Senior Partner’s Note First Quarter 2008   In the midst of much dispiriting financial news, this quarterly note gives me […]

Senior Partner’s Note

First Quarter 2008

 

In the midst of much dispiriting financial news, this quarterly note gives me the welcome task of bringing you a little good news. As the credit crunch’s impact widens globally, and the U.S. faces an increasingly likely recession, emerging markets presents for the most part a refreshingly different story. We realize that today’s markets are, to some degree, all interrelated, and like you, we’re monitoring the Western slowdown with caution. At the same time, the recent market correction is addressing what some have considered dangerous overvaluation of certain sectors. Our limited reliance on debt and dollar-neutrality mean our exposure to recent difficulties is minimal and our access to debt unhampered. Our entrenched local networks and long experience in emerging markets have helped us manage risk with foresight and skill. Having realized many successful exits in 2007, we hope the current environment will help us deploy investment capital at more favorable prices with less competition.

This note also marks a turning point in our firm’s history. In March, Actis gathered together as one firm in Delhi for “Actis Global 2008: Being Good, Becoming Brilliant.”  This “all hands” conference was an excellent opportunity for the staff to meet, work and socialize with colleagues from around the world.  The conference also gave myself and the senior partners a chance to express our vision for Actis’ future development and push ahead to make that vision a reality.

In many ways, Actis occupies an enviable position. We draw on a rich history as a pioneer of emerging markets private equity. Our deep local roots, sector expertise, solid portfolio, exceptional personnel and uniquely collaborative “one firm” approach all give us many present strengths. At the same time, we’re eager to peer into the future as the field we pioneered has become increasingly attractive to competitors. We look forward to increasing our deal size, involving ourselves in deals of greater complexity, deepening our bench with even greater sector expertise, and generally pushing both Actis and the emerging markets forward to the next level. I look forward to telling you more about our approach as it evolves.

Investment activity and pipeline

During the first quarter, Actis invested around US$90 million and realized US$X million across our regional corporate private equity funds.  Since 1998, Actis has invested nearly US$X billion in more than X corporate private equity deals and realized US$X billion from X full or partial exits.

Fundraising for Actis Emerging Markets 3 reached an interim close on April 18 with strong results. We raised US$871 million in commitments this quarter, bringing the total fundraising to nearly US$2 billion. We aim to hit the US$1.6 billion cap for the global pool and the US$450 million cap for the Africa and India side pools in June.

We limited investment activity in corporate private equity this quarter to a single major investment of US$90 million in Paras Pharmaceuticals, a rapidly growing consumer goods company based in Ahmadabad, India. This amount represents a follow-on investment to an existing Fund 2 portfolio company with an original investment of US$49 million. At latest valuations on December 31, 2007, the original investment has generated paper returns of 1.3x cash and 23.6% IRR. This additional investment enables Actis to buy out a significant existing shareholder and establish shared control of the business with Girish Patel, the company’s founder.

My notes from Monday’s call mention 1 exit this quarter, which I believe is IDFC. As an infrastructure investment, though, I assume this should note be mentioned with the corporate private equity stuff.  Correct? Similarly, I focused on Paras and skipped Empower and Capital Properties Limited for the same reason.

My notes also mention “the first control deal in China in restaurants”; can you provide details?

While we have made relatively fewer investments than usual this quarter and last, we anticipate considerable activity from the pipeline in the coming months. Globally, final Investment Committee (IC) has approved four transactions requiring US$306 million of equity; these transactions involve a substantially larger deal size and a level of complexity previously unseen at Actis. We’re eager to plumb Actis’ strengths – locally rooted networks, deep sector expertise, and our uniquely collaborative, “one firm” approach – to meet the challenges of these more complex, larger-scale investments.

In addition to final IC-approved investments, six transactions across four regions totalling $280 million have been approved by preliminary IC, and X transactions requiring US$X billion have been passed by our regional screening groups.

Macro developments

With the steady drumbeat of negative news about the U.S. and Europe’s economies, it’s worth remembering that long-term projections for the rise of emerging markets like China, India, Brazil and Nigeria stem from long-term fundamental trends and the continuation of sound economic policy.  While we keep a watchful eye on developments in these Western powerhouse economies, we see no evidence that the trends supporting long- and medium-term emerging market growth have altered. Short-term prospects also look good. Dislocation in developed markets is attracting some investors to emerging markets, and nearly all of this quarter’s short-term obstacles were already factored into our investment approach.

