Due Diligence: Doing deals in Ethiopia – investor shares lessons learnt

Saad Aouad

Over the past seven years, investment firm 54 Capital has built a portfolio of assets in Ethiopia’s pharmaceutical and fast-moving consumer goods industries. It has invested in excess of $170 million in the country. The firm’s investee companies are involved in the manufacturing and distribution of medicines, beverages, food as well as home care and personal care products.

In this interview with How we made it in Africa, Saad Aouad, co-founder and chief investment officer of 54 Capital, talks about the investment lessons he has learnt and the unexploited opportunities in Ethiopia.

Describe your firm’s investment approach.

Our strategy is to invest in countries that we know and where we have experience. The two countries that we know very well are Ethiopia and Morocco. We have done deals in Morocco and over the past seven years we have invested significantly in Ethiopia.

In Ethiopia we are enthusiastic about defensive sectors that meet the basic needs of the population. When I say defensive sectors I’m talking about food, home care, personal care, pharmaceuticals, education and health care.

We prefer majority stakes where we have management control, unless we are backing an entrepreneur that will do it better than us, in which case we are happy with a minority position. In some cases we even acquire 100% of the company so that we have full control and can go fast. We do mezzanine and equity but not pure debt.

What is the most important investment lesson you have learnt?

Ensure you control the destiny of your assets by putting the right people in charge. In a country such as Ethiopia, you need highly incentivised, committed people with the ability to deal with daily issues such as foreign currency shortages and transport delays. The management team needs to have the ability to take on the bureaucracy to drive raw materials into the factories and finished products into the market.

Name one untapped business opportunity for private investors in Ethiopia.

The most untapped opportunity for me is to use the available resources and grow high-quality agricultural produce that will drive the manufacturing sector. The quality of Ethiopia’s agricultural produce is oftentimes not good enough for food processing, which is why so many products are still imported.

I will give you the example of tomatoes. Ethiopia exports fresh tomatoes but then imports ketchup. That doesn’t make sense because ketchup is a relatively easy product to produce. So why then? It is because the quality of tomatoes grown in Ethiopia is not good enough to run a profitable ketchup plant.

There are a lot of things that need to be done in the agricultural sector so that you can actually export value-added products or use those raw materials for local production. Ethiopia needs to invite large international farming companies to come to the country and set up commercial farms with modern methods of irrigation and fertilising. This international experience needs to be shared with local smallholder farmers situated around the commercial farms. The produce can then be sold to agri-processors in the city.

What is the biggest misconception about your job?

I will be specific to Morocco and Ethiopia, where I spend most of my time. There is always this misconception that we are only in these countries to make money and don’t care about the people and the resources. Obviously we need to be profitable. Profitability is what makes a business sustainable. If a business is not profitable, the jobs it provides will also disappear.

In terms of employment creation, we are always doing projects with the objective to create jobs. When we bring in expats it is to fill gaps in the local workforce. In our portfolio companies we directly employ about 1,600 people and have less than 20 expats. These expats bring global skills and knowledge. It is an opportunity for the local talent to learn from their knowledge and experience.

You’ve been active in Africa’s private equity industry for many years, both through 54 Capital and other firms. Name the one deal you wish you invested in.

IHS, the telecoms tower company in Nigeria. When I was working for Kingdom Zephyr, an African fund, we had an agreement to invest in IHS. However, one of our limited partners pushed against the deal and in the end it didn’t go ahead. It was very frustrating. Today IHS is a multi-billion dollar company.

What are the skills needed to succeed in Africa’s private equity industry?

Africa has 54 countries which are all different from one another. I believe teams that are focused on a particular country will outperform those who have a pan-African approach. This is a business where you have to know the country you are investing in really well so that you back the right people and can get issues solved. The more focused you are, the less mistakes you will make.

In addition to money, private equity firms need to add value to their portfolio companies. One can find money everywhere. Most of the successful entrepreneurs today have access to finance which is less expensive than private equity. To truly add value, you need to be really focused.

Further reading

[May 2020] Investment firm Accion explains why it backed Nairobi-based Apollo Agriculture
[May 2020] Due Diligence: Never buy into hockey-stick growth projections in Africa, says TLG Capital CEO
[May 2020] Interview: Why AgVentures is betting on agrifood tech in Africa
[April 2020] Investor shares an honest account of what it’s really like fundraising a VC fund in Africa
[April 2020] After a decade of building and investing in African companies, Emilian Popa explains why he is bullish on these five industries