Investment...
I heard about this venture and was pretty excited about it.A friend had shown me the prospectus. While debating if this would be a good and profitable investment with myself, I ran accross this article on AddisFortune.
Criticism from an unknown person is there followed by a rebuttle by the company, Access Capital.
http://www.addisfortune.com/Ermias_Almegas_Details.htm
What promoters of a new venture describe as a credible and awesome investment outlet is being challenged by critics as yet another pyramid scheme in the making.
The Devil in the Details
Back in November 2006, a group of people started to distribute a 28-page document, a.k.a. prospectus; it aimed to sell 100,000 shares to the public, worth 100 million Br. This, according to the prospectus, would create a new company, Access Capital Services S.C., which will invest the funds it raises into 15 projects: from agro-processing to forming a leasing firm to ultimately establishing a commercial bank bearing the same name.Promoters of this business model - chief among them are Ermyas Amelga, a pioneer in the water bottling industry and Haileleul Tamru, one of the partners of HST Chartered Certified Accountants & Authorized Auditors – argue that their company “provides investors an attractive risk-adjusted rate of return.”They are not alone in promoting Access Capital: Berhane Ghebray (PhD), who runs a law and consultancy firm, and André DeSimone, executive director of Kestrel Capital (East Africa) Ltd, a Kenyan stockbrokerage and corporate finance firm, are listed in the prospectus as promoters of this company, which promises deployment of capital “with the twin objectives of minimizing risk through diversification and maximizing returns through well-researched and managed investments.” According to promoters, Access Capital is a product of an extensive research conducted in the past six months, identifying sectors that would pay prospective investors what existing alternatives are far from offering.Promoters, whose office is located inside the posh marble building at Ethio-Chinese Friendship Road, a few meters from the Ibex Hotel, had opened share offers on November 30, 2006, originally anticipating that they would come to a close on Wednesday, January 31, 2007. Although they claim to have raised over 30pc of the capital they aspire to receive, which they argue is good enough to launch the company, closing of share offering has been postponed by two weeks; at least three financial firms are considering the project for possible involvement, pending decisions by their respective board of directors, according to one of the main promoters.Prospective investors are promised a lot from their involvement in this company; required to put a minimum amount of 52,500 shares, investment in Access Capital would bring back a risk calculated rate of return that is up to 40pc, while it will be the first company that gives the opportunity of a fast exit when shareholders want to get out, according to promoters.Nevertheless, their claims are strongly contested by many in the business circle in Addis as the legal foundation of Access Capital is far from being clear. In the absence of a regulatory framework and agency with an oversight power on capital market, which would regulate a company that ventures into the business of buying and selling shares, is seriously questioned. Whether Access Capital is simply a private equity fund, responsible in managing money from a selected number of investors or if it aspires to push the line to a share dealing firm are issues that promoters are confronted with.Critics of this venture warn that without addressing these fundamental issues, investors are exposed to enormous risks in their investments at Access Capital; promoters argue that their company is involved in the service sector that is fully covered and governed by existing laws under the country’s Commercial Codes.Following a submission of a critical article from one of our readers who claims to have been exposed to what is in the prospectus, Fortune has approached the main promoters to respond to their critics; Ermyas Amelga has responded in writing to several points that many believe are sticky points to Access Capital.I would like to convey my disappointment that I am forced to respond to a collection of uninformed, misguided and malicious assertions by an anonymous attacker, being presented in the guise of an intelligent critique in the pages of Fortune. Time will show that the attacks are unfounded and, at worst, merely lead to extra cost and frustration.It seems usual in Ethiopia for any dynamic step forward in the economy to meet press “critiques” from people who chose not to reveal their identities and who either misrepresent or are misinformed about the true nature of what is being undertaken. However, as the overwhelming interest shown by the private (not public) potential investors and entrepreneurs we that have approached already indicates, many people actually involved in business in Ethiopia are aware of the dire gaps that Access Capital aims to fill.Our office is already host to many entrepreneurs with expansion projects seeking capital, including some very attractive opportunities that may meet our criteria. In addition, applications for shares are coming in as investors follow our confidence that filling this gap will mean both a contribution to achieving the desired economic and private sector growth, and achieve strong returns for shareholders.
Critique:
http://www.addisfortune.com/View%20Pont-Critic%20On%20Access%20Market-%20A%20Million%20Dollar%20Question.htm
A Million Dollar Question
It is always a pleasure to see ambitious and pioneering projects starting-up in developing countries like Ethiopia. And it was with excitement when I received the prospectus for Access Capital from a potential investor asking for investment advice. For reasons that will become clear shortly, my client has strongly requested that my recommendations be made available, as soon as possible, to other potential investors and the public at large.
