RENEW Strategies

Part 6: How to Become an Impact Angel (Continued)

alt text
Matthew Davis, CFA
| June 12, 2012

A New Strategy for Africa and other Emerging Economies (Part 6): How to Become an Impact Angel (continued) - Building your Investment Infrastructure

Continuing with our series on a new strategy for Africa, we resume the steps to become an “impact angel” (read previous blog). Here we walk through Step 2: Building your investment infrastructure. It may be helpful to picture the investment infrastructure as three pillars supporting your impact investment activity in a country. These pillars are:

  • Pillar 1 – Real Knowledge: This includes gathering and understanding information on the ground, in the country in which you want to invest. You can get a pretty good understanding of “political risk,” inflation and market behavior by reading the reports published by international organizations. But to really understand specific market segments, the incentive programs for foreign investors, the commercial code, the basis of the legal system and the culture – you have to get on the ground. This could take between one month and years to develop. Gathering and understanding this information should be done on location, with some desk research mixed in. The cost may be high depending on the number of flights you make, and whether you can keep your in-country costs such as transportation and lodging low.
  • Pillar 2 – Legal Infrastructure: This incudes the setup and acquisition of your offshore entities (to improve tax efficiency), local legal entities (to isolate legal liability), foreign investment licenses, country appropriate term sheets and shareholder agreements, bank account(s), and the minimum required capital, depending on the sector in which you are investing. Getting the legal infrastructure in place could take from a few weeks to a few months, depending on your relationships and the experience of your legal team. The cost could run into the tens of thousands of dollars, not including the minimum required capital.
  • Pillar 3 – Network: This includes building a trusted network including friends, a great attorney, key government relationships (preferably at the ministerial level), accounting and consulting firms, banks, etc. These relationships often take years to develop. Getting your network in place is an ongoing job. It should not be rushed and will often take a number of repeated meetings in a variety of settings.

It could take years to develop your investment infrastructure. But don’t lose heart, it is possible and can be significantly shortened through a partnership with a firm that provides these services. You then must make sure you trust that firm! Again, do your homework.

Once you or your partner have an infrastructure in place, and you have acquired real knowledge about which sectors are profitable to invest in, you should begin looking for investment opportunities. The best opportunities will come through your network. Your network will help you conduct qualitative due diligence – do this first. Find out about the reputation of the business and the owner(s). Qualitative due diligence is an art, and takes time. But it could save you thousands of dollars on transaction costs.

Westerners in particular, must find a balance between investing their money in the first idea they encounter, and attempting to have everything in place as it would be in the U.S. or Europe (not possible in developing countries). When I first started RENEW, I spent a year traveling around the U.S. and Africa, just listening. I heard two very different stories. The first story was from the “jaded American.” It went like this.

The Jaded American: I invested in a small business in Africa, and it didn’t work! I trusted this guy. Knew him for years. He had an idea to build out a dairy farm. I wrote a check for $150K to help him get the materials and equipment he needed and provide working capital. It seemed like a good opportunity. I even visited his farm before I headed home. Things went smoothly for the first month or so. But then, after awhile, it got harder to get ahold of him. He disappeared. Finally, he got back to me after eight months explaining that a family member was sick, and that he needed more money. I said forget it!

Here’s the other story. This one I hear countless times in Africa.

The Sino-Africa: Ha, Americans investing in Africa? By the time I am done understanding all they want me to fill out and send them, a year AND the opportunity has passed. Your American friends come back with all these requirements and 100 page contracts. The Chinese are much faster. They see something they want. We agree. We write something up, and they invest their money. They have someone here working with me. Their meetings are very efficient, and they make us work hard. But it’s business.

What I have discovered is that the Chinese, Indians, Middle Easterners, Turks, Russians, Brazilians (etc.) either have, or know how to efficiently setup, investment infrastructure which they use to find, assess and close investments. They are patient and shrewd. On a daily basis, I observe our non-Western friends patiently waiting in lines at the Ethiopian Investment Authority, often for hours at a time, to get their licenses. They send their advance team over months, if not years, ahead of them to make sure they have their mobile SIM cards ready when they get off the plane. Their teams have learned the system and have all the necessary documentation prepare to avoid delays. When they are ready, they sign on the dotted line and get on with business. They don’t get frustrated or impatient about the bureaucracy. They see it as a part of doing business. The more business they do, the more they understand the process, and the easier it is for them to get the deal flow and, ultimately, the returns they want.

And this is exactly what RENEW is doing. We have spent years developing an investment infrastructure and have a pipeline of well-researched investment opportunities. We are the advance team. In our next post we will discuss how angels form an “impact angel” group. Please don’t hesitate to contact us with any questions renew@renewstrategies.com or follow us on Twitter @RENEWLLC.