Wednesday, October 17, 2007

Final analysis: is investing in an African firm worthwhile?

Hello everyone, this installment is the final entry for my thoughts thus far on uventure capital. Again I have been tardy in adding this posting so I apologize to those who were waiting. I also want to thank Adapted Consulting for their feedback and support. As always feedback is welcome.

Final Thoughts
Groupe Zirasun presents an interesting example of an African company that could create a fantastic marginal return on invested capital. The potential that Groupe Zirasun has also reinforces the difficulty North American investor have/would have, identifying good opportunities for investment in Africa. If a North American knew to search for Groupe Zirasun, which in itself is very unlikely, the company’s website ( contains no financial data. Groupe Zirasun is not listed on any foreign exchange. The average North American investor has no way of performing a traditional evaluation of Groupe Zirasun. The inability of the North American investor to compare Groupe Zirasun to other potential investments essentially precludes investment. When I began this project I thought that I could encourage investment by bridging this information gap but soon realized I was wrong.

I falsely assumed that I could approach the problem from a different perspective, but still a perspective familiar to North Americans, and justify taking an equity stake in Groupe Zirasun. However, I soon realized that an African company in a developing nation could not be compared on similar risk metrics because of issues such as reliability of data, scale of economic data in relation to developed countries. In fact, it was very difficult to compare Mali to other “developing” nations because of the size of Mali’s economy as compared to that of any of the BRIC countries. As a result, I was led to the conclusion that even traditional thinking on investment into developing countries would not completely apply to smaller, impoverished nations. Soliciting investment in these countries can only be done with the offer of returns from a source not observable under traditional methods of examining companies and economies.

Defining investment in regional terms, instead of by individual country, simplifies the task of enticing individuals to invest in developing markets, and ultimately will provide companies in developing markets with greater access to capital. Adapted Consulting is not large enough to facilitate large-scale regional investment across a number of industries. However, by offering investors returns generated through their ability to identify companies with above average potential, Adapted hopes to prove that there are profits to be made in seemingly unattractive markets. An ideal outcome to Adapted’s plan would be instant acceptance by investors. A more realistic outcome is that the learning curve will be slow. As companies like Adapted help institutional investors to identify opportunities a trickle down effect will likely expose the mainstream investor to opportunities in Africa. Despite the uncertainty of acceptance, the mere process of attempting non-traditional investment should generate feedback sufficient to create a working model that will eventually help to build wealth in some of the world’s poorest nations.

Tuesday, October 2, 2007

Putting the criteria to work: the evaluation of a West African IT firm

Hello again, internet troubles and moving places delayed this posting again. I thank those of you still reading the blog for sticking with me. My intention is that this installment shows how I intended to apply my criteria to a potential site for investment. Next week I will include the conclusions I have drawn from what I have written. Again all feedback is welcome.


The Evaluation of an opportunity: Group Zirasun
To test the criteria, we have used an opportunity that has already been explored by Adapted Consulting, that is the investment into Groupe Zirasun. This is a good example of a company that suits their investment interests. To analyze it using this framework, we have evaluated Zirasun using the four investment criteria that were developed earlier, which have been restated below. This provides us with a good basis for evaluating the criteria as this firm is well understood by Adapted Consulting. The goal of the criteria is to answer the larger question: can additional capital and management training enhance the target company’s value?

(photo: Moussa, manager/owner of Zirasun)

Evaluation Criteria of for (µ) Micro Venture Capital Investments:
  1. Is there an opportunity for management/human resource training to increase profitability?
  2. Is there a sufficient market, both current and in terms of growth potential, for the goods and/or services the organization provides.
  3. How susceptible is the organization to the primary risk factors and impediments to success in their country?
  4. Does the organization operate in a manner consistent with C.K. Prahalad’s Twelve Principles of Innovation for BOP Markets? If not, can the organization be changed to do so?

Criteria 1: Human Resource improved proved productivity potential

Is there an opportunity for management/human resource training to increase profitability?

One limitation for Groupe Zirasun is their current human resource management system. Due to cash flow constraints workers are often hired on an ad hoc basis from a pool of workers who are loosely affiliated with the company. As would be predicted, these working conditions are not conducive to encouraging high levels of productivity from workers. In other words, to expect full commitment from employees an employer must offer full commitment to those employees. In a report prepared by students at the Schulich School of Business, recommendations to improve conditions included: modest employee bonuses near holidays, profit sharing schemes, modest commissions on new contracts secured by Groupe Zirasun. These incentives will increase employee comittment and also address the company’s cash flow problems, as all incentives are based on new business generation.

