SEAF Trade Sales in Emerging Markets: The

1
SEAF Trade Sales in Emerging Markets The Pot
at the End of the Rainbow? Presentation to IFC
Private Equity ConferenceMay 19, 2005
2
Agenda

• Brief Description of Small Enterprise Assistance
  Funds (SEAF)
• Exits in Emerging Markets
• Trade Sales the Pot at the End of the Rainbow
  for Emerging Market Private Equity Funds?

3
A Brief History of SEAF

• Founded in 1989, as part of CARE, through a grant
  from USAID
• Rapid growth after 1994 from Poland into Russia,
  Bulgaria, and Peru
• 1995 spun off from CARE to become an independent
  organization
• First Fund with participation of IFC in 1997
• First private investor in 2000
• SEAF today
• 235 investments
• 124 realizations
• 236 million under management
• a unique institution with global presence
  (offices in 15 countries), and a broadening group
  of investors

4
Tallinn,
Bucharest,
Washington,
Latvia
Estonia
Romania
D.C.
Lithuania
Almaty,

Kazakhstan

Netherlands
l
Bishkek,





Kyrgyzstan


l
Warsaw,

Poland

Chengdu,
China
Zagreb,
Colombia
Croatia
Tashkent,
Lima,
Belgrade,
Uzbekistan
Peru
Serbia

Mumbai,
India
Nigeria
Skopje,
Macedonia
Sofia,
Bulgaria
SEAF IN THE WORLD
Active Operations
New Initiatives
Continuing Advisory Work
Exited Funds
l
Headquarters and Business Development Unit

Office Locations
5
A Well Diversified Investor Base
(35.1M) 15
(29.5M) 12
(22.5M) 9
(22.1M) 9
(17.3M) 7
(16M) 7
(14.4M) 6
(9.0M) 4
(6.5M)
3
(5.0M) 2
(5.0M)
2
(5.0M)
2
(5.0M) 2
(5.0M) 2
(4M) 2
(4.0M) 2
(3.84M) 2
(3.4M) 1
(3.0M) 1
(2.5M) 1
(2.4M) 1

(2.0M) 1
(2.0M) 1
(2.0M) 1
(1.92M) 1
Total 236.95M
(10.5M) 4
6
(1)
, as of December 31, 2004
SEAF Industry Portfolio Breakdown
(2)
Total Invested Capital
91,153,635

Total Number of Investments 228
Professional, Scientific,
Technical service
9
Agribusiness
23
Information and Publishing
19
Manufacturing
Retail Trade
15
12
Pharmaceuticals/Biotechnology
Construction
Wholesale Trade
4
6
12
(1) According to North American Industry
Classification System ( NAICS )
(2) Includes capitalized interest on debt
7
Four Main Types of Exits

• MBOs and self-liquidating exits
• IPOs
• Financial Investors
• Trade Sales

8
Exits MBOs and Self-liquidating exits

• Rarely do we invest with the objective being an
  MBO
• Key is to expand margins, sales rapidly
• If MBO is likely (market, sector), take current
  income (royalties, accelerating dividends, etc)
• Helps to have trade sale options to negotiate a
  fair price
• After years of partnership, it generally is
  all about the moneylosing the alignment of
  interests
• SEAF Returns on MBOs range from 59 IRR to
  negative 31average is 29 and 1.6 X capital

9
IPOs in emerging markets

• Timing is critical hitting the window with
  volatile and generally thinly traded public
  markets and fluctuating currencies
• While it requires a lot of preparation, interests
  of the partners generally remain aligned
• In many emerging markets, difficult to achieve
  more than 2-3 IPOs per (good) year
• While expanding pension funds and local insurance
  companies and low debt yields are helping, thin
  liquidity and dribble out requirements means
  ultimate returns are often unclearphase 2 of
  the exit only beginning with listing

10
Financial Investors

• Despite years of mutual gossip and (some)
  respect, its all about the money-secondaries
  and bottom fishers
• But as financial investors have separated into
  size categories, some important opportunities are
  arising, with PE firms at the top end making for
  important liquidity opportunities/consolidations
• Shortage of deals in many markets after the
  privatizations and end of the easy dealsthe
  banks, breweries, and telecommunication companies
  have largely been done
• SEAF has taken advantage of pressure of some
  funds to invest at the end of the investment
  period or to get on the ground in regional fund
  concepts, recently scoring IRRs of 76 and 61
  and significant times capital

11
Trade Sales the Pot at the end of the Rainbow?

• Many public or lean companies cannot afford to
  devote precious people or earnings to start-ups,
  especially in non-BRIC countries
• Fear of local corruption, strange languages or
  cultures, and other horror stories means a
  premium can be obtained for clean companies with
  global standards
• Generally, the bulk of payments are up-front
  (ranging from 70-92 up front)
• BUT do the strategics know what we have here?
• Do they appreciate what we have accomplished?

