MEED Mergers and Acquisitions Conference: Fast Growth through Early Stage Private Equity

Strictly Private & Confiden3al

MEED Mergers and Acquisi3ons Fast Growth Through Early Stage Private Equity

Sajjad Jaffer Abu Dhabi December 9, 2009

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ShiA towards earlier stage investment

Typical private equity types of investments

  Interna3onally and regionally there has been a shiA from the large buyout, infrastructure, and real estate funds towards smaller growth capital funds

  Several large regional players are moving more towards the growth capital space by establishing smaller funds targe3ng SMEs

  Private equity funds are beginning to focus more on adding opera3onal value to their porHolio companies as opposed to making quick profits through financial restructuring instruments

Startup Pre-revenue Pre-profit Breakeven

Innovation Risk Market Risk

Growth

Seed Capital Round A,B,C Growth Capital

Mezzanine Pre‐IPO Turnarounds

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Changes in private equity value drivers

Evolu3on of private equity sources of value Over the coming years, private equity investors will shiB away from financial restructuring and high exits back to basics: growing earnings and sourcing aHracIvely priced deals

Grow earnings High exit valua3ons

Financial restructuring

Low entry valua3ons Va

lue

drivers

Commen

ts   Private equity

investors will try to buy at lower valua4ons than the fair market value

  Private equity investors will work with the management team to boost opera4ons and improve profitability

  Private equity investors will try to sell at higher mul4ples than the ones they bought at

  Private equity investors will use leverage and financial restructuring to magnify their returns

  Historically, private equity investors focused on financial engineering and leverage to boost their returns. With the debt markets =ghtening this is becoming harder to achieve

  In addi=on, there were a lot of “flips” in the market with private equity investors exi=ng their investments in less than a year with massive returns. With the slowdown in the economy these types of deals will become more scarce

  In the future, private equity investors will have to focus on aDrac=ve entry valua=ons and earnings growth to achieve the returns they have grown accustomed to

  Earlier stage smaller companies can offer more aDrac=ve entry valua=on because of the massive nonfinancial value the investor can bring to the table

  Moreover, their high growth poten=al and opera=on inefficiencies offer great room for growth in profitability

Key drivers in the future Key drivers historically

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The segment is currently underserved in the region

Typical sources of funding With very few funding opIons available to this segment, there is a huge market gap that represents an opportunity for early stage private equity investors to play in a space that is massively underserved with liHle compeIIon currently

Realizing the huge impact these businesses have on boosIng the economy, regional governments are beginning to launch strategic iniIaIves aimed at unleashing the growth potenIal of this business segment

Banks   Banks in most cases don’t want to lend the smaller

riskier players for a number of reasons

―  Absence of 3‐4 years of historical financials

―  Lack of enough assets to serve as collateral

―  They don’t have the right family for name lending

  In the few cases where banks do lend, the terms are short (3‐6 months) and interest rates are very high

(15% in the UAE for unsecured loans)

  A recent poll in the UAE showed that just 25% of

SMEs used a secured loan and only 13% had used an

unsecured loan, while 45% used an overdraS and

55% a leTer of credit facility (Zawya)

Government   Very limited funding and in most cases sector

specific

  Recently regional governments par4cularly in the

UAE and KSA have launched a number of ini4a4ves

to promote SME financing (SIDF, Agricultural

Investment Fund, small business loans ,etc…)

Debt

Private equity funds and investors   Most of the large PE players in the region can’t afford

4me and resources to look at these small

investments

(a US$ 1bn fund will need to make 100 ten million

dollar deals)

  Larger funds typically have a minimum 4cket size (usually around US$ 20‐30m) which is way above the

funding requirements of these SMEs

Friends and family

  With most investors being hit by the stock market

and the real estate bubble burst, it is becoming

increasingly difficult to secure funds from friends and

family Government

  Recently there has been some government ini4a4ves

to launch investment funds targe4ng SMEs, although

this is a step in the right direc4on it is far from filling

the financing gap (ex: Khalifa fund and Mohammed

Bin Rashid fund in the UAE)

Equity

DRAFT 5

Key CEO considera3ons when raising private equity

Lifestyle   Introduces an ac4ve partner who

can share in the responsibili4es of ownership and management

Corporate Governance and

Ins3tu3onaliza3on

  Board mee4ngs, regular repor4ng   Systems and procedures   Methodical development on

opera4ons and forecas4ng

Access to Capital

  Equity   Banks more likely to lend   Non‐conven4onal financing

Network

  Business development (new markets, clients)

