Author: Lynk – lynk.global
If there is anything positive at all that could come out of the global pandemic, the year of 2020 has seen global capital allocators and asset managers moving to facilitate impact investing from just a concept to an integral part of their investment processes. The world has also begun to understand impact investments are not only about addressing environmental issues, but also improving people’s lives by increasing the supply of essential goods and services.
Currently based in Lagos, Adesuwa Okunbo Rhodes, founder and managing partner at Aruwa Capital Management, first became acquainted with the idea of impact investing 10 years ago when she worked as an investment professional at TLG Capital in London where she was involved in completing an investment in a local drugmaker in Uganda.
At the age of 30, Rhodes has been named an Agent of Impact, one of the Top 35 Women Moving Africa Forward, and launched one of the few women-owned and gender lens funds in Africa. Her mission is to close the US$58 billion SME funding gap in the continent, and generate returns while delivering positive social impact and measurable women empowerment outcomes.
When asked about how she makes sure Aruwa Capital actually enforces its preach, Rhodes says the fund only invests in companies that either provide employment opportunities to women or make products that empower women, and those aspects are assessed as early as during the due diligence process. After the investments are completed, Rhodes’ team also works with their portfolio companies to set targets such as doubling the percentage of women distributors in their value chain by the exit stage.
L: Lynk | A: Adesuwa Okunbo Rhodes
L: Adesuwa, you’ve spent a significant time of your career in London working as an investment professional at JP Morgan, TLG Capital and Lehman Brothers, what brought you back to Nigeria to begin your career as an impact investor?
A: I started understanding what impact investing was about ten years ago when I was an investment professional at TLG Capital. During my time there, we completed an investment in a local manufacturer of anti-malarial and antiretroviral drugs in Uganda. We ended up making returns of over three times on that investment. At the same time, this was the first WHO pre-qualified facility in Uganda, and our funding was able to help the company export to neighbouring countries in East Africa. So on top of the attractive financial return, we were also able to see the positive social impact that we were creating in terms of the access to basic and affordable medical drugs. So that was really the first time that I was able to see that intersection between profit and purpose.
Later on in my life, I got a call when I was sitting at my desk at JP Morgan and was invited to leverage my skills and track record to do work related to investing in businesses back home in Nigeria while contributing to poverty alleviation, access to essential goods and services, and women empowerment – which are also something that I care very strongly about.
It was a huge honour for me when ImpactAlpha named me as an Agent of Impact because through our investments at Aruwa, what we are aiming to prove is that as we unlock the potential of small businesses and women in Africa, there is such a seamless intersection between a strong financial return and positive social impact. The fact that the majority of the population in Africa has no access to electricity and water among so many other developmental challenges still to be overcome is one of the main reasons that brought me back home to Nigeria, and I want to use my skills and track record of investing to bring about the necessary changes.
L: From an investment perspective, what does the current business environment in Nigeria look like to you? There’s a good amount of SMEs in the country, do you see more consolidation in the future?
A: I think the SME segment in Africa is the most burgeoning segment for growth and innovation. SMEs make up over 80 per cent of employment across Africa, so they are really the bread and butter and the engine of the economy.
However, SMEs lack access to patient growth capital, and that’s one of the huge opportunities that we see because SMEs are not currently being funded by larger financial institutions. Banks are typically requiring very excessive collateral, they’re lending for a very short term, and also charging high interest rates. But SMEs that are rapidly growing need patient growth capital and growth equity to pass the inflection point of growth. So they typically have to raise internal cash flows or money from friends and family, which means they often hit a wall where it comes to meeting that next stage of growth.
We see a lot of interesting opportunities emerging from this COVID pandemic in local manufacturing, healthcare, agriculture, and technology. We still believe that there’s such a strong business case for backing small businesses in our markets because they are solving the most complex issues that we face on a daily basis. But right now, we need to focus on actually getting these SMEs to scale, so that they can grow beyond just their local borders. But we should also start to think about regional expansion and consolidation because there is such a huge opportunity in our markets for growth.
