The White Stripe | Mar 2018

A small print of Jody Clark’s “Keep Treading” hangs on a wall in my office. It’s a picture that I first saw at the Brazilian Jiu Jitsu (“BJJ”) gym where I started training last fall. It shows a man in a gi trying to stay afloat in the ocean. An eel is wrapping around his legs and pulling him asunder, while a collection of sea nettles threatens to sting him if he reaches out his arms.

It’s an apt metaphor for the travails of a white belt in BJJ. As Sam Harris describes it, “The experience … is akin to falling into deep water without knowing how to swim. You will make a furious effort to stay afloat—and you will fail.”

That is an accurate one-word summation of my first five months in BJJ: failure. Relentless, unmitigated failure. Soul- and ego-crushing failure.

Consider this dispatch from my BJJ journal:

2/10 – Open Mat

Performed poorly. Got smashed. Decent defense but too passive. Need to be more aggressive. Neck got crushed while in turtle. Honestly I just feel dejected.

There are days when the hardest thing is showing up to class or open mat. The certainty of being smashed, submitted, and in pain makes it all seem like a futile exercise. It’s so tempting to quit in the face of near-certain failure.

But, you have to keep treading. It’s all a bit of a metaphor for life as a whole.

Last week, I received my first stripe on my white belt. I know it’s foolish to place much stock in outward signs of progress, but this promotion—this piece of tape—was one of the more hard-earned accomplishments in my life. And yet, it’s merely the first rung on the ladder. Progress. One aching, small step at a time.

In other news, I’m looking forward to joining some folks from General Atlantic next month for a conversation with students at UVA’s McIntire School of Commerce. Should be fun!

I’ve also created a video of the presentation that I delivered at the UNC Alternative Investments Conference last week (some of the slides are featured below). If you’re keen to see a 30-minute overview of EM PE, check it out on YouTube!

Alla prossima,

Abraaj: Part Deux

In last month’s newsletter we discussed the drama at Abraaj following revelations that four LPs had hired forensic accountants to probe the books of the Abraaj Growth Markets Health Fund.

The situation is serious, indeed:

  • Abraaj’s fund management business is being split off into a separate entity with an independent board “to which internal audit and compliance will directly report.”
  • Abraaj’s founder, Arif Naqvi, relinquished management of the funds business, though he is expected to serve on its investment committee.
  • The firm announced a halt to investment activities.
  • Private Equity News reports that Themis, the energy team that Abraaj acquired in March 2016, sought to end its partnership with the firm as early as mid-2017. Denham Capital announced a new platform agreement with Themis earlier this month.
  • The WSJ reports that the firm is weighing job cuts as its fundraising is put on hold; existing investors in its $6B target mega fund are asking for their money back; investors in other funds are considering selling their stakes; and, lenders are reviewing credit lines for their capital call facilities.
  • The FT reports that the firm’s CFO departed.

Meanwhile, the firm is still unable to secure an exit from K-Electric, a divestiture it announced in October 2016. Abraaj was slated to receive a consideration of $1.77B from Shanghai Electric Power, a subsidiary of the State Power Investment Corporation of China; however, the transaction has been dogged by delays.

According to a local news report dated 9 March, the Pakistani government still had not cleared the sale, in part because it has not received a copy of the sale-purchase agreement, in part on national security grounds, and in part because the company is alleged to owe “dues” upwards of PKR139 billion (~$1.25B). Arif Naqvi is reported to have met with government ministers this week in an attempt to accelerate the sale.

What a mess. I’m left wondering if investors in the firm’s funds will seek (a) new GP(s) to manage out the assets.

EM Fundraising: Coming Full Circle?



“Coming Full Circle.” So reads the adulatory headline from EMPEA’s year-end 2017 statistics, which show $61 billion in EM fundraising across PE, private credit, and infrastructure and real assets—the highest level since 2008. Break out the champagne glasses and lace up those dancing shoes. EM PE is back!

Or not.

Looking at fundraising for buyout and growth equity funds, the volumes remain stagnant since 2011 (see below). Though 2017 shows a rebound, the aggregate figure is deceptive: KKR Asia III clocked in at $9.3B and Affinity Asia closed on $6B, which means these two funds account for 40% of the capital raised for buyout and growth strategies. That leaves about $20B for the rest of EM. It’s peanuts!


The trends we highlighted in November 2016 are continuing apace, with only 75 growth equity funds achieving a close in 2017—a 44% decline since 2010. In addition, new entrants are struggling to get traction. EMPEA’s own analyses show that first-time growth equity funds have declined from 30% of the capital raised for the strategy in 2008-09 to less than 10% over the last four years.

At issue is a lack of distributions and a lost decade for LPs in EM buyout and growth equity funds (see below). There is a sharp drop-off in distributions beginning in 2007 / 08 when fundraising exploded. It’s a decade later, and the breakpoint for top-quartile funds beginning in 2008 hasn’t returned investors’ capital.


These performance indicators from Cambridge Associates are damning, and it’s no surprise why LPs have been walking away from “traditional” EM PE in greater numbers.

But there’s something about this exhibit that bothers me. I know many established managers that refuse to provide their performance figures to Cambridge. One global manager was befuddled when I presented these figures; s/he noted that their EM deals generated IRRs well north of 30%.

It’s worth asking whether Cambridge’s benchmarks are a worthy benchmark in EM. I have my doubts.

For example, a quick sketch comparing the universe of EM buyout and growth equity funds—as collected by EMPEA—to those in Cambridge Associates’ database show that CA has between 4% and 21% of the total number of funds by count, and between 29% and 60% by total capitalization (excluding 2011; see below).


The industry is poorly served by these benchmarks. I should probably stop using them, but there is no credible alternative.

If only there were an organization that could serve as a utility for the industry—one that provided impartial data on private capital performance … 🤔

In any event, as bearish as I’ve been about the prospects for the EM PE industry, I am cautiously optimistic that we’re close to reaching a bottom. If flows to EM public equities continue, then the exit windows should stay open, managers should distribute cash to their LPs, and then capital can be recycled to new commitments.

While I don’t expect EM-dedicated growth equity and buyout funds to come “full circle” to the $58 billion they raised in 2007 anytime soon, the scarcity of capital allocated to the sub-$1 billion segment portends well for the performance of current vintages. And if history is any guide, LPs will herd back into these markets after the “easy” money has been made.


Private Equity: Overvalued and Overrated?

Dan Rasmussen of Verdad is not making friends with many people in private equity. His former colleagues at Bain Capital must wish he’d stop talking. Like him or hate him, Dan puts out thought-provoking, empirically driven takes on the myths and realities of U.S. buyouts (see last December’s newsletter for an example).

In his latest piece, “Private Equity Overvalued and Overrated?”, Dan probes three premises about which there is “near-complete consensus:”

  • PE firms make money by creating value in portfolio companies;
  • PE is less volatile / risky than public equity; and,
  • PE will significantly outperform other investments.

Rasmussen’s most interesting conclusion pertains to the first bullet: the myth of value creation. Verdad constructed a database of 390 deals—representing more than $700 billion in enterprise value—for which the PE firm issued debt to finance the acquisition. This enabled Verdad to compare underlying companies’ financial performance both pre- and post-acquisition. What did they find?

