Women in Alternative Assets - Episode 3

29 June 2022

In this episode of our 'Women in Alternative Assets' podcast series, IQ-EQ’s Anne Marie Costet is joined by Sandrine Henton, Managing Director of EG Capital, who is looking forward to exploiting a new strategy which invests in young people and women to deliver measurable financial returns and impact.  

During the session, Sandrine shares her views about recognising the risk perception of bias when investing in an emerging market such as Africa, and the potential for generating alpha by investing in frontier markets. She also discusses several biases in investment decision-making in the industry. 

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Spoken content

Speaker 1 (00:02):

Hello, everyone. Welcome to our podcast series Women in Alternative Assets. I'm Anne Marie, your host for today's session. As a member of the global investor services industry, IQ-EQ wishes to contribute to the global course of supporting women in alternative assets, by introducing a bespoke package that aims at supporting women launching their first fund. We would also like to stimulate conversations on this important topic, and we are pleased to present our second podcast in our Women in Alternative Assets series with Sandrine Henton, our guest for today. Sandrine founded EG Capital as an independent firm. She has over 15 years’ experience, including private equity roles across Europe and Africa. Sandrine welcome and thank you for joining me. You are based in Nairobi today and your project is both financial and human and focused on East African countries. The purpose of EG Capital is to make consumer driven investments in health, food, education, and climate resilience sectors - the fundamentals in East Africa. Sandrine, could you please give us an overview of EG economic empowerment fund?

Speaker 2 (02:15):

Thank you Anne Marie for inviting me. Indeed, we are investing in high growth, a better positive, medium size businesses, as you've mentioned in the health, food, education and climate resilience sectors in East Africa and also in Zambia. Our structure is based in Luxembourg and with offices in Kenya, Uganda, and Zambia, and together with an experienced team. We are putting together our track record, having previously managed 1.4 billion in assets and 14 exits in the regions and the sectors of the fund mandate. We are coming together as a team to exploit a new strategy, which is investing in young people and women to deliver measurable financial returns and impact.

Speaker 1 (03:03):

Great. Thank you. And what were your motivations to set up an Eastern African impact investment firm?

Speaker 2 (03:13):

Now that's a great question. So East Africa as a region and I think in a current global context, whether it's developed markets or developing economies, the issues are really similar across the board with higher level of debts, inflation and higher level of volatilities in the market. So, investors have to be a lot more discerning vis-a-vis the regions and the sectors where they will generate alpha. And what we've seen in East Africa that really motivates us, for emerging markets is the resilience of East Africa as a region, demonstrated during the pandemic with positive GDP, growth, political stability, and a really strong rising middle class with a very entrepreneurial culture, which is really driven by the informal sector of the economy that continue to maintain purchases in the essential sectors of food, health education.

Speaker 2 (04:12):

Now, obviously with the Ukraine-Russia, conflict, there are implications also for Africa and for all regions. We think, however, it'll be positive for the energy sector as Europe will try to decrease its dependency on gas and will look to Africa for the energy. But also, in other sectors that are, perhaps, more severely impacted like food, food production, food imports are going to be impacted for the next two years and health and education. So, these sectors of food, health and education are even more critical now, especially in this context where we need to support governments, African governments that have deepening debt, inflation, currency depreciation, a lack of foreign direct investment, and generally decreasing foreign aid. So, this is really an opportunity to invest locally, to build this local resilience and to also build bridges between Europe and Africa that are going to be really strategic and, and vital going forward.

Speaker 2 (05:20):

And as in all times of uncertainty, there's still a very good investment opportunity. And for us that means investing in these high growth sectors, chronically under invested, undervalued, and I would say overlooked, underlooked, due to several biases in investment decision making. On the one hand, we note the inertia of private capital. There is still a huge home bias globally where most capital is locked into the listed stock market in the country where one lives. There is unfamiliarity with the alternative asset class and a perception that sectors like health and education are just for the government. So traditionally also in Africa, we've seen that most capital goes to financial services, infrastructure projects, energy, the hospitality sector. So in Europe, we also have to recognize there is a risk perception bias about investing in emerging market, particularly Africa. And we're still ignorant about the potential for generating alpha by investing in frontier markets.

