Extended Annual Review Report
Project Number: 38924 Investment Number: 7209 September 2013
Equity Investment Aureos South-East Asia Fund (Regional)
CURRENCY EQUIVALENTS
Currency unit – US dollar ($)
ABBREVIATIONS
ADB – Asian Development Bank ASEAF – Aureos South-East Asia Fund ASEAM – Aureos South-East Asia Managers CDC – CDC Group DFI – development finance institution ESHG – environmental, social, health, and governance FIRR – financial internal rate of return FMO – Nederlandse Financierings-Maatschappij voor Ontwikkelingslanden (Netherlands Development Bank) ICOMM – investment committee IFC – International Finance Corporation SMEs – Small and medium-sized enterprises
GLOSSARY
investment sidecar – a committed funding entity that invests pari passu alongside a main fund in a specific geography or sector carried interest or carry – the profit share allocated to the manager of an investment fund pari passu – equally, on identical terms
NOTE
In this report, "$" refers to US dollars.
Vice-President L. Venkatachalam, Private Sector and Cofinancing Operations Officer-in-Charge J. Yamagata, Private Sector Operations Department (PSOD)
Team leader A. Taneja, Principal Investment Specialist, PSOD
In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.
CONTENTS
Page
BASIC DATA i
EXECUTIVE SUMMARY ii I. THE PROJECT 1 A. Project Background 1 B. Key Project Features 1 C. Progress Highlights 2 II. EVALUATION 3 A. Project Rationale and Objectives 3 B. Development Impact 3 C. ADB Investment Profitability 5 D. ADB Work Quality 6 E. ADB’s Additionality 7 F. Overall Evaluation 7 III. ISSUES, LESSONS AND RECOMMENDED FOLLOW-UP ACTIONS 7 A. Issues and Lessons 7 B. Recommended Follow-Up Actions 8
APPENDIXES
1. Investment Partners 9 2. Investment Portfolio 10 3. Portfolio Highlights 11 4. Private Sector Development Indicators and Ratings 12 5. Industry and Operations Review 15 6. Environmental, Social, Health, and Governance Impacts 16 7. Private Equity Benchmarks 18
BASIC DATA Aureos South-East Asia Fund, LLC (Investment No. 7209 - Regional)
Key Project Data As per ADB Loan Actual1 Documents ($ million) ($ million) ADB investment: Equity: Committed 20 20 Disbursed N/A 18.4 Returned N/A 23.2
Key Dates Expected Actual Concept clearance approval 13 August 2004 Board approval 15 March 2005 Equity agreement 5 May 2005 Equity effectiveness 5 May 2005 First disbursement 6 June 2005
Financial and Economic Internal Rates of Appraisal XARR Return (%) Financial internal rate of return (project 15% 17%2 financial rate of return on equity)
Project Administration and Monitoring No. of Missions No. of Person- Days Fact finding 2 4 Appraisal Project administration XARR mission Others ADB = Asian Development Bank, N/A = not available, XARR = extended annual review report.
1 As of 30 January 2013 2 Net financial internal rate of return after fees and carried interest. Estimated to the end of the fund. As of 31 December 2012 valuation, the fund manager estimates the net FIRR to be 18%.
EXECUTIVE SUMMARY
In April 2005, the Board of Directors of the Asian Development Bank (ADB) approved an investment of up to $20 million in Aureos South-East Asia Fund (ASEAF), a private equity fund targeting investments in small and medium-sized enterprises (SMEs) in Indonesia, the Mekong Region, the Philippines and Thailand. In total, ASEAF gathered commitments of $70 million in the core fund from various development institutions, and a further $26 million in local private capital was committed to parallel investment vehicles.
Investing in ASEAF was consistent with ADB’s established viewpoint that the growth of SMEs is key to economic and social development in Southeast Asia. Development of a local private equity industry was perceived to be important in expanding the provision of capital and management expertise to SMEs.
ASEAF was established as an 8-year, closed-end fund, to be managed by Aureos South-East Asia Managers, a wholly owned subsidiary of Aureos Capital (Aureos), which is a private equity fund manager with extensive experience in investing in SMEs in developing markets. Aureos established investment teams in Thailand, Indonesia, and the Philippines and structured local investment committees to recommend suitable transactions to the fund. ADB was allocated a seat on the advisory committee of the fund.
ASEAF invested $60.6 million across 17 portfolio companies between 2005 and 2010—six in Thailand, five in the Philippines, four in Indonesia, and two in Vietnam. Investments ranged from $0.5 million to $6.3 million, with a clear focus on providing capital in support of organic growth. Aureos had a hands-on approach to investee companies, providing expertise and operational support and keeping a strong focus on governance and compliance.
The fund is rated excellent for private sector development. At a macro level, the existence of the fund directly catalyzed the commitment of a further $26 million in local private equity funding and the mobilization of further debt capital to support the growth of the investee companies. The success of the fund had a strong demonstration effect on the wider investment community, contributing to a more than tenfold increase in the number of private equity funds operating in the region. At the investee level, ASEAF provided funding and strategic management support to boost the growth prospects of 17 SMEs across four countries. In doing so it allowed these companies to invest in innovative new products and services and provided a benchmark for good corporate governance.
As of December 2012, ASEAF has fully exited eight of its 17 investments, delivering an average multiple of 3.3 times the invested capital and a gross financial internal rate of return (FIRR) of nearly 34%. The fund has distributed $91.1 million or 1.3 times the paid-in capital. Its stake in the remaining nine portfolio companies is valued at 2.2 times the invested capital or $66.1 million. Overall, ASEAF forecasts delivering a gross FIRR of more than 27% and to return over 2.8 times the invested capital (before fees and carried interest). This financial success has been driven by the growth and expansion of its investee companies, which in turn has delivered more employment, product and service innovation, and an increase in taxes paid. In light of its strong performance, the project is rated excellent for business success.