In 54 percent of the transactions we examined, revenue growth slowed. In 45 percent, margins contracted. And in 55 percent, capex spending as a percentage of sales declined. Most private equity firms are cutting long-term investments, not increasing them, resulting in slower growth, not faster growth.

If PE firms are not growing businesses faster, investing more in growth, or gaining much operational efficiency, just what are they doing?

In 70 percent of cases, PE firms are leveraging up the businesses they buy. PE firms typically double the amount of debt on the balance sheet, from 2.5x EBITDA to 5x EBITDA—the biggest financial change apparent from our study.

With $1.7 trillion in dry powder, rising rates, and average U.S. LBO entry multiples hitting 11.2x EBITDA, this just does not seem like an attractive value proposition.

Persistence in Private Equity

McKinsey’s Global Private Markets Review has a fascinating finding on the decline of persistence in private equity performance. Notably, “follow-on performance is converging towards the 25 percent mark—that is, random distribution.”

At a time when capital is flooding to mega-cap funds and, at least in emerging markets, established GPs with a track record, I wonder whether new techniques are needed for manager selection. Perhaps the winning LPs will be those with the liberty to chase a variant perception of value; those less hamstrung by rigid asset allocation buckets and / or institutional constraints.

Je ne sais pas.

From the Bookshelf

A man is born gentle and weak.
At his death he is hard and stiff.
Green plants are tender and filled with sap.
At their death they are withered and dry.

Therefore the stiff and unbending is the disciple of death.
The gentle and yielding is the disciple of life.

Thus an army without flexibility never wins a battle.
A tree that is unbending is easily broken.

The hard and strong will fall.
The soft and weak will overcome.

— Lao Tsu, Tao Te Ching (Vintage: 1989).

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The information presented in this newsletter is for informational purposes only. Portico Advisers does not undertake to update this material and the opinions and conclusions contained herein may change without notice. Portico Advisers does not make any warranty that the information in this newsletter is error-free, omission-free, complete, accurate, or reliable. Nothing contained in this newsletter should be construed as legal, tax, securities, or investment advice.

Copyright © by Portico Advisers, LLC 2018, all rights reserved.

Veritas | Feb 2018

Last month, the New York Times published a fascinating article about the market for followers on Twitter. (Disclosure: shareholder of NYT and TWTR). The manufacture of social capital is something that I hadn’t really thought about before, but now that my eyes have been opened, it’s hard not to notice it.

For example, it’s always been nauseating when someone namedrops to inflate his or her reputation, but I hadn’t considered companies leveraging the brand equity of established firms to magnify their own. Think of all the conferences and august fora where firms’ logos are on display. (Yours, too, could be featured amongst the great and the good for a modest sum).

Or, consider this: have you ever read a profile of a firm or entrepreneur and, en passant, your nose turned up in a visceral reaction? Something just smelled about it? Me too. The article was probably placed. By a PR firm that doesn’t do nuance. Occasionally, these articles include character references from individuals who are compensated by the company being profiled, and yet the credulous journalist didn’t care to ask about potential conflicts.

The currency of currency is all a bit exhausting. I’m reminded of Diogenes the Cynic’s apocryphal confrontation with Plato:

On seeing [Diogenes] washing vegetables, Plato came up to him and quietly remarked, “If you paid court to Dionysius, you wouldn’t need to be washing vegetables,” to which he replied in the same calm tone, “Yes, and if you washed vegetables, you wouldn’t need to be paying court to Dionysius.”

Anyway. Next month, I’ll be at the UNC Alternative Investments Conference, where I will be leading a teach-in session on the role of EM PE in LPs’ portfolios. I’m planning to cover the evolution of emerging markets and explore whether investors are being presented with a richer landscape of opportunities than was available in the past. I’m really looking forward to it. Click here to learn more about the event, and please reach out if you’re planning to attend.

Alla prossima,


The New York Times and Wall Street Journal report that the Bill and Melinda Gates Foundation, CDC Group plc, IFC, and PROPARCO have hired forensic accountants to probe the books of the Abraaj Group. The investigation is focused on the use of funds within the $1 billion Abraaj Growth Markets Health Fund.

According to the WSJ, which claims to have reviewed the fund’s quarterly reports to investors, Abraaj called $545 million between October 2016 and April 2017, but had invested $266 million by September 2017. In October 2017, the four LPs are said to have asked for bank statements to show what—if anything—was done with the balance of the funds. Abraaj is said not to have provided them. In December, Abraaj is said to have returned $140 million to the fund’s investors.

A reading of the two articles together suggests that there may be some disagreements over the obligation to return called capital—and the time window for doing so—when projects are delayed rather than canceled. Two hospital projects—one in Karachi and one in Lagos—are said to have been delayed.

The WSJ notes that “construction in Karachi was delayed by a ban on new buildings more than two floors high. The planned hospital had 17 floors.” Local media sources report that the ban went into effect in May 2017 due to water shortages and inadequate civil infrastructure in Karachi. Last month, Pakistan’s Supreme Court approved construction for buildings up to seven-storeys high.

Abraaj released a statement on 4 February saying, “recent media reports … are inaccurate and misleading.” The firm states that it appointed KPMG in January 2018 “to verify all receipts and payments made by the Fund,” and that as of 7 February, “KPMG has now completed its findings and reported that all such payments and receipts have been verified, in line with the agreed upon procedures performed, and that unused capital was returned to investors.”

The forensic accountants’ investigation has either not yet been completed, or the findings have not been disclosed publicly.

To an outsider, this looks quite bad. The investor syndicate that hired the forensic accountants isn’t comprised of neophytes to EM PE and impact investing. On the contrary, they’re the most experienced LPs in the industry. IFC alone has invested in over 200 EM funds over the last decade, while CDC is an active investor in 164 funds in 74 countries—including other Abraaj vehicles. These investors have mainstreamed EM PE as an institutionalized investment strategy. If their concerns are in the newspapers, then it’s worth paying attention.

More broadly, this could have knock-on effects across the broader EM private markets landscape. Integrity and transparency are vital, particularly in an opaque industry and in markets where investors confront information asymmetries. To the extent this story encourages managers to improve their operations and reporting, this is a good thing. However, with one of the largest and most visible EM firms coming under scrutiny regarding its use of funds, there is a risk that more investors will just walk away from EM altogether.

The industry will not thrive without trust, transparency, and quality corporate governance.

Abraaj is currently in the market for a $6 billion mega fund. The WSJ’s sources suggest that the firm has collected $3 billion toward its target. I find that incredible; not only because there have been several senior departures from Abraaj of late, but also because it’s hard for me to make the math work from both a top-down and a bottom-up perspective.

  • From a top-down perspective, we explored the absorptive capacity of EM PE in our latest research piece, which, based on an analysis of exits and M&A volumes, suggests that annual flows to traditional fund strategies may need to shrink to $16 billion per year. Can one firm collect a third of that and invest it well? I have my doubts.
  • From a bottom-up perspective, Abraaj built its global platform through the acquisition of Aureos, an SME-focused investor that was writing $10 million checks. In recent years, Abraaj has been securing deals through auctions—outbidding established large-cap firms such as Carlyle and TPG—and secondary buyouts from the likes of Actis, Advent International, ECP, and Metier. It seems reasonable to ask about pricing pressures and style drift.
  • Finally, the firm has raised an estimated $3B across five funds since 2015 and appears to be in the market for upwards of $7.1B across four funds (see exhibit below). Where are they going to put it all?

