By Wendy Luhabe, Member of the Board, The Abraaj Group
Over the last few years the financial services industry in developed markets has frequently been taken to task over the sustainability of its preferred investment structures, the use of excessive leverage, and transactional arrangements that “take out” before “putting in”. More recently, the relentless pursuit of short term financial returns at the expense of any serious consideration of broader stakeholder benefits has been of concern resulting in a breakdown of trust within the industry at large.
As someone who has worked in the asset management industry for over two decades, I would argue that a different kind of investment model exists and thrives in that region of the world we describe as ‘growth markets’ (and others refer to as ‘emerging’).
The model that I refer to is founded on the principle of ‘partnership capital’. It is an approach to doing business – most evidently through the private equity model – where shareholder and investor returns go hand-in-hand with long-term sustainable partnerships forged between different parts of the broader socio-economic landscape and entrepreneurial ecosystem.
The success of such a model is predicated on a number of factors but alignment and trust are, in my view, the two essential building blocks. The reason for this is simple. Today, the growth markets landscape is shaped by successful family led businesses that are grappling with issues of succession planning and institutionalization on the one hand, and a desire to bring in smart capital that will help catalyse the growth of their business, on the other.
A People Business
It is often said that at the end of the day, private equity is a people business. Given the long-term outlook of the industry, forging effective partnerships between the incoming investor and the legacy owner and management team is key to the development of a successful business relationship that might last anywhere from three to eight years. But such a model is also necessary from a more pragmatic standpoint. Today, arguably the biggest risk for investors in growth markets is counterparty risk: that is the risk that the owner-management of the business is not able or willing to deliver performance in line with the investment case, often in a difficult micro-economic environment, and without resorting to any questionable business practices. Mitigating counterparty risk can be achieved in two ways – first, by being truly local and networked in the markets in which one invests so that you truly know your partner before investing, and secondly, by building relationships of trust with your counterparty to align on a long-term vision and commitment to the business, its management and employees that both parties believe in as best for all stakeholders.
In order for partnership capital to take root, a broad based and inclusive approach is imperative. Private equity investors who recognize that the role of business in society is one that requires us to invest responsibly, to act collaboratively, and to align our long-term success with the interests of the stakeholders we serve, are those that have genuinely adopted the model of partnership capital.
This is most evident when investors have treated people as their most important constituents. It manifests itself when private equity investors embed environmental, social and governance (ESG) considerations in their partner companies through the investment cycle, develop transformative social and economic programs for the communities with whom they work, and commit to improving the health, safety and well-being of workers and their families in ways that go far deeper than those prescribed by local legal frameworks.
Enabling Growth, Transforming Businesses
Such models of partnership capital can only be successful if they are fundamentally linked to the very DNA of an organization and embedded in its operating philosophy and practice. This model, in my view, has been most robustly developed and deployed by The Abraaj Group, a growth markets investor that I know extremely well in my capacity as a member of the Board. Since its inception fifteen years ago, Abraaj has deliberately worked towards pioneering a private equity model where, although shareholder and investor returns are the primary goal, the ability to create long-term partnerships through alignment and trust is a critical factor of success.
The markets in which Abraaj invests are young, dynamic, and forward looking. An important landscape of that market are proud, family owned businesses that seek private capital and institutional expertise to take them to the next level of growth. Yet while such businesses seek private capital, they do so in the recognition that they will be equal participants in their company’s success. Private equity firms that seek to invest in these businesses will only succeed if they adopt an investment model that is inclusive, broad based and genuinely based on long-term partnership.
Private capital is a massive enabler for economic development in growth markets. One can only imagine how transformative private capital can be for economies, businesses and communities, when it is imbued with a genuine partnership approach. It is time that such an approach becomes the norm and not the exception.