Research

EMPEA’s Professional Development Webcast, Active Strategies for Value Creation in Emerging Markets Private Equity, took place on Wednesday, March 4th. Due to the robust audience participation and Q&A during the live event, the panel was unable to address all delegates’ questions during the one-hour timeframe. In an effort to continue the dialogue from the event, the panelists kindly took time to answer a handful of outstanding questions following the webcast. We took the liberty of combining and consolidating similar questions.

Our panelists:

• Scott MacLeod, Managing Partner, Investment Committee Member for Emerging Markets, United States, Asia, Africa and Forestry, Global Environment Fund
• Tom Speechley, Partner, The Abraaj Group, and CEO, Abraaj North America, LLC
• Roger Leeds, Director of the Center for International Business and Public Policy, Johns Hopkins School of Advanced International Studies (SAIS) and Founding Chairman, EMPEA
• Graham Stokoe, Associate Director, Transaction Advisory Services, EY

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What strategies do you use to balance the sustainability value creation potential with the overall value creation potential of an investment as you make investment decisions?

• Scott MacLeod: We regard the value creation realized through our sustainability approach and our overall investment approach as one and the same. GEF effectively takes a sector approach by investing in companies that contribute positively to the environment. Its priorities include the sectors of clean energy, environmental services and sustainably managed natural resources, and it therefore invests in companies that serve sustainability objectives. These tend to be sectors that are growing faster than the underlying GDP and that therefore are rapidly creating value that leads to superior investment returns.
• Tom Speechley: Sustainability is a broad/generic term that can be used in many different contexts. In the investment context we tend to use “ESG” as our frame of reference and ESG is a core part of our value creation strategy for every investment we make. It is a tool just like any other too we’d use to increase revenue or profit and ESG strategies are executed from within the core investment team and through our performance acceleration group (industry professionals).

Beyond increasing sales volumes, what role does pricing play in value creation? How much pricing power do your portfolio companies have with emerging market consumers?

• Speechley: We assess pricing power in the pre-investment screening and due diligence phases because it speaks to value ultimately. For example, pricing power can be used to compete in the market and to pass on FX devaluation. More generally on pricing, it reflects the nature of the consumer base that a business is targeting. We prefer mass market consumption by necessity vs. niche high end goods and services. So a pricing analysis is critical to the overall thesis.

Do you see differences in value creation strategies in different regions – for example, Latin America versus Africa versus Asia? Or is it more related to the size of the economy than to the region?

• MacLeod: The opportunity for private equity value creation is directly related to the needs and abilities of the principals of the companies in which we invest. The less experienced, the less sophisticated the sponsor, the more value the private equity investor can contribute to the company. While this applies at the company level, there is a loose correlation between the sophistication and skillset of a company and its stakeholders and the level of development of the country in which it is located.
• Speechley: In the regions we focus on – Latin America, Africa, Turkey, the Middle East, South Asia/Southeast Asia – there are plenty of similarities and much of what we as a firm do is pattern recognition. So it’s a similar tool kit across the regions but with cultural nuances factored in at the execution level.
• Roger Leeds: In my view, value creation strategies are company and sector specific, much more than regional. One exception has to do with transactions that require changes connected to specific government regulations and/or IPO listing requirements that may differ country to country.

What is your approach to measuring the impact of your interactions with portfolio companies, and does that factor into overall resourcing?

• MacLeod: We go into any investment with a vision of what the company in which we are investing can become and the role we can play with the management and other shareholders to realize this vision. If we do not feel we can provide any value to the company beyond our capital, we are generally not interested in investing, as we believe we can contribute much more to a company’s success and want the opportunity to provide our value-add in order to achieve a higher return on our investment. The larger our ownership interest in a company, typically the more opportunity we have to affect the outcome of the company, so we normally want to hold majority or strong minority ownership interests in companies in which we invest.
• Speechley: We have a custom tool called the “Abraaj Sustainability Index” that measures around 50 metrics across 4 pillars – financial, human, environmental, and private sectors development – for all our partner companies. We have formal written monthly reporting and much more frequent interactions.

What are the techniques you employ for IP retention and leveraging of knowledge/learning across the portfolio?

• Speechley: We have invested heavily in an IT solution that captures basically everything and then pushes it back to our professionals as they log into the system with new deals.

If you were to rank the top 3 key types of interventions across your portfolio, what would they be?

• MacLeod: This varies depending on the level of ownership in the company. As a majority owner, providing the strategic vision and direction, selecting the senior management team, and ensuring the proper capitalization of the company are key. As a minority shareholder, selecting the CFO and ensuring proper accounts and procedures are important. In addition, contributing whatever comparative advantages you have for the benefit of the company, which often includes helping to raise equity and debt financing, using your network of relationships, managing M&A transactions, and improving internal systems, policies, and procedures.
• Speechley: Our top 3 types of interventions would be a governance suite, new CFO/upgrading finance function, and international expansion.
• Leeds: It is very difficult to generalize, but I’d include board policies/procedures, implementing other well-established corporate governance practices (for example financial reporting), assisting with access to additional sources of capital, and, depending on the company, revamped marketing and pricing strategies.

What should be the limit between active monitoring and co-administration?

• MacLeod: This is an important question that needs to be answered company by company and over the life of each company. Ideally, the management of a company has the experience, competence and skills to handle all of the management challenges it faces in the execution of the agreed business plan, and the role of the PE investor is one of active monitoring and board participation. In fact, management often lacks certain skills and experience, and the PE investor has to therefore supplement or complement management until management has improved, or in some cases until certain members of management have been replaced. In some cases, particularly for smaller companies, it can be more cost-effective for the PE investor to continue to play a selected role for which it has a deep skill set, such as managing M&A transactions or external funding, rather than to hire additional management personnel.
• Speechley: We require active involvement in all major decisions and monthly reporting as a minimum in every investment. In some cases, we are heavily involved in the business itself.
• Leeds: Monitoring should be systematic, transparent, and ongoing. Unless it’s a control deal, gaining buy-in and participation from senior management is a key factor for success of any value creation strategy.