ANATOMY OF A MAKEOVER

In August, private equity firm Aureos Capital proudly announced that it had exited its investment in small-deposit lender Uganda Microfinance Limited (UML) in a deal valued at just less than $26 million.

Ref lect ing on its return numbers, the emerging markets specialist had ample reason to feel pleased with its work. UML's sale to kenyan commercial lender Equity Bank had generated a cash multiple of 7.3 times Aureos' original investment, equaling an internal rate of return of 81 percent for LPs.

“It was a win-win for both Equity [Bank] and ourselves,” says Davinder Sikand, head of Aureos' East African portfolio. “They got access to one of the best networks they can get hold of in Uganda.”

Aureos also felt satisfied that it had accomplished what few, if any, other private equity firms had even attempted: transforming a not-for-profit institution into a large, viable commercial operation.

In 2004, Aureos invested $1 million into what was then known as Uganda Microfinance Union (UMU), a kampalabased microfinance NGO that provided inexpensive loans and other financial products to rural, low-income Ugandans.

UMU, which had been operating in the country since 1997, was seeking external capital in response to a fresh set of regulations imposed by the Uganda Central Bank on community-based or not-for-profit finance institutions.

Responding to reports that many microfinance organisations were engaging in dangerously risky lending practices and denying access to deposits, the new regulations required minimum capital and reporting requirements from lenders, as well as the option to become a fully licensed deposit-taking institution.

Aureos, which at the time was seeking to create a regional microfinance power through kenyan portfolio company Microkenya Limited, approached UMU co-founders Rodney Schuster and Charles Naylaali with the prospect of transforming the NGO into a licensed bank.

Aureos got a taste of the difficult road ahead even before the investment was made, when the firm was confronted with the task of arriving at an enterprise value for a non-profit.

“We looked at a bunch of valuation multiples, but at the end of the day it just kind of came back to the net book value of the assets,” says Sikand. “We looked at the loan portfolio, and the quality of the team and just really thought about what it's going to take to turn this into a new company.”

Along with UMU's founders and an investment group that included the Norwegian government-sponsored development fund Norfund, Aureos then embarked upon a host of internal changes to professionalise the organisation – setting up new systems and procedures, bringing in an Indian IT company to put UMU's branches online, and making significant staff changes.

Fundamentally though, Sikand says, it was a change in attitude.

“I think there was a fair number of staff from the old school. As new managers were brought in, many of these people parted to other companies. And the ones who wanted to belong and change with it, they stayed.”

Asked if the shift in philosophy reflected a change in UMU's priorities – from ameliorating rural poverty to evolving into a for-profit enterprise – Sikand said that overall, the maturation of UMU into a full-fledged bank would provide a greater good for the Ugandan public.

“This move really helps to entrench and sustain the microfinance operations,” he says. “You had to team up with someone, and in that way you created a much more sustainable vehicle that will continue to address the needs of the Uganda public, in rural and urban areas.”

UML now stands as one of only four licensed Ugandan deposit-taking microfinance institutions. Equity Bank, which through the UML transaction now counts Aureos among its major shareholders, has plans to expand UML into several Ugandan cities.

PE-BACKED INTERCONTINENTAL BANK OPENS LONDON OFFICE
Nigeria-based Intercontinental Bank, backed by private equity firms Emerging Capital Partners and Scott Foushee-led AIG Global Emerging Markets, has opened its first European subsidiary in London. The launch marks an important milestone in the bank's continued international expansion, which began in 2006 with the establishment of a presence in Ghana. Intercontinental Bank UK will offer a range of wholesale banking services, including trade services business such as letters of credit, collections and guarantees, structuring and funding of structured trade, and project finance transactions, as well as arrangement of funding for group entities. Last year, a consortium including ECP, AIG, Greek private equity firm Vectis Capital and Rand Merchant Bank invested $161 million in the bank.

FMO INVESTS €118M IN AFRICAN PRIVATE EQUITY FUNDS
The Netherlands Development Finance Company (FMO) has disclosed €118 million in commitments to nine African private equity funds since the beginning of the year. The Dutch development bank has invested in private equity firm Aureos Capital's first pan-African fund and also committed capital to AfricInvest Capital Partners' latest mid-market vehicle. The other managers that received commitments were West Africa-focussed Cauris Croissance, Investec Africa, Grofin Africa, Medu Fund, kingdom Zephyr, the Investment Fund for Health and Africa and CIEL Management.

OLD MUTUAL ACQUIRES 25% STAKE IN AUREOS' REAL PEOPLE
South African investment firm Old Mutual Investment Group's Alternative Investments Boutique has acquired a 25 percent equity stake in credit management specialist Real People, a company in which Aureos Southern Africa Fund (ASAF) initially acquired a seven percent stake in 2006. Real People specialises in South African credit management services, providing a range of personal finance and insurance products. It also offers housing solutions and mobile phone financing solutions, with a strong focus on lending to the middle and lower income brackets. The company employs more than 1,500 people in over 120 branches across South Africa, Tanzania, kenya, Botswana, Malawi, Swaziland and Lesotho. Other investors in Real People include the Dutch bank FMO, senior executives, management and a Black Economic Empowerment Consortium headed by South African businessman Herman Mashaba.

EAST AFRICA CAPITAL PARTNERS LAUNCHES $100M FUND
Nairobi, kenya-based private equity firm East Africa Capital Partners has launched a $100 million fund aimed at information and communications technology in East Africa. The fund, called the Africa Technology Media and Telecoms Fund, will target companies in the growing telecommunications market. The firm has already invested $40 million of the fund in the Wananchi Group, a kenyan internet and entertainment company. The vehicle is partly funded by the Overseas Private Investment Corporation, a US government agency that aims to foster economic development in emerging markets, as well as an international group of high-networth individuals. OPIC committed $50 million to the fund.

EMERGENT LAUNCHES AFRICAN AGRICULTURE FUND
Hedge fund specialist Emergent Asset Management has launched a private equity-style fund aimed at the Sub-Saharan agricultural sector. The firm anticipates African Agricultural Land Fund will have its second closing in October 2008. Subscriptions are currently being accepted for the second closing. Initially, the investment focus will be South Africa, but the portfolio is expected to expand to countries such as Botswana, Zambia, Mozambique and Congo. Emergent has partnered with Grainvest, a firm of professional agricultural traders and one of the top five participants on the South African Securities Exchange, involved in agriculture locally, including farming, manufacturing, and transport and trading.

CDC INVESTS €7M IN SOUTH AFRICAN MICROFINANCE FIRM
CDC Group, the UK governmentbacked private equity emerging markets fund of funds, has committed €7 million to South African venture firm Advans. Advans is a regulated specialised venture capital company which invests mainly in greenfield microfinance institutions (MFIs) in Africa and Asia. CDC signed a subscription agreement by which it committed to invest equity in Advans for €3 million. CDC will also commit an additional €4 million in Advans in anticipation of the second round of fundraising to be organised by Advans in early 2009. CDC's investment will support Advans in extending its network of MFIs mainly in Asia and Africa.