Kingdom Zephyr Africa Management Company PAIPPCAP Owners’ Responsibilities in Promoting Corporate...

Kingdom Zephyr Africa Management Company

PAIPPCAP

Owners’ Responsibilities in Promoting

Corporate Governance


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Part I. Overview of Kingdom Zephyr Africa Management Company and its Funds

Part II. The Relevance of Corporate Governance

Part III. Promoting Corporate Governance•Board Representation•Minority Protections•Financial Transparency•Non-financial Transparency•Enforcement

Table of Contents


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Part I. Overview of Kingdom Zephyr Africa Management Company and its Funds


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•Joint venture between Zephyr Management L.P., a New York-based asset management firm, and Kingdom Holding, an investment vehicle headed by HRH Prince Alwaleed bin Talal bin Abdulaziz Al Saud of Saudi Arabia

•Manager of Pan-African Investment Partners (“PAIP”) and Pan-Commonwealth African Partners (“PCAP”)

•Private Equity Funds that invest in profitable multi-country African businesses


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Anchor Investors

Kingdom Holding Company (KHC)

Development Bank of Southern Africa (DBSA)

International Finance Corporation (IFC)

Nederlandse Financierings-Maatschappij

Voor Ontwikkelingslanden N.V (FMO)

Botswana Insurance Fund Management (BIFM)

Société de Promotion et de Participation pour la Coopération Economique,

(PROPARCO)

in collaboration with The Commonwealth Secretariat

as part of its program for African Economic Development

FMO $15.0mm

IFC $30.5mm

DBSA $25.0mm

Kingdom $35.0mm

Proparco $7.0mm BIFM $8.0mm

Zephyr Class B $2.0mm

Total Commitments: $122.5 million


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Two portfolio companies that provide essential services in high-growth industries.

Letshego:• One of the best consumer finance companies in Southern Africa, the

Company is based in Botswana.• Compound growth rates in revenues and cash flow in excess of 40% is last

four years.• Profitable Company.• Good and growing management team.• Company expanding to others countries in Africa• Company listed on Botswana Stock Exchange• Targeted returns exceed 30%

Celtel: • Largest Cellular Company in Sub-Saharan Africa outside of South Africa.• Profitable Company• Strong and deep management team.• Was sold to MTC of Kuwait for US$ 3 for a total consideration of US $3.34

billion in one of the biggest foreign investment deals ever in sub-Saharan Africa.

• Our Funds made 2.4x their investment in five months, which equates to an IRR in excess of 4,000%.

• Will exit this investment completely by 2007


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Part II. Relevance of Corporate Governance


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Defining Corporate Governance

“[T]he relationship of a company to its shareholders or, more broadly, as its relationship to society ….”, Financial Times , 1997

“Corporate governance deals with the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment”, A. Shleifer and R. W. Vishny, 1997, "A survey of corporate governance," Journal of Finance 52, 737-83 at pg. 737

“Corporate governance is one key element in improving economic efficiency and growth as well as enhancing investor confidence. Corporate governance involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined.” OECD Principles of Corporate Governance, 2004


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Financial Benefits of Good Corporate Governance

• In a 2002 survey, institutional investors in Africa and Eastern Europe indicated their willingness to pay premiums averaging 30% to own well-governed companies (McKinsey’s Global Investor Opinion Survey, 2002).

• From 1998 to 2002, stocks in top corporate governance quartile in Asia outperformed their markets by an average of 35% (Annual Survey by CLSA Emerging Markets, 2003).

• A 10-year study of 1,500 US companies showed that companies with excellent governance performed on average 8.5% better than companies with poor governance (Gompers, Ishii & Metrick, 2003).

• A study produced in 2000 by global consultancy McKinsey & Co. found that companies that moved from the worst to the best governance practices could expect a 10% increase in market valuation, thereby reducing their cost of equity (Coombes & Watson, 2000).

