January 2015

Development

Prosperity

Growth

Financial

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After screening 30 material opportunities last year, we successfully executed three growth equity investments in rural electrification, rural healthcare and mobile payments & banking. Our three investees are not only solid investments, but in areas defined as “national priorities” for the Prime Minister’s Office, Ministry of Finance and Bangladesh Central Bank. All are significant disrupters, had multiple global VC/PE suitors courting them and took an incredible amount of legal negotiation securing our 25% equity stakes. Involving more than money, the ability to bridge local context with global standards, leverage powerful networks and our belief in technology’s ability to leapfrog development, in the end, made us the ultimate boardroom colleague and Sovereign partner. It’s important to understand why these companies matter so much to so many, and decipher what’s taking place in rural Bangladesh. Context is always relevant.

The Rise of the Village Consumer

In 1961, a pandemic wave of Cholera began in Sulawesi, Indonesia and violently spread across Asia, Europe and Africa. Extreme dehydration, induced by diarrhea and vomiting, triggered rapid death, killing tens of thousands of people in South Asia alone. Bengali doctors working feverishly in Dacca, East Pakistan eventually found an innovative way to fight back. The Bengali’s revisited a century-old concoction of coconut water, carrot juice, carob flour and old bananas spiking rapid rehydration, healing the sick and ending the outbreak. This life-saving treatment of carbs, sugar and salt was later published in British medical journal, Lancet, and made its way to a doctor in the US. The physician, based at the University of Florida, was working with the school’s football team, on how to best deal with oppressive heat and humidity his players faced during strenuous games. The doctor saw a common solution in rapid rehydration, if it worked for sick cholera patients, it would surely work for his healthy team, the Gators. Whipping up a formula of water, glucose, sodium and potassium, the genesis of the most popular sports drink in history was created - Gatorade.

Gatorade is a rare example of reverse innovation, an idea adopted first in the developing world, and later defies gravity by flowing uphill to the developed world. It runs counter to the dominant innovation pattern we think first happens in places like Silicon Valley or New York. Reverse innovation pushes the performance paradigm, offering more for less while recognizing an entirely different user context.

Legendary investor Howard Marks once wrote, “There are two concepts that successful investors must master: value and cycles.” We know this truth after years investing in Asia. While margin-of-safety is embedded in our investment process, you know navigating cycles is much more difficult. After 20 years of globalization, rural-urban migration and growing middle class theme boundlessly retold, we have finally crossed the rubicon. The 21st century’s newest secular cycle is here. It’s playing out in the streets of HK, Scotland, US, and even far-reaching Greenland. The US National Intelligence Council in their unclassified Global Trends 2030 report describes this theme as their most important megatrend concerning global peace and security.

LEAPFROGGING THE VILLAGE FRONTIER

What is this new secular theme? Individual empowerment. Better known in political science circles as devolution – meaning decentralization of power - it’s the geopolitical equivalent of the second law of thermodynamics: inexorable, universal entropy. Whether manifesting in the streets of Admiralty in Hong Kong, election polls in Scotland or #ICantBreathe rallies in NYC, devolution supporters advocate the same thing: greater empowerment, self-rule and dignity.

To paraphrase Victor Hugo, there is nothing more powerful than an idea whose time has come. Our first three investments in Bangladesh capture the natural extension of this secular cycle - village empowerment.

While Thomas Piketty is correct that inequality is growing within nations, across nations, inequality is actually improving. Around the world low-income rural villagers, measuring 3.1 billion people, represent half the world’s population and nearly $15 trillion in income. Incomes for this group in the bottom 30% of the economic spectrum have grown more than 5% a year on average over the past two decades. Far faster than income growth for the middle/high groups normally discussed in EM. The fact is – globally the middle class is getting larger – but it's really happening from the very bottom up. Engaging the village consumer is the most important secular investment trend of the 21st century, and is at the heart of all of our investments.

