Adlevo Capital: A Private Equity Fund Discusses Targeting Technology-Enabling Ventures in Africa

Interview with Folabi Esan, Partner at Adlevo Capital

What is the major challenge in your business that prevents you to grow more?

The unique situation that Adlevo Capital is in today is as a fund at the end of its life. Funds typically have a 10-year life and then usually two extra years to wrap up your fund and exit. While a particular fund might be ending, the fund manager probably would have raised a second or even a third fund. So, the fund manager continues, even though one fund is ending. To have both a fund that is at the end of life and the fund manager having not yet raised a continuing fund is an unusual situation, even though it is happening more and more in the industry now. This is going to be more and more the reality. That for me is the most fascinating aspect of my day-to-day life at this point in time that I am trying to unravel. In one word, it is misalignment. At the end of the fund life, the biggest challenge that I have to deal with, and that I spend time working on, is to try to bring my LPs, my partners, and the portfolio companies into alignment to try to keep the wheels of the car still going in the same direction. Because at this point, everybody is doing something different and they have different objectives, different goals. So, a lot of time is spent trying to make sure that we do not lose coherence and congruence in the way that we go ahead. Dealing with that misalignment is fundamental. It is inescapable.

Why have you not started a second fund?

Adlevo Capital is a private equity fund manager founded on the belief that meaningful development in sub-Saharan Africa will be driven by the application of technology to business processes across all sectors. Adlevo makes equity and equity-linked investments in rapidly growing private companies in various stages of development.

The reason for not having a second or third fund at this time is something that we have to go back into history and see when Adlevo’s fund was raised what the objectives were and then what happened along the path. In a nutshell, as a first-time fund manager, you raise and manage a fund under a certain framework because that is the classic way of doing it. Often, it is a 10 plus one plus one fund with DFIs – Development Finance Institutions – as our initial LPs. We targeted $100 million as the raise. We raised about two thirds of that, and we sent out final documentation for LPs to sign off. That documentation went out in the first week of September, and in the second or third week of September 2008, Lehman Brothers collapsed. What then happened was that while all those commitments did not evaporate, they all were shaken. So, we could not really progress. In fact, those documents were never returned. Rather than getting documents returned and signatures saying “Yes, let’s go ahead,” we got letters and phone calls saying the world had changed and let’s see what is going to happen. The upshot of that was that we waited another two years, and we closed the fund at $42 million. We were one out of a handful of fund managers that closed at that time. We were also in a slightly different field. We were the first fund manager that focused on technology enabled businesses across Sub-Saharan Africa. This was not a typical area and we were rather new. At that point, these businesses were just beginning to emerge. They were nascent. They were growing. The entrepreneurs were the first ‘technology’ entrepreneurs. The whole framework for Series A, Series B, angel rounds, mentors, advisors, banks, partners, Y combinator, all that was non-existent. So, we entered into this new area and then we had to be careful about what investments we made. This was before it became a huge field which is much more active today and there are a lot more deals to choose from. That market started to blossom about our fifth year of operations. We were ahead of the curve, not just by the five years from when we closed, but also two years before we started. By the time we got to year five, which is normally your investment horizon, when you ought to have investing all your capital, we had not deployed all our capital, but we really needed to have more capital to invest because the industry was now ramping up. Unfortunately, our LPs who had been very supportive and generally quite helpful, had undergone many changes. The people had changed. Their ideas of what was going on and how the market would evolve had changed. The investment strategy or philosophy of some of these LPs had also changed. So, when we requested a top-up, it was almost like starting a new fund. We had three partners, scaled for a USD 100M fund, but we had USD 42M under management and the fund economics didn’t quite work. At the same time, my partner got an opportunity to manage a much larger fund. His first deal after he left Adlevo was just under $48 million into one business. That was our entire fund in one deal. Not only did we have this challenge of needing more fuel at the end of our investment period, we also now had a key man event. At that point, I was committed to ensuring that our LPs got the best value, that they did not feel like they were being short-changed by the GP. Our goal was to ensure that we did not abuse their trust. We want to make sure that even if there are conditions that happen where you know things do not go as planned, we will still do everything we can to safeguard their investments, to make the most of it to optimize investments. So, the commitment was that we would stay together even if we were not all working full time on the fund. All three partners still continue to give ourselves to helping the companies grow and eventually exit. We continue to have our weekly meetings which we had when we were a complete team. We continue to work together on all the reporting, on all the value addition, on all the strategy, even though I am the only person currently executing full-time on those things. I can draw on the resource of my partners. We are ensuring that the LPs do not lose the team. The team is still together. But what we realized was that we are not going to have a future team, the same team in a new fund, because the economics did not work. For me, it is a bit of a disappointment that we are not in the biggest companies being exited today because we ought to have been if we had been able to convince our LPs at that time to reup the fund. There are lessons all along the way for everybody involved. Even now, at the end of the fund, there are a lot of lessons about how to manage alignments because there is still a lot to be done.

Are you present in other activities?