Aureos was spun out of CDC Group, the United Kingdom’s development finance institution. Aureos therefore had both a strong track record in investing in SMEs in developing countries and a genuine commitment to and focus on reinforcing standards in environmental, social, health, and governance (ESHG) matters. With centrally coordinated oversight and expert ii support for local investment teams, Aureos ensured that its own investment team and portfolio company managers were suitably trained on important ESHG matters. All investments were required to be cleared beforehand by Aureos’ ESHG experts, and the organization arranged and conducted annual monitoring of each portfolio company to the highest international standards. A comprehensive report on ESHG matters was provided to investors each year. The project rates excellent on environmental, social, health, and safety performance.
ASEAF expects to return a net FIRR to investors of over 17%, above the targeted 15% cited in the ADB report and recommendation of the President, despite the turbulent economic period in which the fund was invested. This compares with a median net FIRR of 5.8% for Cambridge Associates' 2004 benchmark in the region. On this basis, the project rates excellent on ADB profitability.
ADB invested in ASEAF after its first close and therefore had limited opportunity to influence the terms or structure of the fund. Aureos reports that ADB due diligence prior to its investment was robust and consistent with that of other institutional investors. ADB was represented on the advisory committee of the fund. In this capacity, ADB played a relatively passive oversight role once the fund was in operation, raising relevant questions from time to time in accordance with its fiduciary obligations. ADB deployed independent audit teams to assess compliance with its own ESHG policies at a number of investees; it was the only investor to do this. The overall assessment is that ADB’s work quality was satisfactory.
Since ADB was a second-close investor in ASEAF, it is unlikely that its involvement contributed to the identification or involvement of additional investors, though anecdotally it may have provided some comfort to participating local institutions. Beyond its contribution to the fund's focus on ESHG matters and its role on the advisory committee, the impact of ADB on the success of the fund appears to have been minimal. ADB’s additionality for ASEAF is rated satisfactory.
ASEAF is rated highly successful overall. This finding is driven by (i) its private sector development impact on both a macro and investee level, specifically in catalyzing deployment of private co-investment funds, demonstrating the viability of private equity investment in the SME sector, and boosting the management capability and growth of 17 companies across the region; (ii) its high standards in implementing, monitoring, and reporting on ESHG matters; and (iii) its overall strong financial and economic development impact.
I. THE PROJECT
A. Project Background
1. In April 2005, the Board of Directors of the Asian Development Bank (ADB) approved an investment of up to $20 million in Aureos South-East Asia Fund (ASEAF), a private equity fund targeting investments in small and medium-sized enterprises (SMEs) in Indonesia, the Mekong Region, the Philippines and Thailand.
2. Investing in ASEAF was consistent with ADB’s established viewpoint that the growth of SMEs is key to economic and social development in Southeast Asia. Development of a local private equity industry was perceived to be important in expanding the provision of capital and management expertise to SMEs.
3. ADB’s key objectives were to (i) support expansion and productivity improvements in SMEs; (ii) mobilize complementary sources of capital for SMEs; (iii) demonstrate opportunity and validity of the private equity model in relevant markets; and (iv) capture specific examples of local regulations and business practices that inhibit SME development in each country, and share these with other ADB departments to support the formulation of regulatory reforms to support SME growth in the region.
B. Key Project Features
4. ASEAF was established as a Mauritius-incorporated, 8-year, closed-end fund with the option for two 1-year extensions and with a 4-year investment period (extendable to 6 years). The fund was launched with a target size of $70 million and aimed to deliver a net financial internal rate of return (FIRR) of 15% to investors.
5. In addition to ASEAF, country-specific agreements (so-called ―sidecars‖) were established to raise up to $30 million of committed equity from local private investors in Thailand, Indonesia and the Philippines, bringing total target funding to $100 million. These funds would invest alongside and pari passu with ASEAF in transactions in their country.
6. ASEAF aimed to make negotiated equity or quasi-equity investments of $0.5 million to $4.0 million in SMEs that demonstrated strong potential for growth and regional expansion. At least 85% of the fund was to be invested in Cambodia, Indonesia, Lao People’s Democratic Republic, the Philippines, Thailand, and Viet Nam. The fund had common portfolio restrictions relating to concentration of risk in any specific sector or individual investment.
7. ASEAF appointed Aureos South-East Asia Managers (ASEAM) as the investment manager.1 ASEAM would receive a 2.5% annual management fee and a 20% profit share subject to investors receiving a minimum 6% FIRR.2 The fund established separate, country- specific investment committees (ICOMMs) featuring senior ASEAM team members and respected local entrepreneurs and businessmen.
1 ASEAM is a wholly owned subsidiary of Aureos Capital (Aureos), a global manager of SME private equity funds in developing countries. Aureos emerged from the restructuring of CDC Group (CDC), the United Kingdom's historic development finance institution (DFI) for emerging markets. 2 More typically, private equity funds must deliver a minimum 8% FIRR prior to payment of any profit share to the general partner. The annual management fee is calculated based on committed capital during the investment period of the fund and on net invested capital for the remainder of the fund's life. 2
8. ADB was allocated a seat on the advisory committee of ASEAF. Specific due diligence and governance requirements were incorporated in the fund documentation to ensure compliance with ADB’s governance, environmental, and social responsibility requirements.
C. Progress Highlights
9. ASEAF held its first close on 4 November 2004 with commitments of up to $20 million each from CDC Group (CDC) and Norfund, the development finance institutions (DFIs) of the United Kingdom and Norway.3 Following Board approval in April 2005, ADB committed up to $20 million to the fund in early May 2005 (subject to being no greater than 25% of total commitments). 4 ASEAF held a final close on 5 July 2006 with total committed capital of $70 million from international institutions and a further $26 million of domestic private capital in three country-specific sidecars (Appendix 1).