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Meet Mr. Abedin

The majority of village consumers are either self-employed or casual workers. Take Joynal Abedin, a South Asian rickshaw driver living in the rural outskirts of Pune, India. Mr. Abedin first started driving in this noisy college town 15 years ago and hustles for every rupee. He waits for hours at multiple rickshaw stands, fighting with other drivers while occasionally screaming at passengers over fares. Typically, he earns 300 rupees, or roughly $5, for a grueling 12-hour shift.

Most village consumers, like Mr. Abedin, are entrepreneurs not by design, but by necessity. As there are simply not enough salaried jobs to accommodate everyone who needs to make a living, people go into business for themselves. Mr. Abedin and his resilient contemporaries are forced to make complex economic choices daily. They are the toughest but most rational group you will ever meet. Village entrepreneurs have the meagerest economic cushions to absorb shocks, so the ability to cope with risk is critical.

But for Mr. Abedin, a tipping point has stealthily occurred. During the past three years, rural areas like his are growing faster than urban ones. Rural spending power has picked up due to a mix of urban prosperity trickle down, government led safety-net investments and rural land price escalation. One key catalyst? Disruptive cell phone technology is giving Mr. Abedin greater economic power. Today, Mr. Abedin no longer fights or haggles at work. He quietly checks the text messages on his cell phone for his customer schedule, with new pickups usually coming every hour or so. Business is so brisk he recently bought an apartment for $33,000 and can afford to send his three school age daughters to an English language school. The algorithm embedded in his cell phone is the village twist to ride-hailing app Uber, called Autowale, used to map the most efficient dirt paved routes, optimizing rider pickups and drop-offs.

With more money in pockets, village consumers are consuming more and even “premiumizing,” buying goods you would buy if you naturally had more disposable income. Grassroots visits thru-out Bangladesh/India/Myanmar teach us there are currently three core categories of consumption for Mr. Abedin: “essential goods” (water, electricity, dairy, feature phones, healthcare), “useful products” (Cable TV, Facebook, early childhood education) and finally, “discretionary items” (fast food, 3G data plans, vacations).

This large rural group is still under-served but characterized as increasingly brand consciousness and brand loyal. Interestingly, while the traditional middle class urban consumer mostly buys on credit, Mr. Abedin and his rural friends still prefer paying cold, hard cash.

Village prosperity is starting to fuel consumer appetites on the fringes of an increasingly urbanized planet. Bangladesh has the 2nd highest level of private consumption (75% of GDP) in South East Asia even with the lowest per capita GDP. The introduction of mass consumerism has taken hold with a youthful population, improving health conditions and rising literacy rates. For instance, Mr. Abedin surprisingly treats entertainment as a staple, and food as discretionary. He may not go hungry to pay his Cable TV bill, but will revert to a rice-only diet for a while, when necessary.

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We have reached a tipping point where serving the village consumer is commercially viable and the war for Mr. Abedin’s ever growing wallet is intense. But, to date, all successful efforts to get a piece of this important wallet boil down to a single question — what is the value of the product you are offering? Mr. Abedin won’t spend his hard-earned cash if he doesn’t recognize the value a product will explicitly bring to his life immediately. In this new secular era, village consumers reign supreme while innovation and customization are the holy grail. It’s no longer about “value for money” but offering “money for immediate value.”

Investee Company Details

Solaric (46% GrsMgn, 5.3x EV/EBIT, Rev 55% CAGR)

Our friends at the US State Department and US Department of Energy helped us appreciate their biggest geopolitical concern with Mr. Abedin. Of the 160 million people living in Bangladesh, more than 80 million don’t have access to electricity. Electricity is the single biggest worry for Mr. Abedin and 1.3 billion friends facing the same problem globally. But…there is now a solution. With solar panel pricing collapsing with Chinese overproduction, and battery storage technology improving with the help of Elon Musk at Tesla, downstream energy distribution is where smart money energy investments are being deployed globally. Bangladesh is the pioneer of off-grid Solar Home Systems (SHS). Founded in 2009, Solaric is the technology leader in the field of rural electrification using a patent protected, solar optimizer for off-grid energy distribution.

