C Caribbe ean Eq quity P Partner rs

Caribbe
C
ean Eq
quity P
Partner
rs (A)
On
O Saturday December
D
15th, 1997 David
D
Pantonn was on an oovernight flight to Jamaiica.
He had sp
pent the pastt three montths preparing
g for his firstt marathon aand was now
w just a few hhours
away from the start of
o the race. The
T past weeek had been very challennging and deemanding:
Panton had closed a major
m
deal in
n Latin Ameerica with hiis team at Moorgan Stanleey, the
investmeent banking firm
f
in New York City he
h had been w
working for as an associiate for the ppast
1
year.
On
O top of his marathon trraining and long hours o f work at Morgan Stanleey, Panton hhad
been dev
veloping an investment th
hesis around
d the nascentt Caribbean pprivate equitty industry. His
passion for
f private eq
quity began as a student at Harvard L
Law School, where he hhad realized tthat
being a laawyer did no
ot match his skill set and
d did not proovide enoughh economic iincentives
relative to the requireed intellectual and workiing commitm
ments. The pprivate equitty industry, on
the otherr hand, proviided much hiigher returnss for an equaally stimulatting job that required botth
academicc and practiccal knowledg
ge. Since then, he had ddecided that hhis goal wass to raise the
largest fu
und in the Caaribbean, and he was foccused on whhat steps he w
would need tto take in ordder
to reach his
h objectivee.
As
A the pilot announced
a
“F
Flight attend
dants preparee for landingg”, Panton reealized that hhe
had not slept
s
the who
ole night, bu
ut he was nott worried. R
Running a maarathon sleepp deprived w
was
only a sm
mall challeng
ge compared
d to what he was
w about too face. Raising a fund w
was no easy ffeat.
Amongstt the question
ns that kept him awake were:
w
What do institutioonal investorrs look for w
when
investing
g in private equity
e
princip
pals? Will selling
s
the innvestment thhesis to instittutional inveestors
be sufficiient to raise capital? Do
o I need to brring on boarrd other peopple or form ppartnerships in
order to raise
r
capital and, if so, who
w should th
hose be? Caan I persuadde investors tto invest in
private eq
quity in the Caribbean? Am I right about
a
the finnancial oppoortunity that the Caribbeaan
market presents?
Augusto Fra
ausin (BBA ’11) and Richard Ga
aines (BBA ’11) prepared this caase under the dirrection and supeervision of Profeessor
Klaas P. Ba
aks. The authors thank Dr. David
d Panton for his patience, feedbaack, and time deedicated to prepaaring the case. T
The
authors are also grateful to Ms. Lisa Hanna
a, Dr. Nigel Clarrk, Mr. Jeffrey H
Hall, Dr. Eleanorr Brown, and Ms
Ms. Tanya Allgrovve for
their availab
bility to interview
w in person and
d retell their expeeriences with CE
EP. Cases are deeveloped solely aas the basis for cclass
discussion. Cases are not in
ntended to serve as endorsementss, sources of priimary data, or ill
llustrations of eff
ffective or ineffecctive
managemen
nt. Last revised on
o 8/18/2011.
Copyright © 2011 The Emo
ory Center for Alternative Investtments. To orderr copies or requeest permission too reproduce mateerials,
please writee to The Emory Center
C
for Altern
native Investmen
nts, 1300 Cliftonn Road, Atlanta, GA 30322, or ggo to
http://cai.em
mory.edu. No parrt of this publicaation may be reproduced, stored in a retrieval sysstem, used in a sspreadsheet, or
transmitted in any form or by
b any means – electronic,
e
mech
hanical, photocoppying, recordingg, or otherwise – without the
permission of
o The Emory Center
C
for Alternative Investmentts.
1
Caribbean Equity Partners (A)
Educational and Professional Background
Born and raised in Jamaica, at 16 years of age Panton applied to Princeton with the goal of
pursuing a political career to support and improve his home country. Not having completed his
A-level exams, which were required by Princeton for students coming from Jamaica, Princeton
told Panton that he was not eligible for admission. Thinking the requirement was unreasonable,
he flew to New Jersey to meet with the admission officer of the University to make a case for
why he was an ideal candidate. His charisma did not go unnoticed and in 1992 he graduated
with a B.A. in Public Policy (with high honors). At Princeton, Panton also worked to refine his
leadership and communication skills: he was elected President of the Undergraduate Student
Government and in 1992 Panton and his close friend Ted Cruz were named the number one
debate team in the nation.