Access Capital is expected to be a share dealing brokerage cum private equity/ fund management cum investment consultancy start-up with an ambition to raise 100 million Br from domestic and foreign investors. It has produced what seems to be a professional looking prospectus for potential investors to make a decision on. And it is with this document, as any investor or advisor would, that I have based my findings. Here are key points worth mulling over.
After integrity, commitment to a project is probably one of the most important questions raised by a potential investor.
How committed are the founding partners?
Partners at such an institution with a lot public funds on their hands are expected to commit not only fulltime to their working hours, but in fact, their whole waking hours and more. But the partners of Access Capital are all part-timers who have their day jobs in other firms and probably only committing ‘some time’ to this enormous project.
Just to give you a feel for the size of the project, the amount of money to be raised is equivalent to what is required to start a private bank in Ethiopia. And I do not recall any private banks being run by part-time managers.
It is normal practice for professional financial institutions to offer some kind of security or guarantee for money raised for financial speculation. And there is no indication or statement in the prospectus of any security offered for the funds raised from the general public.
What guarantee is Access Capital offering its investors promising no one is going to fly away with their funds?
It is the norm for regulators like the National Bank of Ethiopia (NBE) to be the guarantor of last resorts. What steps has the NBE taken to ensure that investors’ money is safe in the hands of Access Capital?
From what is written in the prospectus, Access Capital has as much security as the popular, but probably illegal, pyramid schemes that are currently engulfing the unsuspecting and ill-fated public in Ethiopia.
The NBE is the regulator of all banking and financial activity in the country. And it is surprising that Access Capital has not sought clearance from the NBE before launching a fundraising activity. From conversations with my contacts at the NBE, it is already clear that the founding partners have already violated a number of banking regulations.
For example, and as the banking regulation clearly states, the financial sector are closed to not only foreign financial institutions but also to foreign nationals. Access Capital is not only seeking foreign investors but some of its founding partners are also foreign passport holders. It is surprising that the ‘financial experts’ who are seeking investors to trust them with their money have failed to grasp this fundamental regulatory flow in their prospectus.
This is a classic question that advisors always ask partners in financial ventures. It is fundamentally important that fund managers do not have any potential, either direct or indirect, sources of conflict of interest. When a fund manager is entrusted to invest the public’s money, he should not be in any position to personally gain (other than what is already stated as remunerations in the prospectus) from the transactions he enters.
Here there are two clear sources of conflict of interest: As the partners have their own investment advisory related activities in their other companies, there is no guarantee or protection offered that they would not gain financially at the expense of Access Capital investors. The prospectus states that Access Capital will engage in advising clients on investment opportunities while it reserves the option to invest itself on certain investments. If one was an investor seeking advice, how can one be sure that Access Capital is giving him the best advice while it also reserves the right to cherry pick the best investments.
Access Capital outlines four main areas of business that it is intending to embark on from the word go. These are selling shares on behalf of others, buying and selling shares, providing investment advice and investing with its own funds. For a start-up company, this is taking on too much in one go. But for a start-up company entering uncharted waters, where the business of brokerage and private equity can also be considered as start-up sectors, it is definitely a recipe for failure. But the story does not end here.
Access Capital partners are also in the process of setting up two further businesses in the financial sector, each requiring a similar amount of funds to be raised and managed. I understand that they are planning to start up Access Bank with a capital of 100 million Br within the coming three months to be immediately followed up by Access Leasing - another cash hungry financial business.
At the very least, this fact should have been clearly stated in the prospectus, as it will have material impact on Access Capital. Nevertheless, for a business that is to be run by part-time managers whose experience does not cover the areas of the proposed business, it seems to be bordering on the irresponsible in trying to accomplish all of these highly risky businesses, almost in one go. The saying ‘Jack of All Trades and Master of None’ comes to mind.
Says the prospectus: “Investment return likely to beat inflation could be better than existing alternatives.”
A professional investor will only commit to an investment if he is clearly convinced of the expected rate of return. Here, the statement is no more than a flitting remark about maybe beating inflation – without even speculating what Access Capital is forecasting inflation rate to be in the coming few years. And with regards to the investment being ‘better than exiting alternatives,’ what comparisons or studies have been done? What rate of return do existing alternatives provide and how does Access Capital propose to be better than these? When private banks are offering an annual dividend rate of 25pc, who in their right mind would be queuing up to buy Access Capital’s ‘inflation beating’ investment offer?
Even if the rest of the prospectus was convincingly enough, it would fail just on this crucial and fundamental issue. It appears that the quality of the argument on rate of return is as consistent as the standard of the whole prospectus.