Of course, all this may just speak to my failure of imagination.

Several institutional investors have read Hamilton Lane’s reports and clearly disagree with the previous assessments. Washington State Investment Board (approved unanimously, up to $250 million) and Teachers’ Retirement System of Louisiana (approved 6-3, up to $50 million) have committed to the mega fund, while PEI reports that Teacher Retirement System of Texas is on board as well.

Scale has its advantages.


Private Debt in Africa

Runa Alam of Development Partners International co-authored an intriguing article on the prospects for private debt in Africa. There’s clearly demand for more flexible capital solutions amongst local businesses, and my understanding is that some early suppliers of credit / mezzanine solutions on the continent, such as Amethis and Vantage Capital, have done well. As one would expect given the supply-demand imbalance, new entrants emerged:

  • Helios Investment Partners launched Helios Credit, its direct lending platform, in 2015.
  • Ethos acquired Mezzanine Partners in July 2016 and launched Ethos Mezzanine Partners 3 with a target of $150 million.
  • Syntaxis Capital, a Central and Eastern Europe-focused private debt investor launched an Africa strategy in 2016, establishing a presence in Lagos.

Presumably DPI will be joining them.

It’s important to remember, though, as one seasoned private credit manager once put it to me, “leverage is not your friend in emerging markets.” Private credit is more than just a position in the capital stack. It requires a different skillset than growth equity, and a deep understanding of volatility’s impact on balance sheets and cash flows. Choose your partners wisely.

Taking a step back, it’s great to see a broader set of financing options being made available to entrepreneurs on the continent. For LPs willing to look, there are some very interesting managers with vehicles that expand Africa’s investable market. (Drop us a line if you’d like to know more).

Always Low Prices

Walmart, the world’s largest company by revenue, is reportedly shopping around their Brazilian operations. ACON Investments, Advent International, and GP Investments are said to have been pitched.

According to Thomson Reuters, the company’s 471 local stores generated revenues of $9.4 billion in 2016. However, the company “posted operating losses for seven years in a row after an aggressive, decade-long expansion left it with poor locations, inefficient operations, labor troubles and uncompetitive prices.” In short, apart from the labor troubles, they weren’t Walmart.

Apparently, several retailers took a look at Walmart’s assets in the country, but took a pass on them after concluding the suco ain’t worth the squeeze. A consequence, it seems, of Walmart’s poor customer understanding and a bungled expansion strategy.

It will be interesting to see if a private equity buyer can turn things around, but it’s pretty clear they won’t be paying up for the privilege to do so. In that sense, Walmart’s finally operating true to form: offering bric-a-brac at the deeply discounted prices that shoppers have grown to love.

Currency Risk in Emerging Markets

Sarona Asset Management released the final report of its nearly year-long initiative, “Expanding Institutional Investment into Emerging Markets via Currency Risk Mitigation.”

Sponsored by USAID’s Office of Private Capital and Microenterprise, and in partnership with EMPEA and Crystalus Inc., the initiative sought to develop innovative, practicable solutions to FX risk management in EM PE. The final report contains a wealth of data and information on FX hedging in EM, as well as three new “solution pathways” that the project tested with practitioners:

  • New direct currency hedges (i.e., covertures and supported range forwards);
  • Proxy hedges (i.e., baskets of liquid, low-cost interest rate, equity, and commodity options); and,
  • Insurance.

The proxy hedge was piloted through simulated back tests against two EM PE portfolios over 20 years, and the product shows promise. However, as always with hedging, the devil is in the details.

USAID and Sarona have kindly made the report available to the public. Click here to download it.

From the Bookshelf

Recurrent descent into insanity is not a wholly attractive feature of capitalism …

The only remedy, in fact, is an enhanced skepticism that would resolutely associate too evident optimism with probable foolishness and that would not associate intelligence with the acquisition, the deployment, or, for that matter, the administration of large sums of money. Let the following be one of the unfailing rules by which the individual investor and, needless to say, the pension and other institutional-fund manager are guided: there is the possibility, even the likelihood, of self-approving and extravagantly error-prone behavior on the part of those closely associated with money …

A further rule is that when a mood of excitement pervades a market or surrounds an investment prospect, when there is a claim of a unique opportunity based on special foresight, all sensible people should circle the wagons; it is the time for caution. Perhaps, indeed, there is opportunity … A rich history provides proof, however, that, as often or more often, there is only delusion and self-delusion.

— John Kenneth Galbraith, A Short History of Financial Euphoria (Penguin: 1993).

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The information presented in this newsletter is for informational purposes only. Portico Advisers does not undertake to update this material and the opinions and conclusions contained herein may change without notice. Portico Advisers does not make any warranty that the information in this newsletter is error-free, omission-free, complete, accurate, or reliable. Nothing contained in this newsletter should be construed as legal, tax, securities, or investment advice.

Copyright © by Portico Advisers, LLC 2018, all rights reserved.

Bulls on Parade | Jan 2018

The animal spirits are palpable. Though U.S. markets have seemed to be fully valued for some time, the price action since the ball dropped on 2018 is saying, “these go to 11.”

Jeremy Grantham of GMO captures the sentiment in his piece, “Bracing Yourself for a Possible Near-Term Melt-Up.” The punchline: Grantham says it’s possible that we’ll see a melt-up to 3,400–3,700 (!) on the S&P 500 over the next nine to 18 months. I mean, it’s possible (probable?) that we won’t, but I think he’s more right than wrong.

If you missed it, Grantham laid down a gauntlet of a thought exercise late last year: imagine that you are Stalin’s pension fund manager and you are told to generate 4.5% real returns for 10 years, or else. Where do you allocate your capital?

Grantham’s answer: EM equity. In size.

I imagine that many investors—particularly those with 7%+ return assumptions—are asking themselves the question: am I sufficiently overweight in EM?

Unfortunately, I don’t think that extends to EM private markets. However, a bull cycle in EM public markets should boost multiples and be conducive for exits. Here’s hoping that we see sustained portfolio and direct investment flows, and GPs seizing the opportunity to distribute capital back to their LPs.

Separately, thanks to those of you who encouraged people to subscribe to our newsletter. Our plea resulted in a donation to Room to Read, so thanks for contributing to children’s literacy.

Finally, If you missed our most recent research piece over the holidays, Does the EM PE Asset Class Scale?, it’s available for free on our website.

Happy new year. Let’s make it a good one.

Alla prossima,

McVey Calls a Secular Bull Market in EM

KKR’s Henry McVey issued his hefty investment outlook for 2018, “You Can Get What You Need.” The takeaway for readers of this newsletter is his conclusion that EM are in a secular bull market that should last for three to five years. Inshallah.


Of note, McVey ran a DuPont analysis and discovers “that operating margins are finally improving across all of EM after a five-year bear market, which is now boosting return on equity.” Commodity-related companies are a major driver of this swing, so it pays to keep an eye on commodity prices for a potential turn.

One interesting tidbit in the outlook is his forecast for private equity returns over the next five years, which he estimates will decline to 9.6% (the highest across asset classes; see below).



No, not that story.

Norway’s $1.1 trillion sovereign wealth fund has submitted a recommendation to the finance ministry that it be given greater latitude to invest in and alongside private equity funds. This would be a fairly significant development for the private equity industry, given the volume of capital that it could unlock for the asset class.