In 1993, soon after his graduation, Panton published a 250 page book, “The Great
Transformation”, a biography about Michael Manley, former Prime Minister of Jamaica. At a
young age, Panton recognized the importance of building a strong and personable network with
influential politicians and professionals. That same year he applied and received the Rhodes
Scholarship, and went on to graduate from Oxford University in 1995 with a Doctorate in
Management Studies. At Oxford, his passion for the Jamaican economy and political landscape
led him to write six case studies about employee ownership in Jamaica. These case studies were
the result of his steadily increasing interest in the Caribbean business environment and were a
perfect supplement to his studies of how companies operate the economy and politics. While at
Oxford, Panton became close friends with Nigel Clarke, another Jamaican Rhodes scholar who
was going to work with Goldman Sachs after graduation and intended on eventually returning
home and using his talents to better the Jamaican Economy. Although he met many interesting
people while at Oxford, he and Nigel immediately became close friends.
In order to pursue his political aspirations, Panton returned to Harvard Law School where he had
taken leave to attend Oxford. At Harvard, Panton and was elected the second black President of
the Harvard Law Review. This accomplishment had previously been reached only by Barack
Obama, who Panton had contacted at the time to ask for his advice. Jeffrey Hall, Panton’s
roommate at Harvard, was also a Jamaican national and after graduation, planned on going to
work for FINSAC, the financial regulator in Jamaica, before taking over his family owned
business, The Jamaican Production House. Panton’s own interest in politics, however, had
started to fade due to a new passion for Private Equity. In order to transition from the political
career he had been building, Panton published a Note on the Harvard Law Review on
“Developing a Demutualization Acquisition Strategy for Private Equity Firms”. This gave
Panton the proper launching pad to land a job on Wall Street with Morgan Stanley & Co. in New
York after he completed his J.D. in 1997.
Panton became an associate at Morgan Stanley with a group that focused on the financial
services, mining, telecommunications and infrastructure sectors in Central, South and North
America, and Africa. Following this experience, Panton asked to join the Latin American
Mergers and Acquisitions Group. He knew this group presented three major advantages. First, it
2
Caribbean Equity Partners (A)
gave him exposure and knowledge on the industry around the Caribbean market which was
helpful in building the investment thesis of the fund. Second, it allowed him to strengthen his
reputation and credibility in the sector and Caribbean region. Finally, because his group was
very small, Panton was given significant client exposure even as a first year associate. In fact, by
levering his entrepreneurial mindset and making himself indispensible to the team, Panton was
soon given the opportunity to interact with higher management in the client companies. This
allowed him to build strong relationships with many professionals and entrepreneurs working in
the Americas.
Panton thus started intensively studying the Caribbean market while working full-time at Morgan
Stanley. During the weekends and free time at the office, he had researched and built what he
believed to be a robust and compelling investment thesis. In addition, working in Central
America had given him the opportunity to meet many business owners and learn more about PE
in the area. He thought there may be an opportunity to set up a private equity fund, although
there had never been a professionally managed private equity fund in the Caribbean.
Opportunities in the Caribbean Private Equity Market
Panton had begun by analyzing the Caribbean Stock Market. With a $10 billion capitalization it
included the exchanges of Jamaica, Trinidad, Tobago, Barbados and Bahamas. Relative to
international equity markets, Caribbean companies traded at lower price/earnings and price/book
value multiples. Panton had been observing these low valuations and was trying to understand
whether they properly reflected the risks associated with that geographic area or were perhaps an
attractive arbitrage opportunity.
As Panton studied the economic climate and the Private Equity industry in the Caribbean, he
discovered that there were virtually no funds in region. In fact, with the exception of a few
institutional investment funds that dated back to the mid-1980s, Emerging Markets Private
Equity remained a new asset class. Indeed, in the early 1990s, there had been very few private
equity funds dedicated to emerging markets, but the majority of these funds were found in Asia.
Panton thought that, had he been able to raise capital, he would have had a first mover advantage
and limited competition in bidding for companies he was interested in purchasing. He had also
found that, even more so than other emerging markets, the Caribbean had historically been
characterized by insufficient development in its capital markets, onerous interest rates and poor
access to low cost, long-term, international debt and equity financing.
In addition to creating value by providing financing to growing companies, Panton thought the
fund would bring three additional benefits to its portfolio companies. First, the fund would
supply permanent risk capital that would allow companies to expand and build on solid and
robust business ideas in order to achieve their strategic objectives. Second, it would provide
relationships and connections with financial institutions, customers, suppliers etc., as well as
credibility to the business. Finally, it would provide oversight, strategic guidance and helped
strengthen corporate governance. Panton thought these benefits were traditionally difficult to
obtain in developing countries and believed that they would allow him to generate alpha.
3
Caribbean Equity Partners (A)
The Buyout and Venture Capital Strategy
Now that Panton had developed an investment thesis, he had to find a way of implementing it.
