Mfi-pe Link Mgmt 809 Final

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Establishing the Link betweenMicrofinance and Private Equity in

Sub-Saharan Africa

Next Generation Catalyst for Sustainability

MGMT 809 Prof Sammut Spring 2009

Ahmad Abdul-Qadir (EAST)Aneet Chopra (WEST)

Nadeem Firasta (WEST)Joy Jacob (WEST)

Adina Simu (WEST)


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Private Equity in Sub-Saharan Africa:Next Generation Stimulus for a Sustainable Economy

To develop towards economic sustainability, Sub-Saharan Africa (SSA) must attract privateinvestment, and along with it, expertise in creating durable social and financial institutionsthat encourage growth. With nascent capital markets emerging, we propose that Private

Equitywith its emphases on profitability, governance and growthshould become thenext-generation stimulus for Sub-Saharan Africa to achieve a sustainable economy. Whileour recommendations are generally relevant to the 48 independent nations collectivelyknown as Sub-Saharan Africa, we will focus on a subset of these nations in Eastern Africathat share a history of close economic and social cooperation in addition to stronghistorical ties before, during and after colonialism.

Table of Content

1 History of Development in Sub-Saharan Africa .......................................................................................3

2 Microfinance: Road to Economic Development .......................................................................................4

2.1 Material Benefits of Microfinance .....................................................................................................42.2 Non-Material Benefits of Micro financing ........................................................................................5

2.3 Challenges in Microfinance ...............................................................................................................6

3 Sustainable Economy: Private Equitys Role ..........................................................................................8

3.1 Microfinance and Private Equity (PE) ...............................................................................................83.2 PEs future in Microfinance ..............................................................................................................9

3.3 Profit Drivers for PE in Microfinance .............................................................................................10

3.4 Challenges ........................................................................................................................................114 Case Study: PE in East Africa .................................................................................................................12

4.1 Background ......................................................................................................................................12

4.2 Business Model ................................................................................................................................134.3 Initial Public Offering ......................................................................................................................15

4.4 Moving Forward ..............................................................................................................................15

5 Recommendations ...................................................................................................................................205.1 Geographic Focus ............................................................................................................................20

5.2 Infrastructure ....................................................................................................................................24

5.3 Agriculture .......................................................................................................................................25

5.4 Internet & Personal Computing .......................................................................................................275.5 Semi-skilled Manufacturing and Assembly .....................................................................................27

5.6 Hospitality and Tourism ...................................................................................................................27

References: ................................................................................................................................................29

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1 History of Development in Sub-Saharan Africa

Sub-Saharan Africa is a geographical term used to describe the African countrieswhich are fully or partially located south of the Sahara Desert. Covering an area

24.3 million square kilometers and boasting more cultural, ethnic and linguisticdiversity than any other region of similar size, Sub-Saharan Africa (SSA) is still thepoorest region in the world. Excluding the largest two SSA economies, South Africaand Nigeria, 2007 GDP for the rest of SSA was just $399 billion which correspondsto per capital GNI of just $388.

In the wake of European colonialism at the hands of the English, French,Portuguese, Belgian and Germans to a lesser extent, SSA nations began to emergeas independent nations in the 1950s under visionary leaders such as KwameNkrumah in Ghana, Jomo Kenyatta in Kenya and Julius Nyerere in Tanzania. Muchof the development within SSA since colonialism ended has been channeled

through non-governmental organizations (NGOs) and agencies of large globalorganizations such as the World Bank and International Monetary Fund.

A large number of private organizations are trying to address the factorsinfluencing global poverty. Traditionally most NGOs have been focused onoutreach; however, this is not the only area of activity. Focusing on HIV/AIDS, TBand Malaria, Agriculture, Education, Debt Cancellation, Trade, Maternal and ChildHealth, Development Assistance, Aid Effectiveness, Climate and Development,Water and Sanitation, or Governance and Security, organizations such as Bread forthe World Institute, CARE USA, International Medical Corps, International RescueCommittee, Mercy Corps, Oxfam America, Plan USA, Save the Children, World

Concern, World Vision, Habitat for Humanity have been instrumental in solvinghumanitarian crises and channeling funds from donors to aid receivers.

The Bill and Melinda Gates Foundation, one of the worlds largest charitablefoundations, has focused the majority of their work in health, poverty, anddevelopment in Africa. Grants have been offered for projects in Ghana, Nigeria,Mozambique, or projects in the US which aim to solve African problems.

Most recently, the focus moved further, towards sustainability. The WFP, inpartnership with private organizations and charitable individuals, started thePurchase for Progress program, under which the WFP will buy crops from small

local farmers, which will then offer as food aid. Bill Gates and Warren Buffett,through their private foundations, offered more than $75 million for this program.

United Nations with over 30 agencies, and UN Millennium Development Goals isthe largest food-distributor in Africa, thorough its World Food Program agency. Forthe last 45 years, WFP has been using donations from rich countries governmentsto feed poor people. The World Bank, IMF and the International Finance Corporationare also involved.

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Another type of government organization active in Africa is country-specific - oneexample being the United States Agency for International Development (USAID).While the U.S. Government, through USAID, provides assistance to 47 countries inAfrica, the regions economic growth is not amongst the top five priorities. Instead,USAID focuses on bolstering Africas prospects through enhancing strategicpartnerships, consolidating democratic transitions, and helping fragile states.

