RENEW Strategies

A Buffett-Like Approach to Investing in Africa

alt text
Matthew Davis, CFA
| July 5, 2016

There are great companies on the continent of Africa to invest in. And, while Africa is slowly recovering from decades of issues that have given it a less than stellar brand, thankfully that story is changing. Some of the fastest growing economies in the world are on the continent. Countries like Ethiopia, which still has some issues, has a relatively stable government, improving infrastructure, and a young and growing workforce. This growth has attracted investors with a number of different strategies. Some are searching for deals in Silicon Savanah in Nairobi, seeking out the next big start-up and fintech companies. Others are repackaging philanthropy into impact investments – private sector solutions for poverty alleviation – things like innovative cook stoves and agriculture technologies. Even the aid agenda is changing; aid organizations are entering into the private sector game through what are commonly referred to as public private partnerships.

With all of this private sector and investment excitement, RENEW and the Impact Angel Network are choosing a more traditional approach to investing – what some might call a value-approach in a growth market. We are ultimately trying to follow an adaptation of what a young man from Omaha started using in the 50’s in the U.S., but doing it here on the continent of Africa.

FROM ADDIS TO OMAHA

What better place to learn about value investing, the approach perfected by the great Warren Buffett, than to travel to Omaha to meet the oracle himself. In late April, Laura Davis and I, on one of our whirlwind tours around the U.S. to meet with investors, stopped by Omaha for the now infamous Berkshire Hathaway annual shareholders’ meeting. The meeting has grown into a weekend packed with hours of hearing Warren and Charlie Munger speak to thousands of shareholders about their philosophy on investing, their thoughts on the current state of the market, and answer questions about Berkshire. It is also a great time to connect with other like-minded investors from around the world.

We joined up with the cohort from The Investor’s Podcast, led by Preston Pysh and Stig Brodersen. This group of value investors organized dinners, meet-ups and even a pub-crawl on the last night (we sadly had to miss that). And while the annual meeting felt like we were at the super bowl of value investing, Laura and I were certainly the odd-couple; we are not investing in public securities in the U.S. with low P/E multiples. We are investing in mid-size private companies in Africa. Which begs the question, why were we there?

The answer is that deep down RENEW believes one can take a Buffett-like approach to investing in Africa; and we’re setting out to prove that theory - we’re only seven investments in, and we still have decades of investments to go.

BUFFETT AND VALUE INVESTING

The investment world likes to categorize stocks and investors into types. A common category is growth and value. To over simplify, growth investors might follow and buy hot stocks, and hope they earn more in the future to compensate for the premium they paid over earnings. They like to get into new things; technology is a classic growth sector. Value investors, on the other hand, generally invest in established companies that are selling below their (intrinsic) value because of some negative event or an overall downturn in the market. Value investors like bargains; they hunt for opportunities that are undervalued. They patiently wait until the price is right before they buy. They are natural contrarians; when the market is up they might sell. When the market is down, they are likely buying companies they have been watching closely. Benjamin Graham is one of the greatest professors of value investing, and Warren Buffet, his greatest pupil.

In the mid-1950s Buffett started pooling money from friends and family, and using Graham’s value approach to buy “cigar butts” – companies that were selling at prices below their net current asset value. If they were to go under, Buffett could sell off their assets and make his money back with a good return. He later modified his approach with the help of his friend and now vice-chairman, Charlie Munger, to buying great companies at a good price. As Buffet is famously quoted, “Price is what you pay, value is what you get.” You want value to be higher than the price.

Value can be generally calculated as the sum of the company’s discounted cash flows over some period of time. Cash flow being what you, the investor, gets. The discount rate being a function of the opportunity cost of investing, or the risk of the investment. At heart, I am a value investor. On my bookshelf is ‘The Intelligent Investor’ by Benjamin Graham. On weekends I listen to ‘The Investors Podcast’, and in the early hours of the morning I pour over Buffett’s annual letters to his shareholders. While I am investing in growth stage companies in Ethiopia, I believe some of the core principles that Buffett and other value investors use, can be very effective on the continent. Here's how we do it.

VALUE INVESTING IN ETHIOPIA

First, find companies with good economics and an enduring competitive advantage. Finding these is not easy, but it is not rocket science either. With a little hindsight, one can look at a developed market like the U.S., find companies that have been around for decades, and then search for their counterparts here, in Ethiopia. Growth investors might be running after mobile banking and tech companies in Kenya; I am hunting for the next See’s Candy in Ethiopia.

Next, buy these companies at a good price. Thankfully, the law of supply and demand works in my favor. Due to a generally bad "brand" of poverty, corruption, disease and war, which still hangs over the continent today, much of the investment world drives right past the Africa investment market. Africa has 54 individual markets, some are middle-income countries and some are just starting to emerge. However, the world generally thinks of Africa as one place. What if we claimed that investing in Greece was the same as investing in Germany because both belong to the European Union? A similar range of market variation exists in Africa - South Africa is not Ethiopia, which is not Somalia, but the bad news of one country hangs over the others. The risks of one country impacts the others, and the investors keep driving right by. For me and other investors operating on the continent, this keeps competition low and allows us to buy good companies at a good price. I expect we will not enjoy this windfall for much longer, but for now the discount rate is high and the companies are on sale.

Finally, find great managers. This is where you separate the wheat from the chaff. You have to be here, to invest the time in relationships to get this right; and I don’t claim to be an expert. But if you don’t do this part, forget the rest. Finding a great manager is like finding a soulmate – it rarely happens on a barstool, and it definitely doesn’t happen in a hotel lobby. Get an apartment and spend the time.

As an investor, I also like to look at history, which makes identifying good companies easier. I look across the skyline of Addis Ababa, the capital of Ethiopia, which is littered with scaffolding and cranes and think this is what J.P. Morgan must have seen as he walked the streets of New York City in the early 20th century. I believe, if done right, RENEW, our investors and others can recreate the success that Buffett and other value investors did starting in the mid-1950s in the U.S., here in Africa. Some say that many economies here are 40 to 50 years behind the rest of the world. I say, great. I can model the legends that came before me. Now, let's find that candy company.


To find out more about RENEW or the Impact Angel Network, contact us at renew@renewstrategies.com, follow us on Twitter @RENEWLLC or find us on Instagram @impactangelnetwork.