‘Ethiopia has come a long way and there is a lot to expect in the future.’

While private equity is a relatively new concept in Ethiopia, some investors have hit the ground running, providing local companies with capital and capacity building that are otherwise difficult to find. One such firm is Schulze Global Investment. Its CEO, Gabriel Schulze, says his investment philosophy is focused on ‘frontier markets’. According to their website, these provide unique benefits because “their growth is often driven by factors that are intrinsic to the market – such as efficiency gains from the introduction of new technologies or management techniques.” In turn, they provide greater returns and investments have a significant impact on the local economy.Schulze, an American who is the fifth generation of a billionaire mining family, says that Ethiopia is a prime location for private equity – and hopes more firms work to develop the country’s private sector. In an exclusive interview, EBR’s Ashenafi Endale spoke with the unconventional investor about the country’s biggest assets, the challenges working here, and his unique approach to identifying new frontier markets. The following is an excerpt.

What factors influenced you to come to Ethiopia?
Before we came to Ethiopia, we had our headquarters in Singapore and an office in Brazil since we focused on traditional emerging markets. What we did at that time was look at countries like China and there was more and more investment capital coming into [those] markets. But, the actual opportunity was really changing in these countries and ultimately the investment environment was no longer attractive.
As a result, I began to look for frontier markets in Africa as well as Asia. Nine years ago, Ethiopia was [a country] that [was] overlooked. It was just a country people knew because of poverty and famine. No one knew about the actual facts and successes on the ground. Fortunately, I was familiar with Ethiopia through my own family’s charity-related work in the country.
I visited for the purpose of investment, not charity. I was amazed at what I found and I became convinced that Ethiopia represents what I call a perception arbitrage opportunity. Perception arbitrage means an opportunity to take advantage of the difference between the perception that most investors might have [of a particular place] and the reality.
The perception was that Ethiopia was not an interesting place to invest, the risks were too high, the opportunity was lower, but the reality was that it is quite interesting and attractive. Therefore, I decided to start equity investment here.

Most of the time private equity focuses on frontier markets that are undervalued because investors either overestimate market risks or underappreciate its potential. Yet, you’re saying your company capitalises on perception arbitrage. How?
One of the key things an investor has to ask himself when evaluating a frontier market is whether you can find that perception arbitrage. If you can’t, then frankly you are quietly getting yourself into a lot of trouble if you step in anyhow. I say this because people think SGI invests in frontier markets in any country. But we are very careful.
For example, Myanmar has been an extremely popular investment destination recently. We had not invested in Myanmar; we are not even going to consider investing there. This is because at the end of the day, perception arbitrage is about finding the right country at the right time with the right dynamics and you can go both ways. Some countries are ignored when they should be looked at and some countries are looked at far too much, in the case of Myanmar.
The key is evaluating [what is] on the ground and assessing what is happening. If people ask me what is your formula for selecting the market, we take a careful look at quantitative figures. What do the gross domestic product, trade and other quantitative figures say? The metrics that we look at must go with the trends in the market. We also get on the ground with our own team and spend time with as many people as possible to understand what is actually happening on the ground. Then we make our determination based on a combination of our technical assessment, looking at the metrics and analytical [data].
Not everyone knows how to get the right qualitative assessment. But we know how to do that and get into the market, build the right relationships and access the right information.

Private equity investments are known for lasting a few years. How do you manage to cooperate with investees’ long-term plans?
We always discuss with the companies we are going to invest in up front about the time horizons. In a private equity fund, normally you invest and sell your shares within five or six years. Sometimes you can go a bit longer or shorter, with some flexibility. This is because we want to make sure that our partner is comfortable with the timetable.

The government selected the agro-processing and manufacturing sectors as priority areas that can transform Ethiopia’s agriculture-based economy to an industrialised one. Do you think these sectors have potential?
Yes. I have spent the last 11 years living in Asia and I know how manufacturing is perceived. At the end of the day manufacturing needs well-priced or affordable inputs. The two most important inputs are human capital and electricity. If you are going to manufacture anything, these two pieces have to cost less in a given country compared with others. Here in Ethiopia, there is a huge advantage on both factors. I believe the focus of the government on manufacturing is perfect for the particular condition Ethiopian is in today. The low cost of labour and energy provide the perfect [environment], especially as traditional manufacturing countries like China become expensive.
Agro-processing is the other low-hanging fruit, meeting the natural position of the large arable land and low input cost. You can grow whatever you want in Ethiopia because almost every climate exists here. When it comes to the processing side, the input for manufacturing, the energy and human capital are very affordable.
The challenge for manufacturing and agro-processing today is logistics. That is the primary reason why the [potentials of] agro-processing and manufacturing are not fully [realised]. But with recent developments, like the new rail lines, I think the country is close to solving some of those logistic problems.