The prospectus’ main argument for Access Capital and its services is the need for equity financing or what it calls the ‘equity gap.’ Again there is no quantitative argument or justification that backs this claim. There is a great debate about the availability or otherwise of local capital whether in private hands or sitting in the vaults of private or state banks. Unless Access Capital can convince potential investors that it understands and can articulate the real corporate capital demand, it does not deserve to be entrusted with investor’s funds.
The partners at Access Capital have not clearly stated that they are trying to raise equity for investment in other companies as well as to establish Access Capital itself as a business. And before any professional investor makes any new investment, he must see how the business is going to utilize the new capital. This is done through a business plan. And there is no mention of any business plan, financial plan, business implementation plan or any growth strategy. What should be a real concern is not just that there was no business plan developed for Access Capital but that the founding partners, the investment experts who we are asked to trust our money with, did not realize that they would need a business plan before launching a business.
Access Capital makes great play about its ‘first mover advantage.’ The brokerage business that is proposed is a non-starter in such an illiquid environment and non-existent marketplace.
Nevertheless, it is impossible to give a detailed analysis of the prospectus in such a short review note. But to concur with the famous saying that ‘the devil is in the details,’ I will close my high level review with one point of detail.
The prospectus states that the main promoters have made a ‘contribution in kind’ equivalent to 10pc of the shares to be issued. For a 100 million Br share issue, this equates to 10 million Br. But the prospectus also states that ‘the start-up expenses will have totalled approximately one million Birr and are financed by the main promoters with the cost reimbursement to be handled in terms of shares issued. In that case, why are the partners asking for 10 million Br when they have ‘only’ spent one million Birr in start-up costs?
This seems to be a contradiction of a major proportion. The difference between the two figures is nine million Birr (about one million dollars): what is a million dollar for?
I am sure the partners of Access Capital will be rushing-off their feet to defend and answer the questions and concerns raised here. But the point is, all these questions should have already been unequivocally answered in the one place that matters - the prospectus. Unfortunately, the partners have utterly failed to do so.
Editors have withheld the writers name upon request.
Rebuttle:
http://www.addisfortune.com/Ermyas%20Amelgas%20Response-Questions%20and%20Answers.htm
I would like to convey my disappointment that I am forced to respond to a collection of uninformed, misguided and malicious assertions by an anonymous attacker, being presented in the guise of an intelligent critique in the pages of Fortune. Time will show that the attacks are unfounded and, at worst, merely lead to extra cost and frustration.
It seems usual in Ethiopia for any dynamic step forward in the economy to meet press “critiques” from people who chose not to reveal their identities and who either misrepresent or are misinformed about the true nature of what is being undertaken. However, as the overwhelming interest shown by the private (not public) potential investors and entrepreneurs we that have approached already indicates, many people actually involved in business in Ethiopia are aware of the dire gaps that Access Capital aims to fill.
Our office is already host to many entrepreneurs with expansion projects seeking capital, including some very attractive opportunities that may meet our criteria. In addition, applications for shares are coming in as investors follow our confidence that filling this gap will mean both a contribution to achieving the desired economic and private sector growth, and achieve strong returns for shareholders.
Fortune: Can you explain what exactly Access Capital plans to do with the 100 million Br it plans to raise from the public? Is it a private fund management company with an ambition to change a course in due time to a share dealing group or simply an investment consultancy group?
Criticism from an unknown person is there followed by a rebuttle by the company, Access Capital.
http://www.addisfortune.com/Ermias_Almegas_Details.htm
What promoters of a new venture describe as a credible and awesome investment outlet is being challenged by critics as yet another pyramid scheme in the making.