10. The fund invested $60.6 million across 17 portfolio companies between 2005 and 2010 (Appendix 2)—six in Thailand, five in the Philippines, four in Indonesia, and two in Vietnam, demonstrating the scope for such transactions across these diverse markets. Investments ranged from $0.5 million to $6.3 million, with a clear focus on providing capital in support of organic growth. Aureos had a hands-on approach to investee companies, providing expertise and operational support and keeping a strong focus on governance and compliance.
11. By the end of 2012, ASEAF had fully exited eight investments, on which it generated a gross FIRR of 33.9% and a 3.3 multiple of invested capital. From the remaining nine investments, ASEAF has recovered over $17 million, about 45% of invested capital, and values the remaining stakes at over $65 million. For the whole portfolio at 31 December 2012, ASEAF showed total gross returns (including unrealized investments on a fair-value basis) of 28.1% FIRR and a 2.6 multiple of invested capital. The fund is in the phase of active divestment targeting a total gross return of about 2.8 times the invested capital by 2014. This will require the extension of the fund in accordance with the relevant provisions.5 Net returns to investors (after payment of fees and carried interest) are anticipated to be above 17% and 2.1 times the drawn capital.
12. Of the 17 investee companies, 16 have grown considerably over the fund's investment period, with commensurate increases in employment, efficiency, and reinvestment in capital expenditure. Meaningful progress has been achieved at investee companies with regards to ADB’s environmental, social, health, and governance (ESHG) agenda.
3 CDC and Norfund formed Aureos as a joint-venture company in 2001. Aureos' management acquired equity ownership in the entity in successive transactions, finally acquiring 100% in 2008. Aureos was subsequently sold to Abraaj Capital in 2012. 4 The 25% limit is interpreted as having been relative to the total funds committed to the project, i.e., $96 million inclusive of the sidecar investment vehicles. 5 The extension of the fund mirrored the prior extension of the investment period from 4 to 6 years, necessitated in large part by the dislocation in investment markets caused by the global financial crisis in 2008–2009. The extension provisions to the investment period and overall fund life typically exist to cater for such unanticipated external factors. 3
II. EVALUATION
A. Project Rationale and Objectives
13. The presence of a healthy SME sector is widely seen in both developed and developing economies as key to economic growth and sustainable employment. ADB's investment in this area of the economy was thus fully consistent with its objectives.
14. At the time of its commitment to ASEAF, there were few alternative sources of private equity funding available to SMEs in Southeast Asia. Many earlier funds had closed in the aftermath of the Asian financial crisis 1997–1998 and new funds were wary of returning to the geography.6 The rationale for investing in ASEAF as a means to mobilize capital for SMEs was therefore sound, as was the intention to demonstrate to potential private investors the viability of SME investing in the region and thereby catalyze future funding on a sustainable basis.
15. The decision to invest in a fund managed by Aureos was sensible in light of that organization’s history and track record of SME investing in developing markets, and its awareness and sensitivity to the environmental, social, and governance agendas of investors such as ADB. However, given that this was to be Aureos’ first fund in the region, it is arguable that the 8-year life of the fund did not adequately take account of the time that would be required to recruit and establish a local investment team to execute the strategy.
B. Development Impact
1. Private Sector Development
a. Overall Assessment of Private Sector Development
16. ASEAF is rated excellent from an overall private sector development perspective, both from its indirect impact beyond the portfolio companies, and for the direct bearing it had on several investees. (Appendixes 3 and 4 provide highlights on the fund’s impact on select investees as well as its contribution to overall private sector development).
b. Beyond Company Impact
17. On a macro level, as a direct result of the existence of the fund, about $190 million of new debt and equity capital 7 was successfully invested in Southeast Asian SMEs. The innovative use of country-specific sidecars allowed ASEAF to deploy $20 million of local private capital to the sector alongside the main fund, giving three local institutions the opportunity to learn directly about private equity investing. In addition, a Vietnamese furniture company achieved a successful initial public offering in 2008 on the Ho Chi Minh City stock exchange.
18. While clearly not the only factor, the success of ASEAF may have contributed to the resurgent appetite of private equity funds for investing in Southeast Asia.8 Aureos itself is in the
6 Cambridge Associates noted that only 11 private equity funds were established in Asia (excluding Japan), Australia, and New Zealand between 2001 and 2003, down from 44 during 1997–2000. 7 Equity: $60 million from Aureos, $20 million from sidecars, $4 million in Yupi Gum, $28 million raised in Truong Than's initial public offering. Debt: $20 million acquisition finance for Yupi Gum, increased company debt levels at Pancake House ($14 million), Truong Than ($37 million), Hot Pot ($5 million). 8 Cambridge Associates registered the opening of 128 funds in the region between 2004 and 2008. 4 latter stages of raising a successor fund—ASEAF II, anticipated to be $200 million—that will follow a similar investment mandate.
c. Direct Company Impact
19. On a micro level, ASEAF successfully contributed to the development of four companies in Indonesia, five in the Philippines, six in Thailand, and two in Vietnam. In addition to providing finance to support restructuring, capital investment, and working capital needs, the fund supplied regular strategic management input and technical support in areas such as finance, accounting, manufacturing, product development, and marketing. ASEAF also contributed meaningfully to the investee companies’ environmental, social, health, and governance standards.
2. Business Success
20. ASEAF is rated excellent for business success.
21. Against an overall capital target of $100 million, Aureos was able to raise an initial $96 million from a combination of international DFIs and local private capital at a time when private equity investors had been retreating from the region.
