January 22, 2014
Interviewed by: David Snow
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Stories of Growth and Impact

Stories of how investments and business initiatives in the emerging markets have had societal impact.

Stories of how investments and business initiatives in the emerging markets have had societal impact.

Stories of Growth and Impact

Impact Capital in the Emerging Markets

David Snow, Privcap:

We are joined today by Alasdair Maclay of Actis, Okechukwu Enelamah of African Capital Alliance, and Jon Shepard of EY. We are talking about the importance of the entrepreneur in emerging markets and when entrepreneurs build successful companies. In addition to returning financial rewards to those companies’ backers, there are societal and, in many cases, environmental impacts felt across the local communities. You are all involved in investing in the emerging markets, so I am fascinated to hear your stories to best illustrate how you operate and how you work with entrepreneurs. Jon, you work with people who are building early-stage, rough-around-the-edges companies in emerging markets. Do you have any stories that illustrate the impact a successful enterprise can have on the surrounding society?

Jon Shepard, EY:

Yes. One business, in particular, springs to mind that we were proud to be associated with: a small business in Tema, an industrial city on the coast of Ghana. It is a mining supplies company that imports lubricant, safety equipment and machines and sells them to big mining companies, set up by an entrepreneur who had grown the business at double-digit rates. But, he got to a point, this inflection point in the company’s growth, where all of a sudden what is in the entrepreneur’s head is not enough.

So, we are employing 50 people, turning over about $12 million a year, double-digit revenue growth. On paper, a healthy operating margin of about 12%. The problem was that the business was completely choked with working capital. So, none of that operating margin was actually making it to the bank in cash. They had reached the point where they had to wait to be paid by customers before they could make supplies. Frankly, they were in the beginning of a working capital or a cashflow debt borrow.

We were able to help them reduce their working capital, and, more importantly, to permanently improve their ability to manage their working capital. For example, we found that they had a 47-year supply of size-9 safety boots in their warehouse—and this is not a criticism of the business. He is an entrepreneurial guy who ran it. He was completely focused on growing the business. He had passed the point where it was OK to lack a stock management system. He was now at the point where it was not OK and he had not realized it. We worked with an investor in that business, a PE company, to help them permanently improve their ability to manage their working capital. As a result, their working capital will shrink as a percentage of revenue. That saved 50 jobs. Their cashflow will be $1 million a year healthier. And, for a small business at $12 million, $1 million a year of actual cash is a huge amount to invest in growth. And they have gone to create more jobs. So, we were proud to be involved with that.

Alasdair Maclay, Actis:

It is fascinating to hear that story because that typifies how often, going fresh into business with a blank canvas and experience, you can identify value opportunities that, ultimately, put the company on a better footing and improve its finances.

Shepard: Sometimes, it is unglamorous, back-office stuff—like financial administration and governance. Again, this inflection point in its growth, where it needs to get things off the back of the envelope and out of the entrepreneur’s head and into processes and policies and a more scalable operating model. Sometimes, that reflects the core ways the business creates value. We are now working with a promising business in Oman—a social enterprise that is growing very quickly. They provide training and consultancy services in education and entrepreneurship.

They have realized that the core way business creates value, the processes they go through to secure clients, to develop training content, to run teacher accreditation programs, to deliver business training to undergraduates, all the great work they do in Oman and potentially in other countries in the gulf region—all of that is locked in one entrepreneur’s head. If they are going to scale that operation and achieve anything like its potential, they need to get it out of his head and into something more sustainable.

Snow: Okey, your firm, African Capital Alliance, has invested in many different businesses. Can you give an example of your group working with the entrepreneur to really make a change, not only in the business, but that business having a greater ability to have an impact on the surrounding economy and society?

Okechukwu Enelamah, African Capital Alliance:

Yes. Like you rightly pointed out, we have had many experiences that play out this thesis or this value proposition. As I listened to my colleagues, several examples came to mind. Apart from the more visible, high-profile examples like MTN, like Union Bank, where you are transforming a whole bank and helping demonstraction effect for a whole industry, like some in the insurance sector. One that is more entrepreneurial is the leading business newspaper in Nigeria, a business paper called Business Day. Business Day was founded by a man called Frank Aigbogun, a good financial journalist who wanted to create a paper that would be akin to The Financial Times of Nigeria.

In order to do it, Frank needed the kind of partner that will partner with him, not just in terms of capital, infrastructure and institution building, but in terms of content. In Capital Alliance, he found people like Dick, who chairs the editorial advisory board, and the network of people we have—the business community around Capital Alliance, the kind of support ecosystem he needed to build a strong financial newspaper. Today, that paper is the leading financial daily in Nigeria; it is very successful. We have exited, even though our people are still on their advisory board and working with them.