In my dreams, I envision them building a team with a global mandate to identify small- and mid-cap managers with compelling strategies. Exploiting the advantage of being a genuinely long-term investor, and seizing the opportunity to build an edge in private markets.

But in my waking hours, I see billions flowing directly to Blackstone.

Brazil on the Move

Brazil’s auto industry is moving product: vehicle exports are expected to hit an all-time high of 750,000 in 2017, according to reports in the FT. We highlighted the bottoming process in Brazil in our April 2017 newsletter, when we juxtaposed the contraction in consumer lending and declining retail sales in the country with the fiesta in Mexico. If one were fishing for a macro long-short idea, this might be one place to look for pairs.

More to the point, we expect some large Brazilian funds to come to market in 2018. Will investors commit, or take a pass?

Not Interested

“Emerging market interest remained low this year.”

So concludes Probitas Partners, the global placement advisory firm, in its Private Equity Institutional Investor Trends for 2018 survey (n=98). Emerging markets are one of the least attractive segments within global private equity, with only 9% of respondents planning to focus their attention on EM this year (see below).


Managers in EM just are not a priority.

Within EM, surveyed LPs find China, India, and Southeast Asia most attractive, while ~15% of respondents express interest in LatAm and Brazil. Notably, 38% of respondents report that they do not invest in EM.

The full survey is available at this link (registration required).

From the Bookshelf

There are Croakers in every Country always boding its Ruin.

— Benjamin Franklin, Autobiography (Oxford World’s Classics: 1993).

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The information presented in this newsletter is for informational purposes only. Portico Advisers does not undertake to update this material and the opinions and conclusions contained herein may change without notice. Portico Advisers does not make any warranty that the information in this newsletter is error-free, omission-free, complete, accurate, or reliable. Nothing contained in this newsletter should be construed as legal, tax, securities, or investment advice.

Copyright © by Portico Advisers, LLC 2018, all rights reserved.

Does EM PE Scale? | Dec 2017

Does the emerging markets private equity asset class scale?

No. I don’t believe it does.

In fact, I think the absorptive capacity of EM PE / VC is as low as $16 billion in new flows per year, compared to the $40 billion in fundraising we’ve seen on average since 2011. At least, that’s my finding in Portico’s most recent research piece: Does the Emerging Markets Private Equity Asset Class Scale?

The inspiration for this think piece comes from Fred Wilson, co-founder of Union Square Ventures, who wrote a fascinating blog post in 2009 on “The Venture Capital Math Problem.” If you haven’t read it, you should. In it, Fred concluded that the volume of exits in U.S. venture right-sized the industry between $15 billion and $17 billion in flows per year, remarkably similar to the conclusion I reached.

While this piece isn’t likely to win me many friends, I hope that it provides some food for thought, and that it sparks some lively conversations. I’d love to hear your feedback!

A humble request. We’re trying to grow our (monthly-ish) newsletter’s audience in 2018. If you enjoy this newsletter and / or know someone who would, then please feel free to share it with them. It’s free to sign up for future issues at, while previous editions are available here.

For each new (human) subscriber we get between now and 30 December, we’ll make a donation to Room to Read, a nonprofit active in Africa and Asia that focuses on literacy and gender equality in education.

Happy holidays to you and yours, and best wishes for health and happiness in 2018.

Alla prossima,

Mea Culpa

A mea culpa is in order. In last month’s newsletter, I (somewhat cheekily) called out IFC for committing $25M to Carlyle’s $5B Asia Partners V; it was actually to their ($1B target) Asia *Growth* Partners V. Sloppy mistake. I apologize. Thank you to the discerning reader who noticed my error and called me out on it.

That said, I still don’t understand why IFC is funding a fifth-series Carlyle fund. According to IFC’s disclosure of the commitment, as of 31 December 2016, Carlyle held approximately $158B in AUM. This figure is ~70% greater than IFC’s total assets, ~4x the value of IFC’s total investments, and nearly 12x the value of IFC’s equity investments (as of 30 June 2017; see IFC’s consolidated balance sheets at this link).


KKR Quits Africa

We’ve dedicated a decent number of pixels in our newsletters to the issue of large-cap deal flow in Africa. Late last month, KKR decided to disband its Africa team for good. Several of the team’s dealmakers left earlier this year, in part, it seems, because they were investing out of KKR’s European fund and were losing out to French, German, etc. deals in IC meetings.

But a KKR spokesman breaks it down pretty plainly: “To invest our funds we need deal-flow of a certain size. It was especially the deal-size that wasn’t coming through.”

Invariably, KKR’s spokesman continues, “There was enough deal-flow at a smaller level.”

The Power of Compounding

Albright Capital recently released an enjoyable piece on “The Power of Compounding” in an EM portfolio. The firm compares the returns that three hypothetical long-only investors would have received from the MSCI EM, based on their (in)ability to time the market.

It’s an original thought experiment with results that might surprise you.

Will Robots Disrupt Private Equity?

McKinsey Global Institute released its analysis of the impact of automation on jobs. They estimate that “up to 375 million people may need to switch occupational categories” by 2030, with up to one-third of the U.S. and German workforces—and half of Japan’s—needing to learn new skills and pursue new occupations.

Will “private equity investor” be one of these disrupted occupations? Could robots do a better job at allocating capital? Given the recent performance figures, at least in EM, one could be forgiven for thinking so.

There’s an alluring argument that private markets are less ripe for disruption than public markets: not only is there less data available, but also the manager can apply sophisticated judgment and hard-earned pattern recognition skills to source proprietary deals, construct a quality portfolio, and create value.

I’m not entirely convinced. Consider an analysis from Dan Rasmussen of Verdad, who, whilst at Bain Capital, examined 2,500 deals representing $350 billion of invested capital:

About one-third of the deals analyzed accounted for more than 100% of profits (no surprise there) and the majority of the deals in the sample fell well short of the forecasts built into the financial models. The biggest predictor of whether a company would be a big winner or not was the purchase price paid. The dividing line seemed to be 7x earnings before interest, taxes, depreciation and amortization (EBITDA). When PE firms paid more than 7x EBITDA, their chance of success plummeted — regardless of how much managerial magic they threw at it. The 25% of the cheapest deals accounted for 60% of the profits. The most expensive 50% of deals accounted for only about 10% of profits.

In other words, all the fancy analysis and financial models performed worse than the simple rule “buy all deals at less than 7x EBITDA” [emphasis added]. A simple quantitative rule worked better than expert judgment.

I was recently speaking with Abby Phenix—formerly of Advent International, now assisting PE firms with customer due diligence—and we ended up riffing on this topic for a bit. In the past, she raised some thought-provoking points about the automation prospects for manager selection (think funds of funds) and investment analysis (think associates), which could enhance productivity and reduce costs (think management fees).

What is it that investors want? Cost-effective exposure to the investable asset or the privilege of paying fees to the middleman?

Is it Possible to Short Graduate Schools?

This statistic surprised me: the stock of U.S. student loan debt ($1.3 trillion) is now equal to the size of the U.S. junk bond market. Astonishing.

Estimates from The New America Foundation suggest that upwards of 40% of this is tied to graduate school debt. If I could short the graduate education market directly, I would.