He had thus far thought of two investment strategies. The first, The Buyout Strategy, involved
the identification of attractive and larger opportunities in the Caribbean that possessed a strong
and unique value proposition. Panton thought he could then mobilize a consortium of financial
and operating partners to capture that opportunity, with the Fund playing an influential role
through a substantial equity stake. The key attributes of these investments included minimal
exchange rate risk, high barriers to entry, potential for sustainable profit growth and an attractive
structure to international investors. The advantages to pursuing a buyout strategy were reduced
portfolio downside risk, increased managerial resources, facilitated portfolio exit opportunities
and a substantial development impact.
The second identified investment strategy was The Venture Capital Strategy. Panton had
recognized that the venture capital industry in the Caribbean was still in a state of infancy.
Unlike the United States, where large institutional investors readily invested in the industry, the
Caribbean venture capital industry received funding primarily from international investors. In
fact, the capitalization of regional venture capital companies had never been significant:
Caribbean insurance firms, pension funds and banks provided minimal investments in venture
capital; government agencies, other corporations and angels only partial investments; and
multilaterals and international pension funds, corporations and insurance firms provided for the
majority of investments. The advantage of regional investors financing local startups were
similar to those that Panton had identified as benefits to companies financed by Private Equity
funds: these included relationships and connections, and strategic guidance. In addition to the
lack of local investors, the regional venture capital industry had experienced several positive
legislative reforms, industry collaborations and increased exposure, thus presenting the region as
an even more interesting investment opportunity.
Both strategies had a time frame of 3 to 6 years and Panton had targeted industries that he
thought were particularly well suited for the Caribbean: tourism (e.g. business hotels), retail (e.g.
restaurants), information technology (e.g. call centers) and branded manufacturing (e.g. beverage
companies).
Panton thought that the financial knowledge acquired at Morgan Stanley, the studies in the field
of law, and the network of politicians and business men he had built in the Caribbean region put
him in a favorable position. In fact, Panton was confident that he had the necessary tools to take
advantage of the opportunities the Caribbean market offered and provide outsized returns to his
potential investors.
Caribbean Investment Fund (“CIF”)
While writing his book “The Great Transformation”, about Michael Manley, the former Prime
Minister of Jamaica, Panton had become close to Manley and many other politicians in the
Caribbean area. In 1992 Prime Minister Manley convened a seminar at a meeting of the
Caribbean Community (“CARICOM”) Heads of State to discuss the possibility of a regional
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Caribbean Equity Partners (A)
private equity fund. The goal was to create a legislative framework that would provide
appropriate incentives specifically for the attraction of private equity to the region and more
generally for the development of regional capital markets. Following worldwide request for
proposals, ICWI, a regional financial services company with an emphasis on the provision of
insurance services, was selected as the service provider, and in 1993, created Caribbean Basin
Investors Limited (“CBIL”), which received the mandate to raise capital for the Caribbean
Investment Fund (“CIF”).
Pursuant to the agreement between CARICOM and ICWI concerning CIF, the 16 member states
granted the Fund various investment incentives and tax concessions in order to give ample
incentives to institutional investors to invest in the fund. These incentives included: (i) all
consents and approvals necessary to establish the operations of the Fund in the CARICOM
Member States without any restrictions, (ii) exemptions from all restrictions on foreign
investment in land, securities and other property (including exemptions from any applicable
exchange control restrictions) in the CARICOM Member States, (iii) exemptions from all taxes,
duties, levies or imposts levied on any revenues, income, dividends, interest or profits, of
whatsoever nature accruing to the Fund from any investment in the CARICOM Member States,
(iv) exemptions from all taxes, duties, levies or imposts levied in respect of subscriptions to or
investments in the Fund, (v) exemptions from all taxes, duties, levies or imposts levied in respect
of any revenue, profits (including capital profits), capital gains, and income generated by the
Fund, (vi) exemptions from all taxes, duties, levies or imposts levied in respect of the proceeds
of sale, transfer or other disposition of any securities issued to the Fund as a result of any
investment by the Fund in the CARICOM Member States, and (vii) exemptions from all taxes,
duties, levies or imposts levied in respect of remittances of any interest, dividends, distributions
or other payments paid by the Fund to any subscriber, investor or shareholder in the Fund.
ICWI, however, had failed to raise capital, and in 1998 had still not begun operations. As Panton
analyzed the reasons that they had not been able to raise capital, he realized that CBIL had three
major problems. First, it lacked a strong advisory and investment board. Second, CBIL did not
have a track record in private equity investing. Finally, Panton noticed that CBIL had not been
able to find an anchor investor, which was often necessary to draw other investors to the fund.
