This post by Brendan J. Mullen, of Secha Capital, is part of a series in which IEN members and network partners share their thinking about intentional endowment investing to address racial injustice and other diversity, equity, and inclusion themes. Follow along to read members' insights on how to evaluate fund managers in the private equity market.
By: Brendan J. Mullen, co-founder and Managing Director, Secha Capital
“This downturn is different [...] than the last one”
Secha Capital, a Southern Africa impact investing fund, was started five years ago by two former Bain consultants. Our former colleagues recently published the “Bain Mid-Year Private Equity Report” and we contend that the conclusions are insightful--but that they do not go far enough!
We encourage our industry to re-think the way we evaluate fund managers. In each section below, we excerpt the Bain report and share our views across the “Five Ps” of People, Philosophy, Process, Portfolio, and Performance.
We spoke in May to the IEN network on a panel entitled “Emerging Market Investing Amidst the Pandemic” and we continue to assert that 1) Africa is different from more established PE markets and therefore 2) a new, more efficient model of private equity centered on growth capital with human capital, operational value creation, and digital transformation can create alpha for both social and financial returns.
People:
“[Your team must] see past financial engineering to create lasting business value”
Creating value in portfolio companies in Southern Africa -- where we work -- is about revenue increases, margin expansion, channel access, and operational upgrades. In smaller companies, rarely is value creation about changes to the capital structure.
Thus, we need private equity funds made up of operators, not financers. We need young, local, diverse team members with differentiated skill-sets and perspectives who are motivated,mission-driven, and incentivized for the long-term. These are the true value creators in any business, and we should dedicate more energy to building these teams.
Philosophy:
“For all the...sophistication of its practitioners, the business of private equity is stubbornly analog”
The Bain team wrote this line regarding digital upgrades at the fund level, which is valid, but it also applies to how PE is often done on this continent -- large funds that follow the VC and PE playbook from the United States. And yet, the different market, geography, and sector make-up require a different perspective. Boots-on-the-ground is that advantage: From pipeline to funding through supporting, an in-depth understanding of local dynamics cannot be replicated from afar, and therefore, this fit in the form to function becomes a structural advantage.
There is a second point to tease out of this line which is about bringing technology solutions to traditional sectors. Most of the attention (and capital) is on tech-centered companies and “disruptive” ideas. Yet, there is infinite opportunity to take a traditional sector company and to digitize the front and back-end to become tech-enabled and people-led!
Process:
“Instead of waiting around for [inbound,] ... firms [should] target what they want and go after it proactively”
Due to the paucity of data and (comparatively) shallow capital markets, a successful firm must be thesis-driven and develop a proprietary outbound network. There are myriad large, “dormant” fragmented, defensive markets where the addition of growth and human capital can help the companies get to the next level. These companies then become candidates for the large private equity firms that struggle for pipeline. In addition, having a proactive thesis and search process allows PE firms to strongly embed impact outcomes into their process.
Portfolio:
“Sector expertise is more important than ever”
People love to talk about scalability, but repeatability is crucial for a good investment firm in Africa. By focusing on a few sectors and building out key capabilities and codifying the lessons, it creates a flywheel effect for the firm and its operating companies. In Secha’s first fund, we have exposure to FMCG, agribusiness and manufacturing and within these sectors, we focus on specific verticals -- healthy food; black, female beauty; re-shoring unique manufacturing skills. Now, our industry knowledge means that we get better, faster, smarter with each initiative and with each company.
Performance (including Impact):
“Your value creation plan may be obsolete”
We often compare consulting work and an investment due diligence to “drawing the map.” It is crucial to align on where to play, how to win, prioritize key initiatives, and build from the point of departure to the point of arrival. The map is key.
But then the company needs to “drive the car.” Driving the car is not always a straight line and it is even more difficult when faced with volatile macro headwinds. Hence, firms must be structured to work along with their portfolio companies, to have the line of sight to re-write the map while driving the car if necessary.
In Conclusion
“Capital has a clock on it [and there’s] ample incentive to put money to work now”
Secha Capital believes in a small fund, investing in “boring” sectors and, most importantly, getting young, diverse human capital talent into SMEs. As we commence our second fund, our experience suggests that it is the superior approach to generate alpha and impact in this market.
Indeed, it is a change in the flow of capital systems -- financial and human -- that allows for a new model to solve for these market inefficiencies. It is biomimicry we need, not “finance”. Private equity impact investing in sub-Saharan Africa needs to leverage its best and brightest local talent into local, growing businesses. This creates growing SMEs, robust local industries, sustainable jobs, and a new generation of entrepreneurs. It aligns incentives for growth capital and human capital “arbitrage”, as well as quantifiable impact outcomes.
Brendan J. Mullen is the co-founder and Managing Director of Secha Capital. He has worked in impact investing for 15 years via politics, policy, finance, venture capital, consulting and PE. He was previously a consultant with Bain & Company in its Johannesburg office. Previous to Bain, Brendan worked as a Venture Fellow at SJF Ventures. He spent five years as a bond analyst at Putnam Investments and holds an MBA from Duke University, Brendan can be reached at [email protected].