Consider that in 2012, 25% of graduate students were burdened with at least $100,000 of student loan debt. Meanwhile, in 2016, the median incomes for master’s degree holders in the United States were roughly $80,000 for males and $58,000 for females. The math doesn’t work, prospective students know it, and there’s a broad-based slowdown in applications (see below).


Effectively, the market for graduate education experienced a debt-financed positive demand shock, universities expanded supply, and now there is a negative demand shock. Schools will need to cut tuition and take a hard look at which costs can be cut.

If you’re keen to learn more about just how much of a mess this is, I wrote a piece about this on my personal blog (source of the exhibit above).

Lots of data. Lots of charts. Oodles of other content.

From the Bookshelf

I returned, and saw under the sun, that the race is not to the swift, nor the battle to the strong, neither yet bread to the wise, nor yet riches to men of understanding, nor yet favour to men of skill; but time and chance happeneth to them all.
(Ecclesiastes 9:11)

For what is a man profited, if he shall gain the whole world, and lose his own soul?
(Matthew 16: 26)

The Bible: Authorized King James Version (Oxford World’s Classics: 2008).

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The information presented in this newsletter is for informational purposes only. Portico Advisers does not undertake to update this material and the opinions and conclusions contained herein may change without notice. Portico Advisers does not make any warranty that the information in this newsletter is error-free, omission-free, complete, accurate, or reliable. Nothing contained in this newsletter should be construed as legal, tax, securities, or investment advice.

Copyright © by Portico Advisers, LLC 2017, all rights reserved.

Dumb Money | Nov 2017

In last month’s newsletter, I mentioned that I would be speaking at a conference with a bunch of LPs on the topic of “Global Markets for Buyouts and VC”. I closed saying, “Here’s hoping for an interactive, no-holds-barred session.”

Suffice it to say that my hopes materialized. While discussing the performance of EM PE, one LP said:

The issue with emerging markets is these funds have often been growth equity with minority stakes. The teams have been heavy on investment bankers who don’t know how to do deals. In emerging markets, private equity is the dumb money.


Another discussion revolved around whether EM PE is in a cyclical downturn or a structural one. LPs’ commitments are generally pro-cyclical and many herd into markets / strategies at the same time, with predictable results. If so, then—ceteris paribus—the trickle of capital flowing to EMs (apart from mega-cap Asia … more on that below) may well signal a cyclical bottoming. As one conference delegate argued, now would present an optimal time to adopt a contrarian strategy and lean into EM PE.

Two brief rejoinders: First, this is not what LPs are saying they’ll do:

LP Sentiment

Second, this just isn’t how private markets work. Even if you wanted to do so, you can’t buy the index. You have to choose a manager.

Industry cycles and macro need to be disentangled. With that in mind, my view is that the quality of the managers in the market at a given time drives flows more than macro. The nuance is that fundraising is a bit of a coincident indicator: the managers with whom LPs wish to invest frequently come to market (a) at the same time; and, (b) when investor sentiment toward the jurisdiction in question is hot.

Alas, I’m still in the camp of this being a structural downturn. A few reasons I’ve pondered this week include:

  1. “Dumb Money”!
  2. David Swensen’s recent remark that “the breadth of emerging markets that we were interested in 20 years ago has narrowed dramatically.”
  3. DFIs, which historically have supported the development of the industry, are increasingly committing to later, larger funds.
  4. The ongoing emergence of local, non-PE investors that don’t face the same return hurdles / horizons creates greater competition for quality deals.
  5. Tech is disrupting everything; in markets with fewer, ephemeral exit channels, this is a big problem.

More importantly, Happy Thanksgiving to you and yours. One of the great bits of having a toddler is that I’m reminded daily that I have a blessed life. Thank you for being a part of it, and for welcoming this newsletter into your busy day!

Alla prossima,

The Great Wall of Capital

Fundraising for buyouts in Asia is robusto:

Seven funds. $34 billion. There are others.

That is a lot of granola; it’s on par with the aggregate hauls for EM PE funds in each of the last two years.

In other news, KKR inked a deal this month with Great Wall International to bring leveraged loans to China. There’s a joke in here about Barbarians at the Gate, but I’ll stop.

LP Views on Latin America

LAVCA teamed up with Cambridge Associates for the second time on their annual LP opinion survey. There are some interesting findings the study, such as the discovery that 53% of LPs considering a first investment in Latin America view currency volatility as the biggest impediment to investing in the region. (Recency bias?)

My favorite exhibit explores LPs’ preferred means of accessing LatAm:


  • Most LPs plan to access LatAm via pan-regional funds
  • Brazil is the country of the future …
  • Proportionally, more Latin American LPs expect to access LatAm PE via global funds than international LPs (statistically insignificant, but the fact that they’re close strikes me as interesting)


The societal parasite that is Facebook is entering the small business lending space, starting with merchant cash advances. This is a fairly fascinating development. The company has already effectively become the Internet for a large number of people; will it become a lender of first resort for small businesses? Given the vast swathes of data that Facebook collects, one might surmise that they could develop an edge in credit scoring that could benefit businesses with lower rates and Facebook with a large loan book. My interest is piqued.

In related news, EMPEA’s Q3 data show that capital invested in fintech companies through September ($416M) has already exceeded last year’s total ($379M). Aggregate fintech deal value is on track to match or exceed those for 2014 ($470M) and 2015 ($509M).

Turkey Resurgent?

Every so often, a leader steps up and makes a bold pronouncement, and market sentiment shifts. Think of Warren Buffet going long Goldman in the depths of the crisis, or Jamie Dimon plunking $26 million of his own cash on JPM shares in February 2016 (now up ~70%).

Has Seymur Tari of Turkven made a gambit to shift opinion in Turkey? Following a summer IPO of jeans retailer Mavi, Tari appears to be getting bulled-up on the market. Last month, Tari announced that the firm plans to list Medical Park Group in an offering that could fetch $1B. (Maybe?) Moreover, Turkven is planning to execute “three to four acquisitions of $50-400 million each in 2018 … and to start a new fund of more than $1 billion in one or two years,” according to Reuters.

I admire the verve. Turkey has been in the doldrums, and local business and consumer sentiment has been in a downtrend for seven years (see below). Is the tide turning?


From the Bookshelf

The quality of ideas seems to play a minor role in mass movement leadership. What counts is the arrogant gesture, the complete disregard of the opinion of others, the singlehanded defiance of the world.

Charlatanism of some degree is indispensable to effective leadership. There can be no mass movement without some deliberate misrepresentation of facts.

— Eric Hoffer, The True Believer (Perennial: 1966).

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The information presented in this newsletter is for informational purposes only. Portico Advisers does not undertake to update this material and the opinions and conclusions contained herein may change without notice. Portico Advisers does not make any warranty that the information in this newsletter is error-free, omission-free, complete, accurate, or reliable. Nothing contained in this newsletter should be construed as legal, tax, securities, or investment advice.


Copyright © by Portico Advisers, LLC 2017, all rights reserved. 


Super Sized | Oct 2017

Earlier this month I spoke with an MD at one of the largest private markets advisory firms about the landscape of managers in EM. While discussing the consolidation of capital in fewer, larger EM funds, he raised the question of whether this dynamic is a function of greater distributions from these funds.

