The Great Unlock

When I started this business five years ago, I believed that EM private markets investors would embrace a richer, more diversified set of strategies than the traditional PE fund model.

Though I initially framed this evolution as “the tyranny of choice,” I thought it would be liberating — an opportunity to attain better alignment with the universe of investable companies in EM.

Alas, apart from an explosion in corporate venture capital (CVC), progress had been a bit stultifying.

But over the last few months, it feels like we may be entering the great unlock, with firms pushing the market forward with compelling products and strategic moves. 

For instance: 

  • Non-fund structures
    Juven, a Goldman Sachs spinout, plans to invest in a concentrated portfolio of growth-stage tech and consumer companies in Africa. It’s structured like a corporate, with a balance sheet to fund investments, and is reportedly eyeing initial tranches of $10M to $30M in Series B companies, with $50M+ reserved for follow-ons. (Read more).
  • Disintermediation
    We’ve witnessed a hollowing out of SME-focused PE fund managers for several years running. And yet, there are many great businesses in EM that could benefit from entrepreneurial capital.

    Enter the CrossBoundary Group, which has inked a strategic partnership with global search fund investor Ambit Partners. It will be interesting to see whether and how this partnership connects investors’ capital more directly — and profitably — with private businesses in EM. But the insight into industry trends that lay behind the partnership is quite shrewd.
  • Deal-by-deal
    Hiran Embuldeniya, Managing Partner of Sri-Lanka-focused PE firm Ironwood Capital Partners, had an insightful interview with The Capital Quest in which he laid out the structural challenges besetting SME-focused funds. Notably, he highlights the role of DFIs in inhibiting the emergence of local teams:

    Even the DFIs, who were happy to write $5-10 million cheques, are now saying they want to write $30-50 million cheques …

    … a flexibility in mandate was important so that you can choose the deals you wanted. You don’t want to be restricted in doing partial secondaries — if some promoters want to sell a part of their equity or there is an interesting buyout to be done, I did not want to come in and say I am going to bring only new capital, growth equity and take a minority position.

    Ironwood is eschewing the fund model for a deal-by-deal approach going forward, hunting for larger deals where a management buyout might be possible.
  • Hybrids 
    As global PE firms are winding down operations in Latin AmericaPatria is seizing the initiative to attain scale. Following its Nasdaq IPO, the Brazilian firm announced a combination with Chile’s Moneda Asset Management in a $315M cash-and-shares deal (40% cash / 60% shares).

    The transaction expands Patria’s product mix and geographic footprint, and should strengthen the firm’s capabilities in credit. With an uplift of ~$10B in AUM, Patria is primed to accelerate its growth in assets.

    The reality is that scale LPs need scale partners, and Patria is consolidating its position as a partner of choice for large institutions seeking diversified equity and credit exposure in LatAm.
  • Capital market solutions
    Latin American e-commerce giant Mercado Libre teamed up with early-stage VC firm Kaszek Ventures to raise a $287M SPAC

    We’ll have to see the target before developing a view on it; the terms on the sponsor promote are interesting. Either way, I’m enamored with the idea of leveraging U.S. public capital markets to find liquidity solutions for EM privates.
  • Crypto
    This is the decade of digital assets. Crypto has the potential to reconfigure the creation and transfer of value. There is so much happening, so fast, that I can’t keep tabs on all of it.

    I scribbled a few thoughts on why NFTs may be the wedge that unlocks capital flows to African businesses at scale on my personal site here (cross-published on the decentralized publishing platform Mirror here).

Will all of these succeed? 

I don’t know.

But the action is exciting.

What’s particularly invigorating is that the universe of prospective investors in EM private companies is growing. The industry’s reliance upon (increasingly) hidebound institutions is diminishing.

The movements are also a wake-up call, though.

If you’re a PE firm doing business as usual, consider this an invitation to think about your own market position and growth strategy.

A few questions to get you going:

  • Does your firm have product-market fit in 2021? Or are you selling a product the market’s no longer buying?
  • Should you consider a joint venture, acquisition, or strategic partnership? Would doing so rerate your firm’s equity value?
  • What is it about your firm that’s differentiated and relevant to investors / potential partners?

 Always happy to be a thought partner!

Contact me here.

— Mike

Is Sustainable Investing Dangerous?