What is your strategy towards these sectors?
We have already invested in both. If you look at our seven companies we have invested in Ethiopia, they are involved in both areas. Those two sectors will remain high priorities for us. Of course it does not mean all our future investments will go to these two sectors only. But they will have long-term opportunities. Some companies operating in these sectors are in the pipeline for our consideration and evaluation.

Most of the companies you have invested in Ethiopia are involved in the beverage sector. Is there a special reason for that?
Only two of them are in the beverage sector. We like consumer-facing industries. Day by day, tens of millions of people are buying more products and entering the modern consumer world. Therefore, we believe that it is a smart investment to engage in these consumer-facing industries, including beverages.

Your company has offices in six countries, including China, Brazil, Mongolia and Georgia. Compared to these countries, how do you assess SGI Ethiopia’s work and performance vis-à-vis your other locations?
So far we have been very lucky, as with all of the countries we have chosen, especially because we select the right market at the right time. Ethiopia, of course, is the right market at the right time.
I would point to Mongolia as another place we have spent the last four years and are witnessing great progress. One of the differences between Ethiopia and Mongolia, for instance, is Mongolia is not going to be a big place for agro-processing, manufacturing or consumer-facing businesses because the population is small. Mongolia does not have affordable electricity or the environment that Ethiopia has. So, we are always very cautious in selecting an investment strategy that specifically fits the country. We look for the perception arbitrage opportunity that gives us good prospects.
I also see Ethiopia, Georgia and Mongolia have a common legacy of a Marxist socialist economy. [The] challenges we face with our investments in these markets as well as some of the processes that we go through have similarities in part because of the background of the three countries.
But the governments are very different. In each country, you have something that is really going well and something that is easy to complain about. It is quite different. We, of course, also have experiences in China and Brazil, which are different in terms of governance but are similar in some ways because, at a certain stage of development, I believe all countries find themselves with similar types of questions, concerns and challenges no matter where they are located.

Speaking of common challenges, what is the one thing that companies in developing countries lack that hinders their ability to grow?
The number one thing is a lack of capital, particularly equity capital. I think the growth of companies in Ethiopia is stunted because they do not have capital.
But I say that another thing we also bring to the table is assistance in building a well-managed company from the internal governance perspective. Say you are doing good job in the market – but how is your accounting system and do you have everything in place, like good checks and balances or an effective process to track your sales? [These are important] because Ethiopia needs to develop an economy built on strong companies.
One of our problems in China today is there are a lot of companies that grew very fast but never had the internal structure of a company. Now the entire economy of China is suffering in part because those companies grew without the systems, governance and infrastructure to actually make them robust in the future.

What are the challenges that companies like SGI face at the global and country levels?
The biggest challenge for us is finding the human resources we need for our portfolio companies. Even more than other countries where we invest, in Ethiopia that is major challenge for us. It is nice to build a beautiful ship, but if you do not have a good captain, a good engineer and a good person that can manage the other aspects of the operation, it is no longer a good ship. Particularly, human capital and skilled management with experience has been the major frustration for us because it is very difficult to find it in Ethiopia.

Some of your investees say that they partnered with SGI more for the company’s consulting skills rather than the capital injection. Do you train the people you employ in each country where you invest?
Absolutely. First of all, we hire the right people. Second, we make sure that they understand how we do things. Part of the reason that companies want to work with us is not just for the money. For instance, every year, the entire leadership team from all of our offices share experiences about the core values and cultural realities that we need to be focused on to succeed. One of the best practices we have in Ethiopia is our team and the leadership here share everything with the leadership of the company and they take the skills and knowledge and apply them to the market.

What is SGI Ethiopia’s plan for the future?
Ethiopia has come a long way and there is a lot to expect in the future. People ask me ‘you got to Ethiopia at the perfect time, so how long are you going to stay?’ As far as I can tell we have a lot more growth and opportunity to come. At the moment we are here for the long term; we continue finding good companies and invest to help them grow.
As the private sector grows, it will attract many equity investors and 15 years from now the market will be a bit mature. Frankly speaking, it is not going to take 15 years for Ethiopia to be in the mainstream emerging market class. This country is not going to be a frontier market for long. But we will keep investing even when the growth is out of the frontier stage and into the emerging market stage. But 10 years from now, I cannot imagine ourselves doing anything other than what we are doing now, which is investing in this market.

A few months ago, you had a meeting with Tedros Adhanom (PhD), Minister of Foreign Affairs. What did you discuss?
Well, I hold discussions almost every time I come to Ethiopia. It is really about how I can help move forward and promote Ethiopia as an investment destination and how the government can help make Ethiopia a better destination for investors. Usually we [discuss future] opportunities, activities we can get involved in, focusing on some new areas the government wants. I am very frank and I never hold back my view, and I think the officials know I will put my own reputation, money and all for Ethiopia.