2 Microfinance: Road to Economic Development

Microfinance refers to the provision of financial services to poor or low-incomeclients, including consumers and the self-employed. Traditionally, banks have notprovided financial services to clients with little or no cash income. Banks mustincur substantial costs to manage a client account, regardless of how small thesums of money involved. For example, the total revenue from delivering onehundred loans worth $1,000 each will not differ greatly from the revenue thatresults from delivering one loan of $100,000. But the fixed cost of processing loans

-- of any size -- is considerable: assessment of potential borrowers, their repaymentprospects and security; administration of outstanding loans, collecting fromdelinquent borrowers and so on. There is a break-even point in providing loans ordeposits below which banks lose money on each transaction they make. Poorpeople usually fall below it. In addition, most poor people have few assets that canbe secured by a bank as collateral. As documented extensively by Hernando deSoto1 and others, even if they happen to own land in the developing world, theymay not have effective title to it. This means that the bank will have little recourseagainst defaulting borrowers.

Because of these difficulties, when poor people borrow they often rely on relatives

or a local moneylender, whose interest rates can be very high6

. An analysis of 28studies of informal money-lending in fourteen countries concluded that 76% ofmoneylenders charged interest rates in excess of 10% per month, including 22%that exceeded 100% per month. Additionally, moneylenders usually charge thehighest rates to those with the lowest wherewithal to pay. While moneylenders areoften demonized and accused of usury, their services were shown to be convenientand fast in many cases, and they exhibited considerable flexibility when borrowersencountered problems. Thus, hopes of quickly putting them out of business haveproven unrealistic, even in places where microfinance institutions are very active.

2.1 Material Benefits of Microfinance

Microfinance initiatives can play an effective role in addressing material poverty,the physical deprivation of goods, services, and the income to attain them. MFIscan help people become more economically secure. This, in turn, has a multipliereffect on people's standard of living, enhancing basic household welfare, such asfood security, nutrition, shelter, sanitation, health and education services. MFIs canhelp prevent and extricate people from debt. Oftentimes, they liberate low-incomehouseholds from moneylenders with outrageous interest rates that often reach100% annually. Savings and credit services help people start or improve their own

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small businesses, providing income generation and employment for themselvesand their families. Credit can be used as working capital so that clients' effortsbecome more productive; for example, clients can buy rice or grains in bulk atwholesale prices and resell it at retail prices or buy a refrigerator to keep producefresh. As clients become more productive, their income increases and they are ableto accumulate savings for other investments and emergencies.

Savings serve as reserves for important household expenditures (such as schoolfees and funeral costs), and as insurance against sudden crises (such as illness,natural disaster, or theft) that can otherwise result in destitution for people alreadyliving at the poverty line. In many cases low income people want to save, and havebeen saving in a variety of traditional ways, ranging from kinship networks toRevolving Savings and Credit Associations (ROSCAs), but lack appropriate savingfacilities that offer a combination of security of funds, liquidity, positive real return,and convenience. MFIs can build upon Africa's traditional savings ethic to enhanceoutreach and quality of services. It is important to keep in mind that for anyfinancial service to have a lasting impact on poverty eradication, it must be flexible

and innovative to adapt to their needs of its clients.

2.2 Non-Material Benefits of Micro financing

Microfinance initiatives offer more than just material benefits; they can alsoaddress issues associated with "non-material" poverty, which includes social andpsychological effects that prevent people from realizing their potential.Microfinance initiatives individually and collectively empower people. A steadyincome, a savings account, training, and the discipline to honor loan repaymentsusually raise the self-esteem and status of clients, in societies where they are often

treated as second-class citizens. MFIs often utilize microfinance groups to providetraining in financial management, legal rights, business management, as well asother support services. Principles of collective organization and solidarityempowered people to bargain for higher wages, better work conditions, healthservices, child-care, and common forms of insurance to protect their lives andlivelihoods. MFI participants, especially women, are often empowered to speak outmore, assume leadership roles, and address issues beyond their workplace, suchas domestic violence. For many women, the group is the first opportunity to meetformally with other women to discuss problems and develop joint action. Thegroups serve as a channel of information. For example, members may tell eachother about counseling services that have been established for women victims of

violence and drug and alcohol addicts. Many women participants experience achange in their household and community status. Some experience an increase infinancial responsibilities when their husbands noticed that they are involved inlucrative activities.

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2.3 Challenges in Microfinance

Microfinance institutions didnt exist in most parts of the world, including Africa,prior to 1990s. In just over a decade, they have grown to serve millions of activeborrowers. Along with this ramp in the number of institutions, the microfinanceindustry has gone through a profound transformation. It was the social aspect of

microfinance that first drew many people to the sector the use of capital for agreater good. Indeed, microfinance is the one form of socially responsibleinvestment that has a direct impact on the lives of poor and under-served peopleacross the globe. In the early 1990s, these institutions started mainly as nonprofitfoundations that were predominantly funded through aids from government andother philanthropic organizations. In the last few years, the industry has startedputting more emphasis on growth, efficiency and profit. What propelledmicrofinance was supportive government and non-government organizations thatwere philanthropically motivated. However, it has been seen time and again thatcommercial viability the need to run MFI as a business is key to its sustenanceand scalability 3.