To lend legitimacy to any of these recommendations, Groupe Zirasun must formalize human resource practices. Included in this change would be a set of practices for future hiring and training on how to create an environment conducive to innovation. Having a formal HR structure would not only increase productivity, and therefore profitability, but also give Zirasun a basis for future staffing decisions. For example, more formalized tracking of employee sales, productivity, and costs would give Moussa access to better information regarding the need to hire based on workload.(photo: Zirasun's offices in Bamako, photo credit Moussa Keita)

Employee incentives, hiring practices, formalized methods of tracking employee hours and productivity, are examples of programs that Adapted Consulting could help to implement. Without outside evaluations to act as a guide for improvement Groupe Zirasun would not effect these necessary changes. Therefore the answer to the first question is yes, management training can increase profitability. However, cash flow remains the major issue. Cash flow could not only help with HR policies but by allowing increased marketing efforts, which in turn would lead to increased sales, and increased cash flow.

Criteria 2: Market Growth Potential

Is there a sufficient market, both current and in terms of growth potential, for the goods and/or services the organization provides?

Although a traditional top-down approach is a departure from the methodology recommended in this paper, it is important to look at growth sectors in the Malian economy.

The Malian economy experienced a growth rate of 6% in 2005; growth in 2006 is estimated at 5 per cent and is expected to be around 4.7 per cent per year in 2007 and 2008. Drivers of growth are expansion in the mining sector and an increase in ‘food-crop’ production. While there is potential to mine a number of resources in Mali, gold is the most important metal to the country’s economy. More than 85% of the 102 mining permits granted in 2005 were for gold[1].

Increasing energy prices are cause for concern in Mali. An electricity shortage already exists in Mali, as energy prices increase it becomes more costly for industry to gain access to increasingly costly inputs. As in the entire African region increasing energy prices create the risk of widespread inflation. As would be expected, net oil importers are hurt more by rising costs than oil producing nations. Mali is an oil importer but fortunately, increases in gold prices have helped to offset these costs[2]. Global demand for energy, Mali’s own shortage of electricity, and conditions in Africa as a whole suggest that energy consumption will be a concern for businesses operating in Mali for the foreseeable future.

“African countries need to husband their resources much more carefully to pay for the key goals of reducing poverty and raising the quality of life for their populations.”[3]

Outside of natural resources the Malian government is taking steps to bring about structural reform. Improvements to the road network, banking sector, and programs to increase the role of the private sector in the national economy should stimulate growth. The government is also investing in the travel/tourism industry in the form of favourable tax treatment and the creation of Compagnie aérienne du Mali, which offers direct flights from Paris[4]. There has also been a trend for citizens of Mali to form organizations to limit corruption in the country. “Various associations have come into being, including, amongst others: i) TransparencyMali; ii) the national watch for the fight against corruption; and iii) the Malian network of journalists against corruption.”[5]

How does Groupe Zirasun stand to benefit from the economic trends described above? Increased transparency in financial institutions, better road networks, and increased foreign investment will lead to economic growth. OECD projections show continued growth near 5% annually for the next 3 years. Obviously a growing economy is good for any company operating in Mali. However, Groupe Zirasun may benefit more than most from this growth.

  1. Mali has demonstrated a high level of acceptance for wireless technology. The CIA’s factbook states that as of 2005 there were 869,600 cellular phones in use versus 75,000 landlines, a ratio of approximately 11.6:1. The same ratio in Canada was 0.89:1. This discrepancy parallels the acceptance of mobile communications in general in West Africa. Mobile communications are so popular because of the lack of land-based lines of communication. In countries where road networks, banking systems and access to drinking water are issues, it is unlikely that government or industry will spend to develop hardwire communications infrastructure when a more practical, and cheaper, alternative is already available. Therefore, as foreign investors set up new offices in city centres or remote locations, companies like Groupe Zirasun will be called upon to provide communications solutions. Groupe Zirasun can view the communications of mining companies who will have to operate in remote locations, as strong opportunity for growth.
  2. The demand for electricity in Mali means that companies who can provide services that use a limited amount of energy, or are self-sustaining, will be in greater and greater demand. Groupe Zirasun’s experience in dealing with communications systems based on alternative power sources should create an opportunity in dealing with SMEs. In particular, Groupe Zirasun is uniquely positioned to take advantage of e-agri business development.[6]
  3. Groupe Zirasun, with the help of Adapted Consulting, will have a great deal of exposure to, and understanding of western style business practices. This means they will be more prepared to deal with the demands of foreign investors, both in terms of service delivery and in terms of business to business interaction.
Criteria 3: Are the barriers to enter this market too high?

