Harnessing Synergies:Responsible Private Equity Investment in SMEs

Noah Beckwith, Partner, Aureos Advisers

TBLI Paris, November 2006

SME Private Equity: An Evolving Perspective

CDCFunds

1989-2000

•10 Aureos SME PE Funds: 2002-06•US$600m under management

AureosFunds

2001—

Private equity≠

Development

Development Impact: Profitability = Precondition

HolisticNDPs

CDC Funds Group Aureos Capital

International Development Community

Reconciling Commercial with TBL Objectives

Aureos and Development—Three Tenets2. Developmental and commercial objectives are mutually reinforcing.

3. Developmental criteria are intrinsic to investment process.

4. Development objectives are pursued within a commercial framework.

Developmentalism v. Commercialism

CommercialViability

Private SectorDevelopment

SMESustainability

Sustainable Outcomes: The Acacia Fund

• Three levels of development impact1. Microeconomic

• Access to capital, increased sophistication, technology and know-how, sectoral development and integration, economic linkages,

export development.

Economic Linkages

Sustainable Outcomes: The Acacia Fund

• Three levels of development impact1. Microeconomic

• Access to capital, increased sophistication, technology and know-how, sectoral development and integration, economic linkages,

export development.2. Macroeconomic/market

• Sales, consumption, fiscal contributions, export generation,

investment mobilisation, multipliers, externalities, demonstration

effects.

The Acacia Fund—Aggregated Indicators

The Acacia Fund—Contribution to Growth

The Acacia Fund—Regional Expansion of Investees

Sustainable Outcomes: The Acacia Fund

• Three levels of development impact1. Microeconomic

• Access to capital, increased sophistication, technology and know-how, sectoral development and integration, economic linkages, export development.

2. Macroeconomic/market

• Sales, consumption, fiscal contributions, export generation, investment mobilisation, multipliers, externalities, demonstration effects.

3. Socio-economic

• Poverty alleviation, sustainability.

Socio-economic impacts:A broader definition of poverty

• What is poverty?– More than starvation, malnutrition and premature mortality.

– “Pronounced deprivation in well-being” (World Bank Group).

• A broader definition– Opportunity: promoting opportunity for employment, enabling the poor to generate

wealth and to accumulate assets.

– Empowerment: reducing vulnerability to exogenous shocks which hit the poor hardest.

– Security: equitable access to market opportunities and opportunities for the under-skilled and unskilled.

Growth, Wealth Creation and Poverty Alleviation

S U S T A I N A B I L I T Y

Income Generation Wealth Creation Poverty Alleviation

AureosEquity Investments

in SMEs

InformalSector

Semi-Formal Sector

Formal Sector

Poor/Marginalised

Groups

Middle & Upper IncomeGroups

Low-IncomeGroups

Kiosks/micro-enterprises

Small enterprises Medium enterprises

Business Development- growth and profitability-professionalisation- formalisation

Socio-economic Impacts - asset accumulation- opportunity, security, empowerment- inclusion and enfranchisement

Economic Impacts- private-sector development- forward/backward linkages- investment generation

Sustainable Outcomes: Lake Harvest

•Kariba, north-east Zimbabwe–Harare: 350km

–Zambian Border: 7km

•Environs: within a National Park

•Transport Links: Road, Air Strip

•Population of Kariba (est.): 30,000

•Local Unemployment Rate: 80%

•% of Population HIV+ (est. 20-30%)

•Date: September 4th, 2002

•Deal Type: Management Buy-Out

•Investment Size: US$285,000

•Stake: 38%

•Instrument: 3,800 Ordinary Shares

•Other investors: Management Team (36.5%), Comafin (25.5%)

•Exit specification: Trade Sale to Strategic Investor

The LocationThe Investment

Sustainable Outcomes: Lake Harvest

Breeds Tilapia With Its Own Parent Stock

Currently Producing up to 2m Fry per Month

Transferred to Floating Cages

Tilapia Kept in Cages Until They Reach Harvest Size

In-house Training Ensures Top Quality Tilapia Product

Designed Own Packaging, With Security Features

Packaging – UK Retail

Advertisements in Trade Magazines

Sustainable Outcomes: Lake Harvest

Lake HarvestAquaculture

Healthcare

Employment

Training

Output

Multipliers Management

Health & SafetyEnvironment

•informal economy ↑•demand for housing ↑•local contractors used •fish feed plant estab-lished nearby

•good governance•improved systems &administration•reduced corruption

•skilling of local staff•workers perceived asstakeholders•staff more employable

•demand ↑•exports ↑•taxes paid ↑

•↑ jobs•↑ income•↑ jobs for women

•demonstration effecton nearby croc farm•resource preservation

•steady meals provid-ed so nutrition ↑•first aid provisions•hygiene ↑ in homes

•nutrition ↑•HIV/AIDS awareness ↑so vulnerability ↓•counselling provided•access to HIV testing