This desire to become a commercially successful entity thrives upon the need forthe MFIs to overcome certain fundamental challenges that developing countries where microfinance remains most relevant as of today face due to a variety ofuniversally applicable factors. Poor regulations, lack of liquidity & assets serving ascollateral, improper accounting and tracking services, inefficient management andinadequate skill-sets are just some of the reasons for the improper handling of theMFI. There are three fundamental areas of challenges for MFI to become successfulas a commercial entity2:

1. Development Finance Understanding of clients

township money lenders example real market research

Expansion of products, expanded options Regulatory environment - heavy burden of red tape Registry of security interests Transformation of NGO MFIs Business Development Services

2. Asset Accumulation

Savings, insurance, investment products Targeted savings products

Smooth consumption, raise repayment, minimize risk Threat of cannibalization to the banks Addressing negative real interest rates on savings instruments

Need for bundling lending and saving instruments. Repayment is a combination of amortized principal, interest, forced

saving Housing: embryonic township markets

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Investment products

3. Information Need for better data collection and accounting

Better credit scoring and pricing models Having better information on individuals, households and firms applying for /

using credit for policy development Training and capacity building Consumer education to fuel innovation Pricing issues, competition, monitoring

Most NGOs and other philanthropic organizations seeking to reduce poverty havenot exercised the strategy and vision required to overcome the challengesidentified above. As a result, these funds have been squandered in short-sightedand inefficiently managed credits. The sophistication required to overcome thesechallenges may be provided by an organization that can operate at a larger scale

and which brings in the human resources and the vision required to sustain theoperations.

In the next section, we examine how private equity could be the catalyst for MFIsto be able to expand their capabilities by representing the inflection point at whichdevelopment in SSA takes a new trajectory towards growth. See Appendix I for aninventory of MFIs in East Africa.

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3 Sustainable Economy: Private Equitys Role

With projected GDP growth of 5% over the next few years, Africa as whole has thefastest growth rate among emerging markets. Private Equity investments as aresult has been picking up pace with number of Africa focused private equity funds

now being established. Economic reforms introduced throughout the 90s hascreated a stable environment that has attracted even more private investment,one of the PE funds, Pamodzi fund, is as large as $1.3B. According to emergingmarkets private equity association, in 2006, $377 million PE investment pouredinto Tanzania and $307 million in Uganda1.

Along with reforms, there are plenty of investment opportunities in sub SaharanAfrica that has attracted much interest over the last decade. Natural resources inoil and metals have been the primary drivers of the economy but now countriesare investing into technologies that are enabling them to move up the value chainin these natural resources and garner more profits. Basic infrastructure needs like

buildings, roads, transportation, education etc. is severely lacking and needdevelopment for the existing industries to scale. As the governments become moreaware and develop new economic reforms, they will attract more privateinvestment that will eventually lead into commercialization of these industries.New capital is also flowing into industries like telecom and banking. Each of theseindustries is potential investment opportunity for Private Equity funds.

3.1 Microfinance and Private Equity (PE)

Formal Banking in sub Saharan Africa is clearly not nearly as matured as you wouldexpect in developed countries. According to 20% of families have formal bankaccounts in Africa. In Tanzania for instance as low a 5% citizens have bankaccounts. Citizens of these countries do not look at banks to be the means ofsafeguarding their savings nor do they expect them to provide liquidity or loans fortheir personal as well as business needs. While the banking sector as a whole islacking, microfinance as an industry is booming in sub Saharan Africa. MorganStanley Sub-Saharan Africa2 report places the market size of microfinance industryto be $5.5billion but the penetration is less than 5%.

Microfinance banks source funds primarily as debt from investors or deposits fromcustomers. PE plays a huge role in providing the debt capital for the Microfinanceindustry to flourish. Funding availability has grown to $4 billion in 20063 with 40new microfinance funds established in the last three years. Over the last decadeMF has gained traction in the sub Saharan Africa region by enabling liquidity forindividuals who otherwise would not have been able to get those funds. ThePrivate equity funds have fueled the growth in the Microfinance ability to make the

1 Africa Rising By VijayMahajan, Robert E. Gunther2 Morgan Stanley, Sub-Saharan Africa: an equity guide, September 20083 CGAP February2008: Foreign Capital Investment in Microfinance

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loan financing available to such people that has in turn fueled the economic growthin this region, primarily countries like South Africa. Africap fund, largestmicrofinance fund ( $50M), has invested in approximately 15 microfinanceinstitutions across the region and has already seen healthy exits on a few of itsinvestments.

3.2 PEs future in Microfinance

New emerging nations in the SSA region are seeing investments flow intomicrofinance institutions (MFIs). Akiba MFI in Tanzania received $5.2M from Accioninvestments and other investors. We predict that this trend will continue in theunderdeveloped nations over the coming years. The government and NGOs areworking to introduce reforms that will also expedite moving the industries frombeing state-owned enterprises towards commercialized private institutions. In thenear future, it is unlikely that SSAs formal banking system, will be mature enoughto fulfill the capital needs of their citizens. The following table based on a 1997

World Bank report4

shows an inventory of MFIs with a minimum of 1,000 clientsserved each, and a five-year operating record:

KenyaTanzan

iaUgand

a Total %Commercial5 4 4 3 10 27%NGO / Co-op 13 6 11 31 73%Country Total 17 10 14 41 100%

It is obvious that the overwhelming operating model is that of the NGO or co-

operative union, neither of which is driven by its pursuit of profit. With such asmall share of the pie historically, it appears that for-profit microfinance willcontinue to thrive in the coming years. Debt financing will most probably be themajor source of funding for these MFIs. This will continue to fuel further PrivateEquity investment in this region. Even though there are established and prominentmicrofinance institutions funded by PE already, the growth potential formicrofinance is so huge that it will attract new institutions that PE firms can investin. Recently, a few larger MFIs in the region have made headlines as they havegrown into broader commercial operations. PRIDE Tanzania has split into an NGOand a fully-fledged financial institution with approximately 40 branches and acredit portfolio of 241.6 billion [Tanzanian Shillings] ($178.6 million USD).6 Similar

trends are occurring in Kenya resulting in increased competition in the financialservices sector for the low income population.