How susceptible is the organization to the primary risk factors and impediments to success in their country?

The major risk factor in the Malian economy is the exposure to commodity prices. Gold and cotton prices are particularly important for economic growth. In addition to commodity prices Mali is also heavily reliant on foreign aid. Mali is also landlocked. Due to the economy’s heavy reliance on exports, port access is critical. In 2004, turmoil in Cote D’Ivoire limited Mali’s access to ports in that country and economic growth slowed as a result. Despite efforts of the Malian government to improve the road network leading to a number of ports in neighbouring countries, the 2004 experience shows the economic vulnerability created by being landlocked.

How do these risk factors affect Groupe Zirasun? The economic slowdown that would be created by not having access to ports would affect demand for all goods and services. However, Group Zirasun has almost no direct exposure to the problem of limited port access. As a service provider operating entirely within West Africa, port access only becomes a problem deliveries cannot be made by overseas suppliers. As is in the case of port access Groupe Zirasun has only indirect exposure to fluctuations in commodity prices. However, since foreign investment in mining will be a large source of foreign investment large fluctuations in gold prices will reduce the number of potential new clients for Groupe Zirasun.

Criteria 4: Can the organization be structured to better serve new markets?

Does the organization operate in a manner consistent with C.K. Prahalad’s Twelve Principles of Innovation for BOP Markets? If not, can the organization be changed to do so?

The most applicable of Prahalad’s principles of innovation are:

i) Focus on price performance of products and services – by hiring interns and introducing pay incentives unique among Malian companies, Zirasun can achieve very good price performance.

ii) Innovation requires hybrid solutions. BOP consumer problems cannot be solved with old technologies – Zirasun’s strength relies on delivering unique, flexible technological solutions.

iii) As BOP markets are large, solutions that are developed must be scalable and transportable across countries, cultures, and languages – The Groupe Zirasun offering to their customer offers precisely this

iv) All innovations must focus on conserving resources: eliminate, reduce, and recycle – in a recent analysis conducted on Groupe Zirasun a recommendation was made to operate as an internet café during downtime to supplement overhead charges, thereby reducing

v) Deskilling work is critical – the goal of Adapted consulting in their assistance to Groupe Zirasun is to develop a system of accounting where work can be deskilled and compartmentalized so that even otherwise untrained interns can perform Zirasun’s accounting tasks.

vi) Products must work in hostile environments – Groupe Zirasun specializes in delivery of Internet Communication Technology to isolated regions of Africa, their solutions must work in hostile environments or they will not/would not have been able to do any business.


[1] OECD’s African Economic Outlook 2007, Subsection on Mali,
[2] OECD’s African Economic Outlook 2007, Subsection on Mali,
[3] OECD Development Centre, Policy Insights No.47, April 2007,, site accessed August 2007.
[4] OECD’s African Economic Outlook 2007, Subsection on Mali,
[5] OECD’s African Economic Outlook 2007, Subsection on Mali,
[6] Venture Assessment Zirasun, December 2006 – Crespo, Howard, Lagarde & Tunnah

Monday, September 10, 2007

Defining how to define success

(Moussa, manager of Zirasun cutting aluminum for a solar installation)

I would like to apologize for the delay between postings but I recently moved to Paris to do a semester of my studies abroad. As it turns out finding a place here and getting set up was more difficult than I anticipated so internet usage has been limited and reserved for letting family members know I am alive and well. That being said, this installation of the blog lays out the criteria I feel is a starting point for identifying potentially successful enterprises, given a lack of empirical data. I have also added some thoughts on other considerations that may help define "successful" investment in Mali. The next blog will include an example of how these criteria can be applied; I hope to have it up in about a week.


The evaluation of companies will be based on four criteria:
1) Is there an opportunity for management/human resource training to increase profitability?
2) Is there a sufficient market, both current and in terms of growth potential, for the goods and/or services the organization provides.
3) How susceptible is the organization to the primary risk factors and impediments to success in their country?
4) Does the organization operate in a manner consistent with C.K. Prahalad’s Twelve Principles of Innovation for BOP Markets? If not, can the organization be changed to do so?

The first criterion draws on Adapted Consulting’s expertise in working in Western Africa. Being able to identify management and leadership skills in entrepreneurs in the proper cultural framework is one of the largest value adds that an investor would receive when following our model.

The second criterion merely identifies whether there is a customer base willing and able to pay for what a company is selling. There is some overlap with criterion 4.