22. ASEAF ultimately invested $60.6 million or 87% of committed capital across 17 portfolio companies in line with its strategy. To date, it has fully exited eight investments, delivering an average multiple of 3.3 times the invested capital and a gross FIRR of 33.9%.9 The remaining investments in the portfolio were last valued by the fund at 31 December 2012, at an aggregate 2.2 times the invested capital and 22.7% gross FIRR.10 The combined anticipated gross FIRR for the fund is 27.8%.11 The fund delivered these strong returns despite adverse exchange rate movements over the period.
23. By comparison, between 2004 and 2012, the stock market indices of Indonesia, the Philippines, and Thailand respectively produced annualized nominal returns of 23%, 17%, and 6%. The MSCI Emerging Markets Asia Index showed annualized returns of 12.1% over the 10 years to June 2012.
24. These financial results reflect strong underlying investee company performance, as practically all the investees achieved substantial organic growth over the period. This has in turn resulted in more employment and greater profitability through better business practices.
25. Operationally, at Aureos the combination of local investors, locally based investment teams, locally focused ICOMMs, and regional coordination and international support has been a success (Appendix 5).
3. Economic Sustainability
26. ASEAF is rated excellent for economic sustainability. In keeping with previous ADB investments in private equity funds, the gross FIRR is used as a reference point to estimate the economic return from the investment, with further parameters serving as complementary
9 Internal rate of return (IRR) range from –40.6% to 83.8%. 10 IRR range from –22.6% to 60.1%. 11 As per ASEAF valuation at 31 December 2012. 5 indicators to assess the project’s broader economic impact. Given the growth in the portfolio companies, Aureos reports a substantial increase in employment across the investees, an increase in profitability and therefore in tax payments. There has also been secondary capital markets activity in the form of greater access to debt and trade finance facilities. Taken together, these factors would suggest that the economic benefits of the investment go beyond those captured in the anticipated overall gross FIRR of the fund to the end of its life of 27.8%.12
4. Environmental, Social, Health, and Safety Performance
27. ASEAF is rated excellent for environmental, social, health, and safety performance.
28. In light of its DFI roots, Aureos had in place a comprehensive set of environmental impact, social development, employee health and safety, and corporate governance policies consistent with International Finance Corporation (IFC) standards. Aureos consulted its limited partners, including ADB, and further enhanced the ESHG policies for the fund. Every investment made by ASEAF required prior sign-off from Aureos’ ESHG compliance team, and each investee was regularly monitored against these standards. Aureos ensured skills transfer in this area through regular training for team members and portfolio companies on issues relating to ESHG and compliance.
29. Where no recognized certification system existed within a company, Aureos used its own monitoring system, deploying a combination of in-house specialist compliance teams from its London head office, supported by specialist consultancy support where necessary. In addition, Aureos has welcomed the direct monitoring activities of ADB in these areas. ASEAF annually produces a comprehensive ESHG report to an excellent standard.
30. All companies within the portfolio are in compliance with local laws and regulations, and with the ESHG policies of ASEAF. There have been no material breaches of the same. Appendix 6 highlights key improvements in ESHG performance in portfolio companies as a result of the fund’s involvement.
C. ADB Investment Profitability
31. ASEAF is rated excellent for investment profitability.
32. Based on ASEAF’s latest forecast, it is estimated that the fund will return a net FIRR to investors (after fees and profit share) of about 17%, ahead of the target 15% net return cited in the ADB report and recommendation of the President, despite the turbulent economic background of that period. The estimated final net multiple of the fund is around 2.1 times the paid-in capital.13
33. In comparison with all Asian emerging-market private equity funds of similar vintage (Appendix 5), ASEAF rates close to the top-quartile funds on FIRR and is comfortably a top- quartile fund in terms of money multiple. The Cambridge Associates 2004 vintage benchmark shows a median net FIRR of 5.8% and median money multiple of 1.3 times the paid-in capital. Top-quartile funds for the same vintage are showing returns above 19% FIRR and 1.6 times the paid-in capital.
12 Before fees and carried interest. Compares with 28.1% gross FIRR as of 31 December 2012 (para. 11), which assumes all assets sold at fair market value as of that date. 13 As per data provided in the 31 December 2012 valuation. In light of recent exit activity, Aureos’ latest estimate for fund returns is above an 18% IRR. 6
D. ADB Work Quality
34. With regard to ASEAF, ADB’s work quality is rated satisfactory.
35. Screening, appraisal, and structuring. The decision to invest in an Aureos-managed fund was sensibly based on the organization’s structure, history, and familiarity in dealing both with SMEs and developing market environments, though there was some risk in the organization’s historic lack of presence and investing record in Southeast Asia.
36. Aureos commented that the ADB due diligence process was suitably robust and in line with that conducted by other investors.
37. ADB committed to ASEAF after the fund's first close and therefore had little opportunity to influence the terms or structure of the fund. Fund terms and conditions were largely consistent with others in the private equity industry, including prudent restrictions on portfolio construction and concentration. Importantly, the carried interest was equitably distributed and the investment team members were required to invest a meaningful amount of their own capital in the fund to ensure alignment of interest with the external investors.14 It is worth noting that the priority profit hurdle of a 6% internal rate of return15 appeared to be somewhat low given the relatively high-risk nature of the investment strategy and the risk associated with a new investment team.
38. Overall, in assessing and negotiating its position within the fund, ADB performed in line with its operating strategies, policies, and standards as they existed at the time of the investment.
39. Monitoring and supervision. ADB was represented on the advisory committee of ASEAF, although the individual responsible for this role changed three times during the life of the fund, potentially leading to a lack of continuity in approach. Feedback from Aureos is that each ADB representative quickly assimilated the role and provided useful guidance and effective challenge within the committee on points of strategy or fiduciary responsibility.
