On Investing in African Markets: Q&A with Zain Latif, TLG Capital
By Mark Darrough
By 19, Zain Latif had graduated from Cass Business School with a Masters of Finance. Then with HSBC in London he spearheaded an effort to bring Nigeria’s first bank to the international market. At 23, he became VP of emerging markets at Merrill Lynch and quickly engineered a number of groundbreaking deals in sub-Saharan Africa. Soon after he joined Goldman Sachs as executive director in the emerging markets division, where he led the bank’s focus on sub-Saharan Africa. In 2009, Latif founded TLG Capital – a private equity fund dedicated to the belief that commercial and social returns go hand-in-hand in frontier markets.
Darrough: Explain your initial involvement in African markets and the creation of TLG Capital.
Latif: My initial involvement in sub-Saharan Africa (SSA) came about eight years ago. I was at HSBC at the time, and there was this great opportunity in SSA where investors were looking for higher yielding assets. Through my work at HSBC, and later at Merrill Lynch and Goldman Sachs, I became quite successful in bringing large-scale African corporations to these western capital markets. But such capital-heavy banks are focused on the top-tier segment of the market. They’re focusing on those companies or sovereigns that can actually absorb over $100 million of financing.
Now, if you take away Nigeria, and possibly Kenya and Ghana if you’re really stretching it, there are very few businesses in SSA [excluding South Africa] that can sustain that sort of capital. And if you take out traditional sectors like oil and gas, mining, and infrastructure, you find very few opportunities in the more mainstream consumer-driven industries. I think this is a very lucrative space in these markets. And that was how TLG was born. TLG was born of the idea that there is a whole segment of consumer-driven industries that has not been able to attract the necessary level of capital, despite an overwhelming demand that I believe exists.
Darrough: What has created this demand for investment in consumer-driven markets?
Latif: It goes down to the perception issue. When people think of measurements of wealth, or when they think about how rich a country is or how big the middle class is, they look at a very oft-used statistic called GDP per capita. GDP per capita is not an accurate measure of wealth in Africa. Look at Ghana, which is a leading economy in West Africa. Ninety percent of Ghana’s workforce is in the informal economy. And in Uganda, less than five percent of the people have a bank account. So you have a situation where all the informal activity of a nation simply isn’t captured in those official figures. Therefore, if a country has a GDP per capita of $500 per year, you have a feeling that they won’t be able to afford many of the consumer products that we in the West take for granted.
Now let’s take a look at something that is very fascinating: the telecom revolution. In 1995, Africa had fewer mobile phones than New York City. Fifteen years later, the continent had as many phones as North America. This incredible, world-leading growth came from a population that many thought could not afford mobile phones. In a place like Nigeria for instance, a low GDP per capita says that Nigerians can’t afford mobile phones. Yet there are over 60 million mobile subscribers in Nigeria. Obviously something doesn’t add up.
So our philosophy is that there is a huge demand for consumer-driven industries; industries like information technology, health care, water bottling, and agro-processing. But the demand exists only if you can provide the right price and the right quality – the two strategies that made the telecom industry so successful.
Darrough: How do you compare the rewards of Africa to the rewards of more advanced emerging markets, markets like India and China?
Latif: In India and China you’re paying for the growth that has already taken place. Most Chinese and Indian companies are already valued with this growth in mind. So when you look at a place like Uganda, at places like Tanzania and Rwanda, the valuations are far lower simply because there’s not that much access to capital. At this early stage of the game, your ability to go in and determine the valuation is that much higher. Your ability to go in and say, “This is what we want to do, this is how we want to do it,” is much more flexible.
The opportunity, therefore, to get better deals – just on a valuation basis – is simply incomparable to places like India and China. So it depends on the risk-side of an investor. In our view we feel that the risks, especially when compared to India and China, are vastly overstated in Africa. We feel that there are businesses here that are also much simpler to employ.
Darrough: What are such risks that exist in the African marketplace, and how can investors mitigate these risks?
Latif: Of course there are challenges in Africa, as much as there are in other emerging markets. The very definition of an emerging market says that its commercial risk is as equal to its political and stability risks. And that’s what makes it different to more developed markets like Europe and the U.S. But you can learn to mitigate those risks using tools that are widely available, tools like the World Bank’s MIGA risk guarantee. If you do experience some sort of political instability, where the government decides to nationalize your assets or does something that is non-contractual, MIGA gives you the ability to recover your investment.
What’s fascinating is that in the past 25 years, the World Bank has only paid out on these guarantees five times. So people need to understand that the reality of these markets differs from what is portrayed by the international media. There are very real risks here, but there are also ways in which you can mitigate those risks. And that’s what we try to do, and that’s what I think is going to be a winning philosophy going forward in these markets.
Darrough: Reports like Lions on the Move are showing that SSA has experienced unheralded growth in the past decade. Investors now have the choice of getting in while there are opportunities for high returns. What is your final argument for these potential investors, especially at such a crucial stage of the game?
Latif: When you look at the macroeconomic situation of a place like Uganda, where they recently found 2 billion dollars worth of oil, you must recognize the increasing interest that will occur over the next 5 to 10 years. With all the proceeds that will come into the country and have a trickle-down effect into various sectors, it’s going to become much more difficult for an investor to be involved.
So the ability to come in now – to understand the situation, to build those relationships, to figure out where one wants to play in the various sectors that are open to an investor – is critical. And for us that’s a decision we’ve made, that we’re going to enjoy first-mover’s advantage. And we’re going to build our relationships here, so that down the line the people, the countries and the governments will appreciate the fact that we were with them from the beginning. And that to us is very important.
Darrough: And how can this relate to an overall economic impact?
Latif: We’re in this to see strong development. The ability to impact people’s lives here, with the amount of capital that we’re employing, is incredible. Our ability to give people an avenue for job creation and prosperity, through the private sector, is vitally important. What is happening right now is when a person graduates from college, their best choice is to work for the government. They feel that’s where they can have job security, where they can probably get their best monetary returns; and that needs to change. That will only change when there is enough capital to build up dynamic, driven, and sustainable businesses. For us, and for people who want to see development in Africa, this is where you start.
The pharmaceutical plant that we’ve helped finance in Uganda, the Quality Chemicals plant, employs over a thousand people both directly and indirectly. That sort of job creation gives the people an income, gives them a chance to climb up the ladder, and is something that I’m very proud of. That to me is another very important reason why Africa cannot be ignored, and why investment in consumer-driven industries should considered the surest way to ensure prosperity. Not just for the community, or the country, or the region; but for the entire world.
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