The third criterion examines the company’s positioning and correlation to the success or failure of the national economy.

The fourth criterion allows us to evaluate how well a company is responding to the needs and wants of their market. It is important to know that not every potential investment will satisfy each of these criteria. Areas where potential investment sites do not meet the criterion are potential areas for improvement that can be used to market the benefit of outside investment to the site.

After identifying the criteria for evaluation it is important to describe how success will be measured so that failing ventures can be improved. As stated earlier, one of the most substantial problems facing Groupe Zirasun is their access to highly skilled workers. However there is a wealth of potential employees who could complete jobs requiring less skill. These workers may still be university graduates from within Mali who have little professional experience. A problem facing North American investors is the difficulty in trying to benchmark companies in Mali, or other African countries, against domestic companies who use standardized reporting methodologies. Unskilled workers could be used to overcome these barriers to capital investment if they could be given relatively simple tasks (i.e., data gathering) that could be used in the preparation of financial results that are meaningful to North Americans. Adapted Consulting again plays a role in this process by screening employees to be deployed to companies such as Moussa’s. Furthermore, Adapted will develop a framework, which can be implemented within company to allow the unskilled workers to succeed. This framework could then be repeatedly updated and exported to new companies.

Ideally, unskilled workers could be used to collect data locally that could then be transformed to satisfy International Accounting Standards. While these statements would not be audited by professional accounts under the same scrutiny as is the case in North America, they would give north American investors an idea of profit contribution of each company in which Adapted is/was invested. It is important to note that the lack of stringent accounting disclosures may be beneficial, although this may seem counterintuitive. If adherence to strict accounting regulations is demanded of companies whose employees cannot comply, the company will be forced to comply with forgeries or through the employment of creative accounting practices. If less rigid requirements are in place there is less pressure on any given company to conspire to meet the requirement. The other benefit of these practices is that the true driver of investment will be the major offering to investor’s: the ability of Adapted Consulting to leverage local market knowledge to select good investment sites.

Monday, August 13, 2007

The guidance at the bottom of the pyramid?

(Moussa Keita and Rian Aldridge install a wireless antenna in Bamako)

Being a newcomer to the world of developmental finance C.K. Prahalad's book The Fortune at the Bottom of the Pyramid was very useful in helping me to understand what takes place in under developed markets. I have listed verbatim some of the takeaways I used from the book. I have also tried to adapt some of Prahalad's model to better suit smaller markets. As always I am simply giving my interpretation of the authors work, and I am always open to feedback.

In The Fortune at the Bottom of the Pyramid, C.K. Prahalad proposes that there is a vast, untapped market that exists in developing nations with large populations. Prahalad argues that this market opportunity has remained untapped because multinational corporations have to rethink traditional business models to exploit the opportunity profitably.

“The BOP, as a market, will challenge the dominant logic of MNC managers (the beliefs and values that managers serving the developed markets have been socialized with). For example, the basic economics of the BOP market are based on small unit packages, low margin per unit, high volume, and high return on capital employed. This is different from large unit packs, high margin per unit, high volume, and reasonable return on capital employed.”­ – C.K.Prahalad, The Fortune at the Bottom of the Pyramid.

Prahalad suggests 12 principles to serve as “the building blocks of a philosophy of innovation for BOP markets.” They are listed below:[1]
1) Focus on price performance of products and services
2) Innovation requires hybrid solutions. BOP consumer problems cannot be solved with old technologies
3) As BOP markets are large, solutions that are developed must be scalable and transportable across countries, cultures, and languages
4) All innovations must focus on conserving resources: eliminate, reduce, and recycle
5) Product development must start from a deep understanding of functionality, not just form
6) Process innovations are just as critical in BOP markets as product innovations.
7) Deskilling work is critical
8) Education of customers on product usage is key
9) Products must work in hostile environments
10) Research on interfaces is critical given the nature of the consumer population.
11) Innovations must reach the consumer (both highly dispersed rural market and a highly dense urban market)
12) Paradoxically, the feature and function evolution in BOP markets can be very rapid. Product developers must focus on the broad architecture of the system – the platform – so that new features can be easily incorporated.

When I read these principles of innovation I understood the message but wondered if the model is applicable to countries such as Mali due to their lack of population density. While Prahalad addresses the need to serve the urban market he is mainly addressing the need for MNCs to explore all markets in countries like China so that massive populations may be fully reached. In areas of lesser population density, investment by MNCs is harder to justify but these markets still need to be served. As Prahalad proposes, a fundamental rethink must occur however in the case of smaller countries investment may need to be approached in terms of regional expansion.