  Market intelligence: PE team, investment banks, consultants, auditors

Value Crea3on

  Growth through M&A and industry roll up

  Exit through IPO or trade sale

Growth through private equity is more than just a financial decision

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5   Primary focus on exi4ng business may conflict with founders and leaving some value unrealized

  You are no longer your own boss; you must take other perspec4ves in to account

  More work (ini4ally) and a change from informal management style

  Equity dilu4on   Capital raising can be 4me

consuming and a distrac4on

  Strategy may be ques4oned more oSen

Process

  Posi4ve learning experience related to the pre‐investment (nego4a4on, due diligence, legal) and post‐investment process of PE

6   Can be complicated & detail oriented (term sheets, SPAs)

Pros Cons

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Market

  Don’t bet on new ventures, pick companies with an established customer base and an exis4ng revenue stream and provide the capital to grow the business to the next level

  Given the maturity level of the region, local entrepreneurs don’t need to reinvent the wheel, they can take interna4onally proven businesses and ideas and apply them to the region. This eliminates technology risk which is the biggest threat to early stage investments

  Select companies that have a key differen4ator that will allow them to capture market share in an exis4ng market

  Take a view on a specific industry that is growing substan4ally due to demographic drivers or government reforms etc… and find a company that is well posi4oned to tap into that market growth

  Best of all, seek companies that don’t need to compete in an exis4ng market but can actually create a new market of their own and become leaders in that space

Management Team

Things to look for in a management team

  Team gel and history of working together

  Regional experience

  Vast industry knowledge

  Drive and mo4va4on

  Skin in the game

Typical investment filtering criteria

Key investment criteria for early stage deals Regional entrepreneurs don’t need to invent new products, they can just incorporate exisIng global ideas and apply them to the region. By finding these differenIated products they can operate in a space where they are market leaders with liHle compeIIon

Existing market Potential market

Capture market share in an exis3ng market

Capture market share in a growing market

Create a new market

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Risks, mi3gants, and associated returns

Typical early stage investment risks and mi3gants Early stage investments are definitely riskier than their mature counterparts, however if the risks are effecIvely managed, investors can expect superior returns

Investment horizon performance through March 31, 2009 (top quar3le)

Source: Thomson Reuters, Cambridge Associates LLC

Performance of smaller venture funds vs. larger ones

1990‐2008

Innova3on risk   Limit innova4on risk by inves4ng only in proven businesses

Market risk   Mi4gate market risks by choosing businesses with an exis4ng customer base and key

differen4ator along with high barriers to entry

Opera3onal risk   Pick a team that has a proven track record in the industry

Key man risk   As 4me passes, ins4tu4onalize the organiza4on and retain technical advisors

Low management fees

  The low management fees associated with smaller funds and deal sizes can actually be

turned into a strength as it perfectly aligns interest between LPs and GPs where GPs are

compensated mainly when they deliver returns

Lack of exit op3ons

  Secondary sales to larger PE funds that are compe4ng for a limited number of big deals

  IPO on a regional exchange once a certain size is reached

  Sale to a strategic large family business

High entry mul3ples

  ASer managing the entrepreneur's expecta4ons and given the non‐financial value

added by PE shops, very aTrac4ve entry mul4ples can be nego4ated

Early stage and startups

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Post acquisi3on value crea3on framework

Post acquisi3on value crea3on

Define the full poten3al

  Opera4ng value: scru4nize demand, customers, compe44on, and environmental trends

Develop the blueprint

  Roadmap for reaching full poten4al: the who, what, when, where

Accelerate performance

  Mold the organiza4on to the blueprint: use a rigorous program, and monitor a few key metrics

Harness the talent

  Create right incen4ves for employees to act like owners   Assemble decisive and efficient boards

Make equity sweat

  Embrace LBO economics: manage working capital (AR, AP, Inventory, CCC),

  Disciplined capex spend

Foster a results‐oriented mindset

  Repeatable processes that spur performance improvements again and again

Source: Bain & Co.