The Devil in the Details
Back in November 2006, a group of people started to distribute a 28-page document, a.k.a. prospectus; it aimed to sell 100,000 shares to the public, worth 100 million Br. This, according to the prospectus, would create a new company, Access Capital Services S.C., which will invest the funds it raises into 15 projects: from agro-processing to forming a leasing firm to ultimately establishing a commercial bank bearing the same name.Promoters of this business model - chief among them are Ermyas Amelga, a pioneer in the water bottling industry and Haileleul Tamru, one of the partners of HST Chartered Certified Accountants & Authorized Auditors – argue that their company “provides investors an attractive risk-adjusted rate of return.”They are not alone in promoting Access Capital: Berhane Ghebray (PhD), who runs a law and consultancy firm, and André DeSimone, executive director of Kestrel Capital (East Africa) Ltd, a Kenyan stockbrokerage and corporate finance firm, are listed in the prospectus as promoters of this company, which promises deployment of capital “with the twin objectives of minimizing risk through diversification and maximizing returns through well-researched and managed investments.” According to promoters, Access Capital is a product of an extensive research conducted in the past six months, identifying sectors that would pay prospective investors what existing alternatives are far from offering.Promoters, whose office is located inside the posh marble building at Ethio-Chinese Friendship Road, a few meters from the Ibex Hotel, had opened share offers on November 30, 2006, originally anticipating that they would come to a close on Wednesday, January 31, 2007. Although they claim to have raised over 30pc of the capital they aspire to receive, which they argue is good enough to launch the company, closing of share offering has been postponed by two weeks; at least three financial firms are considering the project for possible involvement, pending decisions by their respective board of directors, according to one of the main promoters.Prospective investors are promised a lot from their involvement in this company; required to put a minimum amount of 52,500 shares, investment in Access Capital would bring back a risk calculated rate of return that is up to 40pc, while it will be the first company that gives the opportunity of a fast exit when shareholders want to get out, according to promoters.Nevertheless, their claims are strongly contested by many in the business circle in Addis as the legal foundation of Access Capital is far from being clear. In the absence of a regulatory framework and agency with an oversight power on capital market, which would regulate a company that ventures into the business of buying and selling shares, is seriously questioned. Whether Access Capital is simply a private equity fund, responsible in managing money from a selected number of investors or if it aspires to push the line to a share dealing firm are issues that promoters are confronted with.Critics of this venture warn that without addressing these fundamental issues, investors are exposed to enormous risks in their investments at Access Capital; promoters argue that their company is involved in the service sector that is fully covered and governed by existing laws under the country’s Commercial Codes.Following a submission of a critical article from one of our readers who claims to have been exposed to what is in the prospectus, Fortune has approached the main promoters to respond to their critics; Ermyas Amelga has responded in writing to several points that many believe are sticky points to Access Capital.I would like to convey my disappointment that I am forced to respond to a collection of uninformed, misguided and malicious assertions by an anonymous attacker, being presented in the guise of an intelligent critique in the pages of Fortune. Time will show that the attacks are unfounded and, at worst, merely lead to extra cost and frustration.It seems usual in Ethiopia for any dynamic step forward in the economy to meet press “critiques” from people who chose not to reveal their identities and who either misrepresent or are misinformed about the true nature of what is being undertaken. However, as the overwhelming interest shown by the private (not public) potential investors and entrepreneurs we that have approached already indicates, many people actually involved in business in Ethiopia are aware of the dire gaps that Access Capital aims to fill.Our office is already host to many entrepreneurs with expansion projects seeking capital, including some very attractive opportunities that may meet our criteria. In addition, applications for shares are coming in as investors follow our confidence that filling this gap will mean both a contribution to achieving the desired economic and private sector growth, and achieve strong returns for shareholders.
Critique:
http://www.addisfortune.com/View%20Pont-Critic%20On%20Access%20Market-%20A%20Million%20Dollar%20Question.htm
A Million Dollar Question
It is always a pleasure to see ambitious and pioneering projects starting-up in developing countries like Ethiopia. And it was with excitement when I received the prospectus for Access Capital from a potential investor asking for investment advice. For reasons that will become clear shortly, my client has strongly requested that my recommendations be made available, as soon as possible, to other potential investors and the public at large.
Access Capital is expected to be a share dealing brokerage cum private equity/ fund management cum investment consultancy start-up with an ambition to raise 100 million Br from domestic and foreign investors. It has produced what seems to be a professional looking prospectus for potential investors to make a decision on. And it is with this document, as any investor or advisor would, that I have based my findings. Here are key points worth mulling over.
After integrity, commitment to a project is probably one of the most important questions raised by a potential investor.
How committed are the founding partners?
Partners at such an institution with a lot public funds on their hands are expected to commit not only fulltime to their working hours, but in fact, their whole waking hours and more. But the partners of Access Capital are all part-timers who have their day jobs in other firms and probably only committing ‘some time’ to this enormous project.
Just to give you a feel for the size of the project, the amount of money to be raised is equivalent to what is required to start a private bank in Ethiopia. And I do not recall any private banks being run by part-time managers.
It is normal practice for professional financial institutions to offer some kind of security or guarantee for money raised for financial speculation. And there is no indication or statement in the prospectus of any security offered for the funds raised from the general public.
What guarantee is Access Capital offering its investors promising no one is going to fly away with their funds?
It is the norm for regulators like the National Bank of Ethiopia (NBE) to be the guarantor of last resorts. What steps has the NBE taken to ensure that investors’ money is safe in the hands of Access Capital?
