Q&A: Zain Latif, Principal, TLG Capital

As a regular feature of my blog, I will be interviewing investors in the frontier markets of sub-Saharan Africa, to better understand the ways that perceptions of political and social risks impinge on their investment decisions. First up is an interview with Zain Latif, a principal at TLG Capital, which is a private equity investment firm focused on frontier markets, especially in sub-Saharan Africa. TLG is targeting companies that are poised to benefit from the rise of Africa’s middle class and increased consumer spending—companies in the healthcare, real estate, food processing, and retail sectors.  For example, TLG owns a 12.5% stake in the Ugandan pharmaceuticals manufacturer, Quality Chemical Industry Limited (QCIL), which manufactures triple combination HIV antiretroviral and anti-malarial drugs, under license from the Indian drug company Cipla. TLG also owns a 40% stake in the Snapper Hill Health Clinic in Monrovia, Liberia, which was founded by Dr. Sirleaf in 1980 and survived the country’s civil wars.  I met Zain at a recent Columbia University conference on investing in Africa, where he participated in a panel on healthcare. He expressed a view I found intriguing: “When we invest in India we are considered visionaries. When we invest in Africa we are viewed as the Peace Corps.”

TLG Capital has made some interesting investments in the African healthcare space. What factors have driven your decision to invest in for-profit healthcare in Africa?

One factor is simply the size of the market. In Uganda the middle class is growing rapidly. In Liberia, 70% of its 4 million people do not have access to healthcare. People will get sick, so there is a market.  And in countries such as Uganda, there is a rising middle class, so people can afford to pay for it. The big question is how to price it so it is profitable.  That is, how do we price the product for the so-called “bottom of the pyramid.” Our investors need to make money.

We can lower the cost of the product if we lower the costs of production per person. For example, in the Snapper Hill Clinic, the largest cost is medical equipment. If you can bring in low-cost equipment the cost per person is lower.  We have secured agreements to purchase equipment at a lower cost from distributors. In terms of healthcare providers, we use local providers so those costs are relatively low.  We are also trying to get qualified personnel from Bangladesh. Right now, at Snapper Hill, there are about 20 primary healthcare providers.

Finally, we hope to scale these businesses regionally.  The intended market for the QCIL drugs is East Africa. We also hope to scale the Snapper Hill  model regionally throughout West Africa.  So we think about our potential market in broader, regional terms.

On your website you say that one of your investment strategies is to bring technology and expertise from India into Africa because of the similarities between India and Africa.  Can you elaborate?

The QCIL investment is a joint venture with the Indian drug company Cipla. We feel that collaboration with Indian companies has been really beneficial. I have seen several similarities between the Indian operating environment and Africa: a similar work ethic and similar challenges with infrastructure.  There is no question that these are challenging environments within which to operate businesses. Operating a business in India is useful preparation for operating in Africa.  On the other hand, we have struggled when we have tried to work with European management teams who lacked experience in these emerging market environments. For example, we exited an investment in a cancer care provider in Ghana that was co-managed by European partners.

 How does perception of political risk affect your investment strategy?

In my view, political risk and instability in Africa are over-emphasized. Political instability in emerging/frontier markets is one reason there is such a high return. So emerging markets are defined by political risk. One of our strategies to mitigate political risk is to focus on sectors where there is less exposure to corruption risks. The sectors we are involved in—such as healthcare—are not sectors where there is tremendous exposure to corruption through concession processes.  It is not like the extractive sector. We have strong political and government support for our investments in both Uganda and Liberia, so we are not overly concerned about political risk.

Al Qaeda threatens sub-Saharan Africa’s frontier markets

Though the risk of Al Qaeda attacks in the west has dramatically declined,  recent evidence suggests that the risk of attacks on targets identified as “western” has dramatically increased in several sub-Saharan African frontier markets: Nigeria, Uganda, Kenya.

On June 28^th, the White House released its new counterterrorism strategy, which emphasized that Al Qaeda’s affiliates in Africa pose a serious threat to western interests. Al-Shabaab, based in Somalia, threatens western interests throughout East Africa, especially Uganda, where the group struck last year. Interestingly, in an article by the insightful Ugandan journalist Charles Onyango Obbo, a Kenyan security source described Al-Shabaab as a “pan East African entity.”

The White House report also claimed that Al Qaeda in the Lands of the Islamic Maghreb (AQIM), based in Mali, endangers western interests not only in the Sahel, but also in northern Nigeria through its ally Boko Haram, which is responsible for a string of recent deadly attacks in northern and central Nigeria.

In addition to the White House report, on July 19 the Wall Street Journal reported that, under its new leader Ayman al-Zawahiri, Al Qaeda plans to focus on attacking U.S. and Western targets overseas, where plots are easier to execute than on U.S. territory.

The increased risk of Al Qaeda attacks in Nigeria, Uganda, and Kenya has many potential implications for investors, such as increased security costs– made slightly more complicated by the fortified British anti-bribery law. In Nigeria, the escalating threat from Boko Haram could pose a particular challenge to the pharmaceutical sector: Boko Haram has stated that it is opposed to western medicine and back in 2003, Muslim extremists, some of whom were associated with Boko Haram, opposed the expansion of a polio vaccination program in northern Nigeria.

