McGill Presentation March 2015

Private Equity Experiences

in

Frontier Markets

by

Brian Langis

Overview

• Intro • Frontier Markets Overview

• PE in America vs EM/Frontier Markets • Past Investment Summary • Questions??

Contact Info

• brianlangis@gmail.com

• @absolut_brian

• brianlangis.wordpress.com

• seekingalpha.com/author/brian-langis

Leopard Capital Background

• Established in 2008, raised $34m, exit 2016 • Frontier Market PE fund (pre-EM) • Chairman: Marc Faber • LP domiciled in the Cayman • Mid-Market • Activities in Cambodia, Laos, Haiti, Thailand, Myanmar,

Bangladesh • Investments: SEA 13 and Haiti 3 • Focus on buy-out, venture, expansion • Role: Passive and active role • Spun-off Mutual Fund, Asia Frontier Capital

Analysts/Associate: PE vs Investment Banking

• IB = advisory/capital raising, m&a, restructuring

• PE = investment business, investors not advisor

• Business models do intersect

• IB: Pitch book, modeling, administrative work

• PE: Less standardization. Fundraising, screening + making investments, managing companies, exit

Typical Structure

Frontier Markets Perception

• Highly indebted /Poor fiscal shape • Poor • Wild Wild West of investing • Corruption, you have to bribe to get ahead • Poor corporate governance • Volatile • Mismanagement • Too commodity oriented • Uneducated/Illiterate • Malnourished kids, genocides, despots, disasters,

despair

Reality

• Next wave of emerging markets • Young population, rising income, growing middle class • Low debt • Low correlation to rich countries • Profits mostly depends on local factors • Attractive valuation • Higher growth • Lost-cost workforce • Leapfrog • Reverse “brain drain”

Frontier Markets Snapshot

• ~198 countries, ~9 without exchanges (3 traditional; North-Korea, Brunei, Myanmar)

• 30% of world’s population

• 13% of world’s GDP

• Less than 3% global market cap

• 70% of countries with stock exchanges are not represented by the MSCI All-Country World Index.

• MSCI Frontier Index – Not perfect

• 23 of 25 fastest growing countries over the next 5 years are frontiers – Source IMF

Early America

• Former frontier market

• Was one of the most corrupt country in the world

• Wild Wild West of Investing/ Dog eat dog world

• Lack of rule of law

• Wars, financials crisis

• Cheap labor, plenty of natural resources

• Plenty of bankruptcy (banks, railroads…etc)

• State bankruptcy (Arkansas, Illinois, Mississippi…)

Perception: True Size

Not All FM Are Equal

• We “categorized countries” • Required:

– Legal reliable framework (respect property rights, enforce contracts)

– Free market – Capital mobility – Pro-business, Pro-Investment – Openness to foreign investors – Stable government – Eradication of corruption, enhanced transparency – Sound corporate governance – Development of Capital Markets

Why Invest in Frontier Markets?

• It’s about showing up to the party early. First-mover advantage. You get a head start. You get the best deals before the herd shows up. (Selling to the herd should be profitable.)

• Capturing where the growth is going to be • There are GREAT BUSINESSES THAT ARE CHEAP • The point is to invest in the “BRICs” before it was cool. • Imagine investing in after WWII Japan, or Korea, or

Thailand forty years ago. It’s sounded crazy, very contrarian. • Still a lot of untapped resources. • Government reform efforts also present the potential for

both earnings growth and revaluation for frontier-market companies.

Typical Target

• Are mid sized companies

• Offer a projected Gross IRR of 20 - 30%

• Employ some international managers

• Face minimal local competition

• Are future candidates for local IPOs

• Comply with our ESG policies

• Use credible auditors

PE in NA vs FM

• Financial options are limited • Investor education • Good partners • Policy • Legal • Due diligence • Time for deals to materialize • Risk of underperformance • Liquidity • Higher risk (Political, currency, stability, volatility,

corruption…etc)

FM Investment Decision Drivers

• Very important: Funding access, openness to foreign investors, legal, group/partners

• Less important: GDP growth, interest rates

• Great partner = capitalize on the growth

• Other issues: corporate governance, transparency, clean background

• Early mover = tie up best partners and best deals

Valuation Challenges

• Boots on the ground • Lack of information/data • Google/Capital IQ/Bloomberg • Investor education • Due diligence • Pretty financial modeling = useless • Culture • Investment quality • Fail deals: Not legal, no financial.