From what is written in the prospectus, Access Capital has as much security as the popular, but probably illegal, pyramid schemes that are currently engulfing the unsuspecting and ill-fated public in Ethiopia.
The NBE is the regulator of all banking and financial activity in the country. And it is surprising that Access Capital has not sought clearance from the NBE before launching a fundraising activity. From conversations with my contacts at the NBE, it is already clear that the founding partners have already violated a number of banking regulations.
For example, and as the banking regulation clearly states, the financial sector are closed to not only foreign financial institutions but also to foreign nationals. Access Capital is not only seeking foreign investors but some of its founding partners are also foreign passport holders. It is surprising that the ‘financial experts’ who are seeking investors to trust them with their money have failed to grasp this fundamental regulatory flow in their prospectus.
This is a classic question that advisors always ask partners in financial ventures. It is fundamentally important that fund managers do not have any potential, either direct or indirect, sources of conflict of interest. When a fund manager is entrusted to invest the public’s money, he should not be in any position to personally gain (other than what is already stated as remunerations in the prospectus) from the transactions he enters.
Here there are two clear sources of conflict of interest: As the partners have their own investment advisory related activities in their other companies, there is no guarantee or protection offered that they would not gain financially at the expense of Access Capital investors. The prospectus states that Access Capital will engage in advising clients on investment opportunities while it reserves the option to invest itself on certain investments. If one was an investor seeking advice, how can one be sure that Access Capital is giving him the best advice while it also reserves the right to cherry pick the best investments.
Access Capital outlines four main areas of business that it is intending to embark on from the word go. These are selling shares on behalf of others, buying and selling shares, providing investment advice and investing with its own funds. For a start-up company, this is taking on too much in one go. But for a start-up company entering uncharted waters, where the business of brokerage and private equity can also be considered as start-up sectors, it is definitely a recipe for failure. But the story does not end here.
Access Capital partners are also in the process of setting up two further businesses in the financial sector, each requiring a similar amount of funds to be raised and managed. I understand that they are planning to start up Access Bank with a capital of 100 million Br within the coming three months to be immediately followed up by Access Leasing - another cash hungry financial business.
At the very least, this fact should have been clearly stated in the prospectus, as it will have material impact on Access Capital. Nevertheless, for a business that is to be run by part-time managers whose experience does not cover the areas of the proposed business, it seems to be bordering on the irresponsible in trying to accomplish all of these highly risky businesses, almost in one go. The saying ‘Jack of All Trades and Master of None’ comes to mind.
Says the prospectus: “Investment return likely to beat inflation could be better than existing alternatives.”
A professional investor will only commit to an investment if he is clearly convinced of the expected rate of return. Here, the statement is no more than a flitting remark about maybe beating inflation – without even speculating what Access Capital is forecasting inflation rate to be in the coming few years. And with regards to the investment being ‘better than exiting alternatives,’ what comparisons or studies have been done? What rate of return do existing alternatives provide and how does Access Capital propose to be better than these? When private banks are offering an annual dividend rate of 25pc, who in their right mind would be queuing up to buy Access Capital’s ‘inflation beating’ investment offer?
Even if the rest of the prospectus was convincingly enough, it would fail just on this crucial and fundamental issue. It appears that the quality of the argument on rate of return is as consistent as the standard of the whole prospectus.
The prospectus’ main argument for Access Capital and its services is the need for equity financing or what it calls the ‘equity gap.’ Again there is no quantitative argument or justification that backs this claim. There is a great debate about the availability or otherwise of local capital whether in private hands or sitting in the vaults of private or state banks. Unless Access Capital can convince potential investors that it understands and can articulate the real corporate capital demand, it does not deserve to be entrusted with investor’s funds.
The partners at Access Capital have not clearly stated that they are trying to raise equity for investment in other companies as well as to establish Access Capital itself as a business. And before any professional investor makes any new investment, he must see how the business is going to utilize the new capital. This is done through a business plan. And there is no mention of any business plan, financial plan, business implementation plan or any growth strategy. What should be a real concern is not just that there was no business plan developed for Access Capital but that the founding partners, the investment experts who we are asked to trust our money with, did not realize that they would need a business plan before launching a business.
Access Capital makes great play about its ‘first mover advantage.’ The brokerage business that is proposed is a non-starter in such an illiquid environment and non-existent marketplace.
Nevertheless, it is impossible to give a detailed analysis of the prospectus in such a short review note. But to concur with the famous saying that ‘the devil is in the details,’ I will close my high level review with one point of detail.