Speaker 2 (06:30):

So, these are the opportunities that we are actually exploiting to show that we can deliver returns and impact in these sectors and East Africa with a team based locally in East Africa and Zambia, we are really well placed to attract quality investment opportunities in our sectors, but also provide enhanced value creation to our portfolio companies given our gender lens strategy. We also look to improve the outlook for women founders, getting access to capital, women and young people, in leadership roles, women and young people as part of the workforce, the job creation, impact is huge. And also women as consumers. When we talk about food, health and education, we are, women agri farmers, nurses, teachers, but it is also the women that are paying the school fees, the groceries, and the healthcare bills. So, women are really well represented in our sectors and we have this immense value addition to improve economic empowerment for young people and women.

Speaker 1 (07:48):

Thank you. Another question at the heart of your business model, there is a real correlation between involvement of women and youth and competitive investment return, and you are even going the extra mile by putting the improvement of livelihood in the communities that you are involved in at the center of your strategy. Can you tell us more about the rationale behind selecting this strategy?

Speaker 2 (08:23):

Great. So, women and young people generally are the heart of the consumer economy in Africa, and it is recognized by all investors globally that health, food education, digital services, climate resilience sectors are effectively the recovering sectors post COVID 19 pandemic. And these sectors will deliver the growth, the jobs that will limit the damage of the pandemic in our communities. But also, doubly so it is necessary to make local economies more resilient, self-sufficient, and less vulnerable to external shocks as we are witnessing today in the current geopolitical context with increased level of insecurity. So young people and women are really at their heart of the growth that we see in emerging markets, in sectors that are chronically underinvested. When we talk about health and education, the pandemic has taught us the role of the private sector, the role of private capital in bringing innovation better tailored products and services. 

Speaker 2 (09:34):

And this is really where we need to attract much more private capital. We've seen a certain, I mentioned earlier, inertia and coming from Europe myself, I recognize that that we think health and education should be the preserve of government on me. However, when we look at emerging markets, Latin America, Asia, and it is also true for Africa, a lot of these essential services are delivered by the private sector. Governments generally welcome that investment from the private sector because they are unable to keep up with a young population growing at 30% every year with government budgets being, limited, over indebted, context of inflation and currency, depreciation, and less FDI. We can really well understand the position of African governments to actually welcome private sector investment into these essential services. And there is that view in Europe that needs to be corrected because there are a lot of opportunities for impact and return by investing in affordable quality, healthcare, and education in emerging markets, including Africa. The other aspect, I would say in terms of the improvements, that we seek in livelihoods, indeed, we have linked or impact KPIs to our carried interest performance. So that measurement aspect about being a thematic fund and looking to achieve on certain financial and impact performance and these are measurable and linked to the remuneration of the asset manager is also where we go, I would say, the extra mile as you've mentioned.

Speaker 1 (11:28):

Great. This is a good introduction to my next question. Do you think that nowadays asset managers are paying lip service to ESG, is there is a real commitment to change in a way the industry operates?

Speaker 2 (11:47):

Yes. So, I would say looking back 10 years ago, the last decade, we can say that certainly ESG criteria can no longer be ignored. Yet, there is a recognition that the progress made is not sufficient and it is fragile unless we create this community of trust between regulators, asset owners and allocators and holding each other accountable to implementing sustainable impact investing for us alongside the principles of risk return and impact. At EG Capital, the funds approach to managing ESG is really core across the investment process to ensure that our investees are complying with our own policies, the laws, and we've also adopted the IFC (the International Finance Corporation), sustainability performance standards. We're also developing environmental and social management systems to elaborate how will the investment team identify, assess, manage environmental and social risk, consistent with global practice.

