Docstoc

Slide 1 - FORUMMN

Document Sample
Slide 1 - FORUMMN Powered By Docstoc
					FEASIBILITY STUDY
For Establishing A

Private Equity Venture Fund Company in Mongolia
Presented by Dennis Grubb
Ulaanbaatar, October 13, 2004

EPRC

MACROECONOMIC LANDSCAPE - Mongolian Opportunity - Attractive Industries/Sectors - Economic Growth - Business Environment - Other countries comparisons

PE INVESTMENT OPPORTUNITIES - Companies With High Sales & Growth Rates - Due Diligence - Financial Analysis - Investment Risks - Competitive Returns - Sufficient Number of Attractive Companies - Need for PE Investments

INVESTOR COMMUNITY SURVEY - Investment Objectives - Interest to Invest in PE - Capital Availability for PE Investments - Systemic Risks - Expected IRR vs. potential rates

REGULATORY ENVIRONMENT - Accounting & Reporting - Legal Matters & Rule of Law - Capital Markets Functioning - Rules & Regulations - Corporate Governance Issues - Domestic & Foreign Tax Considerations

DRAFT OFFERING MEMORANDUM - Portfolio Structure - Fund Design & Size - Investment Strategy - LPA/GPA - Fund Management Firm - Fund Administration - Distribution & Fees - Selling & Placement Agents - Competitive Position PRODUCE MEMORANDUM

Yes Positive Regulatory Environment Yes Fund Capitalization Yes Deal Flow Yes Market Opportunity Yes No Deal Flow Yes No Fund Capitalization No No Fund Capitalization No Positive Regulatory Environment yes Yes Yes Yes No Positive Regulatory Environment yes yes Yes

PRODUCE MEMORANDUM

PRODUCE MEMORANDUM

PRODUCE MEMORANDUM

Positive Regulatory Environment
yes PRODUCE MEMORANDUM

EPRC

MACROECONOMIC LANDSCAPE  Mongolian Opportunity PE


Economic Growth




Business Environment
Attractive Sectors



Conclusions

GDP growth 5%, informal sector 35% of GDP, USD/MNT rate, Per capita income $448, savings rate 24%, Inflation rate 4.7%, MNGCI 28000, Mining, Cashmere, Tourism

Is there a market opportunity? Yes
EPRC

ATTRACTIVE SECTORS
Private Equity Group
Group 1 Group 2 Group 3 Group 4 Group 5 Group 6 Group 7 Group 8 Group 9 Group 10 Group 11 Group 12 Group 13 Group 14 Group 15 11 3 2000 2001 34 40 Services Software 17 10 Korea Indonesia 10 2 8 6 6

Year of Deal
1987 1988 1992 2 2 3

Industry of Firm
Distribution/Retail Finance Food 14 16 29 Buyout

Deal Type
28 10 4

Country of Firm
Argentina Bolivia Brazil 18 2 18

Corp. Acquisition Distress

5
3 3 10 8 6 6

1993
1994 1995 1996 1997 1998 1999

4
2 5 10 17 35 31

Health Care
Information Tech Internet Manufacturing Media Natural Resources Real Estate

9
24 9 32 8 11 4

Expansion
IPO Privatization Venture Capital

97
12 10 49

Bulgaria
Chile China Estonia Ghana Hong Kong India

8
7 13 8 3 13 28

2
4 10

2002
2003

22
3

Telecom
Other

14
13

Latvia
Malaysia Mexico

4
2 14

EPRC

INVESTMENT OPPORTUNITIES
    

Sector Analysis and Company Focus Sec Due Diligence Process Financial Analysis Investment Risks

Conclusions
MGL 13/50, DD = I, EDGAR, IAS, Ratios, IPO, PEG

Are there sufficient deals? Yes
EPRC

FINANCIAL ANALYSIS

Performance Indicators

Financial Ratios

Financial Forecasts

•

Sales volume

• Capacity utilization • Gross profit margin • Fixed cost analysis • Variable cost analysis

• Profitability – Gross Margin – Operating Margin – Profit Before Tax Margin – Net Margin – Return on Assets – Return on Equity • Liquidity – Quick Ratio (receivables, cash/total liabilities) – Current Ratio (current assets/total liabilities) • Leverage – Total Liabilities/Net Worth

• Sales

forecasts

• Cost of sales forecasts • Gross margin forecasts

• Efficiency – Sales/Total Assets – Sales/Net Fixed Assets – Sales/Inventory – Sales/Net Receivables

EPRC

VALUATION
Income approach Cost approach Market approach

• DCF (Discounted cash flow) analysis

•

Net asset value

• Comparable

transactions analysis

CF(1)/(1+r) + CF(2)/(1+r)2 + CF(3)/(1+r)3

NAV = Total Assets – Total Liabilities - Adjustment by revaluing certain assets at market value - Obtaining adjusted net asset value by subtracting the liabilities from the adjusted assets