The prospectus states that the main promoters have made a ‘contribution in kind’ equivalent to 10pc of the shares to be issued. For a 100 million Br share issue, this equates to 10 million Br. But the prospectus also states that ‘the start-up expenses will have totalled approximately one million Birr and are financed by the main promoters with the cost reimbursement to be handled in terms of shares issued. In that case, why are the partners asking for 10 million Br when they have ‘only’ spent one million Birr in start-up costs?
This seems to be a contradiction of a major proportion. The difference between the two figures is nine million Birr (about one million dollars): what is a million dollar for?
I am sure the partners of Access Capital will be rushing-off their feet to defend and answer the questions and concerns raised here. But the point is, all these questions should have already been unequivocally answered in the one place that matters - the prospectus. Unfortunately, the partners have utterly failed to do so.
Editors have withheld the writers name upon request.
Rebuttle:
http://www.addisfortune.com/Ermyas%20Amelgas%20Response-Questions%20and%20Answers.htm
I would like to convey my disappointment that I am forced to respond to a collection of uninformed, misguided and malicious assertions by an anonymous attacker, being presented in the guise of an intelligent critique in the pages of Fortune. Time will show that the attacks are unfounded and, at worst, merely lead to extra cost and frustration.
It seems usual in Ethiopia for any dynamic step forward in the economy to meet press “critiques” from people who chose not to reveal their identities and who either misrepresent or are misinformed about the true nature of what is being undertaken. However, as the overwhelming interest shown by the private (not public) potential investors and entrepreneurs we that have approached already indicates, many people actually involved in business in Ethiopia are aware of the dire gaps that Access Capital aims to fill.
Our office is already host to many entrepreneurs with expansion projects seeking capital, including some very attractive opportunities that may meet our criteria. In addition, applications for shares are coming in as investors follow our confidence that filling this gap will mean both a contribution to achieving the desired economic and private sector growth, and achieve strong returns for shareholders.
Fortune: Can you explain what exactly Access Capital plans to do with the 100 million Br it plans to raise from the public? Is it a private fund management company with an ambition to change a course in due time to a share dealing group or simply an investment consultancy group?
Ermyas Amelga: As indicated above, we plan to make carefully selected and professionally managed investments into companies and projects in the agriculture, industry and service sector, using our own funds, raised from our shareholders. Access Capital is not a fund management company - managing other people’s funds - and has no intention of turning into a “share dealing group” or “investment consultancy group.” We believe that there are many opportunities in our economy and that will be able to achieve exceptional returns by applying the right tried and tested skills to selecting and managing our investments.
Many of the promoters of Access Capital have other engagements for their fulltime job in other firms. They seem to be involved in Access Capital with their spare time. Do you believe this is enough commitment in managing a huge fund collected from the public?
Access Capital is a share company that will have a board of directors formed in accordance with the Commercial Code of Ethiopia. These will be the stewards and will oversee the company, including the assigning and monitoring of full-time management staff. It is expected that the shareholders, through the directors they elect, will appoint Ermyas Amelga to be the Chief Executive Officer who had guaranteed to be available, although there is no guarantee this will happen.
The other promoters may or may not be elected to the board of directors at the discretion of the general assembly of shareholders but it is common in the business world that promoters and managers are not the same.
What guarantee does your project offers to prospective investors that “no one is flying away with the money” they may be putting in to your project?
This question betrays a sad lack of understanding about how properly-constituted share companies operate and the corporate governance structures in place to protect shareholders. Access Capital will follow the same standards of governance as other share companies in terms of Ethiopian law, which regulates the protection of shareholders’ funds, both at the inception and during the operation of a share company.
Access Capital will also work towards international standards of corporate governance, for instance in the structure of its boards, checks and balances. The company is being formed in accordance with Articles 304 and following of the Commercial Code of Ethiopia. At the inception, shareholders deposit funds into blocked bank accounts opened specifically for this purpose at five commercial banks. When the application process is completed, the promoters call a meeting according to Article 320 at which the shareholders will set up the company and elect all positions, including the board of directors, as laid out in the Memorandum and Articles of associations.
Once the company is formed, the directors must act in the interests of the share company and therefore its shareholders. For instance, the directors will authorize the banks to release shareholders’ blocked funds into the company’s bank account; appoint and supervise the management; and approve signatory powers including withdrawals from the company’s bank account.
When Access Capital makes investments into projects and businesses, as described in the prospectus, the directors would supervise, for instance through forming an investment sub-committee. By following Ethiopian and international tried and tested governance structures, investors’ money will be used in the best interests of the company and its shareholders.
In the prospectus, promoters of Access Capital claim that one of the many peculiarities of this project is to guarantee fast exit opportunity for prospective investors. Thus, they will keep 10pc of the capital they would be raising in order to pay back those who would like to be out for no other reasons. In the absence of a capital market, who determines the prices of these shares; the company or the investor? Who will protect investors from possible impositions from the company? Who regulates these transactions?
