In 2008 Schulze Global Investments (SGI), an American investment firm and family office, became the first international private equity firm to open an office in Ethiopia. In 2012, SGI launched the Ethiopia Growth and Transformation Fund I, and completed a $86.5m fundraising process in 2014. The firm, headquartered in Singapore, has a presence in six countries including China, Brazil, Mongolia and Georgia. Dinfin Mulupi speaks to Blen Abebe, vice president at SGI Ethiopia, about closing deals in the Horn of Africa, and why similar funds are eyeing the market.
SGI was the first private equity fund to launch in Ethiopia. What factors motivated this move?
SGI is focused on emerging markets and has a history of investing in high-risk, high-potential markets. The first investment outside of the US was done in China several years ago at a time when people weren’t quite comfortable with that country. But in the case of Ethiopia, the Schulze family has a special connection to the country as the family has three children adopted from Ethiopia. As a consequence they visited frequently and saw the transformation so decided to invest their money here. Schulze Global, as a family office, invested in three companies prior to the Fund: a coffee roasting company called Tarara, a cement factory and an international school. And as investment returns were quite good despite the risky environment, they decided to raise a fund solely focusing on Ethiopia.
In which sectors do you see the most potential?
We are open to various sectors including agriculture, manufacturing, education, healthcare, real estate, and tourism. We see great potential in all of these sectors, but particularly in the FMCG sector due to its attractiveness associated with the growing population and rising disposable incomes. FMCG is also very attractive due to Ethiopia’s retail market potential. However, as a foreign entity, we can’t participate in retail outlets as it is prohibited to foreigners in terms of the Ethiopian Investment Proclamation. For example, with our coffee business we just sell to wholesalers and then they sell it to retailers. We cannot open our own retail outlets. Many people ask why we haven’t opened a Tarara coffee shop chain. That would have been great, but as a foreign company by law we may not.
Today more and more private equity funds are focusing on Ethiopia and even opening offices here. Economically, why does Ethiopia make sense?
I think Ethiopia is very interesting. Economically, the country has recorded double-digit growth for several years and the IMF expects that growth to continue. Culturally it’s also quite unique and the fact it has never been colonised makes it distinct in the way people interact and function. Ethiopians also store great value in relationships, so unless you change your mindset and learn how things are done here, it could be very challenging. In the West things are different as you can often do business without knowing the person you’re dealing with. But here, most businesses are family-owned so you have to be close to them to gain their trust.
So how has SGI been able to navigate this unique environment?
At Schulze Global, most staff are Ethiopian-Americans and the fact that you look Ethiopian and speak the native language ensures the locals can relate to us. For example, we have closed deals partly because we were on the ground and could relate better to locals than other private equity firms. And it makes sense, because most family businesses have been passed down through generations so they wouldn’t necessarily trust, or be willing to work with, you before they get to know you. That is why Schulze Global ensures it has people who know both the foreign and local culture.
What are some of the challenges SGI faces in Ethiopia?
Well, being the first one on the ground can have both positive and negative effects. For example, when Schulze Global opened its office back in 2008 most people had never heard of private equity. So we literally had to go through a teaching process of what it was we are doing. And to add to that, most companies confuse us with a bank so we must almost always explain the difference between a private equity firm and a bank.
After they understand the private equity structure, then the next challenge is agreeing to the terms that are in the term sheet. Especially since Schulze Global typically takes a minority stake, less than 50%, we have very strict minority protection rights in our term sheets. Some include compulsory sale, which means selling the entire company at the time of exit if we can’t find someone else to buy our shares. Imagine telling that to a local sponsor who has owned the business for generations. So all in all it is challenging, but all is possible with lasting patience.
Do you see in the future any likelihood of an exit?
We haven’t done any exits yet, but the future looks positive as we are seeing many entrants into the market. Therefore an exit via a strategic buyer should be attainable.
With more private equity funds coming in, how will things play out?
Competition is definitely increasing. We see it already. In fact, in one deal we are currently looking at, the sponsor is telling us they are also being courted by another fund. But our strength has always been that we have been in Ethiopia the longest, so we know what works and what doesn’t. And that long presence, even a small thing like knowing where our office is and the fact that they can visit us anytime, gives the local sponsors comfort – and at the same time gives us some leverage compared with other funds using the “fly-in and fly-out” model.