Specific to Kenya, MicroCapital.org reports:

4An Inventory of Microfinance Institutions in East, Central, and South Africa, Sustainable Bankingwith the Poor Series, World Bank Africa Series, 19975 We researched each MFIs profile from online resources to determine whether it was not-for-profitor commercial6 Guardian News, January 26, 2009. Reported by Perege Gumbo. Nairobi, Kenya

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In competition with commercial banks, MFIs are in many respects at adistinct advantage. First, they often rely on loans from the very same banksthey are in competition with, and have to mark-up the interest rates to covertheir costs. Not only do MFIs offer smaller loan sizes, which have a lowerreturn, they generally have higher overhead costs because they go to theclients rather than have the clients come to them. . .7

Private Equity firms have to be careful in how they invest in these institutions.

First they need patience not only to build relationships but also to build a

pipeline of institution flow that is capable of scaling to the investments. Thetimeframe to build that pipeline tends to be two years.

Basics are critical. There is history of instability, corruption and business

failures. This implies due diligence is even more important. Not allinstitutions have the ability to execute and scale. Evaluating management isalso key.

While pure capital plays with less management oversight may work well in

developed countries, in SSA it is necessary to provide guidance and

mentorship to management. Since investments need to providepartnerships, business and operational support, as well as capital, thenumber of investments available at any given time will likely be limited.

Partnership with NGO, government and corporations is essential to drive

through bureaucracy. Although new reforms are coming but they are slowand in the meantime healthy relationships with the public sector can even bethe difference between success and failure.

Most of the development and resource utilization is happening at the grassroots level or the bottom of the value chain. Currently that would be thefocus of the PE funds but as the market matures, PE funds should look atinvestments that drive up the value chain and enable higher returns.

3.3 Profit Drivers for PE in Microfinance

Private Equity cycle constitutes three key activities fundraising, investing andexiting. Developing market fundraising tends to heavily involve investments frommultilateral organizations like the World Banks International Finance Corporation(IFC) or the United Nations International Fund for Agricultural Development (IFAD).While investing tends to be tedious and slow-moving, there are tremendousinvestment opportunities throughout various industries within SSA.

Although there are tremendous investment opportunities for PE funds inmicrofinance in SSA, the fund managers have to be aware of the key factor: exitsof these investments. The bottom line for these investments is IRR generated fromthe exits. There are potential liquidity options for the PE funds in microfinance:

Sale of stake: Recently PE funds, like Africap, have been successful in selling

their stake to strategic investors. This bodes well for the microfinanceinstitution. In some cases they are even able to transition their capital

7 Ryan Hogarth, www.microcapital.org, Increased Competition for Kenyan Low-Income FinancialMarket Banks, February 11, 2009

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structure from debt to equity. Africap MFI fund recently exited by sale ofstakes in EBL and Ghanas First Allied Savings and Loan.

Equity exit: IPO market continues to be weak in Africa. With time though this

is expected to be an upcoming opportunity that governments are trying tobuild towards.

Adding value beyond just providing capital: PE funds can definitely generate

better profits on exits by providing management support in the area of focusof the microfinance institution. This is critical especially in this region sincethe incumbent management teams tend to be less mature. AA particularpoint of pride for the AfriCap team was the role the Fund had played in thecommercialization of microfinance, aiding MFIs to convert from donor fundedinstitutions to full-fledged commercial banks.

Consolidation: In tough economic time when exits get prolonged and capital

access becomes more stringent, consolidating portfolio companies andreaping benefits of efficiency is the optimal path to pursue and to createvalue.

3.4 Challenges

Exit & Liquidity: Exit from investment remains to be the number one goingconcern for most of the Private Equity investment in Africa.

Regulations and Govt: Country stability and regulations issue by government

will impact the investment opportunity significantly. In May 2000, theGovernment of Tanzania approved a national microfinance policy. TheGovernment recognized that microfinance systems are and will increasinglybecome integral parts of the countrys financial system, with the potential ofbetter financially serving the people, the majority of who reside in rural areas

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4 Case Study: PE in East Africa

4.1 Background

Since 2000, the United Republic of Tanzania has experienced compounded annualgrowth of nearly 7%. A major witness to that growth, the National MicrofinanceBank (NMB), was founded in 1997 when the United Republic of Tanzania passed theNational Microfinance Bank Limited Incorporation Act8. The Banks mission is toprovide sustainable and viable access to a full range of financial services for therural, urban and peri-urban population in Tanzania. . .

Since being partially privatized in 2005 at the tail end of the countrys firstprivatization campaign to relieve the government of many failing corporate assets,NMB has grown considerably in both the scope and depth of its services. By nearlyall measures, NMBs growth has been impressive as seen in the three-year

comparison of operating metrics below:

While there are numerous stories of post-privatization failures following theeuphoria that ushers in the transition from wholly state-owned to majorityprivately-owned organizations due to inefficiencies that arise from poor incentives,NMB has actually become more efficient each year since privatization. A commonmeasure of a banks efficiency is the cost-to-income ratio which spike upward in2007 before declining by a healthy 10% in 2008. During the same three-yearperiod, assets managed have nearly doubled, staffing has increased at a strongpace, and perhaps even more remarkably, NMB went from having zero ATMs in thefield in 2006 to over 167 at the end of 2008, with 120 more new ATMs and 15 newbranches planned for 2009. The proliferation of ATMs is accompanied by theissuance of almost three-quarters of a million new bankcards during the sameperiod.