While the data were too close to call in The Mid-Market Squeeze (DPI of ~0.5x across fund size segments), I decided to run a fresh analysis incorporating greater granularity on fund size and vintage year. The figure below shows that EM funds >$1B (orange) are not reliably distributing cash at higher rates than smaller EM funds (shades of blue). In addition, they are generally underperforming their >$1B peers in Asia, Western Europe and the United States (shades of grey).


All in all, I’m not convinced that distributions from larger funds are driving industry consolidation. That said, analyses based on Cambridge Associates’ benchmarks do have their limitations. A fund-by-fund analysis may very well tell a different story.

In any event, this is one of several topics I’m looking forward to discussing next month in a closed-door session with ~100 LPs at the Private Equity Research Consortium Conference. I’ll be on a panel exploring “Global Markets for Buyouts and VC” with Professor Steven Kaplan from Chicago Booth, as well as representatives from Warburg Pincus and Adams Street Partners. Here’s hoping for an interactive, no-holds-barred session.

Alla prossima,

Indonesia’s First Startup IPO

Last month’s newsletter asked the question: Who Will Make Money in EM Venture? This month, we learned that Indonesia’s first IPO by a startup was … not venture backed.

“The path that startups take is normally to look for venture capital, angel investors and so on … We feel that by taking the IPO route, that’s the method that is the most fair and transparent,” said Jasin Halim, CEO of O2O e-commerce firm Kioson. Throwing shade on VCs, he continued, “Let the market value our company.”

And so it did, at an issuance price of IDR300 / share with a book that was 10x oversubscribed. It promptly proceeded to shoot the moon.

Regulators stepped in and temporarily halted trading this Tuesday (16 Oct.) to allow for a “cooling off” period. It resumed trading on Wednesday and closed at IDR2,650 / share. #9bagger


If the valuations for startups that go public trade at a premium to those held in private hands, Indonesia may be in store for a redux of the pre-IPO craze that hit China a few years back: alchemy in the form of public-private multiple arbitrage. The China parallel is a sentiment I heard from VCs in Jakarta over the summer, and though I’m always skeptical of comparisons to China, this is a space worth watching.


The PwC / CB Insights Q3 data are in and SoftBank, managers of the $93 billion Unicorn Bailout Fund—sorry, Vision Fund—took the top three spots on the league table for largest deals in the United States, and the top four spots on the league table for the largest global deals (Grab, WeWork, Flipkart, Roivant Sciences). And they’re just getting warmed up!

In other news, last month SoftBank placed a $20 billion bond sale (in 7- and 10-years), with the 10s priced at 5.125%. Market participants’ comments in the FT’s write-up of the sale should be preserved for future historians so that they fully appreciate the degree to which, in 2017, all caution had been thrown to the wind:

Everyone is asking the same question: what am I investing in here? Am I investing in a company’s operations or am I providing unsecured financing to fund equity contributions to the Vision Fund?

My view is that bond investors are thoroughly unimpressed, but they’re being sucked in by the price. I find the whole structure of the Vision Fund completely perplexing, but as it’s my job to make money, we were in the [order] book.


(SME) Death and Taxes in India

Saurabh Mukherjea of Ambit Capital is a bit of a downer on the impacts of New Delhi’s economic reforms on India’s (relatively unproductive) small businesses:

My reckoning is that for a substantial number of SMEs, their margin was tax evasion. As the government steps up forcing people to comply with GST, a lot of small businesses that managed to stay in the shadows will find themselves sucked into the tax net. Either their profitability will be vastly diminished — or it will go away completely.

How many companies globally would lose their margin if they actually paid taxes? I wonder.

Heavy Stuff

Last month the New York Times ran a provocative piece tying Nestlé to the rise of obesity in Brazil, which they followed up with an in-depth article on KFC in Ghana [full disclosure: Mike is a shareholder of NYT]. Regardless of one’s views on who / what is culpable for the deteriorating health of Brazilians and Ghanaians, (I mean, processed foods are certainly part of the problem), the fact is that Brazil and Ghana are not exceptions: lifestyle diseases are increasing rapidly across the emerging markets.

To wit, obesity rates are skyrocketing in each EM region (see below for a sampling). In China, the number of obese adults (≥ 30% body mass index, or BMI) has compounded at 9% since 1976, growing from ~3 million to more than 80 million, while the number of overweight adults (≥ 25% BMI) grew 7x over the period to nearly 400 million. There are more overweight adult Chinese than there are people in the United States and Canada combined. Astonishingly, on a global basis, the number of obese children and teenagers has increased 10-fold over the last 40 years.


In a similar vein, the number of deaths due to diabetes is growing rapidly. While roughly 62,000 people in Europe and the United States died from diabetes in 2015, representing a 6.4% increase on the figure for 2000 (entirely driven by Americans), nearly 600,000 died across EMs, representing a 64% increase over the same period (see below).


It’s not solely multinationals that are driving the ubiquity in unhealthy eating habits and processed foods. Private equity firms have been enablers of these trends, tapping into the “emerging consumer” through deals in FMCG, quick service restaurants (QSR), etc. For example, Thomson Reuters data show PE firms have invested in 61 EM QSR companies over the last decade.

That said, you can’t say PE firms aren’t also investing in potential solutions—GPs inked twice as many deals (138) in hospitals and clinics over the same period. Nevertheless, one wonders about the firms that are “investing across the lifecycle”—selling obesity-inducing foods to local populations on the front end, and lifestyle disease solutions on the back end. A fairly perverse way of creating demand where none should exist, no?

From the Bookshelf

In the West, and among some in the Indian elite, this word, corruption, had purely negative connotations; it was seen as blocking India’s modern, global ambitions. But for the poor of a country where corruption thieved a great deal of opportunity, corruption was one of the genuine opportunities that remained.

— Katherine Boo, Behind the Beautiful Forevers (Random House: 2014).

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The information presented in this newsletter is for informational purposes only. Portico Advisers does not undertake to update this material and the opinions and conclusions contained herein may change without notice. Portico Advisers does not make any warranty that the information in this newsletter is error-free, omission-free, complete, accurate, or reliable. Nothing contained in this newsletter should be construed as legal, tax, securities, or investment advice.


Copyright © by Portico Advisers, LLC 2017, all rights reserved. 

Status Update | Sep 2017

It’s an exciting time at Portico as we mark our first anniversary in business. It has been a great year professionally and personally. I’m grateful to all of you who opened your doors for a meeting, picked up your phones when I called, shared our research with colleagues, and last but certainly not least, engaged us as a client. Thank you!

It ain’t an easy road, entrepreneurship. I underappreciated both the amplitude and frequency of the journey’s highs and lows before I got underway, but it is genuinely gratifying to wake up each day and create something of value for other people.

The best part of this endeavor is demonstrating to my son, through actions rather than words, that he should never be afraid to assume some risk and pursue the life of his choosing.

A few highlights from year one:

  • We assisted our clients through a variety of engagements, including strategy, fundraising, marketing documents and materials, pitchbooks, AGMs, custom research, and transaction advisory.
  • Portico released two original research pieces—Is Emerging Markets Private Equity Dying? and The Mid-Market Squeeze—which have been viewed over 1,000 times, and opened doors with firms we’d not yet met. Thank you again for reading and sharing!
  • We’re profitable with zero debt. At the outset of this adventure, I set a revenue target for December 2017. We beat it within 12 months of launch. Clear takeaway: aim higher and *get after it.*

All in all, it’s a great start out of the blocks, but we’re focused on staying humble, staying hungry, and identifying ways that we can deliver more value to our clients in the year ahead. I hope you’ll share the journey with us.