The Solar Optimizer is a highly efficient DC/DC converter that produces high voltage DC from low voltage battery input. Efficiency is so high; it’s now possible to commercialize solar power without subsidies. The value of “grid parity” for Mr. Abedin? 50% cost savings to kerosene, 90% energy savings to traditional lights and 10x more safety. Solaric doesn’t just deliver electricity for 2 bulbs or a solar lantern – they power entire homes 24/7 with led lights, mobile chargers, TV, laptop and fan. Solaric manufactures, installs and enables life.

Currently around 3 million Solar Home Systems have been installed in Bangladesh. The US Department of Energy is so enamored with Solaric’s solution, they are helping with expansion in India, Nepal, Philippines and Tanzania. And, in the spirit of innovation and customization - it doesn’t stop there. Solaric has now introduced nanogrid technology, where the basic electricity needs for 50 village households are met simultaneously – creating a virtual unregulated power utility – with secured, recurring revenue streams. For the 1.3 billion people not connected to the grid today, we now have good news and bad news. The bad news is with budgetary constraints; grid expansion is still too expensive and won’t be coming in the foreseeable future. The good news is you don’t need the grid anymore – Solaric brings light into the darkness at the cheapest price per watt-peak (Wp) anywhere on this earth, and with our help, will be coming to additional villages in Africa and SE Asia later this year.

AFC Health (40% GrsMgn, 2.9x EV/EBIT, Rev 60% CAGR)

After electricity, the next major concern for Mr. Abedin is quality healthcare. For more than 120 million people in Bangladesh, health care services are frighteningly poor. Compared to neighboring country India, Bangladesh expenditure on healthcare is $57 per capita compared to $132 in India, equating to just 3.5% of GDP. The solution to the most pressing need of cardiac care happens in only one city, the capital Dhaka. Treatment is so bad, any health issue usually involves a plane ticket overseas for care. More than $1 billion USD annually leaves the country for cardiac care alone in Thailand, Singapore and India for those with means. Those without means? Confusion, anger and painful frustration.

That has now all changed. Our second investee, AFC Health, is building the country’s only specialized rural hospital chain providing oncology and cardiac care profitably to the 120 million rural people of Bangladesh. AFC has partnered with Fortis Healthcare of India and GE to bring modern technology and training to rural Bangladesh. Fortis doctors lead departments along with Fortis trained nurses and GE provides training and certification for medical technicians. Diagnostic systems are online, with each patient having their own account. Doctors are able to provide online solutions, including telemedicine from India. To facilitate treatment decision making, a massive healthcare intelligence database

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Leapfrogging Forward The mobile phone is a wonderful example of a “leapfrog” technology: it enabled developing countries to skip the fixed-line technology of the 20th century and move straight to the mobile technology of the 21st. Like the mobile phone, our three investees - Solaric, AFC Health and SureCash - are leapfrogging the village consumer into the 21st century their own way. For the 3.1 billion village consumers around the world today, they won’t repeat the last 200 years of industrialization; we intentionally leapfrog development to build systems of the future, rather than of the past. AFC Health profitably leapfrogs rural care to the same level of accountability you have in the West at an affordable price. Solaric leapfrogs the entire electricity grid, bringing light into the darkness for millions, literally. And SureCash? Leapfrogs the check, travelers check, debit card, credit card and others forms of plastic straight to the mobile wallet.