8 Facts and figures extracted from the 2008 Annual Report of the National Microfinance Bank.Where needed, translations from Swahili to English were made by the author himself

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Unlike many companies operating within the major metropolitan areas of a region,NMB has striven to penetrate the Tanzanian countryside where rural farmers hadpreviously been completely without modern financial services, much less adedicated bank branch. The following map highlights the branch network

throughout the country:

4.2 Business Model

The map of branch locations further illustrates the distribution of much ofTanzanias agricultural capability. By recent estimates, over 80% of the national

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labor force is employed in small scale farming. The ongoing trends in Tanzaniandemography will produce a migration pattern that continues to see cities swell, butat the same time, due to Tanzanias historical dependence upon a variety of cashcrops grown throughout the plains and hilly regions. Tanzania has approximately40,000 square kilometers of arable land, but that does not include the large areasof hillside where coffee and other arid weather crops are grown. Despite havingonly 4% of its total land area designated as arable, over 45% of GDP comes fromagricultural exports, and the sector employees 70% of the working population.

Since the nations economy is overwhelmingly dependent upon farming activities,NMB has concentrated itself on financing the entire range of agricultural activitiesfrom trade financing for the large distributors or processors all the way down toequipment financing or short-term cash infusions for peasant farmers who mightonly harvest a few dozen bushels per year. While this model serves the immediateneeds of various actors within Tanzanias most important economic sector, it doesnot meet the needs of the countrys future economic growth plans. TheGovernment has articulated ambitious growth plans in its Vision 2025 document

which rests on five basic principles:

1. High quality livelihood.2. Peace, stability and unity.3. Good governance,4. A well educated and learning society; and5. A competitive economy capable of producing sustainable growth and shared

benefits.

Each of these five principles, but more specifically numbers 1, 4 & 5 aims toamong other thingsdiversify Tanzanias economy away from simple agricultural

exports in order to boost the broader infrastructural, educational, healthcare andsocial needs of this severely impoverished nation.

Reflecting on NMBs operational strategy of being the lender of choice for each legof the agricultural supply chain, one would wonder whether or not the redundanttransaction costs are inhibiting the growth of a more efficient and modern way ofdoing business. If we look at two small scale maize farmers, for example, onemight wish to borrow to rent a truck to convey his goods to the regional brokerfaster to limit the amount of spoilage that he would otherwise experience with aslower means of transport. Another similarly situated maize farmer, on the otherhand, might wish to borrow money to purchase modern farming equipment that

would permanently increase his own productivity.

Thus, while lending in both instances could directly impact an individualhouseholds capacity to boost is self-sustainability, the latter is obviously preferredin terms of advancing the overall economic goals of a developing nation. NMB sitsat the crossroads of a nation poised to embark on a major campaign to re-inventitself as a successful post-socialist state characterized by political stability and aflourishing economy, but in order to play an instrumental role in this prosperity,should NMB alter its strategy?

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4.3 Initial Public Offering

In a private placement closed in September 2005, the government sold 49% of itsstake in NMB to a consortium led by the Dutch financial institution Rabobank.

Three years later, the government sold an additional 21% of NMB during an IPO onthe Dar es Salaam Stock Exchange (DSE) leaving 70% of NMBs equity in privatehands.

The original share price was 600 TZSH ($0.51) when the listing first appeared onthe DSE in June 2008. As of April 2009, NMB was trading around 860 TZSH.Rabobank has managed to put several Dutch executives on the Board of Directors,and appears to be content with its holding in NMB. At the April 2009 share price,Rabobanks position is worth approximately $110 million, an unrealized gain of25% since the IPO.

4.4 Moving Forward

With solid fundamentals, should Rabobank pursue a buy-and-hold strategy forseveral years to come, there would likely be a dearth of attractive exits in thefuture. Their potential windfall profits are due to their willingness to gamble onAfrica before it was popular to do so.

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STATEMENT OF OPERATIONS

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BALANCE SHEET

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As the largest shareholder in Tanzanias most important financial institution,Rabobank has the ability to exert major influence Tanzanias economic future. IfRabobank decides to opt for an early exit in the near future, the most likely meanswould be through a direct sale to a strategic buyer, of which there are probablymany suitors given the above average forecasted growth rates over the next fewyears. An offering on the Johannesburg Stock Exchange (JSE) is also an option,since the JSE encourages regional companies with outstanding fundamentals todual list in order to improve liquidity and to reinforce its role as the premier bourseon the continent. By contrast, this regional offering is something that the next twolargest continental exchanges in Cairo and Casablanca have yet to develop.Another possible exit would be through an American or Global Depositary Receipt(ADR/GDR), however at present this seems the least likely of the three options

presented. The below table shows the number of SSA-based companies with ADRofferings9, and while there are 13 regional banks large enough to list on theprestigious JSE, no single Tanzanian company from any industry has successfullynavigate the global funding gauntlet:

Malawi

Nigeria

SouthAfrica

Zambia GrandTotal

Banks 9 4 13

Chemicals 2 2

Construct. & Materials 3 3Electron. & Electric

Equip 1 1Financial Services 1 4 5

Fixed Line Telecom. 1 1

Food &Drug Retailers 1 1

Food Producers 2 2

Forestry & Paper 2 2

General Industrials 3 3

General Retailers 10 10Health Care Equip. &Svc 2 2Indust. Metals &

Mining 2 1 3Industrial

Transportation 2

Life Insurance 3 3

Media 3 3

Mining 21 21

Mobile Telecom. 1 1

Oil & Gas Producers 1 1

9 Figures compiled from Bank of New York Mellon website: www.bnymellon.com

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Personal Goods 1 1

Pharma. & Biotech. 1 1

Software & Comp. Svc 1 1

Support Services 1 1

Country Total 1 9 72 1 83

Percentage of Listings 1% 11% 87% 1% 100%

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5 Recommendations

The recommendations below follow two parallel streams of growth relatedinvestments suitable to private equity activity in SSA:

1. Enablingthose areas which require large scale capital injections and high

coordination amongst sectors in order to establish the foundation on whichsustainable development can flourish

2. MFI-specificthose areas where MFI activities have been concentrated overthe past fifteen years where considerable productivity gains can yet be madethrough higher coordination between strategic deployment of funds andprovision of business expertise to entrepreneurs that allow the best-in-class to mature into legitimate small & medium scale enterprises (SMEs)

We believe that coordination is essential. By coordination, we are referring toinvestments and management expertise being carefully injected into targetedareas of the value chain where the highest overall productivity impact can be

achieved. This is a core strength of private equity practitioners who areaccustomed to working within a broad economic framework conducive to aligningfinancial incentives for capital recipients (entrepreneurs), capital providers (limitedpartners) and managers of the capital (general partners). Thus, PE is singularlypositioned at the intersection of the social and environmental objectives of NGOsand the financial objectives of opportunistic early movers in SSA. Thus, via acarefully coordinated program of funding MFI-based funds, LPs can establisheconomic and cultural roots from which higher end, higher scale capitalinvestments can elevate SSA industries from fragmented, small scale, uncontestedventures to competitive, internationally relevant players operating with economiesof both scale and scope.

5.1 Geographic Focus

As SSA consists of 48 independent nations, it is not possible to generalizerecommendations that are equally relevant to all of them. Accordingly, we haveselected the three largest members of the East African Community, Kenya,Tanzania and Uganda, to make broad recommendations which are more relevant tothese communities than to the entire list of 48 SSA nations. We will refer to theseselected countries as the EAC3:

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Country GDP (2007USD)

% of SSA Land Area(km2)

Population(2007)

Angola58,547,298,30

4 6.88% 1,246,700 17,019,315

Benin 5,427,615,744 0.64% 110,620 9,025,402

Botswana11,780,779,00

8 1.38% 566,730 1,881,432

Burkina Faso 6,766,986,240 0.80% 273,600 14,777,431

Burundi 973,659,520 0.11% 25,680 8,495,915

Cameroon20,644,331,52

0 2.43% 465,400 18,532,799

Cape Verde 1,434,396,160 0.17% 4,030 530,269Central AfricanRepublic 1,712,110,336 0.20% 623,000 4,343,405

Chad 7,084,617,216 0.83% 1,259,200 10,763,638

Comoros 448,540,832 0.05% 1,861 625,834

Congo, Dem. Rep. 8,955,322,368 1.05% 2,267,050 62,399,224

Congo, Rep. 7,645,842,432 0.90% 341,500 3,766,751

Cote d'Ivoire19,570,176,00

0 2.30% 318,000 19,268,303

Equatorial Guinea 9,923,307,520 1.17% 28,050 507,543

Eritrea 1,201,009,920 0.14% 101,000 4,841,773

Ethiopia19,394,727,93

6 2.28% 1,000,000 79,086,894

Gabon10,653,782,01

6 1.25% 257,670 1,330,182

Gambia, The 643,497,472 0.08% 10,000 1,706,767

Ghana15,245,550,59

2 1.79% 227,540 23,461,523

Guinea 4,563,586,048 0.54% 245,720 9,380,197Guinea-Bissau 356,937,504 0.04% 28,120 1,694,653

Kenya29,508,593,6

64 3.47% 569,140 37,530,726

Lesotho 1,599,873,792 0.19% 30,350 2,005,826

Liberia 725,100,032 0.09% 96,320 3,753,067

Madagascar 7,326,431,744 0.86% 581,540 19,669,953

Malawi 3,551,797,504 0.42% 94,080 13,920,062

Mali 6,862,520,320 0.81% 1,220,190 12,334,168

Mauritania 2,643,784,960 0.31% 1,030,700 3,120,981

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Mauritius 6,362,999,808 0.75% 2,030 1,262,722

Mayotte 953,600,000 0.11% 374 193,618

Mozambique 7,751,984,640 0.91% 786,380 21,372,202

Namibia 6,740,459,008 0.79% 823,290 2,073,624

Niger 4,170,491,648 0.49% 1,266,700 14,195,085

Nigeria165,690,064,8

96 19.47% 910,770 147,982,941

Rwanda 3,319,993,600 0.39% 24,670 9,735,541Sao Tome andPrincipe 144,720,304 0.02% 960 158,013