Conflict Minerals and Frontier Investors

The past decade has witnessed the emergence of a new and very serious risk to western companies operating in frontier markets—what the political scientists Margaret Keck and Kathryn Sikkink described as ”transnational advocacy networks.”  The human rights movement is the paradigmatic—and most successful– example of a transnational advocacy network.

Human Rights In History

The human rights movement has demonstrated strategic brilliance in re-inventing itself at critical junctures.  At the risk of presenting an overly schematic history, in my view the human rights movement has gone through three distinct phases. Up until 1989, human rights activists primarily focused on achieving liberal democratic political transitions in large swaths of the globe oppressed by authoritarian and totalitarian regimes. Once that goal was largely achieved, post-1989 human rights advocacy shifted its agenda to what was called “transitional justice” or post-conflict justice– holding accountable perpetrators of atrocities committed under these abusive regimes through the creation of war crimes tribunals and truth commissions.

The third phase began to blossom around 2002, as new and old human rights groups began to focus on economic issues. Human Rights Watch took what was then a controversial step  (because until then the group had deliberately limited itself to the protection of civil and political rights, not economic rights) and produced a report on corruption in Nigeria and its impact on public service delivery in the oil-producing Rivers state. George Soros’ Open Society Institute provided the seed money for the Publish What You Pay Campaign, the Revenue Watch Institute, and Global Witness—advocacy groups which attempted to address what they claimed was the role of natural resources—and the companies that extract them—in driving conflict, corruption, and poverty.  In the interest of full disclosure I worked for Revenue Watch Institute, so clearly at one point I was sympathetic to this agenda.

Successes of Conflict Resources Movement

Like the previous two phases, phase 3 of the human rights movement has already demonstrated remarkable success—if success is defined as an impact on policy. Activists drove the creation of the Extractive Industries Transparency Initiative,  a voluntary initiative which creates standards and methods for extractive companies to publish what they pay to host governments and governments to disclose what they receive from companies.  Activists were also instrumental in persuading the drafters of the Dodd-Frank financial reform bill to include Section 1502, which requires companies to ensure that the tin, tungsten, tantalum, and gold sourced from Central Africa is “conflict-free.” Because these minerals are used in a wide array of products, from medical devices to electronic gadgets, a broad array of companies will be affected.

But it appears that business groups are starting to fight back against the advocacy onslaught. As a former participant in the movement, I do think that western companies were slow to identify and respond to the risks posed by the natural resource advocacy movement.  In the July 18 edition, the Wall Street Journal published a forceful editorial, attacking Section 1502 on the grounds that companies will simply stop sourcing from Central Africa completely, rather than attempt to comply with what they contend is an impossibly burdensome regulation.

The editorial is behind a paywall, but I’ll just quote the conclusion, which argues that the withdrawal of companies from Central Africa will be worse for the people the regulation is intended to help:

“The highest price is being paid in central Africa, where millions of people, and 16% of the Congo’s population, are dependent on small-time digging. By all accounts most of the money from central African mining goes to these artisanal miners. Soldiers and rebels do pocket some of the proceeds, and that’s a depressing reality.

But mineral operations also provide the local population with centers of commerce, with cash to pay for supplies and workers and easily traded goods. As money from the mines becomes increasingly scarce, Congo’s warlords have moved on to targeting the banana trade. Perhaps conflict-free bananas will be the next object of activist enthusiasm.

Meanwhile, the butchery continues, with recent reports of government troops raping more than 100 women and children over a three-day spree in the Congo’s South Kivu region. If all the money from minerals dries up, these killers will not shy from even more atrocious means to fund their ambitions. As for Western policy makers, Section 1502 is a useful lesson in how well-meaning attempts to “do something” in Africa unintentionally harm the innocent without touching the guilty.”

The Journal makes a compelling argument but it’s difficult to know whether this is just a threat or whether  it is true that companies will stop sourcing from Central Africa rather than comply with Section 1502. I would definitely be interested in learning more from executives at  potentially affected companies, so if you’re reading get in touch and I’ll buy you coffee.

US Firm Risk Appetite Increasing?

The New York Times published an interesting article today about American companies operating on the Mexican border. The article suggests that despite the enormous security risks posed by drug cartels, American firms are expanding their manufacturing presence on the border.

One issue that has diminished American competitiveness in frontier markets (and the reason they’re called frontier is because they entail hefty security and political risks) is the low appetite for risk among American companies. Chinese firms have  a much higher risk tolerance, in part because the government plays a helpful role in mitigating and managing these risks.

If American firms hope to remain competitive, they will have to continue their expansion into high-risk frontier markets. The Times article points to a really interesting research study idea: Are the views of American executives towards security/political risks undergoing an evolution and if so why? Obviously oil and mining companies have a lot of experience in high risk markets (such as in Nigeria) but is the appetite for risk increasing in other sectors? (The company mentioned in the firm, Spellman High Voltage, is an electronics manufacturing company) What strategies are these companies adopting to manage security/political risks? Maybe political risk insurance? No doubt private security contractors, but how will their usage evolve  with increased enforcement of US and UK anti-bribery legislation? These are really interesting questions.