2020 Year End Reflections

Euler Bropleh

December 30, 2020

I am a big fan of The Voice, the American singing competition TV series. And yet, I’ve been frustrated that none of the winners of the show over the past ten years (19 seasons) have any meaningful commercial success after winning. Shouldn’t a show whose judges have included some of the biggest names in music (like John Legend, Kelly Clarkson, Blake Shelton, Adam Levine, Alicia Keyes, Jennifer Hudson, and Shakira, among others), see at least one or two winners that would go on to be “stars” after 19 attempts? Over at American Idol, a similar show, winners like Carrie Underwood and Kelly Clarkson have gone on to sell millions of albums and garner Grammy and Billboard awards galore.

Then came Morgan Wallen, 2020 Country Music Association New Artist of the Year. His song “7 Summers” was listed as one of the Top 10 songs of 2020 by Time Magazine and he recently appeared as a musical guest on Saturday Night Live. In Season 6 of The Voice, Morgan was sent home early in the season before making it to the live rounds. Arguably, Morgan’s recent accolades make him the most successful contestant to have ever competed on The Voice, yet the judges totally missed him.

Like the judges on The Voice, investment managers like us are expected to evaluate a pool of talented people (and businesses) and select the ones that we think have the highest likelihood of being successful. Unlike judges on The Voice, we play a role in ensuring the long-term success of our portfolio companies. Whether an investment is ultimately successful takes time, just like it does for the winning contestants on The Voice to show whether they can be stars.

Outside of their investment track record, one piece of information that can help in assessing the quality of an investment manager is the accuracy of their assumptions and predictions over shorter periods. Each year, many of us make public predictions about what we believe will happen in the year ahead, and very few us review the accuracy of our predictions. Unsurprisingly maybe, since academic research has shown that those forecasts are typically inaccurate.

Earlier this year, we sent our limited partners our thoughts about a few things we could expect in the year ahead. Our predictions early in 2020 completely missed COVID-19’s impact globally and on the markets where we invest. Once it became apparent how historic the pandemic would be, we shared a few issues that we thought would be critical as we attempted to navigate it.

Here is a review of how we did with our predictions for 2020 and our thoughts about the issues that COVID-19 would present:

