December 4, 2013
Interviewed by: David Snow
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Capital Scarcity and Emerging-Market Entrepreneurs

Three emerging-markets experts discuss the ways that private equity firms can support entrepreneurs of all stages with capital and sound corporate governance to get their businesses to the next level.

Three emerging-markets experts discuss the ways that private equity firms can support entrepreneurs of all stages with capital and sound corporate governance to get their businesses to the next level.

Capital Scarcity and Emerging-Market Entrepreneurs

Impact Capital in the Emerging Markets

David Snow, Privcap: We are joined today by Alasdair Maclay of Actis, Okey Enelamah of African Capital Alliance, and Jon Shepard of EY. Gentlemen, welcome to Privcap today thanks for being here.

We’re talking about something very critical in the emerging markets and that is the role of the entrepreneurs, the entrepreneur is the pilot of the ship of value creation. But in addition to creating sustainable businesses or intending to create sustainable businesses these businesses can also have a very important impact on society and on the environment. All of you are very active in the emerging markets, and I’d love to hear your perspectives. Maybe starting with a question for Okey, your firm ACA is based in Lagos and you work with many entrepreneurs. Keeping in mind that entrepreneurs face challenges anywhere in the world can you talk about some of the distinct challenges that a, an entrepreneur in Nigeria or indeed across Africa might face?

Okechukwu Enelamah, African Capital Alliance: Thank you David, that’s a very good question. First we view entrepreneurs as sort of the lifeblood of our business. The way we talk about a deal for us is statistics, but if you really think about it, it comes down to how many people have real businesses that are real opportunities making a real difference, doing something that requires capital and support and partnership to create value.

The good entrepreneurs are very good at what they do, the core business. They tend to understand it. They tend to be very passionate about it and they tend to be very driven by it which means that they tend to be more micro, more hands on  and those sort of things. So if you look at our value added it starts with they may come to you typically for capital or because frankly they, somebody introduced them to you and, but we find that typically we are very big on, on, on the capacity building around the entrepreneur. Cause what’s going to make that entrepreneur take his business from where, one level to the next is the capacity he’s able to build around him. And that capacity while it’s a lot about people, but it’s also about systems, it’s also about governance, it’s also about markets right.

We backed a bus company that is very well known in our part of the world, operating in Nigeria and the rest of West Africa called ABC Transport. This was a gentlemen Frank Nneji who had been very passionate about transport even while in college, I went to university with him and I knew him from them, and had built a business, had a fleet of maybe 50 or between 50 and 100 vehicles. But in terms of capital had used mostly debt to do it, in terms of his capacity he had his younger brother and both of them were the key management team. But he was very ambitious, he wanted to do an IPO in a few years. I said, well if you’re going to do that the whole caliber, management caliber you need or character you need around the business, we need to build that. We need to make sure there is a proper board. We need to make sure there is proper governance and in terms of reporting everything is transparent and very strong. And so we worked with him over a three-year period to do that, and he ultimately did an IPO, I think in 2007 or 2008 in Nigeria, which was very successful.

Snow: Alasdair, at Actis, of course your firm is active in many parts of the world, and again keeping in mind that entrepreneurs have different needs depending on who they are and the business they’re trying to build are there some commonalities as far as what they know they need and what perhaps you know they are, or you think they need once you partners with them.

Alasdair Maclay, Actis: Sure, I’ll echo some of Okey’s comments there. Entrepreneurs are, they’re precious and talented, and whether you’re operating in India or in Nigeria or in Brazil we’re coming across those same very talented, very knowledgeable, very expert individuals with  extraordinary ability to grow their companies. But what we find across all of those regions is they come to us saying we want help to grow this business, and, and one of the most important skills they can have is to recognize what they need and what they want help with. So I think ten years ago when I started doing emerging markets private equity money seemed to be a scarce commodity for the entrepreneurs. There weren’t so many investors. Now there is plenty more capital available to them, but those entrepreneurs are demanding more than just capital.

They want help in growing their businesses, so take an example, we have a business, a pharmaceutical business in India that we invest in. the family came to us and said, please help us turn this into a business that we can sell in five years time. The family wanted to monetize their business and they came to Actis and said, please help us establish better distribution channels, but possibly the most important please help us put a governance framework in, which will be recognized for them world class. So that when the time comes that we sell this company together this business will be ready to be sold without any major changes needed, and indeed that company was sold to a large multi-national who gave us credit for and paid more for the fact that business was kind of up and ready. The, those traits are common to answer your question across whether it’s India, other countries in Africa, including Nigeria, Egypt, South Africa, those entrepreneurs are looking for that element more. I would say there is no sort of fundamental difference between individuals. Talented business people all over the world they’re showing many of the similar traits, but they’re definitely looking for help as they grow their companies into large-scale operations.

Snow: Jon, your group within EY, Enterprise Growth Services, targets sort of a very early stage or at least sort of a, the kinds of businesses in the emerging markets that are little bit rough. And can you talk about the needs within that end of the market and, and what lead to the impetus for the development of your group.