Alla prossima,

The Societal Parasite that Is Facebook

Speaking of Status Updates, John Lanchester has a superb article in the LRB (“You Are the Product”) on the societal parasite that is Facebook. Lanchester’s article came out before the NY Times [disclosure: Mike is a shareholder] revealed the company’s role in facilitating the information operations that influenced the U.S. election. (Oops!)

Frankly, the entire tech sector is overdue for greater regulatory scrutiny and enforcement. Whether it’s Airbnb, Alphabet (fka Google), Amazon, Facebook, or Uber, the laundry list of unpaid taxes, unethical conduct, and outright illegal activities never fails to astound. Firms active in emerging markets often speak about a “social license to operate.” At what point do these firms’ licenses get revoked?

Parenthetically, will Uber be the biggest write-off in the history of venture capital?

On a related note, we’ve mothballed Portico’s Twitter account. It’s a channel that doesn’t deliver value for the company, so we will not spend energy on it.

Who Will Make Money in EM Venture?

Henry Nguyen of IDG Ventures Vietnam made some thought-provoking comments at an AVCJ event in Ho Chi Minh City a few months ago. In a nutshell, he noted that the tech giants—Alibaba, Alphabet, Amazon, Facebook, and Tencent, among others—have radically transformed the venture ecosystem. Not only are these companies scouring the same landscape for deals as VCs, but they’re also doing so with the advantages of: 1) a longer time horizon; and, 2) a lower cost of capital.

These seem like … insurmountable advantages for an investor?

Intuitively, this might leave some space for early-stage investors to front-run their later stage and corporate venture peers; but, I do wonder.

What I don’t wonder about: whether entrepreneurs will build great companies, or whether economic value will be created. These are certainties. The question is: who will capture the value?

I suspect a number of LPs in EM venture funds are asking themselves the same question. Having seen individual deals rocket in value, LPs are seeing appetizing write-ups on paper, but they remain hungry for realizations (see below).

Mind the Gap

This World Awash in Capital

Consider the following. Since 2006:

We have been living amidst a transition from a world in which financial capital was relatively scarce to one in which it has become abundant. Bottlenecks remain, of course, and there’s ample room to expand access to finance for productive enterprises, particularly in our geographies. Nevertheless, this development has profound implications, and I’ve been pondering a few thoughts as of late:

  • Corporations are asset managers. Thirty U.S. companies hold more than $800 billion of *fixed income* investments. This sum is greater than the combined AUM of Blackstone, Apollo, KKR, and Oaktree.
  • Passive investing is a freight train. If capital is becoming commoditized, why should managers earn excess fees for investing it? Investors are voting with their feet en masse, with upwards of 40% of AUM now managed through passive vehicles. Vanguard’s AUM hit $4.4 trillion in the first half of 2017 (up from ~$1.6 trillion as of year-end 2011).Prices go up when there are more buyers than sellers. Therefore, in a world awash in capital, the biggest driver of performance is fund flows. If flows are channeling into ETFs and index products, then active managers that don’t buy the index will have a hard time outperforming, let alone justifying their fees (and most of them aren’t worth the fees to begin with). The passive trend is likely to end in tears, with a resurgence in fundamental-driven investment one day; but this freight train is leaving destruction in its wake.
  • There is a scarcity of assets. The stock of quality, publicly available, investable assets is not keeping pace with the growth in global savings. To take one example, the number of publicly listed domestic companies in the United States has declined by 46% over the last two decades. Or, consider the rapidly growing pension schemes across emerging markets, whose asset bases are growing faster than investment managers can find places to invest it prudently.The relative scarcity of investable products leaves markets prone to bubbles and the misallocation of capital. The rise of passive investing and ETFs only exacerbates this problem.
  • Private markets hold opportunity. Given their inherent inefficiency, private markets are likely to remain an attractive place to deploy capital (though not necessarily via traditional LP-GP structures). Technology-based platforms already exist to intermediate private transactions within the United States, and we should expect these to develop globally, as owners of capital climb further out the risk curve and get more hands-on with co-investment and direct investing.
  • U.S. housing is a political time bomb. The stock of housing is neither keeping pace with the growth in population, nor accounting for the impact of cross-border flows on housing supply.For example, foreign buyers accounted for 10% of the value of existing U.S. home sales between April 2016 and March 2017, and they’re increasingly buying houses that are out of reach for most Americans. To wit, the average price for all U.S. home purchases grew at a CAGR of 5% from 2010-2017. Meanwhile, the prices paid by foreign buyers grew at 8%, and those by Chinese buyers grew at 10%s. Moreover, while 50% of Americans can’t afford a down payment and 30% can’t secure a mortgage, 72% of non-resident foreign buyers paid all-cash (see below).


From the Bookshelf

The world is always full of the sound of waves.

The little fishes, abandoning themselves to the waves, dance and sing and play, but who knows the heart of the sea, a hundred feet down? Who knows its depth?

— Eiji Yoshikawa, Musashi (Kodansha International: 1995).

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The information presented in this newsletter is for informational purposes only. Portico Advisers does not undertake to update this material and the opinions and conclusions contained herein may change without notice. Portico Advisers does not make any warranty that the information in this newsletter is error-free, omission-free, complete, accurate, or reliable. Nothing contained in this newsletter should be construed as legal, tax, securities, or investment advice.


Copyright © by Portico Advisers, LLC 2017, all rights reserved. 

The Mid-Market Squeeze | July 2017

In recent months, I’ve enjoyed some great conversations with individuals who have welcomed a frank discussion of the EM PE industry’s challenges. One recurring topic of conversation is the imbalance between supply and demand for capital for PE funds operating in the lower- and mid-market segments in EMs.

The hollowing out of mid-market funds animated my decision to found Portico, and it served as the impetus for our EM Mid-Market Survey, which we conducted in May. I am pleased to announce the release of Portico’s second research piece, The Mid-Market Squeeze, which shares findings from our survey.

We undertook this project with two objectives in mind: (i) to test our hypotheses for the supply-demand imbalance; and (ii), to illuminate potential paths toward solutions.

Most of our hypotheses were affirmed, in whole or in part, but the report’s overarching finding is that the declining number of EM mid-market funds is more than just a funding gap, it is a symptom of industry-wide problems. Our survey reveals four drivers for the mid-market squeeze:

  • Macroeconomic developments in EMs are not the reason why LPs aren’t committing to mid-market PE funds; it’s the failure of EM PE funds to deliver returns.
  • There is an acute funding gap for EM PE funds smaller than $100 million in size.
  • Development finance institutions are walking away from smaller EM PE funds, and investing with larger, more established firms. Moreover, their preferred ticket sizes are in the sweet spot of where commercial LPs prefer to play.
  • Institutional investors lament the lack of transparency in the EM PE industry.

The report offers a few thoughts on potential solutions to the mid-market squeeze, and prognostications on the road ahead. I invite you to click the button below to download a copy of the report. Please feel free to share it with colleagues, and of course, all feedback is welcome.

Finally, thanks go out to the 76 industry professionals who participated in this survey, as well as the winner of our prize drawing—a representative from an Asia-Pacific sovereign wealth fund—who selected the donation to UNICEF.