Advice Approach

• Macro factors such as GDP growth, the level of interest rates, et cetera are less important in deciding whether to invest in a given country.

• Be skeptical of local brokers/analysts • Always bullish, otherwise is seen as a traitor • Usually after own interest (Want money to increase fund size) • If bearish, will lose job, potential government business, and

corporate finance deals • Academic papers – (guess who paid the academics) • Don’t rely too much on statistics. GDP often understated.

(Bartering, household, underground economy etc…) • The emergence of the middle class in country X —these are

gimmicks, just marketing stories for fund managers.

PPWSA

• First Cambodia IPO April 2012

• Government spin-off 15%, 13m shares offered

• Offering price range of 4,050 to 6,350 riel (US$1.00-1.57) per share

• Size: The implied offering size is US$13.0 to US$20.4m

• IPO bookbuilding process managed by TONGYANG Securities (Korean)

• Post-IPO share count: 86.9m

PPWSA

• PPWSA revenues: Water supply, connections, service and consulting

• Water tariff progressive

• Total capacity of 330,000m3/day

• Network of ~2,000 km covering 90% of PP

• Revenues: ~$30m

• Assets: ~220m in assets

• Equity ~$145m

COMPARABLE COMPANIESAll $ figures in millions except per share amounts

Company Name (Ticker)

Market

Cap ($mm)

Enterprise

Value

($mm)

P/E

2011

P/E

2012E

P/E

2013E

Price /

Book

EV/

EBITDA

2011

EV /

EBITDA

2012E

Dividend

Yield

2012E

ROE

2011

SE AsiaThai Tap Water Supply (SET:TTW) $ 745 $ 916 10.8x 10.0x 9.3x 2.2x 7.3x 7.8x 7.0% 22.5%

Eastern Water Resources (SET:EASTW) $ 390 $ 483 11.8x 10.7x 9.6x 1.7x 8.2x 7.1x 7.7% 13.5%

Manila Water Company (PSE:MWC) $ 1,037 $ 1,406 10.7x 9.0x 7.7x 2.0x 6.8x 5.8x 2.0% 19.1%

Other AsiaHyflux Ltd (Singapore:600) $ 996 $ 1,131 22.3x 13.2x 10.6x 1.3x 8.7x 7.3x 2.8% 16.5%

Beijing Enterprises Water Group (HK:371) $ 1,870 $ 2,548 20.1x 14.6x 12.4x 2.2x 15.3x 11.2x 2.0% 13.6%

China Water Affairs (HK:855) $ 458 $ 668 8.4x 13.3x 12.5x 1.1x 2.0% 14.7%

Non-AsiaUK

United Utilities Group PLC (London:UU) $ 6,715 $ 14,928 9.2x 15.3x 13.6x 2.5x 10.6x 10.7x 5.2% 18.2%

Pennon Group PLC (London:PNN) $ 4,217 $ 7,286 15.4x 17.0x 15.2x 3.4x 11.4x 11.0x 3.8% 20.8%

Severn Trent (London:SVT) $ 5,963 $ 12,358 13.6x 15.9x 13.6x 3.4x 9.7x 9.5x 4.5% 24.5%

USAmerican Water Works (NYSE:AWK) $ 6,008 $ 11,611 19.3x 17.8x 16.3x 1.4x na na 2.8% 7.5%

American States Water (NYSE:AWR) $ 682 $ 1,022 15.9x 15.9x 15.1x 1.7x na na 3.2% na

Aqua America, Inc. (NYSE:WTR) $ 3,071 $ 4,538 21.2x 20.0x 18.5x 2.5x na na 3.1% na

California Water Service Group (NYSE:CWT) $ 763 $ 1,271 17.8x 16.2x 15.3x 1.7x na na 3.4% na

SJW Corp. (NYSE:SJW) $ 443 $ 787 26.2x 22.2x 19.2x 1.7x na na 3.0% na

Middlesex Water Company (NASDAQ:MSEX) $ 287 $ 420 21.4x 18.7x 17.5x 1.6x na na 3.9% na