Jon Shepard, EY: Yeah certainly, so the, the organization I run within EY is called Enterprise Growth Services and it’s, it’s really a non-profit program that sends EY people to do capacity building for relatively small businesses. So we typically work with businesses that have got maybe 20 to 30 employees up to those that have got 100, 150 employees. So they’re very much at the S end of the SME spectrum, and we do a range of things for them. But, but just echoing a point that Okey made, I think one of the things we see is small businesses that reach a point in their growth where running the business on the back of an envelope isn’t, isn’t enough anymore. They reach a point where the, the, the core processes of, of the business and the way it manages its, its, its inventory, and its key supply relationships, and its customer relationships, all of that sort of knowledge remains in the head of the, the entrepreneur that leads it. And getting that out of his head and into what I call the pipes and wires of a business, the beginnings of a scalable business model I think is something really important to do. And, and you see many businesses that don’t make it past that inflation point, and what we’re trying to do with our program is help them through that in a way that is accessible in terms of rates.

Snow: And get the entity or the business sort of to a stage where it would attract more let’s say institutional capital like private equity?

Shepard: Exactly. What we’re trying to do is improve small businesses’ growth prospects, their ability to scale and grow. And at that point hopefully they will become more, more attractive to investors, to customers, to suppliers and to employees.

Snow: In the markets that you target how accessible is capital? Is that every an issue or is capital somewhat commoditized and the private, the real private equity opportunity is the guidance?

Enemalah: What we find is that historically the kind of capital that has been available has not always been the right kind of capital. So a lot of people thought in terms of debt, like if you at this my dear friend Frank he used sort of finance leases right to build it. But it got a stage where it became very constraining. He couldn’t grow anymore because the business had no, the equity underpinning that would create more capacity wasn’t there. But the second thing that drove him, that’s why I say it’s and, was a vision to create a business that he, he somehow wanted his business to be publically quoted. He liked the idea of saying, I built a business that was IPO’d. And between those two things and a number of people sort of reminded him that that’s what sort of we do, and I kind of knew him but I hadn’t followed him as closely. So when we started talking it became obvious that like we could help him with the capital in terms of restructuring the balance sheet and putting in equity. But what could also help in this important dimension of how you build a business to make it a business of size and one that could be leased on the stock exchange, and will attract retail investors, and meet the requirements of regulators and so on, and all the important stakeholders of a public company.

And I would say while there is a lot of talk about a lot of capital becoming available, I would actually argue that that’s not the experience on the ground. I mean some of the very high profile deals  like somebody sells a big fast moving consumer goods company like Fun Milk  you could hear well how many people bid for that? But I don’t think that’s a good reflection of a market that has thousands of businesses, 170 million people with lots of needs. There are, for every one of those trophy assets that are sold there are 20-30 others that need capital.

Maclay: I think if I may David just to add to Okey’s point, the, there is always a price on capital. And that does with cycles, and, but what’s really fundamentally required in a market is domestic capital. So a lot of us are talking of course about US dollar international foreign direct investment, private equity funds or other capital, but where, where those other non-flagship deals, what they’re looking for a lot of the time is not so much the international capital but also domestic markets.

Enemalah: Very true.

Maclay: And that’s, that’s amazing how that’s progressed in every emerging market that I look, whether it’s in Nigeria or China, India the volume of domestic capital has risen. But that has been more volatile, and as Okey says sometimes that has dried up over time. But we’d expect to see a continued growth in domestic provided capital. You’ve seen the rise of the RMB funds, local currency funds in China, which now dominate the private equity space. There are still some very large US dollar funds also operating, but it’s that combination of international plus domestic capital, which is critical to especially the smaller businesses. Which at that earlier stage, maybe the stage John is getting involved with them or, or other investments of a smaller amount it’s much more appropriate really to be sourcing that capital locally and much more possible.

Snow: Accurate John your end of the market is capital indeed something that is not very easy to access?

Shepard: Yeah, I mean people talk about the missing middle. This, this idea of this, this, this set of businesses between the very small start-up level where there is, I wouldn’t say an abundance of capital but a reasonable amount of capital available through, through, through micro-finance institutions. And then there is quite a large gap up to the, the medium sort of size of enterprises where, where banks and the typical private equity firm, not all anyways, but the typical private equity firm will start to take an interest. In the middle there is this gap, the missing middle for organizations that employ 20-30 people up to 100-150 people. I think there are some very interesting models emerging for new ways to get capital to those sorts of organizations. I mean the work that the growing impact investment industry is doing. You’re starting to see NGOs like Oxfam moving to that space, you see foundations like Rockefeller and Gates to some extent moving into that space as well. So I think there is more capital coming into it, but in general most capital that I think is available to those sorts of businesses as you said is domestic yeah.

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. And 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. So, we might send a team of two to help a small business permanently improve its working capital management and that 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 terms of the way 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 not-for-loss basis. So, what we do is we drive our costs right down and then we charge low fees to recover them. So, EY doesn’t make any profit. We don’t recover any overheads or indirect costs. And the people that we send from our European offices take 50% salary cuts for the time that they’re 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. But we set a cap on the maximum size of business that we will work with too, which is well below the level at which we would expect an organization to work with EY on a normal commercial basis.


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