L: In a previous interview you did, you mentioned only two per cent of female entrepreneurs in Africa have access to capital. Why is that the case?
A: You’d be surprised that it’s not only in Africa that this phenomenon is happening. In the US, less than 0.2 per cent of VC funding went to Black female founders, and less than 2.5 per cent went to female founders in general. So it’s not really just an Africa problem, it’s a global problem that women remain underrepresented and underfunded.
There are many reasons for this. A lot of people point to unconscious bias because traditionally, men have been the ones leading the way in entrepreneurship. People say that women don’t know how to sell as well as men, I don’t think that’s true. But there are a lot of unconscious biases that are out there, which means that it’s so much more difficult for women to access capital.
A big focus for us is how we use our fund to change the narrative for women across all levels of society. One of the main reasons that I founded Aruwa is I struggled myself to raise capital from institutional investors. So I wanted to make sure that through launching a fund of my own, I would be able to provide female entrepreneurs with access to capital where they otherwise traditionally wouldn’t have access. I also wanted to change the narrative for other female fund managers who may have struggled to raise capital despite their track record and expertise.
So our strong belief is as we address those imbalances within the capital allocation ecosystem, we will be able to affect change within the gender gaps that we see in society as well. We are investing in products and services that cater to women because we see that as a very untapped segment, where women control 70 to 80 per cent of consumer spending. We are also investing in businesses that employ women in their workforce or in their value chain because data tells us that gender balanced teams improve profitability.
So we want to actually show through our fund that there is an unrealised alpha. I hope through investing in women or addressing gender imbalances within our portfolio companies, we can show the very positive effect in the forms of increased profitability, and reduced volatility and risk in addition to significant social impact. We’ll then be able to show institutional investors that they need to be backing more women as capital allocators in order to remain competitive. So that’s the cycle we’re trying to create.
L: Who have you invested in so far?
A: We’ve launched our US$20 million fund, and made a very successful investment in Nigeria which is a local manufacturer of personal hygiene products for women and infants. We are able to prove that we can make that seamless intersection of strong financial return, social impact and women empowerment through this investment.
As we do that over more investments, we will then have made an impact in our own small way in the ecosystem for women as capital allocators, consumers, entrepreneurs, and labor force participants, and change the narrative for women across all levels of society.
L: How do you, as a capital allocator, assess the potential and performance of small and medium sized businesses on the sustainability and diversity fronts while SMEs typically have less resources to establish ESG and diversity frameworks and policies?
A: A big part of our due diligence process is integrating gender, impact and ESG. It’s not something that’s an afterthought once we complete the investment, it’s something that’s integrated into our screening process, due diligence, and our portfolio monitoring process. So before we make an investment, we incorporate our standard ESG and gender questions into our questionnaire to understand what is the basis that we’re starting from. Because we’re not investing in seed or startups, these are businesses that are already operating that have some track record, an existing customer base, and an existing route to market. We can already assess what is the percentage of women in their workforce, on the board, and in their supply chains in the initial screening process. We also look at whether there are women who are their end consumers, and if they are providing goods and services to women. If it’s a company that is a local manufacturer, for example, we ask them about how they are treating their waste and water usage, if they have the right fire measures in place, and the quality control process for their products.
Then we proceed to due diligence, and that’s really when you assess the entrepreneurs’ willingness to institutionalise their businesses, and whether they are willing to incorporate best in-class governance, ESG standards, and also their willingness to address gender imbalances within their companies if there are any.
So the due diligence stage is really where we make sure that we’re working with companies that have that alignment of interest with us. We don’t put together our operation and financial action plan, and gender action plan after the deal is done. We put it together through this due diligence process, where we already list out the areas of improvement that we see for the company.
There are also some small companies that are sometimes run by a team of one, and they may not have the depth or the willingness to be able to go down this road of having institutional capital. So with those types of companies, we don’t progress with the investment. We respectfully say that they are just not ready to take on the type of capital that we have, which requires an element of institutionalised tracking and accountability. For those companies, we try to offer them advice, mentorship, and may come back to them later on.