  • Enhanced trade engagement between African countries and the US and U.K. — We predicted that there would be an increased focus on trade and business linkages between African countries and the UK and the U.S. While the UK needs to improve trade with other parts of the world post-Brexit, the United States’ wants to counteract China’s growing influence on the continent. All sides took steps towards improving trade with the other — for example, the UK entered into Economic Partnership Agreements with several African countries and the U.S. government formally launched the Prosper Africa initiative to increase trade and investment between the U.S. and the African continent — and we believe this trend will continue.
  • Further “venturing” into the early-stage market by large institutions — We predicted that large companies and development finance institutions would start to make more direct investments in early-stage businesses in Africa. From the launch of the U.S. Development Finance Corporation, with their ability to make equity investments in companies and their investment in Kasha (along with Finnfund and Swedfund), to Stripe’s acquisition of Paystack, WorldRemit’s acquisition of Sendwave, and Bezos Expedition’s investment in Chipper Cash, we saw an increasing interest in early-stage companies across Africa, particularly those in the fintech sector. This trend will continue with the fintech sector continuing to lead the way, but we ultimately expect it to expand beyond the technology sector.
  • Increasing number of funds managed by local investors and an increase in capital flows to local entrepreneurs — The lion’s share of capital going to early-stage companies in Africa still comes from outside the continent. The number of African-led and Africa-based investors is rising, however, and so is the amount of funding flowing to local entrepreneurs. We will continue to see improvement in this area given the increased interest in backing diverse fund managers and entrepreneurs.
  • As “first-generation” startups mature, a new crop of founders will emerge — We have started to see more entrepreneurs who have experience building and exiting businesses on the continent start new companies. They bring with them valuable experience and credibility. However, we are still in the early phases of this trend and look forward to seeing the community of successful repeat entrepreneurs continue to grow.
  • Roll-up our sleeves — Even more than ever, we believed that the most effective way for us to help our portfolio companies was to be a sounding board for ideas on how to think through and resolve the pandemic’s challenges, provide direct assistance in areas that could supplement the work being done by each of those companies, and assist in addressing capital constraints with flexible sources of funding. We also assessed the areas of greatest needs/concerns for each of our portfolio companies and that is where we focused on providing support. Our portfolio companies continue to navigate the challenges that the COVID-19 presents and several are thriving due to adjustments they made in response to the pandemic.
  • COVID-19’s impact on consumer behavior and spending patterns — Unsurprisingly, we believed that consumers would cut back on spending, especially on discretionary items, during the pandemic given uncertainties about the economy and their ability to continue to earn an income, but we were unsure of how long that uncertainty would last, and which product and service categories would be negatively impacted. A few things that have become abundantly clear are that: demand for essential products is relatively inelastic, mass market consumers will continue to be the primary drivers of consumption on the continent, and both consumers and retailers have quickly adapted to the new reality to find alternative methods for getting the products they need, including leveraging digital tools to conduct commercial transactions. With mass vaccinations unlikely to begin across Africa until mid-2021, COVID-19’s impact on consumer behavior and spending patterns is likely to continue through much of 2021.
  • Preparations for the next global crisis — We believed that fighting the virus would require a coordinated response. Fortunately, African countries stepped up to the plate by: following guidance issued by the Africa Centres for Disease Control and Prevention on how to handle the virus, creating the Africa CDC COVID-19 Travel Pass to provide a standard for traveling across the continent that prevented the spread of the virus, and establishing the Africa Medical Supplies Platform to assist with the manufacturing and procurement of certified medical equipment such as diagnostic kits, PPE, and clinical management devices. Many countries also leveraged the experience gained and infrastructure established during the Ebola pandemic. The success the continent has had to date will inspire a higher level of confidence in its institutions and their ability to coordinate a response to the next global health pandemic.
  • Africa’s ability to capitalize on the renewed urgency to diversify global supply chains — We believed that African countries and businesses should capitalize on the opportunity presented by COVID-19 to play a more significant role in the global supply of raw materials and finished products. The Africa Medical Supplies Platform is playing a role in boosting intra-regional trade in the pharmaceutical sector and the African Continental Free Trade Agreement, which comes into effect on January 1, will help usher in improvements in other sectors as well. This is a medium to long term effort, and we believe the pandemic has provided a greater sense of urgency on this matter.
  • The impact that clogged logistics infrastructure would have on economies across Africa — We believed ports across the continent would experience issues with efficiency, congestion, and closures, causing delays in the import and export of products that would, in turn, lead to scarcity of certain products and price increases. We have seen a decline in volume of goods flowing through ports and the number of container vessels arriving at ports across Africa. We have also seen significant delays in cross-border road transport due to a shortage of drivers, reduced utilization of trucks, and delays and stoppages on road routes, especially at border crossings.

Of course, there are developments that we failed to predict or account for — such as our decision a few years ago to not invest in the fintech sector, regulatory backlash that led to a minimum local ownership requirement for companies in Kenya’s ICT sector and the imposition of restrictions and fees on ride-hailing companies in Nigeria, and the escalation of the military conflict in Ethiopia’s Tigray region and the unrest in Nigeria related to the protest against the federal Special Anti-Robbery Squad (SARS) — but we did not aim to boil the ocean with our predictions. For us, these predictions impact how we: set our priorities for the year ahead, view the investment opportunities that we consider, manage our portfolio companies, and build relationships with key partners.

We look forward to sharing our predictions for the years ahead early each year and assessing how we did at the end of each year. Hopefully, we can make better judgments and have more success than The Voice has had in selecting music stars.

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