Brazil, Russia, India and China (BRIC) are often looked to as examples of the economic potential of emerging markets. However the economies of these countries are not representative of all emerging markets. Each of these countries has large populations; Russia has the fewest people with approximately 141 million[2]. Each of these countries is very large in terms of area; India is the smallest with approximately 3.2 million square kilometers[3]. The average GDP of the BRIC countries is $4.43 trillion; China’s economy is particularly large with a GDP of over $10 trillion[4]. These countries are used as the benchmark for emerging market investment but I believe looking to these markets may blind us to other opportunities.

If investment is made on the basis of returns on extremely high volumes in a dense area, with a relatively large consumer buying power (on aggregate), how do small nations attract investors? In other words, if we condition MNCs and individual investors to use size and returns on size as the acid-test for investment into developing markets we condition them to believe that all sites failing the acid-test are not worthy of investment when this may not be the case. For example Mali exhibited a 5.1% real growth rate in 2006[5] but given as an absolute dollar amount the Malian economy is this growth is fractional when compared to growth in any of the BRIC countries. However looking at a group of West African countries we can see how thinking regionally can help identify opportunities: Mali, Senegal, Cote D’Ivoire, Liberia, Guinea-Bissau, Guinea, Gambia, Burkina Faso, Togo and Benin. The population of these nations combined is approximately 86 million, and has a greater population density than either of Russia or Brazil[6]. I am not trying to suggest that anyone should invest in each of these countries simultaneously but thinking regional helps to identify opportunities, which are otherwise not feasible. Because these markets must be considered in a unique way, opportunity must also be evaluated in a unique way. Factors such as ability to adapt to numerous markets and to provide a high level of price performance are extremely important. Sustainable business practices including human resource development are important to both financial success and to social impact.

The need to identify opportunities in Africa in non-traditional ways caused us to incorporate the ideas put forth by Prahalad with our own ideas of success factors in these markets. Below are the evaluative criteria we have developed for identifying companies that represent potentially profitable opportunities for equity investors.

[1] The Fortune at the Bottom of the Pyramid – C.K. Prahalad, © 2005 Pearson Education, Inc. Wharton School Publishing, Upper Saddle River, NJ 07458
[2] CIA World Fact Book Online
[3] CIA World Fact Book Online
[4] CIA World Fact Book Online
[5] Estimate - CIA World Fact Book Online

[6] CIA World Fact Book Online

Friday, August 3, 2007

Rethinking Traditional Methods of Investing

Hello again, this installment of the uventurecap blog looks at how I came to realize that local market expertise might be a necessary substitute for applied portfolio theory. As always, any feedback or thoughts would be appreciated. As you can see below I think that small companies who are operating, have operated in Africa, might be the bridge to help mitigate risk that is inherent in investing in Africa. Also I would like to apologize that I could not figure out how to use the superscript and subscript that would make reading the equations below easier on the eyes.

Rob Tudhope

To use portfolio theory I began with a top down approach. I wanted to analyze the risk associated with investing in Mali. Ideally, I would have liked to identify risk as a function of variance and establish a correlation between the Malian economy and North American economic growth. Had I been able to do so, I could have drawn conclusions about the effect that investing in Mali would have on a well diversified North American portfolio. Note that portfolio risk would be defined as follows:

σp2 = wna2σna2 + wm2σm2 + 2wNAwMρna,mσnaσm

where: σp2 = portfolio variance
wna = weight of the well diversified North American Asset (market portfolio)
wm = weight of the investment in a Malian asset (company)
σna2 = variance of returns of the North American asset
σm2 = variance of returns of the Malian asset
σna = standard deviation of returns of the North American asset
σm = standard deviation of returns of the Malian asset
ρna,m = correlation of the Malian asset

Correlation between the Malian economy and the North American economy could be calculated by comparing GDP growth figures over time and standard deviation of growth of both economies could be easily calculated from historical data. However, Mali has no equity exchange market like the Toronto Stock Exchange or the New York Stock Exchange so comparing returns and correlations on equity investments is more difficult. To do so I would have to develop a risk premium for equity investments into Mali and assume that returns would be similar to a proxy for North American equity returns (S&P 500). After the creation of this risk premium my plan was to use the relationship between North American economic growth and equity returns as a predictor of expected returns in Mali. Normally the risk premium necessary to justify investing in a foreign market is determined by analysis of market data (of which none exists for Mali) or by a team of economists, financial analysts and political scientists. I do not possess the knowledge, or expertise to fill in for a team of experts so I had to settle for simply using GDP volatility as a proxy for equity returns. For the assumption that Malian equity returns would in the same way, relative to GDP growth, as North American equity returns to be valid, both economies would have to demonstrate some similarities. Therefore, my next step was to examine the Malian economy and its drivers.

