August 18, 2012
Interviewed by: David Snow
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What’s Next for Actis?

Few people have been active in emerging markets private equity as long as Jonathon Bond, Partner and Head of Fundraising at London-based Actis. In this Privcap interview, Bond details the reasons behind Actis’ deal with the UK government to buy back 40% of the firm the partners did not already own.

Bond also discusses why emerging markets private equity is “at an inflection point” and describes two cases where Actis bought “trusted, local” brands in specific markets and grew them by expanding to other emerging markets, such as a South African stolen-car recovery system that has been expanded to Brazil.

Few people have been active in emerging markets private equity as long as Jonathon Bond, Partner and Head of Fundraising at London-based Actis. In this Privcap interview, Bond details the reasons behind Actis’ deal with the UK government to buy back 40% of the firm the partners did not already own.

Bond also discusses why emerging markets private equity is “at an inflection point” and describes two cases where Actis bought “trusted, local” brands in specific markets and grew them by expanding to other emerging markets, such as a South African stolen-car recovery system that has been expanded to Brazil.

David Snow, Privcap: So we are joined today by Jonathan Bond of Actis. Jonathan, thank you for joining Privcap today. Very nice to see you.

You are a long time participant in the emerging markets, and so I”m very fascinated to hear your views about what”s going on in the emerging markets today, especially since you”re from Actis, is active across many parts of the world. But there”s been some news recently from Actis that I think might be an interesting place to start.

Correct me if I don”t get all the facts right, but you have bought back from the UK government– the partners of Actis have bought back from the UK government– a 40% stake in the firm that you did not already own. Why did you and your partners do that? You must have been bullish about Actis, the emerging markets?

Jonathon Bond, Actis: Absolutely, David. I think it”s worthwhile just stepping back as to why we started off with the British government owning a 40% shareholding back when we spun off in 2004. It was very much our feeling at the time, and it”s difficult sometimes to remember that back then, emerging markets weren”t nearly as popular as they are now.

And it was our estimation that both for encouraging investors to entrust us with their money, but also to reassure governments in some of the regions where we focus on investing, notably in India and Africa. There was some continuity with the past. We felt it would be very helpful to have the British government remain as a minority investor following the spin out. And I have to say, it has been a huge advantage for us. I don”t think we”d have made the progress we have in the last 8 years without their support, and of course, without the support of CDC, our anchor LP, which is wholly owned by the British government.

But we felt really about two years ago that we were reaching a point where probably it made sense for us to move to the next stage of our development. And I think what it means, in some respects, it means an enormous amount, and in other respects, it means very little. And what I mean by that is that to go to being wholly owned by our partners and staff I think, makes us feel a little bit more masters of our own destiny. We were very lucky that, in effect, the British government has been a very benign shareholder. We”ve been very lucky to have them there.

But I think there”s some things that you just have to take more slowly if you”ve got outside shareholders. There are some matters that pertain to the arcane aspects of private equity in emerging markets that”s sometimes quite tough for government people to understand. So I think we very much wanted to have the opportunity to consolidate our ownership.

Nothing, though, really will change in the sense that our strategy remains the same, the countries we  remain focused on will remain the same. You won”t be reading about us setting up a Spanish internet fund. We”ll remain focused on private equity in emerging markets, because the size of the opportunity there is terrific.

And I hope it sends out a real signal of optimism from us 30 partners at Actis and staff. We”ve jointly clubbed together to buy it. It hasn”t been cheap. The British government did a very good job at negotiating with us. But I think it”s a signal of our confidence in both the opportunities going forward to the next 10 years. We”re suitably bullish about the opportunities, but we”re also fully cognizant that some things aren”t going to bee as easy as they have been in the past, and we can perhaps talk about that later.

But we think the opportunity set is formidable. We”re very proud of our track record, our strategy, and our team, and we just think there”s no better investment that we”d like to make as individuals than buying shares in our own firm. And so, I think it”s a very exciting development. I hope from an LP point of view and staff point of view it doesn”t feel very different, but I think psychologically, it will over time have quite an impact on us.