Speaker 2 (12:56):

We have an ESG officer in the team and training is critical and happens regularly as we conduct ourselves due diligence on proposed investment opportunities, including ESG risks. Now, we also maintain an exclusion list for category A where these are sectors that we obviously see and expect irreversible adverse impact. So, we have an exclusion list, things we will not invest in. And we also will not invest in any company where an identified adverse impact or performance has not been resolved, or the company lacks an acceptable corrective action plan. When we find some aspects during due diligence. So ESG is really integrated across the investment process to identify, assess, manage the risk, but also I would say, enhance the opportunity, enhance the development impact. And that is the other side of the coin where we truly believe there is a premium to investing alongside ESG and impact.

Speaker 2 (14:07):

We also signed up to the impact operating principles with IFC. So we believe in that premium, if we are doing enhanced value creation, and that is the role of private equity to help companies grow and support the management team, bring on networks to make the company even better. When we have this enhanced value creation, we must expect payment that it will generate an additional return. And that return is not necessarily always visible, but it impacts exit. It impacts the quality of exit. It impacts for sure the return, performance and the pricing of that element for us as, as I mentioned earlier, it is also even linked to the performance of the manager to the carried interest.

Speaker 1 (15:04):

Yes. Thank you. You are part of the 2XIgnite project. Could you tell us more about this initiative Sandrine?

Speaker 2 (15:20):

Yep. So, the 2XIgnite is part of also the 2XCollaborative and really stems from 2018 when the G7 made a commitment to put more capital in the hands of women fund managers. And, particularly those, applying an agenda lens strategy to their investments. There was a target set, I think it was $3 billion in 2018 as part of the two X challenge. They've actually managed to invest much more than $3 billion. I think it came around at $11 billion, and, and the commitment was renewed in June 2021 last year. And it's a great achievement to have been able to actually identify and deploy that level of capital in the hands of women fund managers and the gender lens strategy. Now what this effectively means. It's a community of, of practice of emerging fund managers, that embrace a certain number of criteria.

Speaker 2 (16:24):

We talked about it earlier in our sectors which are predominantly influenced by women as consumers, as employees, as leaders, as funders of businesses. And, this is something we really want to encourage. So we look at again, measuring certain KPIs, doing this enhanced value creation, which is good for business and, and good for impact as well, in terms of generating that alpha, where we believe part of our strategy women and young people are the driver. They are the heart of the consumer economy. Companies that understand the market communities, that understand how to market products and services differently will do better in the long term. So that community of practice within 2XIgnite is enabling emerging managers like ourselves. And it's a very diverse community of women fund managers, diverse teams from venture capital to growth investing to private equity, and funds of all sizeism.

Speaker 2 (17:29):

So, it's great to see the diversity of the strategy and the fact that we are starting to correct for investment bias and investment bias in decision making often means that women fund managers find it much more difficult to fundraise, to have access to capital, to close their funds, to cover operating costs. And the challenges are quite real. So, it's addressing some of these challenging, to make sure that we are getting more diverse teams and more diverse teams ultimately generate better performance. We have an IFC report that looked at a number of fund managers over time and, and you get at least a 10% increase in performance by investing in direct diverse teams that make better decisions. So it's a community of support. It's a community of practice. And it's a G7 commitment of all DFIs that has now been joined by institutional asset owners as well that have joined that community.

Speaker 2 (18:33):

So, it went from the G7 and the development finance institutions to the broader financial industry that is also committing to diversity, committing to diverse teams. And when you start with gender, then all of the other aspects of diversity, because it's not just gender. When we look at building a team and making good investment decisions then when you start with gender, typically all of the other aspect of diversity is also follow through and you get different team compositions, different decisions, different performance at the end of the day. I'm particularly excited about this initiative, how we've implemented that within EG Capital. If we look at EG Capital we're equality. So, we are 50%, gender equity, in terms of representation at the investment community level, at the board, and even within the investment team we’re seven nationalities today, very diverse, cultural backgrounds as well, to make sure there's this culture of debate and consensus that is absolutely vital to the work that we do in investing and managing assets. So, we've already started to implement some of these principles within the team. And the work that we are doing with Ignite is also to go further to look at, how do we implement also these principles when we invest in portfolio companies, when we look at building the board representation within our investee ensuring there are women ensuring there are people of color ensuring there are other diverse influences that are that are brought forward also when we make investments.

