Deal flow

2011 was a successful one in terms of private equity deal flow, especially direct deals, where our ongoing efforts to profile our expertise in our focus sectors were particularly fruitful. The majority of our direct deals were in energy, infrastructure and the financial sector. Direct investments outnumbered investments in funds.

Our activity was also boosted by a general pick-up in the private equity market and the fruition of our long-standing relationship-building efforts with fund managers.

We completed 11 new direct investments and increased our exposure in six existing direct investments in companies. Most of our direct investments were in Africa. Fund investments, were mainly in Asia, where we made five of the year's 10 fund investments.

In terms of sectors, our investments became more diverse in 2011. Although the main sectors were energy and financial institutions, we also invested in industries such as telecoms and railways. Last November saw us close the Addax bio-ethanol project in Sierra Leone. Our energy and private equity teams have worked long on this challenging transaction to finance the processing of sugar cane into biofuels.

In line with our strategy, the vast majority of our direct deals were co-investments with partners. These included our first co-investment with the Renewable Energy Asia Fund, a wind energy transaction. We co-invested with Egyptian fund manager Citadel Capital's African Joint Investment Fund l in East Africa's Rift Valley Railways. This major upgrade of a neglected yet important transport link involved the navigation of sensitive environmental and social issues, such as the railway's passage through one of Nairobi's largest slums.

FMO realized three attractive private equity exits in 2011. These included the partial sale of our stake in the Kenmare titanium mine in Mozambique, the divestment of part of our stake in Botswana consumer finance company Letshego, and the sale of part of our investment in African Reinsurance Corporation. We also benefited from profitable exits in our funds portfolio, notably the initial public offering of internet company Yandex, which was only partly sold. Yandes is a portfolio company of Baring Vostok's Russian funds.

For most of our funds and direct investments, however, the exit environment continued to be perceived as difficult. This led to a delay in our exit program despite the fact that some portfolio companies are ripe for divestment.

Although we were satisfied with our deal flow and exits, the tough global economic conditions took a toll. Commercial investors have become more risk-averse, and their caution slows the establishing and closing of some private equity funds. We also had to mark down the fair value of a number of investments as global markets declined. Though this was unwelcome, in most cases it reflected stock exchange fluctuations rather than any structural deterioration in the underlying businesses.

In order to strengthen our business in our focus sectors, we made some internal organizational changes in the Private Equity department. Besides our dedicated financial institutions specialists, we now have two energy and infrastructure specialists who are spearheading investment activity in their sectors, and are responsible for building knowledge and liaising with our debt colleagues on sector themes.