Snow: Great. Well, to your point about obviously being bullish about the future, but also having mixed feelings about the current popularity of the emerging markets– and certainly much more popular than in 2004 when people still had nausea about what had just happened in the 1998 aftermath– what is your analysis of the current state of fund raising in the emerging markets and what it signals about the things that LPs are thinking about emerging markets?

Bond: I think emerging markets private equity is very much at an inflection point. If you look up until the global financial crisis, emerging markets private equity was deploying and raising around $50 billion a year. Something like that. It then dropped to around half the levels, around $25 billion, through the crisis, and it”s slowly coming back up.

So you would have expected me to say, well, that falling off in fund raising is tough and that generally, maybe international investors haven”t depreciated the strengths of the emerging markets private equity case. But I think what I would observe is that, yes, we”re very lucky that we”re focused on growth markets. We”re very lucky that our model is one that doesn”t depend on leverage for returns. And we”re very fortunate in that a lot of LPs are still playing catch up to get the necessary portfolio construction allocations they need for emerging markets.

So all of that has led to really quite a stampede into emerging markets private equity in the last two to three years. And all I would observe is that I think LPs need to be quite discriminating and just make sure that, in a way, they”re not fueling a future problem for emerging markets private equity, which I would term as the weight of expectations, and probably the unrealistic weight of expectations.

I used to work in the European private equity industry, and if you look at how long it took that industry to get to the current funds under management, it was significantly longer than it”s taken the emerging markets private equity community to. And there are dangers there, I think, which is that you”ve got teams that are making great progress, doing great work, but who are being given really quite a lot of capital at a relatively early stage in their developments to manage. And I just worry that that flood of capital will result in unsatisfactory returns, very high entry pricing. And the net result of that might be in five years time LPs say, well, emerging markets private equity was over sold to us. We don”t think it can generate the same returns as elsewhere.

So I think this is a very fine balance to be achieved between how we message to LPs about what we think emerging markets private equity can achieve and generate. And I don”t quite know how you do this, because fund raising is each and every GP goes out and does its best. But I do sometimes worry, notably in places like Brazil, that perhaps too much capital has been put in. I think it”s seven funds of more of a billion dollars. But where is that all going to go, and what will the impact be? And similarly, in India, until recently there”s been a vast overhang of capital, which we”ve seen has driven up prices a lot and made it very hard to make good private equity returns in India, for example.

So I think I”m just observing that, in a way, the global financial crisis has been a mixed blessing for emerging markets private equity. In a way, it”s brought forward and accelerated the moment of growing up for emerging markets private equity, that perhaps we could have benefited from a slightly slower development. I did know, but I do worry about that.

Snow: I want I get your further views on India in a bit, but I”m interested in exploring further something you touched on, which is the increasing competition in the emerging markets. It”s hard to find a large private equity firm, or in some cases medium sized private equity firms, that have not established major efforts in several emerging markets. So how do you think Actis will continue to compete and distinguish itself when you have, again, all the major private equity firms, including all the big, now, publicly traded ones having major beachheads across Asia, Latin America, et cetera?

Bond: Look, I think it would have been naive of us to have expected that we”d have these markets to ourselves. I”m pretty convinced that, as it were, the growth in the number of participants is more than matched by the growth in opportunities. I think you”ve now got an interesting array of choices for LPs in which strategies they choose to support. You”ve got the well established majors diversifying into emerging markets above a certain deal size and sexual approach. You”ve then got the regional funds, you”ve got the pan-emerging markets funds, like ourselves, you”ve got the country funds. So there”s a really rich choice for LPs, which I think can only benefit LPs.

Our own view has been that while competitive intensity has undoubtedly increased, I think that”s good for emerging markets. It”s good for the entrepreneurs. Meanwhile, in the background, IPO markets have been flicking on and off, and in a way, that can be almost as important a source of competition as GPs coming into the market.

For ourselves, we”ve tried to respond to that increased competition by really doubling down on our commitment to having boots on the ground and in markets. So we”re about 110 investment professionals across nine offices, which is an expensive model. We think the days of buying relatively cheaply and allowing growth to generate private returns, we think those are over, and therefore we”re all, I think, now under pressure to be much more interventionist, to have a more sexual approach, to really try and ensure we”re doing more than just being passive investors. So that”s the route we”ve gone down, and of course, we”re very focused on control investing, which is an interesting development in these markets.