Speaker 1 (20:17):

Okay, great. Thank you. And could you give us some insights into the type of deals you are currently looking at?

Speaker 2 (20:29):

Sure. So we've spent a lot of time and particularly during the pandemic where travel was limited to actually build research based sourcing effort. So all sourcing effort being a thematic fund is very like listed equity because we're able to do country reports, sector reports. We're able to develop a view about where in the sectors are the opportunities that we target for young people and women. Again, we're not doing everything in health, we're not doing everything in education or food. We are really zooming in certain products and services that we know are going to enhance the economic empowerment of youth and women, and that are very interesting and different opportunities. So these country and sector research is essential to then zoom in, in terms of who are these companies that are best placed to deliver on that opportunity for youth and women.

Speaker 2 (21:25):

And we start to develop snapshots and profiles of these companies. We do peer group ranking as well to understand the competitive position and the dynamics of different markets and different businesses. We then develop a view of what are the type of growth strategies that we want to support. And that is extremely helpful when we go and speak to management teams about why should we partner and what it is that we want to build together and is there alignment with management teams? And so that really helps our qualitative criteria in terms of selections, who will become an investee of EG Capital and who are good business partners. So for us, and mutually for them, what value do we bring to these businesses? It really helps to demonstrate that right at the sourcing level, at the entry level. We've built a database of about 6,000 businesses and very high level looked at about 1,500 to zoom in into 200 that sort of more or less broadly fits our mandate in terms of what it is that the fund wants to do.

Speaker 2 (22:41): We have 12 businesses that are here marked for the pipeline, as of May 2022. And the pipeline is dynamic. We refresh it constantly based on the research based on conversations with management teams based on opportunities in the market as well. So out of these 12 companies that have been here marked for the pipeline, we have actually five transactions that we are progressing. So these are actual deals that are at different stages of the investment process. One that has completed due diligence is in the completion stage. Others are at the screening stage where we go to our investment committee for review and approval, and some of them, we are monitoring and looking to get into the transaction. So, these five deals, at different stages are being progressed and they're really exciting transactions that really illustrate the opportunity and the fund mandate and why we exist essentially.

Speaker 2 (23:41):

So, to give you a brief overview of one transaction for each of the sectors. In healthcare, we are looking at pharmacies and healthcare, wholesaling and distribution. It’s a family business. And they're one of the key players in the market where they operate. And in that market, the problem we're looking to solve is the fact that it would take you one day to fill up your prescription, walking around town, because many of the local pharmacies have issues with inventory, pricing of medication, quality of medication. And, and it's not readily available. So people generally have to walk an entire day to fill up a prescription prescriptions and by going to different pharmacies. So the way we've looked at this is, we're exiting, we’re exiting the family. So, we needed an operating partner and a management team that could replace the legacy owners.

Speaker 2 (24:46):

We also needed a strategic co-investor and size is typically between five to 10, but most of our transactions, I would say are below $20 million, a little bit larger than what the fund can do on its own. So we do like to bring co-investors on board, either our own LPs or strategic co-investors that add value. In this case, we are working with one of the largest producers of generic medicine. And we are talking about essential medicine, like anti antidiarrhea HIV AIDS, which is also like really good for young people, to have access to that and women as well in terms of reproductive health and family planning. This producer is a local producer is one of the largest local producers in Africa, bringing high quality affordable generics. So immediately for a market that suffers a dependency on very expensive drugs or low quality drugs.