-Price-to-earnings multiple

-Price-to-book multiple

+ CF(4)/(1+r)4 + CF(5)+Exit Value /(1+r)5
________________________________ _ =

Present Value of Equity

EPRC

INVESTMENT RISKS
Panel A: Exit Provisions
Frequency

Contract specifies trade sale to strategic buyer as exit goal, not IPO If exit is not reached within stated time, firm has to pay annual dividends > 50% of profits PEG has a put that can be triggered at any time if there are disagreements with management PEG is investing along side a strategic buyer who might ultimately buy the firm If exit is not reached within stated time, PEG can put back money to parent company of firm Contract pre-specifies an “arbitrator”, for example an investment bank, in case of discrepancies between shareholders to avoid delays in the courts

28 14 13 8 7 4

If exit is not reached in stated time, PEG can put back shares at a price agreed upon by at least three “reputable” investment banks
Panel B: Financing Provisions

3

Frequency

Debt converts to equity if firm defaults PEG issues debt that is backed by guarantees of the parent company of a firm “Forgivable” debt: if firms reaches certain earnings targets, loan is converted into 0% equity Majority shareholder of company issues the bond, not company, to avoid political constraints Government debt becomes subordinate to equity if the firm defaults

9 6 4 3 2

EPRC

INVESTOR INTEREST
     

Investment Objectives Interest to Invest in Private Equity Capital Availability for Private Equity Investments Systemic Risks Expected IRR and Competitive Returns Conclusions
Rates, Yields, ROI, MSE, MNT

Could the PE fund be capitalized? Yes
EPRC

PEF EXPECTED IRR VS EXISTING COMPETITIVE RATE STRUCTURES
Financial instruments
Deposits Demand deposit Time deposit Government bonds 180-day bond 210-day bond 240-day bond Corporate bonds Shine Zuun Puma bond MCS Electronics bond Equity Tulga Spirit bal buram Zoos goyol Bayangol hotel Software company XYZ (hypothetical example) EPRC 1.70% 4.67% 5.73% 4.02% 3.08% 20.36% 55.98% 68.75% 48.19% 37% 1.63% 1.80% 1.58% 19.56% 21.60% 18.96% 1.34% 1.36% 1.29% 16.08% 16.34% 15.53% 0.83% 1.83% 10.00% 22.00%

Monthly IRR

Annual IRR

Assumptions used in estimations of the expected IRR on a 5-year investment in Software company XYZ

EPRC

HYPOTHETICAL COMPANY
       

Company XYZ operates in Mongolia in the software business Company XYZ is a publicly traded company Projected balance sheet and income statement are stated in US $ PEF makes investment in Year 0 by buying 20% of XYZ shares Capital stock consists of 100,000 shares at $100 each Investment is held 5 years Exit at the end of Year 5 through selling at the Stock Exchange Price per share doubles at the end of Year 5
EPRC

PROJECTED BALANCE SHEET


Cash grows at 5% per year and through reinvestment of net profit Inventory grows at 5% per year Receivables reduce at 10% per year Fixed assets grow at 5% per year Accounts payable grow at 15% per year Current liabilities grow at 10% per year

     

Long-term debt grows

EPRC

Software company XYZ projected balance sheet
Year 0 Cash Inventory Receivables Fixed assets Total Assets Accounts Payables Other Current Liabilities Long Term Liabilities Total Liabilities 4,656,000 7,000,000 2,344,000 6,000,000 20,000,000 7,569,200 644,800 786,000 9,000,000 Year 1 5,698,800 7,350,000 2,109,600 6,300,000 21,458,400 8,704,580 709,280 774,540 10,188,400 Year 2 6,974,910 7,717,500 1,898,640 6,615,000 23,206,050 10,010,267 780,208 815,184 11,605,659 Year 3 8,535,956 8,103,375 1,708,776 6,945,750 25,293,857 11,511,807 858,229 919,329 13,289,365 Year 4 10,444,860 8,508,544 1,537,898 7,293,038 27,784,340 13,238,578 944,052 1,103,181 15,285,811 Year 5 12,778,282 8,933,971 1,384,109 7,657,689 30,754,051 15,224,365 1,038,457 1,388,973 17,651,795

Capital Stock
100,000 shares at $ 100 each Retained Earnings Total Stockholders' Equity Liabilities & Stockholders' Equity Investment, 20% of shares 20,000 shares Cash flows IRR

10,000,000

10,000,000

10,000,001

10,000,002

10,000,003

10,000,004

1,000,000 11,000,000 20,000,000 2,000,000

1,270,000 11,270,000 21,458,400

1,600,390 11,600,391 23,206,050

2,004,490 12,004,492 25,293,857

2,498,526 12,498,529 27,784,340

3,102,252 13,102,256 30,754,051

-2,000,000 37%

396,468

484,920

592,842

724,472

4,884,960

EPRC

PROJECTED INCOME STATEMENT
      

Sales grow at 20% per year Cost of sales grows at 19% per year Gross margin = Sales – Cost of sales

Operating expenses grow proportionately at 19% per year
Operating margin = Gross margin – Operating expenses Non-operating income grows at 15% per year Non-operating expenses grow proportionately at 15% per year



