GBENGA HASSAN is the Managing Partner, Àrgentil Capital Management Limited. His firm is currently raising a $95m SME fund which will expand their impact investing activities to countries in West Africa, especially Nigeria, Ghana, Liberia and Sierra Leone. He elaborates on the achievements of his firm and the nature of the impact investing landscape in Africa in this interview with TELIAT SULE. Excerpts:
Kindly provide an overview of Africa’s impact investing landscape with a specific focus on countries where your organisation has investments?
Impact investing refers to private capital investing which targets financial return and social/environmental objectives. The Rockefeller Foundation was a pioneer of the term while development finance institutions (DFIs) such as the International Finance Corporation (IFC) have driven the development of frameworks for setting out and measuring impact investing. The IFC’s Operating Principles and similar frameworks from other DFIs have contributed to the momentum of impact investing. Given the important role DFIs have played with crowding in private capital investing in Africa, there has generally been an alignment of meeting impact objectives and making financial returns by private equity investors in Africa. This has further been developed with the participation of private investors, many with philanthropic mandates, who are keen to see private capital go towards supporting underserved regions/markets in a sustainable way i.e. the investment does social and environmental good and is profitable so that it can continue over time.
Africa is a good example of a continent that sees congruence between challenges and opportunities. The continent faces significant challenges related to poverty, health, education, nutrition, etc. It is home to more than 70%of the world’s poorest people, while under-five mortality rates are significantly higher than global average. Conversely, Africa has 5 countries represented in the 10 fastest growing economies and second highest GDP growth globally.
Àrgentil Capital seeks to make impact investment where clear gaps exist in Africa today including sectors such as agribusiness, consumer goods, and services, energy, and technology. Through this investment, the firm will ensure delivery of services to support reduction in hunger, provision of clean energy for power and cooking, product and services that support inclusive growth. In addition, our investments cover countries like Sierra Leone and Liberia which are underserved and fragile economies.
What is unique about Argentil Capital?
We are a firm with significant experience financing completed transactions in excess of $5 billion. Many of these have been first of a kind deals and demonstrate an innovative approach to completing transactions.
The team also has the unique experience of establishing and operating businesses in sectors in the regions we invest in, providing in-depth knowledge of what entrepreneurs and SMEs face in financing and completing deals while creating value for investors
Àrgentil’s uniqueness is captured in the following:
– Entrepreneurial experience in target sectors in the investment region
– Strong team operational experience to drive value addition for investee companies
– Team members are from key markets in the region with strong relationships and networks.
– Targeting investments that adopt creative approaches to serve existing markets
For how long has your organisation been engaging in impact investing, what are your focus sectors and why those sectors?
Impact has been embedded in our investment thesis from the outset with an investment criterion focused on achieving social and environmental targets with strong financial returns. Our initial credit fund was started in 2012, to support SMEs with financing where many were unable to access lending from banks. We worked with some of the SMEs and contributed to developing their sustainable development model which involved one company joining the UN Global Compact to align its business objectives with the ten universally acceptable principles.
This has expanded to focusing on making investments in SMEs serving the lower end of the pyramid or climate change mitigation by supplying cleaner energy for power generation or cooking. We remain focused to ensure our investments stimulate economic activity, job creation, and portfolio companies have a positive impact on their ecosystems.
Viewing the impact strategy through the United Nations Sustainable Development Goal lens, our general impact objectives are linked to Goal 1 – End poverty in all forms everywhere; Goal 7 – Ensure access to affordable, reliable, sustainable and modern energy for all; Goal 8 – Promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all; Goal 9 – Build resilient infrastructure, promote inclusive and sustainable industrialisation and foster innovation, and Goal 13 – Combat climate change and its impacts.
The impact strategy will also consider Goal 5 – Achieve gender equality and empower all women and girls by applying a gender lens in evaluating portfolio companies hiring practices and making recommendations for gender-balanced teams. This strategy aligns with our target sectors in Agribusiness, Consumer Goods and Services, Energy, and Technology.
So far, which sectors have given your firm the highest returns, and what factors were responsible?
The best performing investments have been in sectors with defensive features – backed by mid to long term contracts and characterised by reduced exposure to business cycles. In addition, we have done well supporting strong management teams who are deploying disruptive strategies to expand verticals or gain market share.