My first step was to check Standard & Poor’s rating of Mali as a borrower. With a B rating investment in Mali appeared to be below investment grade. To better understand the risks associated with investing in Mali, my next step was to research drivers of the Malian economy.

According to the country report on Mali in the OECD’s African Economic Outlook:
“Mali’s economic growth outlook remains favourable.” After recording a 6 per cent growth rate in real gross domestic product (GDP) in 2005, growth in 2006 is estimated at 5 per cent and is expected to be around 4.7 per cent per year in 2007 and 2008. This expansion would be due mainly to higher output in the mining sector and a big increase in food-crop production. The good prospects are also explained by a rising domestic demand helped by private and public investment, especially in 2006.” – OECD 2007

While the Malian economy appears to be in an expansionary state I found it difficult to fairly compare this growth with growth figures in North America. Firstly, Mali’s economy is significantly smaller than that of a developed country: US GDP in 2006 was ≈ US$12.7 trillion, whereas Mali GDP in 2006 was ≈ US$13.8 billion[2]. Secondly, developed countries have a number of industries that contribute to their productive capacity. Mali, on the other hand, is heavily reliant on mining (particularly gold), cotton production and farming. In each of these industries prices are set in a market where Mali is a price taker and as such has almost no power relative to buyers in terms of price setting. Thirdly, Mali’s ability to participate in trade is determined by its access to ports of neighboring countries. In 2004 social crisis in Cote D’Ivoire limited Mali’s access to ports, and reduced the amount of exported goods. Because Mali is land locked and it’s major trading partners are outside Africa i.e. China, port access is particularly important. While rehabilitation of road systems has begun, with particular attention being given to routes leading to major ports such as Dakar, Nouakchott, and Conakry, access to ports still presents a significant impediment to trade.

These dissimilarities between the infrastructure and drivers of Mali’s economy and those of a developed nation do not disqualify Mali as a location for potential investment. However, drawing meaningful comparisons about the Malian economy in terms of traditional metrics could easily lead to false conclusions.
I originally hoped to argue the merits of investing in Mali, in terms of portfolio theory, based on the low correlation between the performance of North American and Malian investments. Ironically the causes of this low correlation made it impossible for me to argue their benefits in a traditional sense. I found my problem with investing in a developing market was symptomatic of doing business in a developing market and is the case for many businesses I had to come up with a market specific solution. Eventually the solution became obvious; instead of marketing investment in African companies, which is difficult to explain and even harder to quantify, it is easier to sell the market expertise of a Canadian company, Adapted Consulting. I came to the conclusion that investors will be much more responsive to the prospect of investing in a Canadian company who has intimate market knowledge of an otherwise inaccessible niche market, as compared with the prospect of investing in small companies in small economies in foreign markets.
[1] Data and factual information concerning Mali are taken from the OECD’s African Economic Outlook (2004,2005,2006,2007 – Mali) unless otherwise stated.
[2] Data gathered from, both US and Mali GDP figures given were calculated using the expenditure method.

Wednesday, July 25, 2007

Traditional Methods of Investing in Africa

As mentioned in the previous blog, the next step in my progression was to show how new ideas could be used to invest in Mali. However, I thought it would be a good idea to first discuss how investors currently approach the African market.

Traditionally investment in Africa is made in the form of relief funds, humanitarian effort and debt financing. These types of investment are made because of a lack of formal equity markets and large corporations, and because the return on investment is known ahead of time. In the case of foreign aid and humanitarian work the return is often a sense of helping and improving the local environment. In the case of debt investment there is no guesswork with projected earnings the expected return is denoted by the terms of the debt instrument. To further ensure return, foreign debt is often issued in a foreign currency so that the lenders do not bear the currency risk associated by African nations. From the perspective of the African borrower the value of domestic currency often exhibits great volatility. This means that there is an increased likelihood that borrowers will be unable to repay, and therefore face higher rates of borrowing to compensate lenders for the additional risk. Recently investors have looked at new methods of investing in local currency debt in Africa. Lending on terms to be repaid in local currency reduces the risk of default by the borrower due to currency risk. Unfortunately, the borrower then increases their exposure to currency devaluation. In the extreme case the borrower could make all payments in a currency worthless to the lender. A potential solution to this problem is to diversify lending across countries by pooling the funds made available by lenders. A fund administrator then distributes lending across countries and all lenders benefit from diversification of funds across a number of countries.

