Tell us about your background and the genesis of Affirma as it relates to the spin out from Standard Chartered Private Equity (SCPE). What has changed and what has remained the same in terms of portfolio, strategy (target geography and sector), and team? Does Affirma have any plans to raise a new fund?
Affirma Capital is a mid-market, independently owned, private equity investor with an 18-year history of investing in emerging markets. Our core focus is on building national and regional champions by investing in companies backed by strong management teams and founders. We have an established track record of implementing best-in-class governance and processes across our portfolio companies, and this is core to Affirma Capital’s DNA.
Post the Global Financial Crisis, there had been significant pressure on financial institutions such as Standard Chartered to divest proprietary businesses. We (the former senior leadership team of Standard Chartered Private Equity) saw immense potential in the business, which led to a management buyout and spin-off in 2019. The spin-off was preceded by a series of secondary transactions with several blue-chip global investors. Our LPs are global SWFs and financial institutions, most of whom have collaborated with us throughout the journey.
Following the spin-off, our core strategy and focus remain unchanged. Over the next 12-24 months, we intend to launch a number of geographically focused funds including an Africa fund geared mostly to DFIs, a global SME and mid-cap fund with a strong focus on the GCC, a Korea fund, and an Emerging Asia fund.
You invest across emerging markets in Asia, Africa, and the Middle East. Please share some examples of what type of opportunities are most attractive in each region and why. Do you look for cross border growth and M&A opportunities for your portfolio? If so, please share an example of a company that you globalized across your target regions.
At the regional level, we expect to see a wave of consolidation across several sectors in the Middle East, where we believe there is an opportunity for us to step in to provide financing to large players looking to build economies of scale, and also to purchase non-core assets from large family groups. We anticipate that these opportunities will further amplify as a result of the COVID-19 crisis.
Our focus in Africa is on scalable businesses that can diversify across geographies and markets. In the case of GZ Industries, a sub-Saharan African beverage can manufacturing business originally based in Nigeria, we were able to lead an expansion of its operations into South Africa. Specifically in the Middle East and Africa, we also see an opportunity to consolidate struggling GPs and we are engaged in active discussions on this front.
The services sector in Asia is particularly attractive to us because of its low capital intensity, ability to generate scale quickly, and its ability to benefit from the demographic dividend offered by Asia’s growing population.
In terms of portfolio value creation, we have worked closely with numerous portfolio companies, helping them achieve cross-border growth and execute on accretive M&A opportunities, as well as transforming their base business. For example, we actively worked with Prime Focus, a post-production services company in Mumbai, on several international acquisitions (including a transformational acquisition of UK based Double Negative), which helped the company become a global leader in the 2D-to-3D conversion and the high-end visual effects industry.
How would you describe the exit environment across the regions you invest in for managers operating in the mid-cap space? Please share any examples of recent exits and/or upcoming plans via public market offerings, strategic sales, secondaries.
In general, exits are difficult to come by in the emerging markets because of limited liquidity and depth in some primary markets, as well as a smaller number of participants in the secondary markets. The key to a good exit strategy is thinking and acting upon it from the day you invest. To date, we have returned over USD6b to our investors through 58 realized exits across our markets.
We have an established track record of divesting our businesses to global companies. Examples include Eaton Towers (sold to American Towers in 2019), Topaz Energy and Marine (sold to DP World in 2019), Souq.com (sold to Amazon in 2017), and Export Trading Group (sold to Mitsui Group in 2017).
We have also exited businesses through secondary sales to other private equity groups – examples include our investments in ITQ (India) and Golden Gate Restaurants (Vietnam). On the IPO front, we have successfully listed several businesses including our Chinese portfolio company ZTO Express (listed on the NYSE) and Varun Beverages (listed on Bombay Stock Exchange).
It is important for us to also plan for alternative exit scenarios at the time of investment. These alternative exits include put options, redemption rights or drag rights; these have been helpful in securing a select number of our exits and in ensuring that we are on the same page with our promoters and founders from day one.
Given the current global market volatility due to the pandemic, how has the interaction with your limited partners changed during this time and how has the pandemic affected your portfolio? Do you have any portfolio companies that are actively involved in the resolution for COVID-19 (healthcare companies, logistics, manufacturing, etc.)? What are you seeing in the regions in which you are active?
Globally, we have asked each of our portfolio companies to pre-emptively plan for a 6-month emergency cash buffer assuming a continued depressed environment over the medium term. We have also instituted global video team calls where we often share COVID-19 portfolio management best practices from across our geographies.
A number of our portfolio companies are actively involved in resolving the COVID-19 crisis. MENA-based Fine Hygienic is producing reusable N-95 masks with a special germ-free technology and launching new hygiene products such as disinfectant wipes and gloves. Each of our investee companies is doing its part in combating the crisis including donating masks to their communities.
Lockdowns and travel restrictions in Asia have disproportionately affected a number of services businesses with high returns on equity, especially in the retail and food & beverage sectors. Some of our portfolio companies, like Phoon Huat, a food ingredients company in Singapore, have found creative ways to manage the crisis by setting up pop-up stores in unused restaurant chain premises.
In Africa, we are seeing a large number of well-run businesses that are looking to optimize their capital structures with an additional equity cushion and are now willing to have equity investment discussions at good valuations.
In the Middle East, we see an opportunity to work with governments to help deploy equity capital into select SME and mid-cap companies as part of the regional stimulus measures. Several companies with healthy business models have been significantly strained through the crisis and have very limited access to private capital. However, we are fortunate that our portfolio companies have weathered the crisis well so far and are actually exceeding expectations.