That is an example of providing people financial information, which is a critical component to building a modern society, certainly in a democracy and where you want the citizens to be informed and to help put the right pressures on those in government or the policymakers. We are very proud of what we did in Business Day. It is very successful. In fact, we partnered with a South African business that became a technical partner. We also brought them in. The impact today—I do not know the readership, but in terms of both Internet and the manual edition—is probably tens of thousands. Hundreds of thousands. It is a respected daily.

I want to comment on something Jon said, regarding the example about working with businesses on the non-glamorous things like working capital. People like to talk about growth, but for students of finance, sustainable growth is all about working capital because if the business keeps requiring a standard capital to grow, by definition, financial experts will call it unsustainable growth. When a business is able to manage its finance, its working capital, in a way that it can internally generate much of the funding it needs for its own growth, that business can go on to create all kinds of jobs and they do.

Some basic things private equity does helps to create a more sustainable business environment and a better society for all.

Snow: Alasdair, your firm Actis is active all over the world. But, you have a specific example of financial and impact returns in Uganda.

Maclay: Sure. To clarify, we do private equity but we do it across three broad products: conventional private equity, electricity and real estate. In Uganda, we have a business called Umeme, which is Swahili for “electricity.” It is the electricity distribution business for all of Uganda. This is the favorite baby in the company. We have owned the business for about 10 years; it has been a long-term investment. We have grown that business from a state-run, somewhat chaotic organization, to a leading-edge, private-sector business today. It is so successful that it has been listed on both the Kenya and Uganda stock exchanges.

What has been most satisfying about this business is that the economics of the business are very sustainable, to Okey’s point. The company has found ways to finance its growth through debt and other instruments above its own organic cashflow. It has been very well-structured. But, we are extremely proud of the impact on the country of Uganda. I have been there many times and met with the employees and customers. The most important thing is to deliver safe electricity to people. Around the world, the most important thing about electricity is that it is safe, and that it is cheap. So, you need to manage your network cost efficiently. You also need to focus, particularly, on safety elements. The time and investment we have spent on educating children and employees on the safety elements of the business—it is a dangerous sector whatever country you are in—has paid for itself many times over. It would be Jon’s example of every dollar you invest, particularly if it has a multiple effect. It has an impact on our business because we have fewer shutdowns, fewer incidents, less bad things happen to worry about, but also the effect of the quality and cost of electricity being delivered to the customer through these various impact project programs we have rolled out.

That is an example of where, to Okey’s point, a good business is profitable but also will enhance development. We now have more electricity flowing to the people of Uganda, to more homes, with more connections, in a sustainable, profitable way, which we are proud about. But, I hope the customers feel the same way—that they are getting more of a good thing. That is one example from the electricity sector where we have tried hard to go the extra mile into serving the customers in a way that enhances value for them.

Enelamah: Power is a big thing in Nigeria today; they are aware of that and looking at it as well. But it is fascinating that this is an example where they have navigated through the issues and created a sustainable power company that has had a high impact on society.

Maclay: It is all about the whole ecosystem. Whether it is national building, whatever language you use to describe it, the most important element of our success in Uganda has been one particular individual who was the key relationship manager from the government. He understood what an investor would require in order to agree to certain things, risk capital, but still with some conditions. And that level of understanding and maturity from the Ugandan government was invaluable to allowing us to put together a company that worked.

These infrastructure electricity projects are complicated and intensive capital use and valuable elements of the country’s asset base. You need everyone to understand the language so everyone is operating off the same code. That is an important element in all the markets we look at. If they are private-sector friendly and understanding the importance of a cost-reflective system, a system that does not rely on subsidies but is economically sustainable in its own right. Those are important ingredients.

Expert Q&A With Jon Shepard of EY

What is EY’s Enterprise Growth Services program?

Shepard: Enterprise Growth Services is a non-profit program within EY. We send people to the emerging markets to work with job-creating small businesses. We help those businesses overcome barriers to growth and exploit opportunities for growth. We send experienced EY people for a long enough duration to help them do that. We might send a team of two to help a small business permanently improve its working capital management, which might take two or three months. In some cases, we will send a larger team to work for up to six months with a business if it needs fundamental rewiring in how it manages its core operations and its finances.

Do your entrepreneur clients pay for these services?

Shepard: The program works on a not-for-profit, but also a not-for-loss basis. We drive our costs down and we charge low fees to recover them. So, EY does not make any profit. We do not recover any overhead or indirect costs. The people we send from our European offices take 50% salary cuts for the time they are on the program. We then charge fees that recover the remainder of their salary.

What is the smallest business your program would work with?

Shepard: This is not for a guy with a fruit stand. They need to be big enough to absorb some professional consulting help. So, the smallest business we would work with is probably 20 or 30 employees.

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