Connecticut Water Service, Inc. (NASDAQ:CTWS) $ 252 $ 362 21.4x 19.6x 19.6x 2.1x na na 3.5% na

PPWSA

High $ 137 $ 182 15.9x 17.0x 13.8x 3.3x 12.5x 11.9x 0.6% 6.5%

Medium $ 112 $ 157 13.0x 13.9x 11.3x 2.9x 10.8x 10.2x 0.7% 6.5%

Low $ 87 $ 133 10.1x 10.8x 8.8x 2.5x 9.1x 8.6x 0.9% 6.5%

IPO Results

• Offering 17x oversubscribed

• Share went up 60% on the first day of trading

• Leopard exited with a 42% gain

• Share tanked since then, now trading at 5,000 riel, below book value

• No trading

• Other IPOs taking a long time

• Today only one stock is trading but 2nd on the way. Grand Twins International

PPWSA Update Fiscal 2014 Numbers / US$

• Water utility company, $1.09/share, $94 million market cap • Price below 2012 IPO of $1.55 • FY2014 Revenue – $37.2m, yoy +14.5% • Profit – $11.3m, EPS: $0.13, yoy+30% • ROE – 2.55% • ROA – 1.59% • Current and Quick Ratio – 4.2x and 3.4x • Dividend Payout Ratio – 12.50% (2012: 7%) • 2013 Dividend per share: $0.013 (2012: $0.006) +116% • Great management, 99% billing collection, monopoly • Valuation: Forward P/E 9x, P/B: 0.52x

Stock Exchange Update

• Cambodia (World’s smallest exchange?) – 2 listing, ~$5k volume, mkt cap:

1) Phnom Penh Water Supply Authority

2) Grand Twins International

• Laos – 4 listings, ~$750k volume, mkt cap:

1) Banque Pour Le Commerce Exterieur Lao

2) Electricite du Laos Generation Public Company

3) Petroleum Trading Lao Public Company

4) Lao World Public Company

Difficulties

• Education • Mindset • Resistance • Lack of volume, Size, Cost • Don’t understand the mechanism of the stock

market • Need for compliance + transparency • Company owners don’t understand why they

have to reveal their financial statements to the public.

Extreme Frontier Investing

• WARNING

• For informational purposes.

• Do your own research.

• Not an investing recommendation.

• Information need to be verified.

• This is not an endorsement.

Extreme Frontier Investing

• Defaulted North Korea Bond from the 1970s for about ~0.15 on the dollar. The interest accrual, since their 1984 default, amounts to more than 500 percent of the principal in unpaid interest.

• Largest car theft in the world, US$393m • Orascom Telecom (EGX:OTMT) – 1m+ subscriber in NK.

Owns 25% of Koryolink. Only 4% mobile penetration. • Invest in Chinese companies operating in NK. • South-Korea companies operating in NK • Alternative assets: Coins, stamps, art. • Special Economic Zones on the rise. (Rason)

NK Mobile Connections

More Exotic Investments

• The world’s first pirate exchange, Harardheere, Somalia.

• Open 24 hours a day, the exchange allows investors to profit from ransoms collected on the high seas, which can approach $10 million for successful attacks against Western commercial vessels.

• There’s now approximately 72 maritime companies. • You can provide cash, weapons or useful materials. • Ransoms collects between $2 to $4 million. $9.5m for

the Smyrni, a Greek tanker. • Risk: Attacks are dropping. 237 attacks in 2011, 75 in

2012, 15 in 2013. Is the market hitting a bottom?

At the end of the day this is what matters:

• Don’t buy a stock because its from an “exotic high growth country”.

• Valuation. Buying below its intrinsic value. Value < price. Low/reasonable valuation.

• Margin of safety

• Adjusted EBITDA good for comparing cross-country companies.

• Predictable, consistent cash flow

• Look for increasing FCF, and ability to re-invest

• Prefer dividend paying Co. Can fake earnings. Can’t fake dividend. Shareholder oriented.

• Reliable financial statements

• Excellent management/partners

Advice

• Networking. No job posting.

• Ask for 15 min trick

• Knock on the door

• Attitude

• Just show up

• PE hiring cycle

• “Resourcefulness”

Thanks

• Questions?

bl@leopardcapital.com