40. In addition to attending committee meetings, the ADB representative was regularly in touch with Aureos team members to discuss progress of the fund and to provide feedback on specific investment opportunities. ADB deployed independent audit teams to several ASEAF portfolio companies to assess compliance against its own ESHG policies. ADB was the only investor to do this.
41. One of the keys objectives of ADB’s investment in ASEAF was to identify practical impediments to growth faced by SMEs in the focus geographies, to capture these examples, and to systematically share them with relevant groups throughout ADB. There is no evidence that any such activity was undertaken.
14 The Aureos investment team contributed $700,000 or 1% of the core fund. This level of participation is common for private equity investment managers. 15 This is the rate of return that must be provided to limited partner investors before the fund manager can claim a profit share in the form of a 20% carried interest in the fund. More typically, the hurdle rate is 8%, and for higher- risk investment strategies it is often higher. 7
E. ADB’s Additionality
42. ADB’s performance in terms of additionality to the inception and outcome of ASEAF is rated satisfactory.
43. Since ADB was a second-close investor in ASEAF, it is unlikely that its presence contributed to the identification of additional investors, though anecdotally it may have provided comfort to the domestic sidecar investors.
44. Beyond its contribution to the fund’s ESHG policies and its advisory committee presence, ADB did not specifically contribute to or influence the strategy, implementation, or outcome of the fund. However, given the experience and overall profile of Aureos, the necessity for ADB and other limited partners to contribute to these aspects of the fund’s strategic and operational structures and processes was also somewhat diminished.
F. Overall Evaluation
Table 1: Evaluation of Aureos South-East Asian Fund Indicator and Rating Unsatisfactory Partly Satisfactory Satisfactory Excellent Development Impact √ Private sector development √ Business success √ Economic sustainability √ Environmental, Social, Health, √ and Safety Performance ADB Investment Profitability √ ADB Work Quality √ ADB Additionality √
Unsuccessful Partly successful Successful Highly successful Overall Rating √ ADB = Asian Development Bank.
III. ISSUES, LESSONS AND RECOMMENDED FOLLOW-UP ACTIONS
A. Issues and Lessons
45. Entry at second close. By investing after the first close of the fund, ADB had limited opportunity to negotiate the strategy or terms of investment, and no demonstrable influence on other potential investors to participate. In light of its objective to catalyze the deployment of third-party funds alongside its own investments, and to allow it to leverage its influence to optimize investment strategy and terms, ADB ought to focus on investing at first close in its private equity initiatives.
46. Experienced sector fund manager. As an experienced SME investor in developing markets, Aureos had the appropriate systems and institutional knowledge in place to deliver a high-quality investment portfolio and had real understanding of, and commitment to, ensuring proper ESHG standards across the portfolio. This expertise compensated for the lack of a specific Southeast Asian investing record. It is important for ADB to identify the specific mix of skills that is likely to ensure a fund manager’s ability to successfully invest in the relevant environment, whether the skills be geographic expertise, industry sector expertise, or investment-stage expertise. 8
47. Local investment teams and local investment committees. The combination of locally resident personnel and internationally experienced investors gave ASEAF an advantage in recognizing both opportunities and risks when assessing its investments. In developing markets where information on companies, industries, and individuals is scarce and often informal, local knowledge and networks are at a premium. The ability to benchmark and share experiences from similar investment scenarios in other geographies ensures a consistency of approach to risk and opportunity across a regional fund.
48. Country-specific sidecars. By allowing investors to place their funds in country-specific sidecars, Aureos was able to expand the pool of investment capital. In addition, this structure allowed local investors to gain experience in private equity investing in a geography that was familiar to them and with reduced exchange rate exposure. ADB may wish to encourage similar structures in future regional funds as a way to leverage greater private parallel investment and as a means to expand familiarity with the private equity model.
49. Investment selection. As the investment strategy for ASEAF was being refined, Aureos realized that small investments in early-stage companies proved to be more volatile and required significantly greater monitoring resources than investments in more established SMEs with potential for growth. From a development perspective (e.g., in terms of employment growth, capital expenditure, ESHG) it also appears that more can be achieved with established companies than with very early-stage ventures, as the latter lack the resources and scale to have significant impact over the typical 4–5-year investment period of a private equity fund. ADB should incorporate this understanding in its selection of future investment funds and in shaping future fund investment strategies.
B. Recommended Follow-Up Actions
50. ADB is considering a commitment to ASEAF II, the follow-up fund to ASEAF. In conducting its assessment of this investment opportunity, it is recommended that ADB take into account the following: (i) Aureos has been acquired by Abraaj Capital in July 2012. It will be important to understand how this will affect the operational running of the fund manager, and in particular what changes will occur in the team responsible for ASEAF. (ii) It appears that neither the use of country-specific sidecars nor country-specific ICOMMs will be a feature of ASEAF II. Both were unique and successful features of ASEAF, and ADB should fully understand the rationale for this change in operations.