Being a fund manager is like being a parent. Parenting is a full-time job. Sometimes the kids go play, everything is fine, they go to school, they come back, it is all good. But all the time, you – the parents – are thinking about them and all the time you are considering what the next thing will be. Then, sometimes they are going to get into trouble. There are peaks and troughs for how much engagement you need one on one, but you are always thinking about how to improve and get better performance and outcomes. There is almost no day when there isn’t a conversation about an opportunity, an idea, a potential new investor, somebody who wants to exit. It is a full-time job. But I am active in some syndicates where we make some other investments, so that occupies some of my time as well. But what really changes for a fund like ours, at the end of life, is that you are not actively sourcing new deals for a fund. That could quite easily be half your time, talking to entrepreneurs and so on for the fund. Because I am an angel investor, I do that anyway. So, in reality, my activities have not changed. I speak to entrepreneurs, I interact with them, respond to their questions, we exchange ideas, I advise them to invest or not invest at this point in time. This is the operational value addition to get the portfolio companies ready for exit. That is a really hands on activity. When you are at the point of exit, you have to be sure that the books are clean. You have to ensure that potential buyers are getting a fund and portfolio companies that are well run, well governed, well presented, everything works. Sometimes, you will feel that you need to bring in more money if there is a lot of activity in those companies. In fact, one of the key things that is interesting is that our portfolio has evolved over time. We invested in different types of companies, all of them technology-enabled, but some were a bit more mature in that they already existed, they already had revenue, they had well organized management structures and policies and support. We are really trying to find product market fit. In Africa, it is not that easy. You start off trying to do something and you might end up doing something quite different because you discover the market as you play. So, some of them are just now hitting their stride and in the last couple of years, we are seeing the proverbial hockey stick growth. Even then, you are really still hands on, trying to help them to grow, trying to help them to find people, trying to help to put in technology to manage the growth, trying to help them to do the necessary research, analytics, get the right data. How to influence all of these things with relationships at board and top management levels, given interest from many global investors to invest in local companies? There is no rest, really. I am trying to think about what is next and develop some of the things that would be future threads. It is now 14 years from the initial idea of Adlevo Capital. There is a lot of stuff we have done that we need to interpret, distill, and then give back in a way that helps the ecosystem grow. I am looking forward to that stage of our work.

When will this future thread happen?

The future thread can start now. In a way, it has already started. We have Adlevo Capital and we are going to exit the portfolio. So, we are working really hard to get value for our LPs. The question still remains, should I then continue and do something else with Adlevo Capital, the company and that name and the brand, or should we retire that name and brand and create something else? What is clear, though, is that there is 14 or 15 years of experience, of activity, that is worth distilling into something that continues. Now, that could be advisory work or it could be another fund done in a different way. When you have raised one fund, you ask yourself ‘if I were to do this again, I would do A, B, or C differently?’. I have some ideas on the kinds of things that we could do.

What activities are you doing with the portfolio now?

It depends a lot on the specific asset you are talking about. If you look at an asset like Interswitch, which we have been in for eight years, it is a very large company and we have a very small share of that. Therefore, we are not in a position to drive an outcome. We are able to speak to the management, speak to the investors, and suggest ways to exit. Interswitch is on a natural exit path of an IPO. It has been close to an IPO a couple of times, but unfortunately, external factors have usually come in the way. For example, last year was the pandemic and the year before that was Nigeria being in a recession, or just coming out of recession. The good thing about Interswitch is that it is a very big, very profitable, very dominant company and continues to be that way. So, there is no real pressure on the companies; although there could be pressure on the investors who want to exit. But if we really wanted to exit that badly, it is quite liquid. A lot of people would be interested to take it off our hands.

Our next largest or most visible investment is Paga. Paga is a growing company. It is the largest non-bank independent mobile money company in Nigeria so we target a large network of agents. There are new products coming out. Paga was in an expansion stage and for them, we thought, what would be a way for us to exit because the company itself wants to continue? First of all, of course, the existing investors have a right. Otherwise, we look for new investors who might want to come in and do a secondary transaction. They might want to make an investment of X million, but this percentage of 30% or 40% will be a secondary. We are able to take part of our investment in that way. Looking for secondary investors who want to make an investment or who want primary plus secondary would be interesting. With a company like Paga with multiple investors, a very large company, very structured, we are not going to be driving that. We are going to be talking about how to make it happen. So, it is always collaborative in those kinds of instances.