I think some other firms wait till the investment is done before they begin assessing their portfolio companies’ governance and ESG strategies. In our opinion, that is too late. We try to bring these issues up as early as we can so that we can really assess the type of entrepreneurs that we’re working with, and if they’re willing to institutionalise and be held accountable with the type of capital that we bring.
L: You have mentioned oftentimes you were the only Black woman in a boardroom setting, which brings me to ask you about the recent Black Lives Matter movement. Has anything changed for you at all after the movement? How do you view the treatment that Black financial professionals have been getting over the years?
A: This is a very pertinent issue, and I think the problem we’ve been facing over the years is a lack of opportunity. We’re not given the same opportunities as our white counterparts. We may have the same qualifications, the same track record, the same everything, but we’re just not trusted in the same way because of unconscious bias. This year has been very sad because of a lot of things that have happened in America with regards to the unwarranted killings of Black people. But the only positive thing that can come out of that is it really just highlights some of the issues that Black people have been experiencing for many years.
So I’m glad that people are now talking about it, and I’m glad that it’s now out there for everyone to see that there are just so many inherent biases, so much inherent injustice, and lack of opportunity for Black people. When thinking about it in the context of my industry, I was reading some research about the US, and it showed that only 1.3 per cent of the US$69 trillion assets under management are private equity firms owned by women or minorities. Also, only 3 per cent of decision makers at VC firms are Black while at the executive committee level of asset management firms, 88 per cent of them are white. So we’re just not getting the same opportunity.
A previous survey done by a US firm found that there are inherent biases in the industry. For funds that have equally strong performance, the survey found that people began to question the good performance of the Black-owned firms. But I am glad changes might be on the way, and there are different initiatives that have been announced such as Netflix’s one hundred million dollar fund to support people of colour. So there’s a lot of momentum this year that I’m hoping is not just lip service.
While currently sitting in Africa as an African where we are all Black here, we don’t have that same level of discrimination amongst ourselves. But there is that access to capital from foreign institutional investors that we still have to deal with as raising capital for Africa is still challenging. It is not really a racial problem, I think that’s just the lack of understanding about the market which I hope I can play a small role in helping people understand Africa more.
L: Where are the opportunities in Africa? What are some of the factors that foreign investors will need to consider when looking into making investments in Africa?
A: Africa is the last frontier for growth. It’s the last continent in the world, in my opinion, where there is still such a long way to go in terms of growth. There is a huge growing population, and a huge young workforce that is just going to continue growing. We see it as a market with tremendous potential across so many sectors, where there is still low per capita usage of essential goods and services, and low penetration rates in terms of services that are being provided to the population.
The fourth industrial revolution is yet to happen in Africa. So there is just so much that we still need to do as a continent. As the population grows and with the majority of that population still being young, these people need access to goods and services, and we need to invest in the companies that will be providing those goods and services over the next 50 years. There is no other place in the world where you can say the population is going to be doubled in the next 30 years. Lagos is going to become one of the most populous places in the world in the next decade.
So we are just such a rapidly growing and urbanising population where disposable incomes still have a long way to go, while the middle class will continue to grow. So as an investor, you want to be positioning yourself in a continent like this as there will be companies that will be innovating and disrupting to solve infrastructure issues locally.
Unlike other emerging markets such as Brazil or China, Africa is relatively uncorrelated to other markets. So if you’re a global investor and you already have businesses in the US or the UK, investing in Africa also provides a lot of diversification because the growth that we’re seeing here in our markets is not really correlated to other emerging markets or developed markets. So if you’re thinking about enhancing the value of your portfolio for the long-term and diversifying your portfolio, then Africa is really the last frontier for growth. We always try as much as possible to encourage investors to understand the African opportunity before just dismissing it as too risky.
This article was originally published on Lynk Insights.
Buyside Power Women is Lynk’s latest interview series that features conversations with female leaders and male allies on the buyside to increase visibility of women in the industry. The series covers the career journeys of female leaders in different regions, and how advocacy for diversity could influence future capital allocation.
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