Nigeria Needs Impact Capital

David Snow, Privcap: We are joined today by Tokunboh Ishmael of Alitheia Capital, based in Lagos, Nigeria. How are you, Tokunboh? Thanks for joining us.

Tokunboh Ishmael, Alitheia Capital: I”m very well. Thank you. Thank you for having me.

Snow: You are one of two co-founders of Alitheia Capital. You focus currently on the Nigerian private equity opportunity. I”d like to talk about a lot of different things with you, but maybe we can start with Nigeria.

It”s a huge country. Not a ton of private equity firms there. And so I”m wondering if you can talk about the distinct private equity opportunity in Nigeria from your vantage point.

Ishmael: Thank you very much. Well, actually, there are a few companies. But what we found is that those companies are focused in a particular area– the sort of larger transaction infrastructure transaction, where they”re looking to by cash flow, essentially, invest in a business that already has a lot of cash flow going. So you have Capital Alliance, AfricInvest as well. But you”re right, there are not many players.

Now, in terms of the opportunity, the opportunity exists along the spectrum, whether you”re a large private equity player or a smaller one like us. We”re in the more smaller brackets, and have a niche which I”ll come onto. With the larger players, they”re typically looking at transaction sizes of north of $10 million. They”re looking in the mainstay sectors of the economy, oil and gas, and now telecom in recent times, looking at large transactions.

But what we found in looking at the market is there are a number of companies, particularly the small and medium enterprises– we call them the missing middle– squeezed between being too small for the larger private equity guys and being too big for the traditional microfinance, if you like. And for us, we see those entities as the ones that are probably better able to, in some cases, serve the broader population, and in some cases actually engage and employ them. And the broader population anywhere– I mean, we”re talking about Nigeria, but Nigeria, 160 million people, or Africa, a billion people, everybody needs food.

So whether it”s agribusiness, whether it”s food and beverages, where you begin to process and add more value to that, that is definitely an area where we believe that there is opportunity. So moving away from what people have traditionally known Nigeria for, for their oil and gas and large infrastructure.

But then also, beyond food and beverage, people need to live. So we see that mass housing is a problem in our economy. And that”s not just from a perspective of enabling people to buy their own homes, but just even having homes that are affordable to rent. So housing, the construction and housing sector, we see as a very viable sector there.

But underpinning all of that is the fact that the broader population don”t have access to financial services that even enable them to begin to participate fully within the formal economy. So financial services, to the extent that you enable the masses, the broader population, to be able to even save, smooth out their consumption, even introduce insurance products to them that enable them to smooth through disasters– because typically, when there are disasters, or there are hiccups, these people are more affected than wealthier members of society. So for us, for our niche, we see opportunity where we believe you can provide basic goods and services to the broader population, where we see the latent demand for that. And also, where you can actually empower them to be able to participate better.

Snow: Of course, one of the big themes across emerging markets is the growing wealth of people at all levels of society. Is it safe to say that your focus is really on sort of the bottom of the pyramid– that people who may be coming out of poverty and trying to improve their lives in various ways?

Ishmael: We call it the base of the pyramid, because we”re not looking at the absolute bottom. We”re looking at those that have productive capacity. So they are engaged in productive activity, they”re either earning an income, or they”re trading, or they”re handicraft. They have activity– or they”re farmers– they have activity that does bring in income. But like you and I, or any other person, or any other business, they require working capital to be able to scale up and provide the services that they provide within their communities.

Snow: Your firm engages in what you described as impact investing. Can you define that, and can you make money from it?

Ishmael: So for us, yes, you can make money for it. And how do you define it? For us, it”s saying, look, we do want to make money. We do want to have financial returns.

But we also want more. We want to be able to have an impact on people”s lives, whether that”s from a social perspective, or whether that”s from even an environmental perspective. And I”ve mentioned about providing financial services through our investments. When we invest in financial institutions, we”re looking for those institutions to be able to serve the base of the pyramid better– provide them with a working capital, or whatever it is they need, or the savings products. The products that you and I take for granted.

Typically, people think that means giving people loans. Well, actually, the first day you started work, the first thing you wanted was not a loan. You just wanted somewhere to put your money, and it doesn”t differ for these group of people. And the demand is there.

It”s the same when telecoms was being rolled out in Africa. People said, how can people afford phones? And the rest is history, right?

We take that same view that people have the money, they just don’t have the services provided to them. So that’s on the social. When we talk about social, we”re helping to improve their lives and enabling them to have that.

Then you can also look on the environmental perspective. One of the transactions that we are involved in in one of the businesses is enabling low income households to switch from their traditional fuel of wood as a cooking fuel to LPG gas. We call it a cleaner fuel. Some would say, well, is that really green? Well, if you look on the energy ladder for them, it is green.

A statistic that sort of moved me when I was looking at this opportunity is that in Africa, there”s a statistic that about 500,000 deaths a year come from indoor air pollution, and about 90% of that is children under the age of four. So just because someone”s mother has chosen to cook with wood, a child has died. So there”s a social aspect there, and there”s an environmental aspect from the deforestation point of view.

But we are not sacrificing financial returns. I”m an ex-investment banker. I used to be with a traditional private equity firm, so I still use the same rigor, but I use it to also provide meaning in our investments. Does that answer your question about defining impact?

Snow: Yes, absolutely. I”m going to ask you about your profile in Nigeria as a businesswoman. You”ve done something that not a lot of private equity people or people in general have done, which is to be on a popular television show. It was called Dragon”s Den Nigeria. How did that come about, and was it a fun thing to do, and was it popular?

Ishmael: Starting from the end, it was very popular. I realized it was popular one day when I was at the airports, trying to be inconspicuous, as one does, because you don”t think anybody knows you. And let”s just say that I realized very quickly that I couldn”t be inconspicuous any longer.

It was very popular, and it was particularly popular amongst the youth and up-and-coming entrepreneurs, because they thought they were getting a business education on the television. And if you think that many people, access to education is a challenge, and then if you think about access to business education– so for them, it was like, this is fantastic. I”m learning. I”m on the go. Even if they”re not investing in all the businesses, I can see what the issues are. I can see how I can think about my opportunity. So it was very popular.

It was very satisfying for the judges on the program, because we realized that we have a long way to go. I mean, if you compare it to Dragon”s Den in the UK, for example, the quality of the opportunities, there”s a vast difference.

Snow: In which direction?

Ishmael: Well, in Nigeria, the quality of the opportunities was far poorer, and also the quality of the management. And again, it”s about exposure. It”s about having that kind of guidance which is readily available in the West, and not necessarily so in our markets.

If I think about my peers in the traditional private equity world, they just wouldn”t be dealing with these entrepreneurs, because they”re looking at the traditional infrastructure– oil and gas. And the typical managers that are coming to them are ex-corporate managers. But these are people that, either through lack of job opportunities, or through the lack of opportunity to even earn an income– whether it”s to trade, or whatever– they wanted to be entrepreneurs.

You know, we have entrepreneurs out of necessity in our markets, and this was their first time of being given a grounding in how to even think about an opportunity and present that opportunity. So for us, it was very gratifying, and we enjoyed that aspect of it. I”m not sure I enjoyed the popularity aspect of it. But no, it was very gratifying. And although it”s something that most private equity people wouldn”t do, for us, and for the kind of people that we look at and opportunities, it was a very good springboard.