Mongolia

Sustainable Growth
Private Equity Fund
19 June 2015

Contents
Because things are the way they are,
things will not stay the way they are
- Bertold Brecht

A commercially-focused organisation
can invest for both financial and
social returns for the nation, this will
be the basis for sustainable growth in
Mongolia.

1. A Diverse Economy
2. Growth Opportunities
3. Diversification
4. Economic Impacts
5. Social Impacts
6. Ecological Impacts
7. Structured Impact
8. Sectoral Focus (1)
9. Sectoral Focus (2)
10. Investment Focus
11. Case Study
12. Fund Structure
13. Investment Comparison
14. How to Invest

A DIVERSE economy
Projected average growth of 5.9% 20152020 non-mineral GDP
Far less volatility than mineral-related GDP
growth
Diversification is a key focus
Raising profile of expanding sectors
Resilience across cycles

Mongolia Mineral & Non-Mineral GDP Growth History

30

As a resource-rich nation,
Mongolia is also developing
and differentiating its economy
Enhancing absorptive capacity
requires broad growth and a
perspective beyond typical
investment pace metrics
Private investment can take
the lead in generating nonmineral growth, foregrounding
rich opportunities

23
15
8
0
2011

2012

Mineral GDO Growth

JUNE 2015: FUND 1

2013

2014

2015

Non-mineral GDP Growth

GROWTH opportunities

Economic diversification
Employment creation
Additional liquidity
Stimulating growth
Encouraging transparency
Raising profile of growth sectors

JUNE 2015: FUND 1

Mongolia has the right mix of

wealth and income growth that
will promote strong consumer
demand in the medium and
long term. OBG The Report 2014
Mongolia needs to diversify the
economy by developing value
chains for high-quality, locally
made agricultural products.
Establishing genuine Mongolian
brands. IMF - 2015

Diversification

SECTOR

FOCUS

Agriculture

Real Estate & Construction

Financial Sector

Mechanisation
Standardisation
Production for domestic markets
Expanding export base

OUTCOMES

Rehabilitation of distressed assets

Preparing for growth in indirect demand
Emphasis upon Value-add

New financial sector products

Insurance

Manufacturing

Moving up the value-chain

Healthcare
Tourism

Education

Infrastructure
JUNE 2015: FUND 1

Diagnostics
Laboratory facilities

Developing a more synergetic sector

Tourism infrastructure

Support facilities (i.e. student housing)

Expanding opportunities
Technical and vocational skills
Small-scale energy security
Clean-tech

Job creation
Food security & import substitution
New export opportunities
Expansion of service sector
Job creation
Improvements in low-end retail sector

Improved private-sector financing

Capital market growth
Improved export opportunities
Value-add production
Job creation

Healthcare improvements
Technology and skills transfer
Technology and skills transfer
Sectoral collaborations on infrastruture

Improvements in employability
Upscaling skills

Clean-tech adoption

ECONOMIC Impacts

Economic diversification
Employment creation
Additional liquidity
Stimulating growth
Encouraging transparency
Raising profile of growth sectors

JUNE 2015: FUND 1

The fund will initially focus on

issuing debt financing, whilst
managers work to prepare
appropriate projects for
equity financing.
Diversified approach spreads
risk and ensures return
across cycles - exemplified by
14%+ yields on low-end retail
real estate 2013-1015

SOCIAL Impacts

Human capital improvement

Employment creation
Improving social housing
Creating sustainable living
conditions
Food security

JUNE 2015: FUND 1

Strong growth should not only be

measured in nominal terms, but
also be felt by the entire
population and the benefits of
growth should be equitably
shared - Axel van Trotsenburg World Bank Vice President for East Asia
& Pacific.

Mongolia ranks 103 in the

United Nations Human
Development Index, up 3 places
from 2013

ECOLOGICAL Impacts

Emphasis upon clean-tech

Improved energy usage
Small-scale and nodal energy
solutions

Carbon intensity of Mongolian

energy sector is highest
among regional countries
Ministry of Environment & Green
Development

Mongolia is a renewable
energy paradise Asia Nikkei

JUNE 2015: FUND 1

STRUCTURED Impact
Economic

Social

Ecological
Equitable Social Environment

JUNE 2015: FUND 1

Triple bottom line:

Economy, Society,
Environment

Diversification:
Enhance and underpin
growth in diverse sectors

Systemic approach:
Understanding synergies
and outcomes in our
investments

SECTORAL focus (1)

SECTOR

DIRECT CONTRIBUTION

GROWTH

OPPORTUNITY

Agriculture

Accounts for 16% of GDP and 40%

of employment

20% of the world's cashmere

production, with this industry set for
new growth
Meat and crop production growing to
meet national demand, with sown
areas for vegetable and fodder crops
growing 3.3 and 7% annually

Real Estate &

Construction

Construction sector achieved 91%

growth Q1-3 2013, accessing pentup demand on the back of lower cost
mortgages.

Despite contracting 11% in first 9

months of 2014, construction
continues to underpin growth as
other sectors grow

Financial Sector

Fastest growing sector of Mongolia

since 2010. 20% in 2014 and
accounts for 5% of total GDP of
2014.

90% of business in Mongolia are

SMEs, but few have access to
SME financing
finance. Efficient and broad financial
intermediation is critical.