Short-term GDP growth projections for emerging markets have held steady in the face of increasingly volatile global equity markets, the threat of a credit crunch and evidence of a recession in the U.S. and Europe. Standard Chartered recently affirmed its January 2008 forecasts for 2008 GDP growth: 9.5% in China, 9.5% in Nigeria, 8.1% in India, 6.1% in Indonesia, 5.8% in Egypt, 5.4% in Pakistan, 4.8% in South Africa, and 4% in Brazil – all handsome returns compared to flat-to-negative GDP growth expected for the U.S. and Europe this year. Recent spikes in oil prices have benefited oil-rich markets like Nigeria and Brazil, offering additional capital for continued diversification into other sectors.

As a major private equity investor in Africa, both historically and currently, we at Actis continue to keep a close eye on recent political instability there; our considerable local expertise has helped us weigh our moves wisely in advance. Nigeria’s disputed election results are playing themselves out civilly in a courtroom, not in the streets; we see the threat to our portfolio there as minimal. Actis had already exited its three Kenyan investments in 2007, before the country flared up with uncharacteristic violence at its election results. (This conflict has recently resolved itself in a peace agreement, giving us hope for a cautious re-entry into this highly promising market.) Similarly, we have no active investments in Zimbabwe, where fractious election results and spiraling inflation continue to develop. We emphathize with the difficulties these developments have created for ordinary citizens, our colleagues and friends there. At the same time, long-term fundamental prospects for our African investing regions remain bright.

On a more hopeful note, we second the long-term confidence the World Bank recently expressed in recommending sovereign wealth funds of Asia and the Middle East to commit steady investment flows to Africa. I heard the same encouraging themes echoed when I spoke as a panelist on Private Equity at the Annual Meeting of the World Economic Forum at Davos in January. We’re also happy to report that Actis won the African Private Equity Firm of the Year 2007 in Private Equity International magazine’s annual awards. In short, misperceptions about short-term instability in Africa, combined with our deeply entrenched local networks and dominant position in private equity there, may provide Actis with extra competitive advantages in the region going forward.

Moving across the globe to China, we have already prepared our portfolio for a drop in Chinese export demand as U.S. and European economies slow. As mentioned last quarter, we’re encouraged by the fact that Chinese domestic consumption continues to grow at an accelerated rate. As Standard Chartered notes in a recent report, net exports accounted for only about 15% of China’s GDP growth from 2005 to 2007, while domestic investment and household consumption accounted for more than 70%. Can you help me find an updated version of this report? This used to be 5%/95% in 2004, so I want to confirm it hasn’t slipped further. Accordingly to official data cited by The Economist, real GDP growth in China reached 11.4% in 2007, with domestic consumption outstripping investment in that figure for the first time in many years. As noted last quarter, we have already limited investment in export-dependent businesses, and our exposure to that sector is modest and in-line with our assessment of China’s longer-term prospects as an exporter.

Volatility in global equity market prices certainly hurts consumer confidence and slows investment prospects – but bringing P/E valuations more in line with reality are, we believe, a very good thing. Luckily, Actis’ portfolio is relatively neutral to many of the most headline-producing macroeconomic developments. The dollar’s continuing slide does not impact our portfolio materially, as investments are held in local currencies. Similarly, our limited reliance on leverage makes us less vulnerable than most to the credit crunch. All in all, we feel we’re well-positioned to ride out these interim shocks towards a successful medium- and long-term.

People

Our all-firm meeting in Delhi last March was a great success, and we’re now actively engaged as a team in follow-up from the conference. Firm-wide workgroups have already commenced researching topics including sector affiliation, global partnerships with external service providers, gross-to-net, opportunities posed by climate change, an Actis foundation, and our corporate branding. We plan to report back to partners in July with details of these initiatives and a clear blueprint for our future growth.

We’re also excited to announce the appointment of Chris Chris to the Actis team. Chris will help us enhance the firm’s existing risk management capabilities, assist with larger deal sourcing and debt financing and provide ongoing portfolio management support. Chris joins Actis from Barclays Capital where he was Head of European Leveraged Finance.

We’re gearing up for an exciting quarter ahead, with brisk investment and fundraising activity ahead and the future blueprint to envision and execute. We look forward to reporting back to you on our progress in the coming months.

Best regards,

Paul Fletcher
Senior Partner