While these investments clearly fit our new secular cycle and have recurring revenues, that’s still not good enough for your faith in us. Our investees pass three core filters we deem mandatory for any growth equity investment. First, they are run by solid management teams we trust and are strong capital allocators as well as leaders. Second, all three businesses have a significant moat. Patent protection, networks, and little competition with a high barrier to entry, creates a durable consumer brand. Finally, despite high growth, they incorporate a high margin-of-safety. After seriously tough negotiations, these investments were initiated at less than 5x EV/EBIT, 1.5x sales with growing net margins and 40% margin-of-safety. We know buying undervalued moats with cheap convexity at a bargain price is the foundation for investing success.

Stories have always been a terrific way to deliver life lessons. Little Red Riding Hood warns us not to trust strangers. Beauty and the Beast teaches us that true beauty comes from within. Mr. Abedin’s story transforms the cliché around deficiency in rural villages to one of empowered potential. Solaric, AFC Health and SureCash represent a new breed of entrepreneurs accreting shareholder value solving grassroots problems. If it works in Bangladesh, reverse innovation scales for millions across our planet. Your investees are real life heroes, commercially transforming the human condition. And, if you want to know how…that’s the subject for your next investment note.

links specialized doctors to patients via their mHealth platform. AFC Health is also establishing the first clinical trial program, facilitating the potential for block-buster drug creation. Villagers no longer have to travel abroad or 4 hours by ambulance to receive medical care. AFC Health profitably scales developed world standards of accountability to Mr. Abedin’s life at an affordable price - not just valuable - but priceless.

SureCash (12% GrsMgn, Rev 80% CAGR, TransVol 90% CAGR)

160 million people live in Bangladesh with almost the same number of cell phone users. Just as 80 million village consumers don’t have access to electricity and 120 million don't have access to proper healthcare, more than 130 million don’t have access to a bank account. 160 million active cell phones vs. 30 million bank accounts. The whole premise of mobile financial inclusion revolves around a huge real world arbitrage; collapsing the spread between the number of active cell phone users while increasing the number of formally banked consumers. The global mobile money industry is projected to become a $300 billion USD business by 2018, a CAGR of more than 82%. Informal “grey money” reduction in Bangladesh is happening at the same pace. SureCash was founded in 2010 and is a scalable model developed around an open banking and payment platform co-branded with multiple banks. Similar to what VISA and MasterCard have done successfully for credit/debit cards and what ApplePay is doing in the US. SureCash operates on a revenue-share model, collecting service fees for customer transactions. It’s an easy to use, highly secure product based on patented technology. SureCash is growing rapidly with 25,500 agents nationwide. 30 educational institutes are using SureCash for tuition fee collection and customers can pay utility bills, municipal taxes, and shop rents from their mobile wallets. SureCash is in the process working with government entities for disbursement of salary, pension and safety net payments. Mobile pay and banking is a sexy space and gets a lot of attention. After an enormous amount of work understanding different models globally; we know SureCash is the real deal. There are three basic requirements for success: an independent software entity purely focused on the mobile payment opportunity, relationship with banks for KYC/AML and eFLOAT management, and marketing campaigns (ATL/TTL/BTL) illustrating value is more than just P2P transfers of eIOUs. We clearly recognize when investment opportunities with large total addressable markets combined with increasing gross merchandise value, low customer churn and decreasing costs of customer acquisition exist - extraordinary valuation magic occurs with successful execution. One overarching insight worth sharing: SureCash’s platform architecture, their scalability, and their variegated connectivity model allows for innovation and customization for any village consumer with a cell phone, anywhere, anytime.

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“Leapfrogging The Village Frontier”

The Osiris Group is a leading private equity firm scaling innovation in frontier Asian markets. We are the financing engine for scalable, profitable disruption - intentionally building systems of the future, rather than the past. A top priority for the firm is allocating capital into investments leapfrogging long-term development, prosperity and growth. Pioneering impact investing in Asia, our investment framework integrates public policy, entrepreneurship and operational leadership, creating sovereign alpha while best capturing risk-adjusted growth returns.

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One investment. One job. One empowered community at a time.

For more information please contact impact@osirisgroupllc.com

Osiris Asia Impact Fund January 2015