A detailed explanation of this process can be found in Up From Sin: A Portfolio Approach to Financial Salvation a paper written by Randall Dodd and Shari Spiegel, January 2005 (No. 34 in a series of g-24 discussion papers for the United Nations). The paper draws on research (Haussman, 2001, 2002) that concludes developing nations are more able to cope with the negative effects created by shocks and policies errors, on ability to repay debt, if they borrow in their own currency. Dodd and Spiegel note:

“ The market risk, which consists of the uncertainty of domestic interest rates (i.e., interest rates in local currency assets) and exchange rates of each local currency security, is often significant. From 1994 to 2003, the average volatility of individual country returns on local currency debt instruments was nearly 16 per cent. At the same time, yields on local currency debt were also high, at 13.7 per cent on average, but not high enough to compensate for the risk. Hence investing in any one local currency market was not attractive.Combining the returns on individual country securities into a portfolio, however, does produce desirable results. As we will show below, returns on a diversified portfolio range from 8.10 per cent annually while the risk of a diversified portfolio drops substantially to approximately 5.5 per cent (which is in line with United States investment grade bonds).” – Dodd & Spiegel 2005

Although Dodd & Spiegel focuses on investment in debt instruments I thought their line of thinking could be applied to an equity portfolio as well. My hope was to use portfolio theory to show that the risk of investing in a company in Mali was balanced by that investments effect on the expected variance of a portfolio. The difficulties I encountered while attempting to make this connection lead me to change my course of action to steer investment to Groupe Zirasun.

Tuesday, July 17, 2007

How a consulting firm became a venture capitalist

The origin of the idea

Upon graduation from the University of Bamako, Moussa Keita was recruited by Ian Howard, one of the co-Founders of Adapted Consulting. At the time, Ian was the director for Geekcorp Mali, an NGO based in West Africa. Moussa worked and was trained by volunteers and other ex patriots who were in Mali to help bring internet and other technologies to rural areas. Through this experience he soon became an expert in wireless and open source technologies, after a bit more than a year. As the project's work gained notoriety, it was soon overwhelmed with requests for assistance by other NGOs and companies. It was then that Moussa was encouraged by Ian to open his own business. It was anticipated that Moussa would continue to support the project, but he could also serve these many potential customers commercially. His firm, Groupe Zirasun was thus created and incubated by Ian and his team. Zirasun was provided an office and shared tools and other resources. There was no shortage of work, so Moussa was kept busy.

(photo: workers build a new solar structure for a roof, under the management of Zirasun and with designs and engineering provided by Adapted Consulting)

Since, Group Zirasun has built an excellent reputation amongst its clientèle. Moussa has continued to expand his reputation as a quality provider of wireless and open source solutions. Despite the success of the firm, in terms of establishing its reputation and the stature of Moussa, it is not growing, nor profitable.

A cultural hurdle

A study by Ian and classmates at the Schulich School of Business in the Fall of 2006 concluded that Zirasun was suffering primarily by a lack of affordable financing and a lack of internal practices. Consequently, Ian brought the idea of buying into Zirasun to Adapted Consulting. He believed that it was an opportunity to both help Moussa's firm to grow and would also further strengthen the collaboration between the two firms, thereby allowing Adapted Consulting to further expand the African market.

As this idea progressed it became apparent to Adapted that Zirasun was perhaps not the only business, and Moussa was not the only entrepreneur, that could benefit from management consulting, training, capital and infrastructure.

Access to Credit: nearly impossible

There are many systems in place in North America, which protect lenders from losses due to default. For example, the World Bank’s 2006 Doing Business Report states that there is 0.0% private bureau coverage of individual credit histories in Mali. In comparison, in both Canada and the United States there is 100% coverage1. This coverage is important as small businesses often rely on the ability of the owner to borrower funds. With no way of determining the creditworthiness of borrowers, lenders must charge a high premium to compensate for risk, and consequently funds become less accessible. This is just one example of why Mali ranks in the 90th percentile with regards to ease of access to credit, as compared to the 6th percentile for both Canada and the United States2.