Manufacturing

Primary and tertiary activities

Manufacturing contributes around
are growing faster than
7% to national GDP, although this is manufacturing.
slowing
Growth is imperative to move up the
value chain

JUNE 2015: FUND 1

Develop new value-chains

Create Mongolian brands for export
Standardisation
China / Russia export

Accessing indirect demand

Low-level retail as driver of job
growth and regeneration
Distressed asset rehabilitation

Identify manufacturing opportunities

that use local raw materials, can be
economically produced and compete
in international markets

SECTORAL focus (2)

SECTOR

DIRECT CONTRIBUTION

GROWTH

OPPORTUNITY

Healthcare

Private healthcare providers

leading the growth of medical
sector, accounting for over 15% of
healthcare financing

Tourism

4% of GDP, growth, 5%+ growth

2013-2014.
Accounts for 58,000 jobs directly
and indirectly

Education

A well educated workforce

increased opportunities and
national economic and social
success.
Deficit of over 43.1 million US$ in
education funding.

Improvements planned to current

supply driven irrelevant vocational
education for youth and adults
Number of students growing 0.6%
p.a.

Modernise vocational training

Support PPP programs in primary
and secondary education
Provide supporting facilities
including student accommodations

Infrastructure

Road and rail links crucial to

development of mining sector
Urban infrastructure in critical
condition,

US$5 billion worth of trade deals

with China signed
US$80 billion required for major
infrastructure projects

Equity in nodal infrastructure

platforms
Co-investment in clean-tech energy

JUNE 2015: FUND 1

Healthcare remains a key concern,

with need for improved financing,
insurance and technical facilities

Testing facilities
Diagnostic centres
Insurance

Expected sector growth of 5.7% p.a

by 2024 (3.6% of GDP)
Shared tourism infrastructure
Tourism supported by Government
Hotels and hospitality investment
as a key growth industry

10

INVESTMENT focus
HORIZON

Sectors

SHORT-TERM

Agriculture & Food Production

Distressed Assets
Financial Sector

MID-TERM I
Real Estate Yielding Assets
Agriculture & Food Production
Distressed Assets
Technology
Education
Manufacturing
Tourism
Small-scale energy
Healthcare
Financial Sector

MID-TERM II

Real Estate
Manufacturing
Agriculture & Food Production

Investment Structure

Debt / Equity (80/20)

Debt / Equity (70/30)

Debt / Equity (60/40)

Target Return (IRR)

14-20%

13-16%

12-16%

Exit

Disposal of assets
Conversion of debt
Amoritisation

Disposal of assets
Conversion of debt
Amoritisation

Disposal of assets
Conversion of debt
Amoritisation

Fund Allocation

35%

35%

30%

JUNE 2015: FUND 1

11

Case Study

Investment

Multiple retail locations, including two marketplaces

Investment Size

US$ 5.1 mm

Tenor

3 years into 5 year investment strategy

Risk management

Deal structure + transaction monitoring on title transfer

Exit

Sale of structure - improved attractiveness as a result of large balance of developable land

Return Profile

Current NAV US$ 6.2 mm (6% capital appreciation per year) + 14% NET yields, expected ROI of 2.03
over 5 years.

Social Good

Created 200+ direct jobs

JUNE 2015: FUND 1

12

FUND structure
Investors
BoD comprised of
independent members

Board of Directors
International Audit

PE Fund

Fund Management

(Mongolia domiciled holding co.)

Independent
managers with
sector-specific
track-record
originate
investment
opportunities

JUNE 2015: FUND 1

Arms Length Asset

Management

Arms Length Asset

Management

Arms Length Asset

Management

SPV

LLC
40%

Debt
60%

13

INVESTMENT comparison
Vehicle

Typical Return

15.7%+

Returns

Bank Term
Deposits
Govt Bonds

Bank Term Deposits

Direct RE
Ownership

Government Bonds

Direct Real Estate Ownership

Risk
JUNE 2015: FUND 1

Considerations

Additional
exposure to
market upside

15.1% typical

Minimal risk

13%-16%

Lowest risk

8%-14%

Highest risk and no

differentiation

14

HOW to Invest

Economy, Society, Environment

Fund Size

US$ 100 million

Tenor

5 years

Fund Structure

Closed-ended Private Investment

Fund

Currency

USD, Investments will be made in

USD and MNT

Investment Mechanisms

Debt & Equity

Management Fee

2% of committed capital annually

payable quarterly in advance

Performance Fee

19% of NAV growth, with 8%

hurdle

Valuation / Reporting

Audited NAV published annually

and reporting quarterly

Return Profile

15.7 % IRR

JUNE 2015: FUND 1

Expertise in identifying highgrowth opportunities

Experienced Management

Asset managers with sector-specific

knowledge participate in management

Sustained growth across

Mongolias cycles

Long-term outlook and focus on

essential goods and services

Independent, Experienced
Board

International board selected based

upon EM investment track-record

Thank You

FOR MORE INFORMATION PLEASE CONTACT

Alex Skinner
Monsor Nyamdavaa

+976 97 07 55 50
+976 99 10 82 46

alex@umc-alpha.mn
monsor@umc-alpha.mn

Mongolia Sustainable Growth Private Equity Fund