Alla prossima,

Indonesia: So Hot Right Now

Having freshly returned from a trip through Southeast Asia, I was interested to see KKR’s Henry McVey release a new report on Indonesia, stating:

Indonesia has one of the most compelling stories that we see … and unlike in past trips, we are now confident stating that we think Indonesia is harnessing its potential into near-term economic and investment realities.

The macro is certainly compelling, and there are reasons to be optimistic (not least the forthcoming rail line connecting the airport with downtown).

I agree with McVey that “public market indices are often not the appropriate investment vehicles to actually gain access to compelling GDP-per-capita stories;” and based on my own meetings in the country, I share McVey’s conviction that there are attractive tech opportunities in private markets (see charts below). KKR is actively pursuing this thesis, having invested alongside Capital Group Private Markets, Farallon Capital Management, and Warburg Pincus in the local ride-hailing / transportation company GO-JEK last year.

Still, translating the macro into compelling investment returns requires deft navigation. One dynamic working in mid-market managers’ favor is the general scarcity of capital; there is less competition for deals from other financial sponsors in this segment, though local families and investors play an important role in the private markets ecosystem. The game changes once tickets climb north of $100m, where a large volume of PE capital is searching for deals.


Coffee Talk

In our April newsletter we highlighted the rise of secondary buyouts as an exit channel in Africa, and there’s big news from ECP portfolio company Nairobi Java House. Abraaj won the auction for the company, which reportedly drew 12 non-binding bids (including from Carlyle and TPG). Abraaj shall take full control of the company, which includes two additional franchises: Frozen Yoghurt and 360 Degrees Artisan Pizza. By my count this is Abraaj’s third secondary buyout in Sub-Saharan Africa out of four deals since 2014 (Mouka from Actis in 2015, Libstar from Metier in 2014).

While Abraaj has some experience in the QSR segment (Kudu in Saudi Arabia), and I’m curious about potential synergies with its investments in Brookside Dairy, Fan Milk, and Libstar, the firm has its work cut out for it. I struggle to think of an East African firm that has been able to achieve pan-African scale.

One experienced advisor in the region tells us:

The pan-African strategy is very difficult to execute due to: (a) the small size of most of Africa’s 40+ markets, which means you’re spreading the fixed costs of market entry across a small customer / revenue base; (b) the high cross-border costs of trade, which makes supply chains expensive to run; and (c), the economic, regulatory, and cultural differences between East, West, and Southern Africa. The difficulties cut in every direction.

While Ecobank is a partial exception (it has a long way to go to become a consolidated, sustainable business with deep insight into all of its local markets), the failures are numerous. For example, United Bank of Africa, which has met success in its home market of Nigeria, got burned in Kenya. South African retailers, such as Shoprite and Massmart, have struggled to gain traction north of the Limpopo.

The general lesson I draw is that African markets do not have a broadly even playing field. Any attempt to expand beyond one’s own region will only work if you make a massive investment, and you bring in heavy hitters with political influence. A more sensible strategy is to aim to become the number one player in your region rather than overstretching by seeking a continental presence.


Will Private Equity Build Africa’s Manufacturing Sector?


The FT recently ran a comment piece imploring PE firms to drive the development of Africa’s manufacturing sector. Private equity can deliver—and has delivered—powerful developmental impacts in Africa. For example, an impact assessment of CDC Group plc’s Africa fund investments between 2004-12 shows direct job creation of 40,500 positions and a $600 million increase in taxes paid. I’m a believer in the potential of the asset class to deliver dignity in EMs; however, some of the author’s overzealous assertions bear some scrutiny:

Private equity has largely ignored investment in African manufacturing and industrial projects. [EMPEA] data show that 23 PE firms have made only 53 investments in the industrials sector in Sub-Saharan Africa since 2008.

PE firms have not ignored African manufacturing companies. First, by excluding deals in manufacturing companies outside of the industrial sector (e.g., consumer durables, food and beverage), the data understate the volume of investments that have been made in manufacturers.

Second, how many manufacturing companies are there in Africa? Within the industrials sector, according to Thomson Reuters Eikon there are only 57 private African companies generating between $50m and $500m in revenue.

Middle market funds, in particular, have an enormous opportunity to unlock potential in this sector. Doing so will … create value for investors by creating a robust deal pipeline with attractive exit opportunities …

Maybe? There have been—and will be—some excellent returns from manufacturing deals in Africa; but has the traditional EM PE model created value for investors?

According to Cambridge Associates’ African Private Equity & Venture Capital Index, the 10-year horizon pooled return is 4.51%, and the pooled return has not exceeded 5% over any multi-year period. This may be a function of the constituents in Cambridge’s database—Ethos, for example discloses a USD gross IRR of 20% since its third fund—but the pooled return suggests investors are taking on equity risk + country risk + illiquidity, and receiving 200 basis points over 10-year Treasurys.

With this return profile, why should pensioners, endowments, and foundations be subsidizing African industrial policy?

On a related note, McKinsey Global Institute released a fascinating report on Chinese investment in Africa that shows who is likely to drive the growth of manufacturing on the continent: Chinese firms. McKinsey estimates that there are more than 10,000 Chinese firms operating in Africa—3.7x more than previously estimated—and nearly one-third of them are in the manufacturing sector (generating ~$60 billion in local revenue, with 12% market share). Says McKinsey:

In sectors such as manufacturing, there are too few African firms with the capital, technology, and skills to invest successfully and too few Western firms with the risk appetite to do so in Africa. Thus the opportunities are reaped by Chinese entrepreneurs who have the skills, capital, and willingness to live in and put their money in unpredictable developing-country settings.

In the Beach Bag


I don’t know if these are the books I’ll end up reading, but here’s what I’m planning to pack for the beach this year:

  • Business Adventures, by John Brooks
    The “best business book” say Warren Buffett and Bill Gates.
  • Evicted: Poverty and Profit in the American City, by Matthew Desmond
    Most Americans are one accident away from financial ruin: 25% can’t pay their monthly bills in full, and 44% can’t meet a $400 emergency expense. Desmond’s book looks at the precarious state of Americans’ living situations. In Milwaukee, for example, “a city of fewer than 105,000 renter households, landlords evict roughly 16,000 adults and children each year.”
  • The Devils of Loudun, by Aldous Huxley
    I quite enjoyed Huxley’s Grey Eminence, which chronicled the life of Father Joseph—advisor to Cardinal Richelieu and advocate of policies that led to the Thirty Years’ War—so I thought I’d return to the trough for his take on mass hysteria and witch hunts in 17th-Century France.
  • The Demon in Democracy: Totalitarian Temptations in Free Societies, by Ryszard Legutko
    A Polish freedom fighter contemplates the similarities between liberal democracy and communism.
  • Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages, by Carlota Perez
    A recommendation from Marc Andreessen.
  • The Thirty Years War, by C.V. Wedgwood
    With talk of the Westphalian system’s decline, why not read Dame Wedgwood’s classic for a refresher on the madness that led to the peace?
  • Musashi, by Eiji Yoshikawa
    A novel chronicling the life of the infamous samurai, and teacher of bushido, Miyamoto Musashi.

From the Bookshelf

I have given up newspapers in exchange for Tacitus and Thucydides, for Newton and Euclid; and I find myself much the happier.

— Thomas Jefferson, letter to John Adams, 21 January 1812 (Monticello, Virginia).

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