From fish to pharmaceuticals, investor bullish about import substitution in Nigeria

Danladi Verheijen, managing partner and co-founder of Verod Capital Management

Verod Capital Management is a Lagos-based private equity fund manager which invests across multiple sectors in Nigeria and Ghana. In part one of our two-part interview with Danladi Verheijen, managing partner and co-founder of Verod, he discusses opportunities in Nigeria’s manufacturing and agriculture sectors, and reveals the investment lessons he has learnt.

Verod has invested in several manufacturing companies in Nigeria. Which areas within the manufacturing sector hold the most potential?

We evaluate deals based on specific opportunities, so there is not necessarily one area of manufacturing that we find more interesting than another. Nigeria has an extremely low manufacturing base; we import practically everything. For example, until a few years ago we were importing toothpicks. We export tomatoes, but import tomato paste from Indonesia. There is a soya milk drink that is imported from Asia, even though we have all the ingredients to manufacture it here locally. The list goes on and on. So we like the investment theme of import substitution and we see many opportunities to manufacture things locally across multiple sectors.

Our investment in GZI was a great example of this import substitution focus. The company started manufacturing aluminium beverage cans (used for beer, Coca-Cola and other carbonated soft drinks) locally to displace imports from Latin America and Southern Europe. We also invested in Rotoprint, which produces labels for consumer products. It was started by an entrepreneur who previously imported labels from India, but realised it would be more profitable to produce them here.

Another of our manufacturing investments, drug manufacturer Emzor, exemplifies the tremendous scale of opportunities available in Nigeria. Emzor is the largest drug manufacturer in Nigeria – for perspective, they are 50% larger than the second-largest player, multinational GSK – but have only approximately 13% of the market share. The pharmaceutical industry is a very fragmented market here but offers huge opportunities.

Generally, any light industrial products that can be produced locally instead of imported is of great interest to us. Covid-19 has also led many countries to think more about being self-sufficient, and this is particularly important for Nigeria. There is massive need and opportunity for import substitution. We look for entrepreneurs who are skilled, who can scale businesses, and who have the requisite levels of corporate governance in place to make us comfortable enough to back their businesses with growth capital.

Which agriculture sub-sectors in Nigeria are you most enthusiastic about from an investment perspective?

Nigeria has a very large domestic market for food products. The government has made a number of very helpful policy changes over the years to dramatically increase the amount of local production of agricultural products and encourage the establishment of more agribusinesses. For example, Nigeria used to be the world’s largest importer of rice, but that has changed.

At Verod, we don’t invest in primary agriculture – we would avoid growing rice, soya beans, maize, guava or mango, for example. We don’t think we are the best at primary agriculture and mitigating the risks those types of businesses face. However, we do invest in agriculture businesses that have a processing angle, i.e., their end product is a branded consumer product that can be sold to a large consumer base.

An example of this is Shaldag, which is a fish farm we invested in. It grows fish at over 40 times the density of other local fish farms by using modern technology in their operations. The company produces processed, smoked catfish under the Shaldag brand. Nigeria imports over $600 million of fish a year, so this investment is also an import substitution play. There are villages in Norway where the entire economy is based around growing a particular type of fish (stockfish) that is sold to Nigeria, and used in sauces and soups. Trawlers from Southeast Asia also fish in the waters outside Lagos and Accra, process the fish in their own countries and then sell the same fish back into Africa. Obviously, this is inefficient and creates an opportunity for African businesses.

Verod has invested in Nigeria’s Shaldag fish farm which produces processed, smoked catfish.

Elaborate on your most successful investment to date.

It’s hard to choose – how do you pick your favourite child? Perhaps three investments stick out: GZI, Emzor and DTRT. We talked about the aluminium can manufacturing company, GZI, earlier, but that investment probably first put us on the map. It has now expanded out of Nigeria and into South Africa, and experienced pretty high returns along the way.

We also really like the story of Emzor, the pharmaceutical company. The family that founded Emzor are incredibly talented entrepreneurs and business operators, which is the reason why Emzor is the industry leader today, producing quality drugs – like paracetamol – that have become household names and are synonymous with headache or pain relief medication.

A third company is DTRT Apparel, a garment manufacturing company based in Accra, Ghana. They produce and export clothing to the US for companies, and due to the Covid-19 pandemic, have started manufacturing personal protective equipment for African customers. DTRT is a unique company, and we really like their model; they currently employ about 2,500 young workers, about 80% of whom are women. DTRT – which stands for “Do the Right Thing” – helps keep these workers off the streets, teaches them how to sew, and compensates them with about twice the minimum wage in Ghana. The global apparel industry is known for labour abuses, but this company is focused on reversing that trend and creating mass employment.

What are some of the investment lessons you’ve learnt over the years?

The biggest lessons have to do with being very methodical about how we invest, and being very deliberate about what we’re trying to achieve. Africa is a continent where so many things are exciting – we see all of these opportunities, and it’s easy to get distracted and lose focus. We’ve learnt to stick to what we know we can do well, and as a result, our investment criteria has actually become more rigid over time.

For example, we don’t do turnarounds. Warren Buffett used to say turnarounds never turn around, and we’ve found this is true. We’ve had some opportunities that on paper looked like they could be no-brainer home runs, but post investment, we struggled more than expected. Over the years, we’ve learnt to stick with what very experienced investors say all the time: “Just figure out what you are good at and don’t get distracted by anything else.”

Finally, we’ve found it’s worth focusing more time on finding the best business operators and convincing them to let us invest in their businesses. Usually the easier it is to close a deal, the more work we’ve had to do once we’ve invested. Life is a lot easier if you simply partner with the best entrepreneurs.