51. The concept of capturing practical examples of regulatory obstacles and market failures that impede the growth and development of SMEs, so that these might be appropriately shared across other ADB departments to help them in guiding policy discussion with governments, seems sensible and worth pursuing. To deliver this, as part of its investment negotiations ADB needs to agree and implement a low-resource method of gathering such examples from fund managers. The Private Sector Operations Department then needs to establish appropriate ways to catalogue and disseminate the acquired information on a timely basis to other interested ADB departments. Appendix 1 9
INVESTMENT PARTNERS
Table A1.1: Investors In Aureos South-East Asia Fund And Sidecar Funds
Amount Investor Fund / Sidecar ($ million) CDC Group ASEAF 20 Norfund ASEAF 20 Asian Development Bank ASEAF 20 FMOa ASEAF 10 70
Planters Bank Philippines 10 a Sequis Life Indonesia 6 Government Savings Bank of Thailand Thailand 10 26
Total 96 a Planters Bank subsequently reduced its commitment to $5 million, citing central bank restrictions on its continued exposure to the fund. FMO = Nederlandse Financierings-Maatschappij voor Ontwikkelingslanden (Netherlands Development Bank). Source: Aureos Capital
10 Appendix 2
INVESTMENT PORTFOLIO
Table A2.1: Chronological Investment Summary of Aureos South-East Asia Fund (as of 31 December 2012)
Company Country Industry Invest ASEAF Return Return Date Investment (Gross (Money ($ million) IRR) Multiple) Pancake House Philippines Consumer Oct 5.0 14.7% 2.1x 2005 Save on Surplus * Philippines Consumer Jan 0.4 8.9% 1.4x 2006 Tirta Marta* Indonesia Packaging Aug 3.0 (5.5%) 0.8x 2006 Yupi Indo Jelly Gum* Indonesia Consumer Dec 5.3 52.0% 8.0x 2006 Vinta Systems * Philippines IT Dec 0.5 (40.6%) 0.1x 2006 Hot Pot Thailand Consumer Dec 3.0 34.1% 4.4x 2006 Environmental Care Thailand Utilities Dec 1.7 16.1% 1.7x Management * 2006 Truong Thanh Furniture* Vietnam Consumer Jan 3.0 83.8% 1.9x 2007 Cirtek Holdings * Philippines IT Aug 5.0 15.0% 1.7x 2007 Eurotech Engineering Thailand Engineering Nov 5.7 (22.6%) 0.4x International 2007 Pamindo Tiga T Indonesia Automotive Dec 3.5 24.8% 2.9x 2007 Marsun Company Thailand Engineering Sep 3.8 21.5% 2.2x 2008 Vejthani Thailand Health care May 3.8 38.5% 3.1x 2009 Unitrio Technology Thailand IT May 2.2 33.2% 2.1x 2010 Champ Resto Indonesia Indonesia Consumer May 6.3 60.1% 3.4x 2010 Tran Anh Digital World Vietnam Consumer Jul 4.5 4.5% 1.1x 2010 Mercado General Hospital Philippines Health care Sep 4.0 27.7% 1.7x 2010 ( ) = negative, ASEAF = Aureos South-East Asia Fund, IRR = internal rate of return, IT = information technology. * = fully exited investments. All others valued as of 31 December 2012. Source: Aureos South-East Asia Fund.
Appendix 3 11
PORTFOLIO HIGHLIGHTS
Table A3.1: Select Portfolio Company Highlights of Aureos South-East Asia Fund
Company Investment Key Developments ASEAF Value Addition Rationale Pancake Support plan to build - Financed acquisition of Teriyaki Boy and - M&A identification and House multi-brand Yellow Cab Pizza chains in two separate execution restaurant group transactions - Introduction of Malaysian through synergistic - Developed joint venture with Malaysian relationship acquisitions restaurant company to co-develop brands in - Board participation respective countries Tirta Marta Support plan to Significant problems and delays in - Introduced international develop and developing biodegradable product of expert in materials commercialize sufficient quality management and new technology for product development to biodegradable support processes packaging and bags - Upgraded general management planning and control tools and techniques Yupi Indo Jelly Professionalize - Changed senior management team (twice) - Recruited new CEO and Gum operations and - Forced to change distribution partner in CFO, and marketing invest in marketing Indonesia director (twice) to drive organic and - Improved customer portfolio to reduce - Introduced enterprise- international growth reliance on own-label manufacture scale planning tools, - Reduced product range to streamline systems, and processes production, reduce working capital needs, - Introduced professional and improve efficiency policies on human - Expanded production more than three resources, including times, including construction of a second employee share ownership production line plan Mercado Fund new walk-in - Refurbished building in Philippine General - M&A support General diagnostic center Hospital and fully equipped it with diagnostic - Board participation Hospital business equipment to create start-up ambulatory diagnostic center business - Recruited doctors and other professional staff to run and manage the center. - Established joint ventures and management contracts with other regional hospital groups. Eurotech Fund new factory to - Personal breakdown in relationship of - Mediated at board level Engineering support expansion husband (CEO) and wife (CFO) owners - Arranged recruitment of plans in face of paralyzed executive decision making new CEO and CFO demand growth for - Unable to take advantage of market growth, - Participated in turnaround power plant leaving new factory underutilized. planning components - Arranged working capital loans Vinta Systems Support proven - Missed plan due to longer-than-anticipated Participated at board level Silicon Valley sales cycle and problems with software entrepreneur in usability commercializing - Founder owner died (cancer) software for banking and advertising sectors ASEAF = Aureos South-East Asia Fund; CEO = chief executive officer; CFO = chief financial officer; M&A = merger and acquisition. Source: Aureos Capital
12 Appendix 4
PRIVATE SECTOR DEVELOPMENT INDICATORS AND RATINGS: PRIVATE EQUITY FUNDS
Indicators Ratingsa Justifications and/or Annotations
Impact to Potential Impact Combined Date (Sustainability) Rate and Risk to Realization
1. Beyond Intermediary and Impactb Impactb Riskc Ratingb Investee Company Impacts
1.1. Private sector expansion and institutional impact ASEAF materially increased the 1.1.1 Contributes to pioneering private sector’s role across the or materially increasing the 3 N/A N/A 3 regional economies by investing private sector share and role $60.6 million into SMEs at a time in the economy when private equity activity in the region was muted. 1.1.2 Contributes to institutional development by A further $20 million of equity funding (a) improving supply of risk 3 N/A N/A 3 from three local private institutions capital in the market; was mobilized directly alongside the (b) demonstrating the fund, providing them with direct merits of private equity experience of the private equity funds to the public, investment model. firms, banks, and others; About $28 million in equity from (c) bringing liquidity to local private investors was raised stock exchanges with immediately before and during the IPOs; IPO of Truong Thanh. A further (d) helping a private equity $4.1 million from private investors industry take root and was invested alongside the ASEAF become more efficient, in Yupi Gum. along with maturing capital markets; and Private debt funding of about (e) increasing private equity $76 million was raised by portfolio expertise via migration companies in conjunction with the of fund manager staff to fund’s investment or through the other funds and entities. period of its ownership.