Then, we have three companies that are in different stages, they may be smaller, in an earlier stage, or a new stage of innovation where they’ve created a new product or it is a new market. Then we might have more of a say. We might find partners who might want to do a joint venture, partners who want to acquire the whole company, ways to sell the technology which is core to the company. Someone might be interested in the core, technical competencies of the company and our job is to look for adjacencies, look for similar companies, maybe bigger. Sometimes there might be a customer who is interested in absorbing the skills and capacities that these companies have. But all the time, it is a creative process. It is a process where you are thinking, you are dreaming, you are imagining. Who is interested in this? Who should be interested in this? Why should they be interested? What story can I tell them that makes them want to be involved? That process generally involves us putting together a story, putting together the list of people that you really want to talk to. Then, of course, you can do a secondary for the whole fund. It is a fairly balanced portfolio with very large companies, very interesting smaller ones that are growing like weeds, big ones that have positive cash flow. Put them together and you have a nice balance of big positive cash flow and small positive cash flow. If you take a look at Helios Partners, for example, who are the lead investors in Interswitch, they started out by essentially buying out a small portfolio of assets and working with those, turning them around, and getting the value. Because their portfolio is at the end of its life, while somebody exits, somebody else could come in as a fresher. You already have some assets and they bring a little bit more capital so you have a bit more time. You just need to find someone whose vision aligns with the potential and the possibilities that are being created. At the end of the day, you have to be a great storyteller.

I was listening to an interview with a London Business School professor interviewing Roger Martin who is the former Dean of the Rothman Business School in Toronto and he was talking about how business schools teach people how to analyze quantities. So, we learn how to differentiate quantities, we can count things, but oftentimes, you have to learn to differentiate qualities. The qualitative assessment becomes very fundamental. What we need to be doing as business people and as investors is to create the value that is in the future. These numbers are the past. They tell you something, but they are not the thing that tells you what the future is. There are always new opportunities, new ideas, new openings, new countries. It is the infinite game. It is a game of possibilities. It is a game of creation in how you combine these things to bring out the next new value and it does not end. Any fund manager is doing a valuation every quarter and presenting that to the LPs. You must do all of that. But at the same time, you have to look beyond the numbers, you have to look into the essence of what these guys are trying to create as entrepreneurs, and that honestly goes far beyond the numbers. The great person who becomes an asset and turns it around is the one who can see what the numbers do not show. I am learning not to give up and to never say never. The reason we were invested in these companies was because we saw something in them, we saw opportunity, we saw potential, and if the potential has not actually come to fruition, if for some reason it is being killed by regulation or by some macro thing, then it is not over. We have an investment horizon so we have to exit, but that does not mean that that asset is not valuable. I am very optimistic, very hopeful, very pragmatic, as well. When you look at the history of the company, you start to see certain things like resilience, not giving up, finding the next way, finding how to turn adversity into an advantage. You can see that many companies in the last year demonstrated all kinds of versatility, all kinds of resilience, to go through what continues to be a global concern. How do you live and grow and thrive in this new environment? Companies that already have that as part of their DNA of adaptation, of finding a way even when it looks as bleak as possible, those guys will survive. We have examples of that all over in every country, including in Africa. I am bullish that the companies will do well. I do not know if we will be fortunate and creative enough to get the right investors to give us the value that we think is in them. These companies all have the seeds of great companies in them and some already are blooming and showing their potential and some are just about to show their potential. My job is to find someone who will be a good gardener.

How do you advise the companies that you are investing in on CSR, the environment, and other social issues?

All of us have a role in sustaining the earth which is where we all draw vitality from. If there are no environments that we can live in, then there is no point. If we are all on a sinking ship, then it is just a matter of time. We have to be cognizant of that. All the evolutions of the stories from PPP, bottom line, venture philanthropy are just extensions of the same thing that we must live in harmony with the earth. From the very beginning, we have always had social development at the heart of our operations because we are in emerging markets in Africa mostly. We want to make sure that our portfolio companies’ activities impact on the health of the employees and members of communities is positive. We want integration into the global economy because we believe that that is how you get sustained growth and you contribute to the well-being of your own country. We look at reduction of poverty. We can see that the companies we invest in are creating jobs and have above average wages. We want to look at environmental stewardship which is very direct. We want to be sure that those companies do not degrade the environment. We want people to develop skills, grow their capacity, and contribute to the economies where they are. These were things that we came up with at the beginning of our journey and we still hold on to them. We measure the companies along these qualitative lines. It is fundamental. It is a losing game to pollute your own environment. It is a losing game to abuse your employees or to take advantage of employees. It is a losing game to take advantage of a community.

When you started this journey, what was your inspiration? What drives you to do what you do?

When I was graduating from university, I was thinking about what my life would be like and what I would like to do. I really came to the realization that teachers, farmers, and entrepreneurs were the people I needed to help. I wanted them to grow and have a good life. I wanted to improve their conditions to ensure that they were able to have a fulfilled life. Whatever I did would have positive impact on teachers, farmers, and entrepreneurs. These were the people who created sustainable cycles on Earth. Teachers pass on our collective values, our civilization, to the next generation. Farmers feed us. Entrepreneurs bring those amazing ideas and they create the economic cycles that we also live by. So, for me, at a very young age, I saw those three groups of people as those I wanted to serve. Somehow, the universe conspired, pushing me more and more towards entrepreneurs in a way. Having gone through some entrepreneurship myself and consulting, eventually, when the opportunity came to finance entrepreneurs and to help them to achieve their dreams, it was perfectly aligned with what I had always wanted to do. Philosophically, I want to help people to achieve fulfilment and make sure that I am able to give as much as I can give, to support them, to help them to help us, the earth, everybody to be sustained and to thrive.

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