Access to Equity Financing: too little information

Companies in Mali also have more restricted access to equity financing compared to Canada and the United States. One major barrier in Mali is the lack of a formal equities exchange where shares of corporations can be traded. The existence of an equity market is a fundamental element to how companies can attain financing and how shareholders are protected, i.e., if the shareholder perceives too much risk verse a return (going forward), they can simply sell their stake in a company. In Mali no such mechanism exists. In addition, there are legal differences, which offer greater protection to shareholders in North America than to those in Mali. Two examples are less stringent disclosure requirements for material information, and less personal liability to CEO for actions contrary to shareholder interests. Again, legal protection to shareholders increases their willingness to invest as they perceive less risk and therefore require a lower return premium to justify investment.

First Conclusion: a new approach to entering this market is required

After identifying barriers to traditional investment into Africa I felt it was important review the current thinking of investment and then to adapt them to create a new set of rules that are appropriate for this very different market. Next we will begin to present our ideas of how to approach investing in small to medium sized firms in Mali, which will serve as an example of how it can be done in similar markets.

End Notes

1 Doing Business 2006 – World Bank,

2 Doing Business 2006 – World Bank, 90th percentile in this case denotes that it is easier to get credit in 90% of the 175 other countries involved in the report.

Tuesday, July 10, 2007

Commentary: there are fortunes at the bottom and there is no mystery that capital can unlock poverty

The idea of investing in the developing world is not new, though in the past this has been done through personal contacts and experience in these markets. Often it was ex-patriots who found new lives in developing countries who brought money to start businesses. This, for the most part, still continues to be the case. To invest in most, if not all of Africa, requires on the ground research, and the slow development of trust and information about the markets. Our friends on Wall, or Bay Street, might say is that this is high-friction and that the lack of information is a major factor for limiting investment. They might also cite a multitude of other reasons that are listed in the Doing Business Guide, provided by the IFC (a great resource).

This personal experience is how I have come upon an opportunity to invest in a business in Africa. My own business, Adapted Consulting, is largely focused on economic development in Africa and as a result we do see opportunities from time to time. Though many argue that it should be local people who are left to develop these endeavours alone, I would argue that in some cases that is certainly a good choice, but as happens elsewhere, the infusion of expertise and capital from elsewhere is an important shot in the arm in development. NGO established economic development projects are often plagued by a problem of a mis-alignment of incentives and perhaps agency issues -- the people funding and managing may have quite differing goals. These people also are not vested in the success of these operations.

While working in Africa for the better part of the last 5 years, I have developed a set of principles that I believe in, for how economic development should be done. One of these ideas has emerged from the Prahalad school of thought, that is that I do agree with his thesis that there are economic opportunities at the Bottom of the Pyramid. I also have come to agree with many of the ideas of de Soto, that capital is essential to developing more robust economies where economic exchange can happen with reduced friction (to grossly paraphrase). Moreover, in that sense, I believe that one of the weaknesses of the current 3rd party donor model, is that good ideas that have economic potential are not easily capitalized and financed so that they can be scaled. As a result, we have vested in this idea, Rob has taken lead by pulling together academic research to help fet our or practical knowledge. I trust that we are right and that we can find a scalable and sustainable means to invest in those countries where so far, few have dared but that so much is needed. There are fortunes at the bottom and there is no mystery that capital can unlock poverty. This next decade is again about innovation, but the greatest triumphs will be in finding new ways to do business. There is great potential in these undeveloped markets, we just need to find out how to do it. Here is our effort to that end.


Wednesday, July 4, 2007

My summer job


I have created this blog to track my progress, and to receive feedback on, my summer job. My summer job consists of helping uventurecap encourage micro-equity investing into lesser developed markets, specifically Sub-Saharan Africa. My main deliverable as an employee of uventurecap is the preparation of a paper documenting my assignment in terms of my approach to completing it, hurdles faced by along the way, resources I draw on and conclusions (for better or worse) that I draw along the way. I look forward to feedback from anyone who thinks they can improve on or offer insights into what I come up with. Below is the first installment:

In no way is this literature meant to be the final word in how to profitably enable growth in Africa. Instead my hope is to define a starting point for continuous critical review of investment practices, eventually leading to a widely acceptable model for investment. The starting point for my research was my summer internship; requisite to the IMBA program at York University’s Schulich School of Business. My internship was with μventure, an offshoot of Adapted Consulting. Adapted Consulting is a firm who specializes in providing IT solutions to small business and NGOs in remote areas. Adapted is a Canadian firm who operates a great deal in West Africa. After hiring local workers Adapted provides skill development and on some occasions encourages employees to go out on their own. It was one of these employees who lead the directors of Adapted to identify an opportunity to earn a profit while enabling SMEs to better serve there market and ultimately create wealth in some of the world poorest nations.


Rob Tudhope