January 24, 2017
Interviewed by: Privcap
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Investing Behind the Emerging Middle Classes

With 13 offices in emerging markets around the world, Actis is a major private equity investor the geographies that are expected to experience the most growth over the coming decades. Co-head of private equity Natalie Kolbe tells Privcap how the firm formulates its investment themes, why consumer demand can outweigh macroeconomics, and how consumer trends also inform the firm’s real estate and infrastructure investing.

With 13 offices in emerging markets around the world, Actis is a major private equity investor the geographies that are expected to experience the most growth over the coming decades. Co-head of private equity Natalie Kolbe tells Privcap how the firm formulates its investment themes, why consumer demand can outweigh macroeconomics, and how consumer trends also inform the firm’s real estate and infrastructure investing.

Investing Behind the Emerging Middle Classes
With Natalie Kolbe of Actis

Q1: How was 2016 for Actis, which invests across the global emerging markets?

Natalie Kolbe, Actis:
In 2016, we saw good deal flow for Actis. We invested in five businesses across all of our markets, from Latin America all the way across to China and in the different sectors we’re in. So, it was actually a good, consistent level of deal flow that we saw in 2016.

The macro economy comes into an account, but it doesn’t actually affect the deal flow necessarily. The businesses that we look to invest in are supported by secular growth trends in our market. So, we invest in businesses that are supported by trends that are not disconnected, but they are somewhat immune to what is happening in the macro economy.

Q2: Talk about another big secular trend Actis is focused on: the movement of the emerging market’s poor into the middle class.

Kolbe: Regardless of what’s happening at the economic level or the GDP level, people wake up in the morning and they carry on with their day. They still get up in the morning. They send their kids to school. If they’re sick, they go to hospital. If they need a pair of shoes, they go into a shop and they buy a pair of shoes on their credit card. Life carries on, regardless of what’s happening at the GDP level and, frankly, at the macro level. With the political shocks and revolutions that happen, life still carries on in our markets. And it’s really those day-to-day products and services that people need and demand as they move out of poverty and into the emerging middle classes. That’s where we look to invest behind.

Q3: What is an example of a theme you are focused on right now based on the emerging middle classes?

Kolbe: Generally, if you look at where the public sector provides education, it’s either overcrowded—there’s not enough space—or it is at a quality level where, if you have disposable income, you would rather send your children to a private school. That is a theme whether you’re in Brazil, Beijing, South Africa, India or Tunisia. The theme of people having more disposable income and wanting to send their children to better education is one we’re seeing across all of our markets.

The other one is tertiary education, so that’s actually where we’re focusing our attention more. We built a platform of private universities in Brazil and we’ve taken the learning from that onto the African continent. We’ve recently bought, or invested in, a university in Tunisia. We acquired a university in Morocco and we’re looking at universities in South Africa and Kenya to build a platform of private education universities on the continent.

Q4: Actis also has real estate, infrastructure and energy investment teams. How does your view of the rising consumer class inform your investment strategies outside of private equity?

Kolbe: In our real estate business, there is a move out of open air markets into shopping malls and modern-day shopping centers. Again, that’s the rising middle classes moving out of an open-air market and into shopping malls and looking for that experience. In energy, one of the big growth areas or one of the big supporters of growth in our markets is energy—power, access to power. Again, as people move out of poverty and into the emerging middle classes, they’re buying an air conditioner, they’re buying a stove for the first time and they’re getting access to power. So it’s all about the emerging consumer moving out of poverty, having more disposable income and wanting access to goods and services that they didn’t have before.

Q5: Give an example of emerging-market consumers embracing the same next-generation services as developed-market consumers.

Kolbe: For example, there’s a big revolution—in China we saw it with ecommerce—where people used to go to malls to go shopping. They no longer go to malls to go shopping. They shop online and the mall now becomes an entertainment experience. We need to watch that trend in other markets, like in Africa, where there are nascent malls. There are not a lot of malls on the continent and we need to make sure to check that trend, because you may see malls being leapfrogged at some point.

Q6: How does Actis decide which new markets it is going to enter?

Kolbe: The way we invest is through a sector lens always; we always look at it through the sector. We’ve got four sectors in which we invest: financial services, healthcare, industrials and the consumer sector. And, within there, we invest in certain themes. So, we always look at it through the sector lens and that will move us or point us to where the opportunities are.

Q7: It sounds like Actis has high confidence that it can navigate just about any new cultural, political, regulatory and legal landscape.

Kolbe: We’ve been doing this—investing in emerging markets—for 50 years with our predecessor. So, we absolutely understand the way the developing world works. And you have to take into cognizance the legal aspect. You have to take into cognizance the political aspect. But, it doesn’t actually make a difference to the daily lives of the people and the products and the services that you’re investing behind. So, it really is about understanding the consumer first and then, the other parts of it come afterwards.

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