Speaker 2 (25:42):

Then this is immediately saving consumers, money, disposable income, that they can then reinvest in other things like education or food, and other disposables. And it's also bringing higher quality to the market. So that's one examplein healthcare. In pharmacy, we forget the role of a pharmacy in Africa, but a pharmacy in Africa where there is such a low number of GPS of doctors per, per 10,000 of population means that the pharmacy is really at the heart of healthcare in the community. This is where most of the health information is available. And that's particularly important for women to have access to essential products and services to lead productive lives to make choices. So that's an incredible actually asset to have in terms of what we want to see also in terms of empowerment of young people and, and women.

Speaker 2 (26:38):

When we look at education, we are looking at a blended model for tertiary education. It's a blended model with physical campuses and online learning. So they have about three physical campuses in Africa, but they're able to reach about 19 countries across the continent, through the online platform. And this is a great example of how to invest in the education sector. I get this question all the time from European investors, what is the business case? How do you invest in education? So we are looking at tertiary education, which is undergrad degrees and online MBAs, mostly. So you can get your online MBA, your undergrad degree, either accredited by the local university, where there is a campus or by university in the UK or the us without having to leave your home. And we know in this global talent war, the issue of young people leaving their countries, and never returning is really a negative impact for the local economies.

Speaker 2 (27:46):

So you can get your degree without having to leave your home and your friends and family at an affordable cost and its quality tertiary education. This company, so their revenues during the pandemic go three times was around $17 million in 2020, it moved to $49 or $50 million in 2021. So it's a three times increase. And that shows the potential of this blended model, physical and online learning for Africa in the same way that we would see in India or China. So that's a great example that obviously w want to support, and we want to also look at what is the potential for this company to use that platform. And they use AI also in really innovative ways to convert interest into paying students, how to move that technology platform beyond tertiary, beyond just graduate and MBAs into vocational training.

Speaker 2 (28:48):

What if we could use that online blended model for training of nurses now, wouldn't that help the growth of our investment in health, which is often limited by the lack of qualified nurses, qualified, opticians. These are some of the vocations that we really need to boost going forward to increase the resilience of local economies. I would say in the food sector, we are looking at a few things we're looking at aquaculture. Now, aquaculture is a great source of protein and the blue economy and sustainably producing protein. And in Africa, this is really relevant in the current context where we are looking in a food crisis, at least for the next two years. We know that the top exporters of wheat to Africa is Russia, France, and Ukraine. And currently there is 30 to 40% of the world's wheat supply, which is off the market.

Speaker 2 (29:48):

And obviously farmers in Ukraine are not planting this year, so we can expect at least a food crisis for two years in Africa is highly dependent on imports. Food imports for the continent is about $35 billion annually. And in East Africa in our regions, wheat is really important. So, we are looking at replacing wheat by local crops, like millet and sour gram. And so that are local indigenous crops and highly nutritious. So, there are processes where you can replace certain crops, build local, invest in local food production, local resilience. And so, we see that as an opportunity, to do this a little bit faster than expected. In aquaculture, we saw great examples, in our markets, where young companies, only five years old company went from zero to $60 million revenue because Africa has a huge potential for food production and organic food production.

Speaker 2 (30:50):

That is also good for the environment locally, if we bring and we bring together innovation, agri processing capabilities, logistics, call chain logistics, and the retail, we have to build entire value chains from the farmers to the consumer. But that is possible. We have the example of China that has donated over the last 10 years, very successfully. And we're starting to see this in Africa over the last five years, I would say, where we are starting to build local value chain for food production. And this has happened in aquaculture with the tremendous growth. And we have to remember that well, during the pandemic, East Africa or region, which is really big on fish and tilapia fish particularly, could no longer import frozen fish from China. And so it's Africa which has enough water bodies to produce fish locally and to have access to protein. And it is also better for the environment that these are really some of the sectors we're looking to do these companies are positive and have really witnessed fantastic growth over the last five years and will continue to do so, even in the current context.

Speaker 1 (32:06):

Great. I mean, great project, great initiatives. Thank you so much Sandrine. Our podcast is now coming to an end. Thank you very much for joining me and have a great day.

Speaker 2 (32:23):

Thank you, Anne Marie, for inviting me. It's great to be part of the Launchpad as well.