Senegal11,151,151,10

4 1.31% 192,530 12,411,094

Seychelles 727,912,448 0.09% 460 85,032

Sierra Leone 1,672,188,160 0.20% 71,620 5,848,320

Somalia 5,524,000,000 0.65% 627,340 8,695,928

South Africa277,581,266,9

44 32.62% 1,214,470 47,587,543

Sudan47,632,433,15

2 5.60% 2,376,000 38,555,569

Swaziland 2,942,203,392 0.35% 17,200 1,144,872

Tanzania16,180,884,4

80 1.90% 885,800 40,432,163

Togo 2,493,390,848 0.29% 54,390 6,580,669

Uganda11,214,478,3

36 1.32% 197,100 30,930,082

Zambia11,363,341,31

2 1.34% 743,390 11,919,870

Zimbabwe 2,242,000,000 0.26% 386,850 13,402,661

When the two obvious outliers to the right-hand side of the GDP distribution, SouthAfrica and Nigeria, are excluded, EAC3 has the following significance:

EAC3 as % of SSAexcluding RSA and

NigeriaGDP 37%LandArea 8%Population 18%

Thus, it is clear that the region has economic significance. Due to the cultural andhistorical connections between the nations, this grouping is even more important.

Each of the EAC3 was British colonial subject, and the indigenous language ofSwahili is widely understood throughout the region. Traders along the Africancoastline of the Indian Ocean helped to unite the cultural and commercial centersof Dar es Salaam and Mombasa. Uganda, on the other hand, is landlocked and assuch relies heavily on its two neighbors coastlines its own trading pursuits. In1999, the governments of the three nations ratified the introduction of a commonEast African passport that would allow citizens of the nations to travel freelythroughout the region and be otherwise entitled to the same trading freedoms asfellow citizens of the other two. In relative terms to one another, Kenya is oddly

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positioned as exactly one-third of the EAC3 across measures for population, landand GDP:

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Kenya Tanzania Uganda

Populati

on 34% 37% 28%LandArea 34% 54% 12%GDP 34% 34% 32%

Below, we outline a framework within which private equity activity in the EAC3might be most appropriate to drive triple bottom line (financial, social,environmental benefits) investment results.

5.2 Infrastructure

In a 2002 working paper by the Economic and Social Research Foundation (ESRF)in Tanzania entitled, To What Extent is East Africa Globalised? author BeatriceMkenda explains via analysis of a regression model that low human capitalexplains the heavy reliance on exporting primary goods. She further concludesthat poor infrastructure increases transport costs and makes East African exportsless competitive. Her final conclusion is that policies in the region be modifiedaggressively to empower East African nations to invest in both human capital andinfrastructure.

We recommend that private equity firms examine methods to enter into tariffableinfrastructure projects such as airports, toll roads, ports and modern expeditedland transport. The benefits of infrastructure development are numerous and neednot be elaborated upon here, however the idea that tariffable infrastructureprojects, as opposed to other types of infrastructure investments, is an importantone that we should expand upon. In the EAC3, agriculture still plays a primary rolein export revenue. In many cases, the geographies in which certain crops grow arenot accessible to areas where those crops are commonly bought and sold orotherwise demanded. As cities swell with inbound migration, much of thepopulation of EAC3 still resides in rural areas, making supplying these populationswith their needs an incessant challenge. Modern roads that allow farmers totransport their goods or travel for business are needed. Reliability and safety for

the driving public are just simply non-negotiable for a country aiming to modernizeitself. A common expression in third word development studies is, you pay forgood roads whether you have them or not.

The following table depicts the rural versus urban distribution:


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% RuralDwellers 78.7% 74.9% 87.1%% UrbanDwellers 21.3% 25.1% 12.9%

Urban GrowthRate 4.1% 4.2% 4.6%

With vast countryside to traverse to reach the most developed areas within theEAC3, efficient railways are needed. In Tanzania, Chinese-built Tanzania-ZambiaRailway Authority (TAZARA), costing over $500 million when originally constructed,spans over 1,860 kilometers and represented the largest foreign aid project thatChina had ever undertaken at the time. TAZARAs assets are now grosslydilapidated, with much of the rail falling far short of international safety standards,and the majority of its locomotives out of service due to lack of maintenance.Recently, Tanzanian President Jakaya Kikwete has made public appeals for private

investment in the railway citing that the current situation is not good. In myopinion, time is rife to privatize TAZARA. . .10

Finally, modern seaports and airports are needed. In the case of airports, theAustralian PE firm, MacQuarie, holds a 30% stake and license to operate TanzaniasKilimanjaro Airport, the countrys second largest. While the list of suitable sea orairport investments is not extremely lengthy, the importance of such investmentsto the economic future of the EAC3 cannot be overstated. Modern airports willallow an important source of revenuetourismto grow faster than previouslypossible, and will further allow business and recreational travelers to reachdestinations previously reachable only by daylong bus or train trips.

5.3 Agriculture

Another ESRF working paper published in 2005, entitledAgricultural Marketing andSupply Chain Management in Tanzania highlights the dismal state of Tanzaniastransportation infrastructure, but further stipulates policy recommendations thatwould boost productivity in the agriculture sector. We reproduce Table 4 from thisreport since it correlates rather nicely with the majority of the recommendationsthat we have outlined within this paper:

Main Constraints for trade in Tanzania today11

Inadequate PhysicalInfrastructure

1. Poor road infrastructurea. Increased cost of transportationb. Works as a market barrierc. Delays in transportd. Decreased size and profitability of the

market2. Inadequate storage

10 TAZARA Crisis Deepens. East Africa Business Week, Daniel Said, September 22, 200811 Elina Eskola,Agricultural Marketing and Supply Chain Management in Tanzania, Economic andSocial Research Foundation, Dar es Salaam, 2005

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a. Loss of perishable goodsb. Increased risk for traders