Between 2000 and 2002, Cambridge Associates registered 11 new private equity funds in Asian emerging markets. This compared with a total of 44 new funds in the prior 4 years. Between 2004 and 2009, Cambridge Associates noted the formation of 128 new private equity funds in the region. 1.2. Competition. Contributes to 3 N/A N/A 3 ASEAF’s presence and success new competitive pressures in key (along with other factors) led to investee markets and/or in the increased competitive pressures in financial sector for risk capital investee markets as evidenced by (i) and finance auction bidding situations both upon entry and exit from the investments and (ii) increased valuation of assets over time.
Appendix 4 13
Indicators Ratingsa Justifications and/or Annotations
1.3. Innovation. Helps introduce 4 4 The fund’s investment supported a effective new products, services, number of its portfolio companies in and new technologies, as well as implementing new products, replicable new business services, and strategies: (i) Tirta strategies in investee companies, Marta—development and production or in the way the fund operates, of biodegradable plastic bags and thereby supporting reform and packaging using cassava-based transformation of business materials; (ii) Yupi Indo Jelly Gum— sectors, industries, and/or greater focus on branded products maturing financial markets (item and export markets; (iii) Pancake 2.2) House—development of a large- scale, multi-brand restaurant business strategy with regional potential; and (iv) Unitrio— development of an out-sourcing based data-processing center.
The fund itself used innovative local sidecar investment vehicles to expand its capital pool, and used innovative country-specific investment committees within a regional fund. Both of these can serve as successful models for other regional funds in future.
1.4. Links. Relative to size of N/A N/A N/A N/A The fund investment had no material investments, adds notable link effects. upstream or downstream link effects to investee and/or financial markets for growth 1.5. Catalytic element. 3 N/A N/A 3 The fund deployed $20 million in Catalyzes finance or helps equity from local investor sidecars. improve wider supply of debt or risk capital from local and foreign A further $108 million in debt and investors to investees and to equity funding was mobilized in local finance sectors in general conjunction with ASEAF’s $60.6 million investment across 17 portfolio companies. 1.6. Affected laws, 1 N/A N/A 1 A core objective of ADB’s frameworks, regulation. participation was to collect and report Contributes to more robust legal practical examples of impediments to and regulatory private business SME development in Southeast Asia. or sector frameworks, or to This data was intended to enrich stronger finance sector ADB’s wider dialogues with regional regulation, such as by observed governments and regulators on how promotional activity. Fund to improve the business manager reports on significant environment. No such activity was dialogue leading to reform . undertaken by the fund or ADB.
1.7. Wider demonstration of 4 N/A N/A 4 ASEAF developed and new standards. Complies with conscientiously implemented a good standards, and sets comprehensive ESHS and replicable new standards in, governance agenda with its portfolio among others, corporate companies. governance, transparency, stakeholder relations, ESHS, and Investment team members received
14 Appendix 4
Indicators Ratingsa Justifications and/or Annotations energy conservation; regular training on matters of ESHS, demonstrates governance governance and broader areas of standards and greater compliance. transparency, e.g., as a result of preparing investee companies for listing on stock markets (item 2.2) 2. Intermediary and Investee Company Impacts
2.1. Skills with demonstration ASEAF was active in upgrading and wider dissemination management at investee companies, potential 4 N/A N/A 4 and providing strategic support to Through achievements in management teams. Examples new managerial strategic include a full upgrade of planning, and operating skills, budgeting, reporting, and human contributes to successful resource policies at Yupi Indo Jelly investee enterprises with Gum, and the sourcing and provision potential for more of expert materials and new product widespread demonstration development support at Tirta Marta. and replication
Achievements in developing ASEAF deployed innovative local skills in private equity deal 4 N/A N/A 4 (country) investment sidecars structuring, instruments, and alongside the core regional fund. new ways to invest can be applied by fund staff in follow-on funds, or when joining new private equity groups, banks, or other financing entities 2.2. Demonstration and new standard-setting potential 3 N/A N/A 3
Demonstrates new ways of ASEAF introduced international best operating businesses and of practices in ESHG and accounting competing, and investee standards across its portfolio performance that is companies. comparable with relevant best industry benchmarks The fund employed local investment and standards committees within its regional structure to improve the quality of its As evident in set standards risk assessment. in corporate governance and stakeholder relations
Overall PSD Rating 4 N/A N/A 4
ADB = Asian Development Bank; ASEAF = Aureos South-East Asia Fund; ESHG = environmental, social, health, and governance; ESHS = environmental, social, health, and safety; N/A = not applicable or available; IPO = initial public offering; PSD = private sector development; SMEs = small and medium-sized enterprises. a The combined rating should weigh impacts and risks to its sustainable realization. b Excellent (4), satisfactory (3), less than satisfactory (2), unsatisfactory (1). The rating is not an arithmetic mean of the individual indicator ratings, and these have no fixed weights. It considers already the manifested actual impact (positive or negative) and the potential impact as well as risk to its realization c Risk: low (4), modest (3), medium (2), high (1).