Profit before tax = Operating margin + Non-operating income – Nonoperating expenses
Tax equals 40% of Profit before tax Net profit = Profit before tax – Tax

    

Dividend payout: 60% of Net profit
Plowback: 30% Retain: 10%
EPRC

Software company XYZ projected income statement
Year 0 Sales Cost of sales Gross margin Operating expenses Operating margin Non-operating income Non-operating expenses Profit before tax Tax Net profit Dividend Plowback Retained Earnings per share Dividend for 20% of shares 16,090,000 10,500,000 5,590,000 1,325,000 4,265,000 685,000 450,000 4,500,000 1,800,000 2,700,000 1,620,000 810,000 270,000 Year 1 19,308,000 12,495,000 6,813,000 1,576,750 5,236,250 787,750 517,500 5,506,500 2,202,600 3,303,900 1,982,340 991,170 330,390 19.82 396,468 Year 2 23,169,600 14,869,050 8,300,550 1,876,333 6,424,218 905,913 595,125 6,735,005 2,694,002 4,041,003 2,424,602 1,212,301 404,100 24.25 484,920 Year 3 27,803,520 17,694,170 10,109,351 2,232,836 7,876,515 1,041,799 684,394 8,233,920 3,293,568 4,940,352 2,964,211 1,482,106 494,035 29.64 592,842 Year 4 33,364,224 21,056,062 12,308,162 2,657,074 9,651,088 1,198,069 787,053 10,062,104 4,024,842 6,037,263 3,622,358 1,811,179 603,726 36.22 724,472 Year 5 40,037,069 25,056,713 14,980,355 3,161,919 11,818,437 1,377,780 905,111 12,291,106 4,916,442 7,374,663 4,424,798 2,212,399 737,466 44.25 884,960

EPRC

REGULATORY ENVIRONMENT
     




Company Law of 1999 Securities Law 2002 Accounting and Reporting Legal Matters and The Rule of Law Capital Markets Corporate Governance Tax Considerations Conclusions
Article 5 (CL), Provision 26 (SL), IAS, ABA, MSE, MSEC, 15/30%, VAT

Is the regulatory environment conducive to creating a local PE fund? Caution
EPRC

EXAMPLE OFFERING MEMORANDUM
 


 


  

Portfolio Structure Fund Design & Size Investment Strategy LPA/GPA Fund Management Firm Fund Administration Distribution & Fees Selling & Placement Agents Competitive Position

EPRC

PE FUND EXAMPLES
Kula Fund


Central Asia Small Enterprise Assistance Fund
   

 





  

Countries: Pacific Islands (Cook Islands, Fiji, Kiribati, Marshall Islands, Micronesia, Nauru, Papua New Guinea, Samoa, Solomon Islands, Tonga, Tuvalu, and Vanuatu). Total investment $11.4 million Financed by: ADB, EIB, IFC, etc. Investment objectives:  Provide risk capital to private sector  Assist business with a sustainable competitive advantage with higher than average returns, sales and profitability  Focus on most sectors: agro-processing, fishing and fish-processing, warehouse retailing, mining services, printing, palm oil production, and aviation charter services. Investment policy:  Invest equity capital between $200,000 and $2 million; exit after 3-7 years  Be a supportive minority shareholder  Meaningful financial contribution from sponsors  Be an active Board member  Contribute to the profitability of the company  Meet international health, environment and safety standards Successful divestments: IRRs of 26-27% Return on invested capital: 30% so far, additional 10% to be achieved A follow-on fund to be raised in 2005



Countries: Kazakhstan, Uzbekistan, Tajikistan, Turkmenistan, and Kyrgyzstan Total initial investment $8.6 million Financed by: USAID, IFIs (IFC, ADB) Investment objectives:  Risk capital to medium and small enterprises  Provide business and management services  Investments between $200,000 and $1.5 million per business for a stake between 20% and 49%  Minority equity participations often combined with quasiequity financial instruments and subordinated debt  Investment is combined with technical assistance provided through local offices Investment policy  Enterprises that have difficulty securing funds from conventional commercial sources due to their small size or location is less developed capital markets  Entrepreneurs who are able to develop growing and profitable businesses and comply with all laws  Businesses who have developed a product in a niche market with a sustainable competitive advantage  Businesses with a positive impact on the local community  Companies in which at least 51% of ownership interest is held by locally resident nationals

EPRC

RECOMMENDATION


Post Feasibility Study-Ad hoc Committee




“In Principle” Investor Commitments
Establish Closed or Limited Liability Management Company MSE by default
OSF/EPRC/USAID/ADB/KFW/IFC/EBRD, MLI, LPA/GPA, $10-12 m, 10-40%, 25-70%, IPO/SI, 10-25, 3/5/7



EPRC

Thank you for your attention.

EPRC


				
DOCUMENT INFO
Shared By:
Categories:
Tags:
Stats:
views:41
posted:11/24/2009
language:English
pages:21