FRONTIERS-From Goldman to frontier private equity

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* Ex-Goldman banker invests in frontier private equity

* Market offers way into countries with few stocks, bonds

* Returns can be high, but liquidity, transparency risks

By Carolyn Cohn

LONDON, May 26 (BestGrowthStock) – Zain Latif has swapped a career
in investment banking for a niche start-up, and $100
million-plus deals in Africa for tiddlers of $3 million.

Once a banker at Goldman Sachs, Latif last year took the
plunge to set up a private equity firm which sports a headcount
of five.

From an apartment in a smart block in London’s West End,
between budget clothing store Primark and chain restaurant Ask,
Latif and his team at TLG Capital have invested in three
companies in the past half-year in frontier markets — Uganda,
Ghana and Cambodia.

Frontier markets are typically regarded as markets where
market capitalisation, liquidity and market-making are lower,
not only than in developed, but also than in the bigger emerging

But what if these countries do not, or barely have, their
own stock exchanges or bond markets?

One of few ways to invest in these deep frontiers is through
private equity — buying a stake in a local company, helping it
to grow, and then achieving an “exit” either through selling it
on to a bigger firm, or turning it into a listed company.

Bigger players like Latif’s former employer Goldman tend to
overlook these tiny deals.

“An investment bank will do nothing less than $100 million,
five to six deals a year if that, and you are restricted to
three countries — Nigeria, Kenya, Angola, the commodity plays,”
Latif told Reuters.

“We are looking at small and medium-sized businesses at a
size of $3-5 million. We will go down to half a million.”

TLG is attracting money from private investors in the Middle
East and Europe, and none of the countries in which it has
invested so far even make it to the MSCI Frontier Markets index,
against which many frontier market funds will be measured.

Its first three investments are in a pharmaceuticals plant
in Uganda making anti-retroviral and anti-malarial drugs, a
cancer centre in Ghana and a Cambodian company running cruises
along the Mekong river.

One of TLG’s pipeline projects is in the healthcare sector
in Liberia, still recovering from a 1989-2003 civil war.


Last year less than $1.5 billion was invested in private
equity projects in sub-Saharan Africa, one of the main regions
for deep frontier markets, compared with around $3 billion in
each of the previous two years, according to data from the
Emerging Markets Private Equity Association.

The figure for sub-Saharan Africa compares with over $22
billion invested in private equity in emerging markets globally
last year, and $43 billion in the United States.

But private equity investment in sub-Saharan Africa has
risen from $651 million in 2003, while in the United States it
has fallen from $59.2 billion in the same year.

Liquidity issues are a particular constraint in frontier
private equity markets, where the way to make real money is,
after grooming a company, to sell on the stock to what will be a
relatively small pool of buyers.

It’s hard to do business, but the flipside is that if your
investments pay off the returns are high.

CDC, the development finance arm of the UK government and
the biggest investor in private equity funds in Africa, made an
average annual return on investments of 16 percent over the past
five years.

“If we over the medium term can achieve in the teens, that’s
an attractive return and that’s possible,” said Richard Laing,

The way to get into these markets is to be on the ground,
say Latif and other private equity managers.

TLG is adding two new staff, and all of its future projects
will involve employing someone locally.

“We go on the boards, our value-add is providing the
strategic review,” said Latif.

Local staff from private equity firms will advise companies
on how to do their accounts, how to stick to international
standards of corporate governance and transparency, and help
make them presentable for sale to multinationals.

Transparency is an issue in countries often considered a
byword for bribery and corruption.

Laing at CDC tells a story from a few years back of a
Bangladeshi power station manager going to the port to pick up
some imports.

“It will probably take two days because we do not pay
bribes,” the manager told him. As Laing says, business takes
longer if you won’t pay bribes, because you have to wait while
your local official enjoys lunch with someone who does.

Of 47 sub-Saharan African countries in Transparency
International’s Corruption Perceptions Index 2009, 31 scored
less than 3 out of 10, indicating that corruption is seen as

These countries include Kenya and Uganda, although Ghana
shows a slightly better performance.

“Fifty percent of the value of a company in Africa is based
on its presentation, financial governance, corporate
transparency,” said Latif. “People pay extra for that.”

Aureos Capital, an emerging markets private equity firm with
$1.2 billion under management, has nine offices in Africa,
including Zambia, Ghana and Senegal.

“Many of these countries do not have good intermediaries,
investment bankers, advisers, accountants — it is not available
at that level of sophistication,” said Aureos chief executive
Sev Vettivetpillai. Aureos’ local staff help fill that gap.

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FRONTIERS-From Goldman to frontier private equity