucks in India and 90% are operated by small family-owned businesses with one or two trucks. The company has developed a sophisticated logistics platform with GPS trackers that allow them to manage the fleet more effectively and monitor the average temperature of the vehicles. The fund’s focus is on supporting other small and mid cap companies in India to help them improve their services.

A third direct investment into Mekong Capital was discussed at length in the Q&A session. This investment, which focuses on expanding supermarket facilities, was not fully supported by the investment committee. While the company has a long track record, the team was led by an ex- patriot CEO who did not present well. Conversely, the middle managers interviewed by the investment committee presented very well.

While Sarona is a fund of funds they do seek to maintain an active role in the management of the funds and in the direct investments by drawing on the breadth of experience they have built through the wide portfolio of activity in the market. Sarona reviews 100 to 150 funds a year with the goal of investing in five, so they have built up a lot of expertise in identifying strong investments. An investment team that includes at least one independent reviewer who is either an LP or is able to provide independent review of the investment makes investment decisions.

In terms of their commitments to ESG review, they recognize that they need to work with the funds to improve their capacity to deliver on these measures. In addition, if they are too strict in requiring full reporting, they take management time away from working with the investees, which raises the costs. For that reason, ESG is typically managed on the basis of voluntary disclosure.

While the best funds are still not oversubscribed, they do have the ability to be selective in choosing partners. The Kandeo fund GP commented that they very much valued the strategic benefit of bringing on an LP with Sarona’s track record.

Impact Investment Context Invited panelists: Bowman Cutter, Former Managing Director of Warburg Pincus (1996 – 2009) and Chairman of MicroVest and CARE. Patricia Dineen, Senior Advisor at EMPEA and Chair Impact Investing Council, formerly Managing Director at Siguler Guff and Company.

The discussion focused on two overarching questions:

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Member Brief—Sarona Asset Management AGM Report, May 2015

1. What can private investors do to ensure equitable growth in emerging economies? 2. What can national government sdo to ensure growth is supported by many players?

Highlights Bowman Cutter: - the approach taken to private equity in most emerging markets is primarily equity investment, not the ”buyout business” that is normally associated with the sector. - Attitude of most investors it to obey the spirit of the law in the emerging economy and that is as much as you can expect to do. - Warburg Pincus did the bulk of its investment in India and China, investing ”in people who are not the kids of generals and political leaders.” - It is key to work with development banks as the underwriters of impact investment opportunities: they play a critical role in building economies by improving access to capital. - It is a very big step to go from negative screens to positive filters on investment and they are nowhere near ready yet. - The institutional investors are large bureaucracies with a mix of public and private boards and they are highly risk averse. They will tend to see impact investing as highly risky. They will only change when investors change. - Important to lobby for policy to reduce the challenges of starting businesses. It can take months to set up a new business in Tunisia, for instance, and you have to visit up to 47 offices to do so. - The World Bank ”Ease of Doing Business” index has played an important role in encouraging countries to simplify the task of setting up new businesses. - Does private equity and investment contribute to inequality? Economic development tends to occur in bursts, which often contributes to short-term inequality. You can only address that over time by increasing access to capital for new enterprises. You can only succeed in the long run in a way that ties up capital in longer-term development. - The highest goal for impact investing is to avoid becoming like the mainstream

Highlights Patricia Dineen - built out a portfolio of investments but it is still difficult to know why some countries succeed and some don’t - mobilization of faith based organizations has been important; the Mennonites were involved in Sarona. - recognize that the economy at the bottom of the pyramid is around $5 trillion - Need to find a balance between profit and social justice issues. Investments into telecoms and satellite communications offer increased access. - ESG screens becoming much more important for development institutions and even the large private equity firms recognize that they need to get beyond negative screens to establish positive criteria for investment. Increasing professionalization of the impact investment industry - Global Innovation through science and technology - The G8 Social Impact Task Force headed by Sir Ronald Cohen focused on how governments could make it easier to run a business. One key recommendation was for

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Member Brief—Sarona Asset Management AGM Report, May 2015

government to increase investment in infrastructure to create public goods including roads, bridges and power plants. It is very difficult for private investors to have an impact here and still generate a return. Similarly for social infrastructures like education

Fund Presentations The GP’s of three funds—Mediterrania Partners, Afrinvest and Kandeo—were invited to present to the audience and provided a more detailed overview of the direct investments they are making.

