What an LP wants

Why is understanding and influencing drivers of returns the most important factor you consider when managing your private equity portfolio?

Sarona was founded to contribute to profitable, sustainable and responsible growth in frontier and emerging markets. We seek to identify the best possible GPs based in and operating across Africa, Asia (excluding China), Latin America and emerging Europe.

In turn, we expect these GPs to build strong portfolios of mid-market, growth-stage companies that deliver goods and services to a rising domestic middle class with increasing consumption power and growing aspirations. Demographics, urbanization and increasing GDP are all powerful tailwinds in the sails of entrepreneurial companies with solid business models but not enough capital to expand their activities. These are the companies that Sarona’s capital is designed to reach through experienced local partners.

Given our strategy, the most important drivers of return for our portfolio are manager selection and portfolio construction. It is essential for us to identify and select local managers (we do not believe that a flying-in flying-out model can work as effectively) with values and objectives aligned with Sarona’s. To do so, we need to understand in great detail their past experience, their team dynamics, and their ability and experience in adding operational and strategic value to their portfolio companies.
Environmental, social and governance considerations are particularly important in countries where ESG concerns have not been historical focus points. We sit on funds’ boards to understand and influence portfolios over the life of the fund.

Portfolio construction is important because it allows us to manage the J-curve effect by allocating up to 40 percent to secondaries and co-investments. Understanding the investment thesis, believing in the strategy and influencing the quality of its implementation are essential factors to achieving the returns expected from our private equity portfolio.

Do you value the use of an external valuation expert as part of an underlying fund manager’s valuation process?

When we select fund managers we pay particular attention to their experience, knowledge and ethical approach to company selection and ongoing valuation. We require annual audit accounts by a reputable firm, but we do not expect external third-party valuation experts. Our fund managers should themselves be the best possible experts and Sarona then applies a sanity check before we report to our own investors.

How satisfied are you with the current cybersecurity policies of your fund managers?
When we perform due diligence we consider the IT systems put in place by fund managers. If we find that there is room for improvement, we suggest corrective actions and monitor implementation. We find that most fund managers are keen to meet required standards.

Is it important to meet the finance and operations team of the fund managers? 

It is very important for Sarona to meet all team members of the fund managers we select, especially those responsible for the finance and operations of the GP itself and of underlying companies. 

We attach particular importance to the fund managers’ ability to add value to their portfolio companies and to their intention to do so according to the highest possible international standards. During our due diligence we do not see a distinction between investment teams and finance-operational teams. Good investments are those that are “done right” by the whole team working seamlessly.

Why are geopolitical risks one of the most important macro issues to impact private equity investing over the next 12 months?

For Sarona, investing in frontier and emerging markets is a long-term proposition, and we see it as an opportunity for asset owners to diversify from other forms of private equity exposure, including listed equity emerging markets.

We do not believe that it is possible, or advisable, for private equity investors to time these markets based on macro considerations. Sarona believes in the possibility of generating attractive returns from private equity and micro-company selection in these countries so strongly that we have built our whole company around it.

Yes, we live in uncertain times and geopolitical risks are all around us. However, we have repeatedly witnessed the ability of domestic companies, serving domestic demand, to continue growing revenues and profits in spite of macro headwinds. Pharma companies in Algeria, fruit juice factories in Nigeria, universities in Egypt, restaurant chains in Vietnam, financial inclusion institutions in Colombia, tile manufacturing in India … these are all companies that can continue to grow successfully when they are well-run by competent management teams.

There is a large gap between perceived macro risks and the risk profile of a well-diversified private equity portfolio, as run by Sarona. While we are and will be consistently present in these markets, we also believe that over the next 12 months we will see some particularly attractive investment opportunities as currencies have devalued against the US dollar and global investor sentiment has turned away from emerging markets.

Where in Africa and the Middle East do you see the biggest opportunities?

We see opportunities across all our markets and, in building our portfolios, we seek to capture the best ones while meeting our diversification criteria, which are so important to mitigate risk. As already mentioned, we believe the best opportunities are in the smaller mid-market segment of these fast growing economies and sectors serving domestic demand.

Of course we remain mindful of countries where the rule of law, ability to do business and infrastructure requirements are below acceptable levels; countries such as Sudan, Venezuela, Syria, Afghanistan do not currently belong in our investable universe. Yet, we believe that countries such as Nigeria, Ethiopia, Morocco, Turkey, Philippines and Mexico, among many others, present significant opportunities if approached thoughtfully and competently.