12
Trade Salesproblems and opportunities

• Strategic buyers understand their business, but
  do not think VC guys doa better of us than the
  German government has, butsouffles
• Strategic (international) buyers do not generally
  understand the local markets in which we are
  active and tend to reflect internal exigencies
• If an offensive or growth acquisition,
  counterparts may have difficulties in convincing
  their boards of the value (growth multiples will
  be heavily discounted, and risks will be seen as
  high)why Peru and not Pakistan? If price over a
  certain level, board involved extra hassles
• If a defensive acquisition, things will be
  different (OI, others)

13
Trade Sale Research
Average Acquisition Prices for Private Equities
in Selected Industries in Emerging Markets
(1992-2002)
Source SDC Platinum, Mergerstat, Nexis, SEAF,
other Note Without the top five deals, which
are in the range of 17-83 million
14
EXITS CEE (1989-2003)
1989-94

• 72 reported deals totaling 1.3 billion
• Average transaction size 18.7 mio
• Median transaction size 7.9 mio

Optimism about investment Opportunities,
incl. Privatizations, in emerging CEE

• 214 reported deals totaling 4.3 billion
• Average transaction size 19.9 mio
• Median transaction size 4.8 mio

1995-99
At the end of 1999, the MA bubble was at its
biggest, even in CEE

• 143 reported deals totaling 2.5 billion
• Average transaction size 17.8 mio
• Median transaction size 3.1mio

2000-03
In early 2000, the MA bubble started to burst.
Transactions slowed and valuations decreased.
15
Exits Distribution of Deals in CEE by
Transaction Value(1989-2003)
Majority of transactions (357 out of 429
disclosed), or 83 of the total number, were
worth less than 20 million
Note Research based on Thompson Financial data
on 429 disclosed completed transactions in food
processing, retail and wholesale trade, newspaper
and magazine publishing industry.
16
Trade Sales Lessons to Follow

• Talk with industry people, both at trade fairs as
  well as at their headquarters
• Understand the trends, and what strategic buyers
  value before you put (a lot) of money into a deal
  (distribution /supply base rather than EBITDA?)
• Research is good, industry experts are
  betterissue can be whether limited partners
  understand this
• VC/PE role to remain disciplined and
  understanding of what is locally possible (Amazon
  Poland vs. BangBangWa)what do we do best?
• Financial controls
• HR alignment
• Interface with finance and exits

17
Trade Sales the actual exits

• Opportunities are increasing (esp CEE and Asia)
• Auctions will almost always be betterprepare for
  them
• Get the financial statements, legal compliance in
  order early
• Spend time trying to align interests into the
  trade salebeware management contractsdrag-alon
  gs (with floors)? Exit bonuses? Negative ratchets
  and preferred returns?
• Sometimes local purchasers are better than
  international
• Understand the local market
• Are trying to position themselves ahead of
  foreign competition
• SEAF experience 46 IRR and 2.8 X capital

18
Some Case Examples

• Internet TechnologiesWalk before you can run
• RegioSelling to Western Strategic Investors
• Sharp-HanmarBeware of the Easy exit

19
Internet Technologies Polska Company Profile and
Investment Overview

• Polish Internet service provider
• Investment made in 1Q 1996 for 30 of company
• Strong local management team - US-educated
  Polish brothers
• Reputation for excellent 24-hour service to
  corporate clients
• Although revenues were increasing, company was
  not profitable

20
What Needed Improvement?
Poor accounting systems and unreliable financial
reporting Lack of marketing plan
Steps Taken (1) After making investment,
SEAF actively assisted the company to improve
financial systems and reporting--Reliable revenue
numbers key to driving exit (2) SEAF worked
with Management and outside experts to develop
marketing plan, and to hire new marketing director
21
With what else did SEAF assist the Company ?
Rejected buy-out offer initiated by large
strategic investor at low valuation helped
entrepreneur establish clear strategy to deal
with concern over potential increased
competition Helped negotiate exit at 112 IRR
and 4.7 X capital .two years later
(1) Our experience needed not to be intimidated
by larger players into selling too early at low
valuations (2) Focus on building the business
and work systematically on good exit
opportunities
22
Regio Company Profile and Investment Overview

• Young Estonian software developer initially
  concentrating on producing maps and surveys from
  satellite images
• Investment made in 1998 for 29-- SEAF initially
  helped on legal and back office issues, including
  negotiating a contract to develop global location
  as a WAP for Ericsson
• SEAF accompanied principal to a trade fair where
  they were approached by an interested purchaser
  from Finland
• In 2000, after three months of negotiations, SEAF
  helped conclude an exit at 147 IRR and 7.1 X
  capital

23
BSEF Regio - Geographical Information Systems
software applications programming.
Products services Spatial data Cartography
Training and consultation Information systems
Mobile positioning
24
Sharp HanmarThe Easy Exit?

• Sharp-Hanmar a flexible package printing
  company in Poland
• Approached by two companies at a trade fair
  (Australian and Austrian)
• Initial valuations thrown about were very high
  (gt50 IRR)
• Negotiations and time dragged outdistracting
  visits
• Neglect of marketing by entrepreneur
• Single most important customer in difficulties in
  down turn
• Back out by one potential
• Due diligence results
• Sick wife and management contracts
• A 10 IRR Exit was all we could achieve

25

• THANKS!