Access Capital believes that lack of a transparent way to moving shares from one shareholder to another has been a serious deterrent to potential investors in previous equity offerings. Access Capital will, on a monthly basis, set a price at which it will be willing and ready to buy back its shares from individual shareholders who may wish to sell. It will also set a price at which it will sell to investors who want to buy more.
After starting at book value, every month Access Capital will adjust the price up or down based on the supply-demand situation from investors wishing to sell or buy. The price of the shares is, therefore, determined by the shareholders themselves. Access Capital is offering it as a service to individual shareholders and all transactions are governed by the Commercial Code of Ethiopia (no restrictions will be made on the free transfer of shares according to Article 333 of the Commercial Code).
Which regulatory agency has an oversight power on behalf of the public that regulates your operational activities? Since any company involved in financial ventures is under the direct supervision of the National Bank of Ethiopia (NBE), would it be accurate to assume that NBE does this job? Have you been granted any permit from the NBE? Are you licensed?
Access Capital, as is normal for a share company, will have a business license from the Ministry of Trade and Industry; it will be governed in its activities by the Ministry’s directives and the Commercial Code of Ethiopia. This will follow the meeting of shareholders. Several other companies have previously been registered and operate with similar aims and objects. Access Capital is neither handling other people’s funds nor is it approaching the general public, but only selected potential investors. It is not a financial institution that requires regulation by the National Bank of Ethiopia (NBE).
Some of the promoters of Access Capital do hold foreign nationality. Is it not a violation of the country’s laws to involve foreign nationals in activities that is financial in nature?
It is one of the government’s priorities to encourage foreign investment and some Ethiopian-born potential investors have foreign passports but are very committed to using their savings and skills in developing our country. However, as explained above, Access Capital is not a financial services company and there is no reason why it cannot have foreign nationals as shareholders or promoters.
In your prospectus, you have said that Access Capital will select opportunities for direct investment, while at the same time it also says the company advises prospective investors in their decision where to invest. Doesn’t this bring a conflict of interest?
Access Capital is structured to achieve maximum benefits for its shareholders by aligning the Company’s interests with those of its shareholders. It would not, as a principle, offer investments to outside shareholders that it was not also investing into itself as a company after applying its due diligence procedures and systems. Moreover, prospectuses prepared by Access Capital clearly state that Access is not advising people to buy but offering the shares, and investors should seek their own expert advice before investing.
Because potential shareholders in future capital raisings are likely to be already invested in Access Capital, being offered shares would mean they are merely being offered opportunities to expand their interests in companies they may already be investing into indirectly through their ownership of Access Capital. Thus interests will not be in conflict but will be aligned to the interests of all parties.
According to the prospectus you have distributed to the public through your brokers/agents, Access Capital is set out to sell shares on investors’ behalf; buy and sell shares; invest with own fund; and provide advice on investments. It also wants to set up a commercial bank and leasing firm. Aren’t these too much to chew for a start-up company, if not making it a “jack of all trade?”
There is no foundation to the assertion that Access Capital also plans to “set up a commercial bank and a leasing firm.” Access Capital may invest in companies in these sectors in the future, but it will not be responsible for them. As an equity investor, Access Capital will invest into well-managed businesses, which can be existing businesses or new ventures. In the latter case, this will involve appointing for each company a management team with individual track records of excellence and a board of directors dedicated to its success. In each case, the quality of the management invested in will be one of the main determinants of an investment’s success.
Access Capital will ensure it allocates sufficient resources to each investment to protect and maximize its investment return, but will not seek to manage these businesses.
Your project claims to be different from other undertakings in that it promises a higher rate of return for an investment that is “likely to beat inflation and could give better return than existing alternative.” How is that so when some of the private commercial banks were rewarding their shareholders with an average 25pc rate of return on equity in the past five years?
Access Capital will generate returns for its shareholders by facilitating and making private equity investments in growing Ethiopian businesses. Access Capital expects to achieve its objectives by: recruiting and training the brightest talent; building strong relationships, based on competence, professionalism and integrity, with investors and entrepreneurs that will be our partners and clients; systematically and professionally researching and selecting the best from the wide range of investment opportunities available in Ethiopia; and working with the management of firms in which we have made private equity investments to add value through professional support in financial and strategic management.
Our business is about providing capital and services to the most promising opportunities, selected through rigorous research and analysis. Even in the competitive developed economies, where easier access to information makes opportunities for exceptional returns harder to find, private equity firms have generated returns of up to 100pc. Returns in excess of 35pc are not unusual.