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Salata

Key Financials (Salata GCC) Deal Overview

  Board Seats: Three

  Equity Stake: 85% (subject to further

dilu4on)

  Source: Proprietary

  Investment Date: April 2008

  Other Investors: Thomas Schwarz, co‐

Founding Partner

Recent Developments

Websites: www.salatafarms.com

  Retained Lazard as lead financial advisor raising US$ 50m capital across GCC ins4tu4onal investors

  Retained Bidwells, UK based agriculture consultancy, to provide assistance with technical due diligence, management expansion, marke4ng, supply chain and sustainability strategy

  Retained Lovell’s and KPMG to advise Salata on tax and legal structure

  Legal assets include intellectual property trade secret agreements, trademarks, copyrights, and exclusivity agreements for access to hydroponics technology in the MENA region and Turkey

  Sustainability plan includes carbon offseqng energy supplies using solar based absorp4on cooling

  Featured on BBC World Middle East Business Report

2009 2010 2011 2012 2013 2014

Revenue growth 443% 968% 109% 18% 5% 4%

EBIT margin (318%) 32% 47% 45% 50% 50%

Business Descrip3on and Investment Ra3onale

  First company in MENA to adopt environmentally sustainable hydroponics producing high margin products in water based medium

  Technology enables superior produce, saves energy, transporta4on, labor, and land use, building on success of similar models in developed markets

  Arbitrage opportunity to sell high end products that fetch 3‐4x price premium while producing fresher produce locally at lower costs

  2 year off‐take agreement with leading UAE wholesaler   Food services in the Middle East is a US$ 31bn market with 90% of food

requirements met through imports   Food security is a priority for governments in the MENA region leading to

land acquisi4ons overseas   MENA is the world’s most water stressed region necessita4ng

environmentally sound and resource efficient prac4ces

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Post acquisi3on value crea3on: Salata



  Growth levers: geography, product, value chain, and branding   Sources of compe44ve advantage: IP, arbitrage opportunity growing

high end produce at the point of demand


  Management: Test concept through R&D facility, ring‐fence IP, and plan phase 2

  Technical partnerships: Bidwells, EU based academic ins4tutes, NGOs   Incremental plan for financing capex and WC


  Assignment of business plan to key personnel across sales, marke4ng, opera4ons, and technology

  Focus on product quality, new customer wins and strategic partners in KSA and UAE

Harness the talent

  Co‐investment at incep4on   Sweat equity plan for founders   Stock op4on plan for management team and advisors

Make equity sweat

  Supplier financing   Shareholder loans   Volume discounts from supplier


  Update targets, budgets and management incen4ves   Study new opportuni4es as they arise (M&A, JVs)

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Delta United

Key Financials

2007 2008 2009 2010 2011 2012

Revenue growth 109% 12% 422% 50% 50% 22%

EBIT margin 6% 10% 17% 20% 21% 21%

Over 50% of 2009 projec=ons have been achieved since March 31 (Delta’s fiscal year)

Deal Overview

  Equity Stake: 65%

  Board Seat: Two


  Investment Date: July 2009

  Other Investors: Aziz Assi (Managing

Partner)

Recent Developments

  Siraj has secured Delta a credit line from a leading bank for SAR 10m (expandable to SAR 20m in 6 months). This will allow Delta to start taking up larger projects (they were turning down very large projects due to lack of financing )

  Siraj is working with the CEO and a consul4ng company to hire key personnel (CFO, head of HR, etc…) and is close to reaching a final decision

  Siraj is working with an interna4onal consul4ng group to restructure Delta United to achieve interna4onal standards of organiza4onal structure

  Delta is in ini4al stages of nego4a4ng a poten4al acquisi4on of a telecom service provider in the region

  Should Delta secure addi4onal financing, it should be able to win a SAR 50m project with Zain

Website: http://www.deltacompany.com/

Investment Ra3onale and Business Descrip3on

  Telecom liberaliza4on spree triggered by Saudi Arabia’s WTO accession

  Number of service providers increasing due to liberaliza4on driving up the demand for infrastructure services

  Solid management team with track record of having built a comparable US$ 200m+ revenue business in Saudi Arabia

  Ranked #11 on 2009 KSA Fast Growth 100 Company list

  Delta is primarily an infrastructure outsourced service provider for telecom operators and OEMs including: ―  Ericsson, Motorola, Nokia ―  Zain, Mobily, STC ―  Fixed line operators STC, Atheeb ―  Government agencies: KSA Armed Forces, Police, Na4onal Guard

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Post acquisi3on value crea3on: Delta United



  Growth drivers: market liberaliza4on of telecom sector, growing spend on telecom infrastructure (e.g. STC spent US$ 5B in 2008)