So on the whole, I think, sure, how do we stay as we were in 2004? I think we”d be finding life really quite tough. But I”m pleased to say that we”ve tried to stay ahead of the curve, and we”ve experimented with developing our approach. And so far, the signs are pretty encouraging.

So we never take the competition complacently. We think we”ve got very, very high quality competition in all our markets, and I think that”s great for the markets. It builds confidence in the sector to have some of the really big brand name firms investing in these markets and showcasing really successful deals.

So I think on the whole, I”m less worried by the growth in the number of participants than I am by perhaps people, as I say, allowing perhaps too much money to go to firms in too early a stage in their development. So I think we welcome the competition, but we do worry about the impact of so many players addressing the same strategies at the same time.

Snow: Well, let”s use India as a case study. I”m interested in a bit of a deeper dive into your views on the current opportunity in India, and then how Actis has maybe repositioned itself or girded up itself for what lies ahead.

Bond: Well, I need to declare my hand. I”m a long term bull on India, and have been ever since I arrived in India in “94 with two suitcases wanting to set up a private equity firm there. And none of those reasons have really changed the last 20 years, but what I have seen over the last 20 odd years is really quite an intense cyclicality in investor”s attitudes to India.

Some things to me remain constant, which is the very attractive demographics, the hugely talented people, generally a very bureaucratic and not very able government, so you can factor that into your thinking. And a lot of money that goes in and out, because the Indian markets, in a way, are very open.

India is remarkable. It”s gone from being the darling of private equity only five years ago to now being the whipping boy, and some of that I can understand why, because I think returns have disappointed relative to China, particularly exits. There haven”t really been the number exits people wanted. I think a lot of Indian GPs were a bit lazy three years ago and adopted pipe strategies, which perhaps it”s a bit cheeky to charge 2 and 20 on those, and I and LPs were a bit disillusioned.

I think that the recent Indian government”s announcement that it plans a 20% capital gains tax, and maybe even retrospectively, has not done a lot for international sentiment. But I said this morning, and I”m happy to repeat it, that I”ve been observing India for long enough to know that if there”s one thing you can be quite confident on, it”s that the Indian government will continue to do the wrong thing until the last possible moment.

I really do believe that they will row back from this, and it”s probably likely that we”ll end up with around a 10% capital gains tax, which will make private equity compatible to institutional investors in the listed markets, and will make us pretty similar to China. But it hasn”t done a lot for sentiment.

But seeing past all that, there is a very brutal culling of GP capacity in India going on at the moment. There was probably around about $10 billion odd of undrawn capacity in India when I last checked, and that”s against probably an annual deployment rate of somewhere around $3 billion. And that”s been brutal in the impact it”s had on pricing. And we, for example, have stayed pretty light on India in the last two years, because everything we see in India looks quite expensive relative to opportunities elsewhere. And remember, part of our strategy is making sure we deploy capital where we see the best opportunities across all emerging markets.

So I think we would observe that a lot of capacity is now being withdrawn from India, so people are either unable to follow on with new funds, which is brutal, or people are reducing their allocations. And personally, I believe– I can”t prove– that there”s a scenario under which the 2013 vintage of India funds could be very good, because you”ve got a huge demand for capital in India. They”ve got a huge need to modernize. If you compare airports, roads, rails, with China, they just haven”t started, really. You”ve got IPO markets, which are mostly closed. And I think Indian secondary purchasing will become a very important source of exits for the Indian private equity market.

So personally, I think that India is probably oversold. People are worried too much about it. I think it has a very important part to play in a well-constructed private equity portfolio. And I think people just need to keep their faith a bit with what”s happened in the past, and I think India will bounce back. But I think it could take a further 12 to 18 months.

And an interesting data point– but it”s only one data point– is that the most recent Indian investment we made, in January, we did on a six and a half times EBITA for a very successful business, and only nine months ago, that would have been very unlikely that we could have done a deal at that price multiple for that quality business. So at long last, the trend is downwards, but you”ve still got to be very disciplined.