Mediterrania Capital II:

Fund Size: EUR115m

Description: a fund investing in growth-stage small to mid-market companies in the Maghreb region within the logistics, healthcare, consumer goods, light manufacturing and financial services sectors.

Regional focus: MENA

Approach: Filter the portfolio on the basis of contributing to at least one environmental, social, governance or energy outcome. Focus on the mid market serving the growing middle classes. Apply ESG negative screens with a private equity approach. They have built a strong local presence alongside their investments with 19 professionals across the region. They support companies looking to enter Africa and help them to identify acquisition targets based on their experience and local investments. They have delivered double-digit growth in earnings across their portfolio over five years. In terms of their investment, they seek to take significant equity positions in the companies up to 49%. They screen over 100 companies each year but only invest in 2. Companies that have received investment to date include a leader in regional freight delivery, a cash transfer application that provides the foundation for a low cost banking system and a truck manufacturing plant.

AfricInvest

Fund Size: $760m primarily from development finance institutions

Regional focus: Africa

Approach: While not included in SFMF2, they spoke at the AGM to provide a broader example of approaches to finance focused impact investing. The GP described the growth in awareness of private equity investments in Africa and the increasing level of sophistication of companies. They focus on family owned business with opportunities for growth and optimization. The fund is actively involved in the management of the companies to improve performance. They see opportunities to consolidate businesses and assets on the continent to drive broad based

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Member Brief—Sarona Asset Management AGM Report, May 2015 economic growth. They describe their approach as a fairly conventional private equity strategy, where they look for savings, divestment of non-core assets, and focus on growth. Typically, they have seen 2- to 3- fold growth in revenue and earnings. Sample investments include Mansard Insurance, which provides life and non-life insurance through cellphone billing systems, and Elephant Group, which imports and distributes rice from Asia into Nigeria. They took advantage of the strong branding of Elephant Group and are looking to sell other commodities through the same distribution channels.

Kandeo II

Fund Size: $43.6m

Reginonal focus: Mexico

Approach: Building on the success of Kandeo I, which raised around $95m in 2011 for investment into Colombia, Kandeo II is focusing on generating good private equity returns based on a strong local presence and on developing financial services to support SMEs. Mexico, Colombia and Peru rank in the top five for financial inclusion and ease of doing business in the region. They follow the IFC’s guidelines for private equity investment into emerging markets. For instance, while Mexico performs well on many development scores, fewer than 6% of people in rural Mexico have access to loans, and although 40% of them have bank accounts, they typically withdraw monies received from employment.

Analysis by JP Morgan shows that banks supporting low-income countries and regions consistently outperform the largest banks in developed markets. Those larger banks are also looking for entry points in low-income markets. Direct investments include a commercial leasing model in conjunction with Avis to give SME’s access to leased vehicles that they could not otherwise afford. Kandeo has provided capital to existing microcredit organizations to allow for higher levels of lending, while still preserving very low delinquency rates. They have also established an innovative leasing model for taxi drivers in Peru where they pay for the lease as a surcharge on fuel at the gas station.

Kandeo has worked to improve its capacity in reporting related to ESG criteria and recently published their first report.

General Partners Panel Session Highlights

At the close of the day, the panel composed of General Partners that have received investment from Sarona addressed questions from the audience. Main comments: - leveraged buyouts are difficult in most emerging markets because it can be very difficult to bring in new teams and also, a number of funds tend to invest in family owned businesses - better approach is take a significant minority position and focus on growth

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Member Brief—Sarona Asset Management AGM Report, May 2015

- ESG screens are becoming increasingly important. Latin American Pension funds are starting to look at them and all the development banks need some level of screening. - Family foundations typically broaden their investment goals in the second generation - Internal investment in Africa is becoming more important: the biggest investor in Africa now is South Africa. - Despite the growth of this form of impact investing, the central banks in African countries still seek to limit the flows of capital. - There is still very significant underrepresentation of women on the investment boards of funds despite the fact that women are often key players in the portfolio companies - Big challenge with the perceived risk of African investments. In addition, the fear of outbreaks like Ebola has an impact across the whole continent.

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