Appendix 5 15
INDUSTRY AND OPERATIONS REVIEW
1. Aureos South-East Asia Fund (ASEAF) deployed several innovative operating strategies that are worth noting as some of the elements that were instrumental to its success.
A. Combination of Local, Regional, and International Resources
2. Aureos Capital managed the fund using a combination of country-focused staff and regional coordination and international support. This allowed Aureos Capital to best blend local knowledge and networks with the highest standards of investor relations, international governance, and compliance, and to leverage the investing experience and institutional learning of investing in small and medium-sized enterprises (SMEs) in developing markets that the firm had garnered through many previous funds in other geographies.
3. Specific examples include: (i) Local investment staff in permanent offices in each core geography across the region (Indonesia, the Philippines, and Thailand)—this was critical to establishing networks and rapports with local intermediaries and entrepreneurs, leading to better deal flow both in terms of quantity and quality. (ii) Country-specific investment committees (ICOMMs), comprising respected local, third-party businessmen and senior members of Aureos’ regional and international partner group—this allowed for independent review of opportunities, bringing to bear local understanding of risk (critically including counterparty risk) and opportunity with extensive previous investment experience. (iii) Consistency across the investment committees—the presence of the same senior Aureos partners on each ICOMM ensured coordination and consistency in the approach to risk across the portfolio. (iv) Involvement of international experts in environmental, social, health, and governance (ESHG) and compliance matters—the regional Aureos team received support and training from Aureos’ central experts, ensuring efficiency and consistency in applying the highest ESHG and compliance standards. The relative independence of the central experts ensured that there was no complacency in monitoring the performance. (v) International support in fundraising and investor relations.
4. To ensure that these structures worked properly, it was essential that the incentive and remuneration systems at Aureos Capital reflected the value added by individuals. Aureos Capital achieved this by (i) ensuring that all key team members were invested in ASEAF, contributing nearly $1 million in total; and (ii) equitably distributing carried interest allocation from the fund between the country and regional teams and the head office (70% was allocated to regional team members, 10% to central team members, and 10% to the corporate entity). To eliminate any potential ―free rider‖ effect between individual countries, for local staff to receive carry payments their own local investments had first to clear the 6% hurdle rate.
B. Establishment of Country-Specific Sidecars
5. To boost the pool of investment funds, ASEAF signed parallel investment agreements with private institutional investors in Indonesia, the Philippines, and Thailand. These entities invested pari passu in transactions in their own country and had the same fee and carry arrangements with Aureos as ASEAF. This was an innovative way for Aureos to expand the size of the project, accessing capital that would not have been invested directly in a regional fund due to lack of experience or mandate.
16 Appendix 6
ENVIRONMENTAL, SOCIAL, HEALTH, AND GOVERNANCE IMPACTS
1. Aureos South-East Asia Fund (ASEAF) produced a comprehensive annual monitoring report on each portfolio company. This includes a detailed assessment of performance against 14 summary criteria in the areas of health and safety, environment and social issues (workforce and community), and an itemized report of progress against identified improvement plans. A sample scorecard for an investee company is depicted below.
Point Scorecard for Yupi Indo Jelly Gum
Appendix 6 17
2. Selected highlights of progress in the areas of environmental, social, health, and governance (ESHG) performance are noted below.
Select Environmental, Social, Health, and Governance Achievements of Aureos South- East Asia Fund
Company Initiative Yupi Indo Jelly Gum Achieved ISO 22000 certification for food manufacturing Implemented Microsoft ERP – Axapta Worker canteen extension and improvement Health clinic extension and renovation Tirta Marta Upgrade to ISO 9001:2008 Applying for ISO 14000 Upgraded factory roof to improve heat insulation and increase natural light Champ Resto Upgraded financial and operating reporting systems to provide more timely and accurate information Introduced occupational health training, including fire safety and evacuation drills and driver safety training Cirtek Upgraded to ISO 9001:2008 (quality system) Upgraded to ISO/TS 16949 (product and process) Various community projects, including tree-planting activities and support for disaster relief Mercado General Hospital Recruited highly qualified chief financial officer to improve financial controls and reporting. Upgraded clinical governance with (i) surgical site infection monitoring, (ii) nutritional support teams, and (iii) introduction of comprehensive safety policies and procedures. Marsun Upgraded to ISO 9001:2008 Applying for ISO 14001 and OHSAS 19001 (social and environmental assessment and management systems) Installed wastewater treatment system for offices Source: Aureos Capital Annual Reports
3. In addition, it is worth noting that the Aureos deal team had training in ESHG (provided by external consultants from Internal Finance Corporation), in-house training on anticorruption and anti-money-laundering activities, and on the roles and fiduciary duties of directors. All staff participated in extensive training on the Aureos King III Corporate Governance system, delivered in person by partners of PwC South Africa and London, and the Aureos ESHG team. New team members also participated in online World Bank Institute training. Other courses attended by various team members included a 2-day ESHG training offered by Nederlandse Financierings-Maatschappij voor Ontwikkelingslanden (Netherlands Development Bank or FMO) / Deutsche Investitions- und Entwicklungsgesellschaft (DEG) and a 1-day training session offered by CDC Group and Norfund.
18 Appendix 7
PRIVATE EQUITY BENCHMARKS
Table A7.1: Asia Emerging Markets Benchmark Statistics, Vintage Year 2004
Arithmetic Mean Median Top Quartile Bottom Quartile FIRR 16.4% 5.8% 19.1% 2.9% Capital Multiple 1.5x 1.3x 1.6x 1.1x (TVPI) Data as of 30 June 2012 FIRR = Financial Internal Rate of Return; TVPI = Total Value Over Paid-in Capital Source: Cambridge Associates