• Research by ABN/AMRO study showed that Brazilian firms with above-average corporate governance achieved returns on equity that were 45% higher and net margins that were 76% higher than those with below-average governance practices (Erbiste, 2005).

• Also, for a private equity investor, good corporate governance practices can lead to higher multiples upon exit.


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Other Reasons to Implement Good Corporate Governance

• Increased pressure from investors in private equity funds;

• Tighter regulation by securities exchanges, regulatory agencies and governments to stamp out poor corporate governance practices;

• To attract additional investors by differentiating oneself from other fund managers;

• Benefits accruing to employees, customers and other stakeholders as a result of increased transparency and accountability;

• To lower risks within one’s investment portfolio.


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Part III. Promoting Corporate Governance


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Board Representation

As the board of directors is the body that provides an independent check on management, private equity investors usually seek representation on the board of directors.

In so doing they pay particular attention to :•Appointment and rotation of directors•Independence of directors•Remuneration of directors and senior management•Conduct of and voting at board meetings•Frequency of board meetings•Limitations on the actions of the board of directors•Duties and responsibilities of the board of directors•Directors’ liabilities•The active promotion of good corporate governance practices by the board•Representation on key committees – Audit, Nominations, Risk Management & Remuneration.


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Minority Protections

Often private equity investors are foreign investors that will take up a minority stake in a company.

Thus, one of their key Corporate Governance concerns is that their rights are adequately protected.

In so doing they pay particular attention to :

•Anti-dilution provisions in charter documents or agreements•Constraints on the rights of the majority to carry out various corporate actions• Genuine participation in meetings of shareholders – right to call meetings, receive notices and being able to vote freely•Equal treatment of foreign shareholders.


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Financial Transparency

•Regularity of reporting on financial performance to shareholders•Compliance with International Accounting Standards•“Substance over form”•Frequency and quality of audited accounts•Changes in accounting treatments and conventions•Role, responsibilities and qualifications of members of the Audit Committee•Selection and rotation of external auditors•Communication of material changes in financial projections

Inadequate disclosure of financial information has led to several recent corporate crises – Enron, Parmalat, etc.

As accurate financial information is essential to evaluate properly the prospects of an investment, private equity investors pay close attention to the issue of financial transparency, and in particular focus on:


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Non-financial Transparency

Private equity investors also pay close attention to the level and quality of disclosure of non-financial matters.

In particular, investors look for disclosure of:

•Beneficial ownership structures above a certain threshold (e.g. 5%)•Conditions attaching to the company’s shares•The various risk factors that are faced by the company•The company’s values and objectives•Conflicts of interest and related party transactions within the company•Compliance with anti-money laundering regulations•The state of labor relations and human resources policiesCompliance with environmental regulations•Material disputes or litigation involving the company.


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Implementation

The aforementioned issues that are of particular concern to private equity investors are addressed at various stages of the investment process:

At the due diligence stage, the investor seeks to understand the extent to which good corporate governance practices are in use by the investee company;

At the negotiation stage, the investor identifies the additional corporate governance practices that it would like the investee company to adopt;

Following investment and during the monitoring stage, the investor ensures that the investee company complies with its corporate governance obligations and assists it in doing so. Such assistance can include training of the company’s management, visits to other of the investor’s portfolio companies and secondment of relevant staff from the investor to the investee;

Prior to exit, the investor helps the company’s management to ensure the continued application of the good practices that were adopted by the company.


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Enforcement

In order to ensure compliance with good corporate governance practices, private equity investors usually rely on contractual provisions, which include:• Covenants, both positive and negative•Warranties and representations•Indemnities•Put options•Drag-along provisions

Nonetheless, most investors prefer to ensure enforcement by the use of “soft power” – the power to persuade, influence and attract - without resorting to the aforementioned contractual provisions.

The most persuasive method of ensuring that an investee company practices good corporate governance is to highlight the benefits of doing so, which in most cases, outweigh the costs.

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