Due Diligence: Never buy into hockey-stick growth projections in Africa, says TLG Capital CEO

Zain Latif, CEO of TLG Capital

Zain Latif is the CEO of TLG Capital, which focuses on private credit investments in sub-Saharan Africa. The firm’s investments include fintech company Branch, Nigerian pharmacy chain Express, and the BAJ fuel station network in Uganda, to name a few. In an interview with How we made it in Africa, Latif reveals what he has learnt about investing in Africa and how he is approaching the Covid-19 crisis.

What is the most valuable investment lesson you have learnt over the years?

Never buy into hockey-stick growth projections. When you look at all the people who have been successful or became very wealthy in sub-Saharan Africa, they all had one trait: patience. They’ve been able to stick it out through the cycles, political instability, currency devaluations and so on.

Whenever a hockey-stick projection is introduced, it always assumes the background – i.e. the political, legal and macro-economic frameworks – remains constant. But in our experience, it never remains constant. Every year you deal with another issue in Africa. It is therefore absolutely critical to be dynamic, adaptable and patient.

Identify an untapped opportunity for private credit investors in Africa.

I’m completely sold on the idea of regional digital banking. There is a phenomenal opportunity to create a mobile-based digital bank that offers customers an account where they can access savings, loans, other financial services such as insurance as well as the ability to transact in various currencies. However, it needs to be a regional platform as most of Africa’s individual countries are too small. To make it work, one would need scale.

A lot of people are trying to do this, but it is a very difficult proposition because you need to operate across jurisdictions. So it’s a lot of work, but to me that is a huge opportunity if someone gets it right.

If you consider how Africa largely skipped fixed-line telephony and went straight to mobile, the same thing can happen with banking. We don’t need a branch network like the US, Europe and emerging Asia, we can go straight to digital. Brick and mortar bank branches are important from a marketing perspective and maybe for dealing with high-end consumers, but to access small towns and villages in Africa, a branch network is not that important. In fact, it is just a huge overhead.

Name the one deal you wish you invested in.

Whatever deal you wish you did in the past few years is now back in a big way. To give you an example, a while ago an Africa-focused financial services company issued a bond at a rate of 9%. We think it is a great company and wanted to invest, but we missed out. Now with Covid-19, you see that same company’s bonds trading 50% higher. So we can’t really say we missed it. With Covid-19, whatever deal we want is pretty much on the table, particularly in Africa, because every company is looking to shore up their capital.

Covid-19 is going to present a very difficult challenge for Africa. It is not only because of the disease itself but because the global economic environment is depressed. A global economic downturn negatively impacts commodity prices on which African countries such as Nigeria are heavily dependent.

What skills are required to succeed in Africa’s private credit industry?

For the size of investments we make – typically between $5 million to $20 million – it is important to recognise that the deal you struck initially, might not be the deal you end up with. You might have to restructure in a year or two: you might look to take more equity, you might take less equity, or you might decide to give up your equity and just take all your return in a fixed-rate instrument. One of the things we do in our structures is we keep the flexibility to manoeuvre as we see fit. For instance, in our deals we typically have some equity options that also have a coupon equivalent. Therefore if we decide not to take the equity kickers, we get a pick up in our coupon. This gives us the flexibility to manoeuvre after seeing how the investment develops and how well management is working with us.

I’m a huge fan of being absolutely flexible, adaptable and patient. For example, trying to exit deals in Africa at the moment is not going to work. You are likely to take a massive hit on any investment because, even if the underlying businesses are great, there are just so few buyers at the moment. In a country like Nigeria you just don’t know what is going to happen to the oil price in the next four months, you just have to remain flexible and able to adapt to that.

A few years ago TLG bought Cipla’s entire pharmaceutical business in French West Africa; we are the sole distributors of drugs for Cipla in the region. Since the Covid-19 crisis the company saw a slump in sales. So what we did was introduce Covid-related items, such as disposable masks and medical gowns, to our portfolio of products. We’ve adapted the business to take advantage of the current opportunities. During this crisis, I believe one needs to be flexible and adaptable as opposed to cowering under a rock and hoping things will not go under. For all our businesses, we at least try to lower the impact of Covid by doing things we wouldn’t normally do.

Are you looking at new investments in the current environment?

As TLG, I doubt we are going to do any new investments until at least August. You can’t invest in a company when there is so much uncertainty as to how the next six months will play out.

From a business perspective, the biggest risk is not the disease itself but the lockdowns. If these lockdowns continue, or keep coming back, it’s going to have a major impact on any business in Africa. Africa can’t afford a lockdown to the same extent as the US and Europe. So the major question mark, for me, is around how long the lockdowns will continue.

In the context of Africa, the virus is not as big a threat as the lockdown simply because the continent has a much younger population, which is at much less risk from Covid-19. Africa also has so many other issues. For instance, malaria kills half a million people every year. In Uganda, 100 people die from malaria every day. There is still not a single fatality from Covid-19 in the country. But then again, with Covid-19 nobody really knows how it will play out, so better safe than sorry. I really don’t envy the job of policymakers.

What tends to happen in these situations is that the recovery in emerging markets always lag the recovery in developed markets. Investors will first pile into developed markets before they consider emerging markets. Emerging market investors, therefore, have time to analyse the situation without having to worry that valuations are suddenly going to skyrocket. As Tolstoy put it best, the two most powerful warriors are patience and time.


Further reading

[April 2020] Profit-making idea: Opportunities for private equity to provide funding to distressed South African companies
[March 2020] Low returns: How African private equity needs to change its approach
[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
[March 2020] Africa: crisis a once in a decade opportunity