Àrgentil Capital recently supported some organisations in Nigeria in a bid to find solutions to COVID 19. Tell us more about that move?
Àrgentil is currently providing support to multiple initiatives to help with the healthcare emergency created by the COVID-19 pandemic. This has seen us provide financial resources to pay for a full complement of medical staff at one of the newly built medical facilities in Lagos State as well as support with contributions to help those affected by the economic impact of the pandemic.
We also recently partnered our portfolio company Tempohousing Nigeria and other leading firms in their fields including 54gene and Arnergy Solar to develop mobile COVID-19 testing laboratories. Two of these have been deployed in Ogun and Kano State, Nigeria. The mobile labs are environmentally friendly in terms of build and energy supply and will allow up to 400 tests be carried out in each state. The partners are working on additional deployments in more states towards making testing more accessible nationwide given the low testing per capita in Nigeria. This is in line with Àrgentil’s investment philosophy of supporting and partnering indigenous entrepreneurs to provide solutions to help fast track Africa’s development.
How much is your company’s portfolio worth in the world? Kindly provide Africa’s share and the distribution of your investments across African countries?
The team has executed its investment strategy via a credit fund, Àrgentil Principal Investment Portfolio I (APIP I), which completed 8 fully exited investments, and a follow-on fund, APIP II where we have completed 3 investments including follow on rounds to support expansion strategies. We have also made principal investments in real estate and a clean energy holding company. The total investment from us and co-investors will be ~ $30m to date in Nigeria. Àrgentil is currently raising a $95m SME fund which will expand our investing activities to other countries in West Africa. The fund will invest in Nigeria, Ghana, Liberia and Sierra Leone.
Africa, and by extension, Nigeria has a challenging business environment. So, how do you persuade investors to subscribe to some of your portfolios?
Investors can be categorized into DFIs that have a developmental mandate alongside commercial returns, and commercial investors where the focus is commercial returns. DFIs have a strategy of supporting the development and crowding in private capital into emerging and frontier markets. Africa continues to remain a key focus for such investors and Nigeria being the largest economy in sub-Sahara Africa gets its fair attention. For many commercial investors, post the Africa rising narrative, there remains the strategy to achieve strong risk-adjusted returns by investing in the second fastest-growing continent which offers long term growth prospects compared to more developed markets. Some key reasons for investor support have already been noted in our uniqueness above and that we have delivered good returns to them. Our credit fund APIP I with eight investments returned 1.8x.
Based on your interactions with investors, which aspect of the business environment would you suggest the government should urgently improve?
The difficult business environment in Nigeria, captured by the World Bank’s Ease of Doing Business Rankings, has seen some improvement in the last few years with the efforts of the Presidential Enabling Business Environment Council (PEBEC). However, this specific indicator is still negatively perceived/experienced by investors with obvious impacts on investment decision-making. Consistency in policies that support strong economic fundamentals and encourage long term trust is recommended.
What were the challenging moments in the past and how do you overcome them?
Moving from a strong brand associated with energy and infrastructure advisory to SME investing presented some initial challenges. We were able to secure support from an anchor US-based investor into APIP I which helped us significantly. Also, the firm and partners have generally invested a significant part of our own capital into our funds which has given investors additional comfort. Further, being an entrepreneurial firm, we have also sought to develop opportunities we see by investing our own capital into early stage of projects and developing the opportunity to where larger PE investors are comfortable to come in and make a commitment. We have done this for our clean energy holding company.
Future outlook for impact investing in Nigeria and Africa.
We expect that impact investing in Nigeria, and Africa, more broadly, will continue to benefit from the development and implementation of global principles and standards championed by the DFIs and philanthropic organisations. Impact investing is going to be needed more in a post COVID-19 future as economies in Africa recover from the significant economic impact of the health crises and as society adapts to the new normal. We have already seen how important it is to be able to ensure most of the society has access to digital tools to access education, financial services, healthcare and other services which relied mainly on physical contact. At Àrgentil, we will also continue to support entrepreneurs and businesses to develop ‘home-grown’ solutions such as the COVID-19 mobile testing laboratory and similar innovations which have a positive impact on society and helps to fast track our development.