Is there a gap between what the government says while lobbying investors and the actual experience on the ground?
In every single country we operate in we have spoken to government officials. Their presentations are polished, but when you get to the ground, things are more complicated. I think in Ethiopia the reality is more complicated than the advertisement, but you start to learn. Of course, the government cannot give you a guarantee. But the reality in Ethiopia is similar to some other countries where we operate, including China and Brazil. The brochures always [paint a pristine picture] and the reality is always complicated.
In Ethiopia, the government officials told me some stories that I found accurate, but they are very eager to help me understand the complexities and solve them. The polished [presentations] are always the same in any country, but if it is genuine, you can deal with the practical problems.

Do you think there is a conducive environment to do business in Ethiopia?
One of the challenges we face here is a lack of clarity regarding certain matters of regulation and commercial laws. For example, private equity was not something happening in Ethiopia when we started. It was legal, but there was no experience. We spent a lot of time working through uncertainties because the regulations were not fully developed or exercised.
Here in Ethiopia, there are a lot of things to do to create the degree of clarity that would promote a faster pace of private sector development and investment. There should be a mechanism to ensure the people and government are not only empowered with ‘no’, but are also able to say ‘let us help you do this’. One of the challenges in any government is if there is a question about a law or regulation, ‘stay away’ or ‘that is not allowed’ seems the safest option for government officials. From the top down there must be encouragement for government employees to say ‘yes’ and ‘let me see if I can do it for you’ to the people. I think the regulatory uncertainties are factors. But they are getting better bit by bit – we are seeing progress and I am still very hopeful.

What should the government do to attract more firms like yours?
Private equity is particularly important for Ethiopia. It is good if investors come and invest in the agriculture sector and build a factory. But it’s better if the government builds the indigenous private sector. Equity investors like us are essential to develop the private sector in Ethiopia. The biggest challenge we face – and that others coming after us will face – are the uncertainties around certain regulations and the degree of scepticism at the low level of government [regarding] why an investor is coming here and [what they’re] putting money in.
The lack of enthusiasm at the lower level of the government can create a more challenging environment that we do not mind because we’re used to it, but other investors might come and see it as a real challenge. I believe at the top level this government is incredibly positive towards foreign direct investment, including private equity funds. The policy is correct, the laws and the regulations are in the right direction, but it needs to [spread throughout] the system, so that at every level there is a sense of encouragement for what you are doing, rather than a sense of scepticism.
Of course there are bad investors out there. But do you block out all the equity investors because of the bad ones? It is better to create a supportive environment and a healthy management system so that everything is done properly.

Under your leadership, Schulze Global has built a unique track record, successfully pioneering private equity in countries like Ethiopia, Mongolia and Georgia. How do you manage to do that?
First, I think the most important thing in leadership is you have to be passionate about what you are doing. One of the reasons I have been successful in building SGI is because I wake up every day genuinely excited about the business that we are involved in. When I spend time with my teams, here in Ethiopia or elsewhere, I think they feel that passion and excitement and they know that I am not just showing up because I have to. I really see the opportunity ahead and get excited. Leaders have to be effective and have to have genuine passion, which you cannot fake. I know many leaders who tried to fake leadership and it did not work. The passion is truly genuine for me.
The second factor is, when I built this company, I always instilled in my team that we could make money and make a difference. The truth is the people at SGI all want to make money and everyone also feels like they have a purpose in doing something positive. If you talk to one of our team members in any country, they genuinely feel that what they do matters. Thus, they work hard.
Unlike most private equity firms, we insist on having an institutional quality head office in Singapore, which has all the top-class mechanisms that the best private equity firms in New York and Singapore have. We are licensed and regulated by the Singaporean Monetary Authority, we have very detailed client programmes in place and we run the operation at a very high level. But at the same time, in every single country, we have teams on the ground. I do not know if there is any private equity firm that has a full head office and full local offices in every single country in which it operates. We have also the institutional platform that ensures we have all the best practices and structures in place in each country we invest. That has been the pivotal part of our success.

What is your philosophy towards life and work?
The number one element to success is very simple – perseverance. More than anything, perseverance is what makes a person, a company, a marriage, a politician, or a country successful. If you look at why Ethiopia managed to where it is today, because of perseverance. When you look at SGI’s success, it is because of perseverance.

What do you do if an investment fails?
I would apply perseverance. But I also believe very strongly in the concept of multi-dimensional thinking, which means facing challenges or opportunity from the perspective of rational analysis and emotional analysis. So we think about it rationally and also from emotional perspective. Approaching a problem only from your instincts is not going to work. An approach from only a rational analysis, by picking apart the details and trying to solve the problem with careful thinking also does not work. Put both together and you will address the challenge through multi-dimensional thinking.
This is especially important when you operate in environment different from your own culture. If I face a challenge or opportunity in Ethiopia, I am not going to look at it solely from my own perspective. I identify what happened, take a look at the values, the pre-conceived notions, and my constraints; evaluate the opportunity; and ask if am I thinking about it too much, or overreacting emotionally. It is very empowering to give yourself that intentional feedback based on balanced, multi-dimensional thinking. EBR

4th Year • July 16 2016 – August 15 2016 • No. 41

Ashenafi Endale

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