  Sources of compe44ve advantage: quality and speed of project execu4on, deep customer rela4onships


  Management: Maintain quality of execu4on, secure key contracts, resource management and alloca4on

  Siraj: Streamline processes, redesign org structure, recruitment, cross selling through Siraj porvolio companies


  Geographic expansion throughout the GCC   Product diversifica4on to focus on high growth annuity services

Harness the talent

  Co‐investment at incep4on   An4 dilu4on clauses to protect management through subsequent capital

increases   Stock op4on plan for leadership team

Make equity sweat

  New shareholder loans to replace exis4ng debt   Credit facili4es through regional commercial banks   Structuring debt instruments to support non‐recurring large projects


  Compensa4on plan 4ed to MBOs   Quarterly board mee4ngs to review performance   Regular strategy workshops

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Lomar

Key Financials

2007 2008 2009 (est.) 2010

Revenue growth 57% 39% 74%

EBIT margin 22% 16% 16% 18%

Financials based off Management projec4ons for core thobe business. Plans being formulated for product line expansion and entry into new brand categories which should significantly enhance financial projec4ons

Deal Overview

  Equity Stake: 30%; op4ons to acquire

addi4onal 19.9% equity

  Board Seats: Three


  Investment Date: May 2009

  Other Investors: Founders

  Company is in process of finalizing construc4on of new 5,000 sq. m. centralized facility that will streamline produc4on, improve quality & delivery 4me and allow for 4x capacity increase

  2nd 4er – mass market “trend” brand – HAMZA being developed (launch Feb/March 2010)

  Lomar Franchise development model being finalized with Francorp   “Store within store” partnership signed with Sawany Group, leading KSA

department store chain   “Lomar by Appointment” concept being developed for VIP clientele   Luxury 1st Class “Sleeping Thobe” and “Thobe Robe” ini4a4ves   Strengthening senior mgmt team: brand, produc4on & finance managers   Ranked #13 on 2009 KSA Fast Growth 100 Company list

  Founded 2005, high end, made‐to‐measure regional fashion retailer   Brand recogni4on by TIME Magazine, MTV Arabia, Mercedes Benz   Sales per sq S of US$ 901 in ‘07 exceeds the US$ 300 industry benchmark   Historical business highly profitable with opera4ng margins of 20+%

compared to 10% retail apparel industry averages   Currently 4 loca4ons in Jeddah, Riyadh & Khobar), 15+ addi4onal outlets

planned for regional footprint (inc. franchised loca4ons in GCC)   Opportunity to develop ancillary suppor4ng lines of business (ready‐to‐

wear line, inner garments, head wear, women’s line) and transform concept into leading GCC high‐end fashion brand

  MENA clothes mkt. worth US$ 27bn in 2006 w/GCC retail industry 2nd in size to the oil & gas industry. Retail sales per capita at US$ 1.8K lags the US (US$ 9K) and UK (US$ 7K) providing ample room for domes4c growth

Recent Developments Business Descrip3on and Investment Ra3onale

Website: http://www. lomarthobe.com/

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Post acquisi3on value crea3on: Lomar



  Growth levers: young popula4on, increasing wealth, supply chain management

  Sources of compe44ve advantage: branded customer experience, WOM marke4ng (MTV Arabia, Mercedes Benz)


  Management: Introduc4on of mass market brand, network expansion   Financing plan for new produc4on facility, recruitment of brand

managers


  Store profitability per square foot, repeat business rates   Factory capacity and throughput rates   Viral marke4ng ini4a4ves

Harness the talent

  Co‐investment at incep4on   Compensa4on plan 4ed to achievement of key milestones   Stock op4on plan for management team and advisors

Make equity sweat   Franchise model across the GCC   Capex 4ed to supply chain op4miza4on


  Rewards for new branding programs to match emerging consumer preferences

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Siraj Capital (Dubai) Ltd. P. O. Box 506625 DIFC, Gate Village Bldg 4, Level 2 Sheikh Zayed Road, Dubai United Arab Emirates

Tel: +971 4 425 – 0685 Fax: +971 4 425 – 0680

Siraj Capital Saudi Company Ltd. P.O. Box: 126666 Future Business Centre, Level 5 Amanah Street, Jeddah – 21352 Saudi Arabia

Phone: +966 2652 9600 Fax: +966 2652 9633

Economy & Finance

MEED Mergers and Acquisitions Conference: Fast Growth through Early Stage Private Equity