Since inception in 2008, our goal has been to bring timeless investment wisdom and timely ideas to our members worldwide. In the full spirit of our vision, I recently met with Gordon McLaughlin, Partner at Development Capital Partners, to explore domain-specific knowledge his firm has accumulated from 100+ investment trips to Africa.

As Africa-focused value investors, Gordon and his partners at Development Capital Partners travel extensively throughout the continent (to South Africa and well beyond: Botswana, Congo, Ethiopia, Ghana, Namibia, Nigeria) in search of intelligent investments — both public and private.

Gordon generously shared from his wealth of cumulative experience and his perspectives below are particularly insightful:

There are three patterns to the types of businesses we’ve focused on while investing in Africa:

First, we always knew — but have learned over and over again — that you can’t go wrong investing in, and working with, great people. A business is a collection of people and assets; you have to know the people running the company, their motivations, and their character.  We’ve tended to have our biggest positions in companies where we felt comfortable with the motivations and character of the people running the business.

 

Second, a major constraint in Africa — which isn’t the case around the world right now — is capital. Risk-free rates are high and debt capital is constrained in most of the countries in which we are investing.  The average risk-free interest rate of most countries we are investing in is over 12% and in some cases as high as 25%.   Companies that have a capital-efficient business model are really the only ones that can survive and thrive in those kinds of environments.  We’ve stayed away from businesses that require a large investment up front on an ongoing basis or require large debt capital to produce high equity returns because that model doesn’t work very well in Africa.

 

Third, is a pattern of industries where there’s a growth path driven by formalization as opposed to broad macroeconomic growth.   For example, formal retail penetration replacing informal modes of retail.   An organized supermarket is much more efficient terms of the cost of its logistics and both the quality and price of goods that can be delivered for consumers.  That growth isn’t necessarily hurt, or even changed dramatically, by what’s happening at a macroeconomic level.

 

(Slightly edited for readability)