In the latest episode of the Portico Podcast, I interview Tariq Fancy — the former CIO for Sustainable Investing at BlackRock— about his delightfully thought-provoking essay The Secret Diary of a ‘Sustainable Investor’.
Tariq and I get into the important distinction between ESG-related investments in public and private markets, as well as the roles the public and private sectors can play in solving climate change and inequality.
You don’t want to miss this one.
Check it out on Apple Podcasts | Google Podcasts | Spotify


Actis closed its Actis Energy 5 vehicle with $4.7 billion of fund commitments (~20% above target), and the firm anticipates that co-investment opportunities will take the aggregate capital deployed to $6B.

It’s a massive success that signals a strong endorsement of the firm’s strategic pivot. Notwithstanding the challenges besetting the EM PE industry, Actis’s decision to eschew growth equity and embrace real assets was a bold decision.

Assuming they execute smartly, the firm should be well positioned to attract and deploy sizable volumes of capital going forward.

DPI, Quona & Talking About Impact

Development Partners Internationalannounced that it closed its third flagship fund at $900M, with an incremental $250M in co-invest available for deployment across Africa. 

Hats off to the team following what had to be a grind of a fundraise. African PE has gone through a challenging period, indeed.

One of the things I like about DPI’s refreshed website is the clarity and focus re: impact and ESG. Impact has been a part of DPI’s DNA since inception, but they’ve brought it to the fore with a clearly articulated impact agenda that is tied to the SDGs. It’s well done.

One of the best examples I’ve seen of a firm communicating its commitment and strategy toward impact is Quona.

(Don’t miss our interview with Monica Brand Engel discussing fintech and financial inclusion here).

Quona recently refreshed their brand identity, and I love it.

Their new website deftly threads the impact needle — conveying the dynamism and scale of their commercial opportunity whilst establishing the firm’s bona fides as an OG impact investor.

You should check it out.

I hadn’t thought about it until recently, but most of our client engagements now incorporate an impact strategy audit and / or the development of customized impact frameworks and measurement methodologies.

I should hasten to add that these aren’t ‘greenwashing’ exercises, and that Portico’s not interested in levying an ESG tax on firms (see interview with Tariq Fancy above).

That said, we’re always happy to help mission-driven firms (1) identify and accentuate the additionality of their investments; and (2) hold themselves accountable with meaningful metrics.

Send me a note if you’d like to chat.

Noisy Customers

ILPA released its fund terms survey. You have to be a member to download the full study, but anyone can glimpse the key findings or read about it in Institutional Investor.

The nut of it is that LPs are paying more in management fees (because they’re allocating to larger and larger funds), and those management fees are covering a smaller share of expenses (because GPs are passing along more operating costs to LPs).

Is it just me, or is it becoming an annual ritual to hear institutional LPs complain about the actions of (mega-cap) PE firms?

And then exacerbate the problem by handing (mega-cap) PE firms even more money?

Here’s a tip: you’re getting worse terms because the people on the other side of the table don’t respect you. They know that you’re not willing to walk away, because then you’d have to find a new manager relationship — and that entails work and a modicum of career risk.

The good news in the report is that “transparency has improved” so the institutions have a better grasp on the volumes of beneficiaries’ retirement savings that are being used to fund GPs’ operational expenses.

Wall of Shame

For Private-to-Private transactions, [employee] dissatisfaction is concentrated in non-management employees and comes mostly from how management treats them. In Public-to-Private transactions, the dissatisfaction is stronger, multi-faceted, and present for all employees, including management.

— “Employee Views of Leveraged Buy-Out Transactions” by Marie Lambert, Nicolas Moreno, Ludovic Phalippou, and Alexandre Scivoletto

From the Bookshelf

The inventors we remember are significant not so much as inventors, but as founders of “disruptive” industries, ones that shake up the technological status quo. Through circumstance or luck, they are exactly at the right distance both to imagine the future and to create an independent industry to exploit it.

Let’s focus, first, on the act of invention. The importance of the outsider here owes to his being at the right remove from the prevailing currents of thought about the problem at hand. That distance affords a perspective close enough to understand the problem, yet far enough for greater freedom of thought, freedom from, as it were, the cognitive distortion of what is as opposed to what could be. This innovative distance explains why so many of those who turn an industry upside down are outsiders, even outcasts …

Another advantage  … [is] being a disinterested party. Distance creates a freedom to develop inventions that might challenge or even destroy the business model of the dominant industry.

 — Tim Wu, The Master Switch (Knopf: 2010)

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