As he analyzed CBIL fund’s history, he wondered how he would be able to avoid those same
problems and potentially partner with CBIL.
Panton knew he had to take advantage of what ICWI had already built. Having worked with
Michael Manley put him in a favorable position, as he had met many of the key players behind
the legislations and CBIL. He also recognized that, in order to raise capital, he needed to bring
on board people who spoke the language of Wall Street: investment bankers. Entrepreneurs and
politicians did not speak that language and would not likely have been able to raise capital from
institutional investors.
5
Caribbean Equity Partners (A)
Jamaica Production Fund
In addition to the proposed CIF, there was a second private equity fund in the Caribbean market:
the Jamaica Production Fund. Although it had successfully raised $9 million in capital, the
Jamaica Production Fund had made only a few investments of which none had been profitable.
Panton had carefully analyzed the reasons that the fund had been underperforming and had found
three main causes. First, the fund was managed by only one general partner. Panton thought this
was a suboptimal organizational structure. In fact, he believed that investors need an investment
committee to serve as a sounding board to the manager’s ideas. Second, the fund followed a
reactive sourcing strategy. Instead of proactively seeking investment ideas and opportunities, the
general partner often waited for those opportunities to present themselves. As Panton had
observed, some of the most profitable investments by private equity managers were the result of
time spent building a network of companies and relationships with managers. Finally, the
Jamaica Production Fund had neither detailed an investment thesis nor focused on a few key,
targeted industries. This often proved to make fundraising difficult, and, in the case of the
Jamaica Production Fund, difficult to determine which investments to pursue.
As Panton realized that the fund was in a distressed condition, he thought of the ways that he
could learn from their experience and potentially take advantage of the situation. In fact, he
knew that the general partner of the Jamaica Production Fund was trying to find a way out of his
commitment, and that the government would be searching for a new management team.
Track Record and the Fundraising Process
While researching the private equity fundraising process, Panton had come across an unsettling
reality. He had discovered that investors were reluctant to invest in partners who did not have a
proven track record. Making things even more complicated, investors shied away from teams
who had never worked together. In fact, investors wanted to review fund managers’ track
records before committing capital, as it provided them with an indicator of how successful the
fund could be expected to perform.
Research data showed that fund managers with a top-quartile fund went on to have their next
fund ranked in the top quartile in 40% of cases and in the second quartile in 30% of cases, while
only underperforming the median with their follow-on fund in 30% of cases. This demonstrated
that GPs with a top-quartile fund outperformed the median benchmark with their next fund in
70% of cases. On the other hand, bottom-quartile fund managers went on to have their next fund
ranked in the bottom quartile 40% of the time. 14% of bottom-quartile fund managers had their
next fund ranked in the top quartile, while 18% have their next fund ranked in the second
quartile. This demonstrated that fund managers' mobility between the quartiles with each new
fund was relatively low.
The correlation between fund performance over time was a clear signal that investors and
institutional investors were going to demand a proven track record from private equity
practitioners before investing in their funds. Panton understood that the investment thesis he had
6
Caribbean Equity Partners (A)
built around the Caribbean market would not be a good enough pitch to raise capital from
investors and institutional investors unless he could establish substantial credibility through other
means. However, he knew it was still possible to raise money without a track record as a close
colleague of his at Morgan Stanley had just raised a private equity fund in India.
Conclusion
As the airplane landed, Panton realized that the hard work he had put into developing the
investment thesis was only the tip of the iceberg. Preparing for the fundraising process was
going to require much more work. As he thought about what he had learned about ICWI and the
Jamaica Production Fund, he started brainstorming ways in which he could take advantage of the
two funds’ prior experiences. However, the lack of sleep made him begin to wonder whether the
risks and returns associated with trying to raise a fund were worth giving up his stable and
lucrative job at Morgan Stanley. He had worked hard to build a professional network and secure
a valued position within the firm, but it was also his dream to raise his own fund in the
Caribbean. As Panton stepped off the plane in Jamaica, he asked himself: “Should I leave
Morgan Stanley and try to raise a fund in the Caribbean, and if so what strategy should I
pursue?”
7
Caribbean
n Equity Partne
ers (A)
Exhibit 1 – Panton’’s CV
8
Caribbean Equitty Partners (A)
Exhibit 2 – Nigel
N
Clarke BIO
O
9
Caribbean Equitty Partners (A)
Exhibit 3 – Jeeffrey Hall BIO
10
Caribbean Equitty Partners (A)
Exhibit 4 – The
Th Investment Thesis
T
11
Caribbean Equitty Partners (A)
Exhibit 5 – The
Th Caribbean In
nvestment Regio
on
12