Snow: So India, Brazil, very big markets. What are some of the newer markets, perhaps more frontier-like markets, that Actis has either entered or is thinking seriously about entering?

Bond: Well, of course, we”ve always specialized in Africa. And so, we”ve always had big commitments to South Africa, Nigeria, Egypt. If I think of some of the markets we”ve added recently to our portfolio, we”ve invested in Guatemala, where we did a very attractive buyout of the distribution monopoly outside the capital at a very attractive price from a European buyer. We”ve bought for our pan-African electronics payments platform a very interesting business in Jordan at a time when a lot of people worried about what might happen in Jordan because of the Arab Spring, and we”ve been delighted with how that business has since performed.

And then also, we”ve been investing actively in Cote d”Ivoire, just through the recent civil war. So, we”ve long had a taste for the markets beyond the BRICs, and I think that will continue.

And call them what you like, next generation of growth markets. I think there”s a very important role for them in a portfolio, particularly from a pricing point of view. But often scale is the challenge. Have you got big enough businesses in those markets to warrant giving them attention?

But we”re looking at quite a few new markets. Columbia, everybody”s looking at. We are, too. Peru, in due course. I can see us wanting to do things in Vietnam and elsewhere. Sri Lanka we”ve repetitively invested in when many people haven”t. And Indonesia, of course, everybody”s very interested in at the moment. So I think there”s plenty of relatively new territory for mainstream private equity players to be looking at.

Snow: Final question for you, and it”s kind of investment that Actis has done a lot of, which is investing in brands. How do you recognize a brand that will travel beyond borders?

Bond: Thank you, David. Yes, we really like local, trusted brands, and I think for a number reasons. One is that the multinationals tend not to be able to integrate them into their stable so well. And for many of the aspiring consumers who we”re interested in investing behind, a Gillette or a Unilever or a Procter & Gamble product may be just way too expensive.

And so, the local brands are better known. They”re probably better trusted. They have lower advertising budgets, and therefore, the net cost is lower. So, our attraction to local brands is very much driven by the opportunity it provides you to buy into that growing, aspiring consumer class.

So most recently, in West Africa, we invested nearly $19 million to acquire a 19% shareholding in West Africa”s leading fashion fabrics brand that we bought out of a Dutch family who were a long way from the market, who very much had a manufacturing mentality. And we just saw a fantastic opportunity to build a modern, branded clothing company that had retail stores, and so forth.

The attraction for us was the strength of brand. It commanded a premium of nearly three or four times local market prices, and we just thought this is a fabulous business. We”d love to own it. We”d been talking about it for nearly two years. It was quite hard for other western bars to assess, so we brought in new management. We”ve massively invested in the brand, and it”s massively out-performing our expectations.

That”s an example of where you can take a local brand that it”s very hard for people outside those markets to appreciate, but where we know there”s huge local loyalty. That brand extends across most of West Africa, and we”d like then to expand it into new markets in other African countries, and indeed, to some of the African community in London and New York. Beyonce wears the stuff pretty regularly. That doesn”t do us any harm. And so, I can see us trying to develop an international brand, trying to create the Hermes of Africa.

Other examples would probably include, in South Africa, we”ve recently done a buyout of a business that is the market leader in stolen vehicle recovery. And regrettably, because of the crime wave, the insurance groups are insisting that everybody has tracking devices, panic buttons. And this business is a very nice business.

Snow: What is the name of the business?

Bond: It”s called Tracker, and it uses LoJack.

Snow: That is a brand as well.

Bond: Yes. And we would like to extend that into Brazil, because regrettably, many of the same issues about personal security on the road, if you can actually move your car, apply. And we”d like to see if we can extend that through to the Brazilian market.

So, I guess about a quarter of our deal flow today is about taking well-established local brands and doing our best to build them to their full potential, and then extend those brands to adjacent or similar markets. And I just think it”s a very nice strategy that probably today accounts for around about a third of our portfolio, and long may that continue.


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