3. Poor market infrastructurea. Health problems for tradersb. Health problems for consumers

Lack of Know-Howand Capital

4. Lack of market orientation (producers)5. Lack of business skills

6. Difficulties in managing and obtaining loans toincrease worker capital

a. Micro credit schemes poorly run or under-funded

b. Problems with repayment and highinterest rates

c. Difficulty in expanding business due tolack of capital

d. Risk aversion

Weak InstitutionalFramework

7. Weak institutions to represent farmers at the freemarket

8. Poor institutional capacity to foster organization

of farmers and traders9. Weak framework to enforce contracts

a. Long supply chains between knownparties

b. Increased cost of tradingc. Lack of standard measurement and

quality10. Lack of market information11. Corruption

The following table highlights the significance of the sector on a macro level:


Source: 2008 CIAFactbook

% Employed in Agsector

75% 80% 82%

Agriculture as % ofGDP

24% 27% 29%

Major products Tea, coffee, corn,wheat, sugarcane,fruit, vegetables;

dairy products,beef, pork, poultry,eggs

Coffee, sisal, tea,cotton, pyrethrum(insecticide made

fromchrysanthemums),cashew nuts,tobacco, cloves,corn, wheat,cassava (tapioca),bananas, fruits,vegetables; cattle,sheep, goats

Coffee, tea, cotton,tobacco, cassava(tapioca), potatoes,

corn, millet, pulses,cut flowers; beef,goat meat, milk,poultry

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5.4 Internet & Personal Computing

Lending itself to strong levels of both MFI and larger PE activities, modernconnectivity through PC, internet and mobile telephones will continue to be amajor growth area for the EAC3, especially for the masses outside of themetropoles of Nairobi, Dar es Salaam, and Kampala.


Source: World DevelopmentIndicators (2007)

Internet users 8.0% 1.0% 6.5%Personal computerowners 2.1% 1.0% 2.7%Mobile phone owners 30.5% 20.4% 13.6%

5.5 Semi-skilled Manufacturing and AssemblyPerhaps the greatest factor contributing to the rapid development of a society is itsthe level of knowledge-intensive production. In contrast with hi-tech intensiveareas like Silicon Valley in California or Asian capitals like Seoul or Taipei, very littlehi-tech production takes place anywhere within SSA, much less in the EAC3.

From assembly of components for local production (personal computers, cellphones, motorcycles, etc) to higher value add processes such as outrightconversion of raw materials into finished goods, the EAC3 is at the low end of themanufacturing continuum. It is likely that MFI-backed activities into assembly

might provide the first major foray into this important realm of the value-creationprocess.


Source: 2008 CIA Factbook

Services as % of GDP 59.5% 50.3% 46.0%Industrial Production as % ofGDP 16.7% 22.7% 25.0%

5.6 Hospitality and Tourism

A popular and highly accessible activity that earns hard currency is tourism. TheEAC3 has tremendous nature allure, and while Europeans have been keen to travelto Eastern Africa in the past, the destinations hardly rank in the top ten list ofEuropean vacation or recreation spending. EAC3 as a vacation idea is even furtheraway from the hearts and minds of American travelers. With enormous potential

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and very little internationally-focused marketing, tourism and hospitality could be avery large draw in the near future.


Popularattractions

Haller Park, GediRuins, Maasai Mara

Mt. Kilimanjaro,Mikumi NationalPark, SerengetiNational Park

Bwindi NationalPark & MgahingaNational Park forthe endangeredmountain gorillas

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References:

1. The World Bank annual report, 20082. The World Bank, Africa Development Indicators 2008-2009

3. Matthias Cinyabuguma and Louis Putterman, Sub-Saharan GrowthSurprises: Geography, Institutions and History in an All African Data Panel,2006

4. ASC Library in Leiden, Dossier China in Africa,http://www.ascleiden.nl/Library/Webdossiers/ChinaAndAfrica.aspx

5. Susan E. Rice and Stewart Patrick, 2008, Index of State Weakness in theDeveloping World

6. The Mystery of Capital, Hernando de Soto7. Challenges facing the microfinance industry in South Africa, 2006 MFSA

Conference, Centre for Microfinance8. The Social Impact of Commercial Microfinance, Micro Capital Institute

9. Sub-Saharan Africa An Equity Guide, Morgan Stanley10.Microfinance as a strategy for poverty reduction in Africa, UNCDF

microfinance unit for southern and eastern Africa (Expert Group Meeting onPoverty Eradication, Bangkok, July 2005)

11.Making Sense of Microcredit Interest Rates, CGAP Donor Team12.Microfinance: An Emerging Asset Class for Equity and Debt Investors, Marco

Coppoolse13.Africa Rising By VijayMahajan, Robert E. Gunther14. http://www.un.org/ecosocdev/geninfo/afrec/newrels/214-cell-phone-

banking.html15.http://www.un.org/esa/africa/microfinanceinafrica.pdf
http://www.ascleiden.nl/Library/Webdossiers/ChinaAndAfrica.aspxhttp://www.un.org/ecosocdev/geninfo/afrec/newrels/214-cell-phone-banking.htmlhttp://www.un.org/ecosocdev/geninfo/afrec/newrels/214-cell-phone-banking.htmlhttp://www.ascleiden.nl/Library/Webdossiers/ChinaAndAfrica.aspxhttp://www.un.org/ecosocdev/geninfo/afrec/newrels/214-cell-phone-banking.htmlhttp://www.un.org/ecosocdev/geninfo/afrec/newrels/214-cell-phone-banking.html

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