The combination of capital plus management support will be particularly potent in developing economies. The private banks are driven to offer high returns in the form of dividends, but this reduces their capital available for growth, but investors still tend to value their shares at the initial offer price. Access Capital will exceed the dividend returns by offering its shareholders both earnings returns and the potential for capital growth in the value of their shareholdings since prices to buy back (or sell) shares will be set by demand and supply, which will be driven by investors’ understanding of the Company’s growth.
This combination will enable Access Capital to provide excellent returns while contributing to the growth of a vibrant, job-generating private sector.
What is the quantitative justification when the prospectus you have distributed claims that Access Capital addresses the issue of “Equity Gap?”
Many expert commentators have agreed that there is a severe shortage of risk sharing and long-term financing in Ethiopia; it is surprising that someone who claims to know about business in Ethiopia can think there is not a severe shortage of equity financing in the country. The government’s five year plan for Accelerated and Sustained Development to End Poverty speaks of a “severe shortage of capital” and the need for “financial sector reform to increase the availability of capital.”.
This gap is usually filled by “equity” (share capital) as well as by debt financing. The term “equity gap” refers to the shortage of capital available to entrepreneurs seeking equity financing to grow their businesses. The principal source of growth financing in Ethiopia is retained profit, since our capital markets are not yet developed, and there is a limit to the amount of debt that a firm can access or carry on its balance sheet.
The growth of our most successful companies is limited by the need to generate funds for new investment internally. Many of these companies need only five percent or 10pc more investment to become excellent, and yet there is no source for these funds. This constraint is strangling the ability of these firms to generate wealth and jobs.
At the same time, there are many individuals and institutions with funds available for investment, but for whom the opportunities to earn good returns are limited. Instead, they may currently be pouring funds into property developments and soaring land prices and buildings without being able to quantify where the businesses will come from that will rent all these properties when they are complete. This is another aspect of the “equity gap” between entrepreneurs seeking funds to grow their business and potential investors with funds available, but lacking the means to invest them productively.
Access Capital will bridge that gap, by providing a mechanism that will connect investors to entrepreneurs, allowing firms to grow more quickly, generating more wealth, providing products and services that are needed in Ethiopia, and generating new and more secure employment opportunities.
There is hardly any mention of either business or financial plans in the prospectus, least of all growth strategy. Is it not a norm to develop a business plan before launching a business?
It goes without saying that there is, of course, a very detailed business plan and strategy in place. Most of our carefully targeted investors have visited our office in person and heard the presentation of our business plan prior to investing. The business plan is not presented in the prospectus upon the advice of legal counsel who advised that it should cover the issues required by the Commercial Code of Ethiopia and nothing more. Any genuine investor is welcome to ask for our business plan and we can share this in detail.
Access Capital claims to be the first of its kind yet to emerge in the market, if we were to read the prospectus. Aren’t there other private fund management firms in Ethiopia? Were two of the main promoters of Access Capital involved in similar initiative before joining hands with this project? How do you respond to allegations that they have “pilfer an idea developed earlier by others?”
We still stand firmly behind this claim. Other companies have been licensed to carry on business in investing in growth opportunities. Notable among them was East Africa Investment Securities of which Ermyas Amelga was a partner but due to other circumstances, the plan to make such investments was never actualized. Where Access Capital is different from its predecessors, and so can claim to be “the first,” is the pool of expertise and resources which the promoters have already dedicated at their own risk to setting up the business before the share offer, so that it will be able to start operations as soon as the share company is incorporated in accordance with the law.
The promoters claim in the prospectus that they have a contribution of 10pc in kind from the total capital they would be raising. What justifies this claim? Can you elaborate in depth the contribution you have put in kind in developing this project?
It is normal practice in Ethiopia and elsewhere for entrepreneurs starting a new business and inviting investors to co-invest with them to earn “sweat equity” or “founders’ privileges,” representing the risks and energy they have put into creating future value for their investors. The Commercial Code of Ethiopia (Article 310) formalizes this by allowing founders for “a period not exceeding three years” to reserve personally, in addition to their rights as shareholders, “a share which shall not exceed one fifth of the net profits” (i.e. 20pc). Further, profit-share benefits for directors are also permitted by law.
In the case of Access Capital, the promoters have stated in the prospectus that they have chosen not to exercise this. The earnings drain could limit future reinvestment for growth and disadvantage fellow investors. Instead they have asked shareholders at the incorporation meeting to allot the lesser amount of 10pc of initial shares in recognition of their initiative and risk-taking as well as the skills and background they bring to the company.
posted by Mechachal yichalal at 11:25 AM
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