Much of the talk at the moment, and nearly always, is where we should invest in a world of recession, low-interest rates, unpredictable markets and a challenging socio-political climate. As open borders in East Africa close, open, close and re-open again and as Kenya prepares for yet another Covid-19 lock-down our own region is particularly challenging.
I am a member of several international investment groups and so I am fortunate to hear the views, perspectives and experiences of many clever and visionary investors around the world. I have written here before about ESG investing – Environmental, Social Impact and Governance – the “do’s” of impact invest but I haven’t written about the “Don’ts”. And it strikes me that we should be talking just as much, perhaps even more, about where not to invest at the moment and in the future.
Here is a different understanding of ESG as a pneumonic in investment – the better known ESG values means that you proactively invest in anything that delivers an environmentally friendly, positive social impact where there is good governance and an ongoing measure and controls over all aspects of the investment and its supply chain.
My alternative ESG investing principles are as follows:
Exit – the most important aspect of any investment in any asset class. How am I going to get my money back? How is the investment going to pay the interest promised? When are they going to pay me? What might delay an exit? What is the latest that I am going to be reimbursed? If an investment isn’t clear about the exit then don’t enter and if the exit is one of those nebulous statements like “we will float the company for $10bn within a year” or “we expect to sell all 330 apartments within three months” or “Google is already begging us for a sale”, then the answer is that the underlying exit strategy is prayer. And even as a believer I do not think that is credible!
Simplicity – if you don’t understand it then don’t invest in it. It really is that simple. Everyone who loses money on investments and is unhappy about it did not understand the risk/reward ratio, the inherent risks in investing, and the investment that they had funded. If it does not make sense to you then it does not make sense. All of the most enticing investments on the market today can’t be properly explained and there is a reason for that! This month I was offered an investment that, if I committed $500k, would return me $5m a month for 10 months. How exactly? There followed a long and rambling discourse about a gate-keeper, seven elite and unnameable trading desks and an additional 10% a month to any good cause I liked. I almost expected to be inducted into the Fellowship of the Ring at any point. Perhaps that only happens when you give them the gold. They have filled four of ten slots by the way.
Groups – the groups of people who are promoting the investment, the base of existing investors and the group running the investment – directors, auditors, management team and leaders of the business or organisation. The best investments will fail if the people behind them are wrong and that is one of the reasons that I never invest without meeting the team that get the money. It is also good to see who is promoting the investment because if the opportunity is being offered by everyone, pushed hard by telephone call centre and offering the promoters huge commissions then there is something wrong. I have avoided at least two big failures because I knew that the promoters were people I would never allow to represent my business. I like to know how many investors there have been before me and how much they have invested on average. That is a really good metric because if their average investment is low then their average investor is not sophisticated but a retail investor. And the hard truth is that retail investors rarely make great returns. The professional advisers to a business also give you a flavour of the business itself. If a new company is advised by a big four accountant, that makes me nervous. But not as nervous as if they are advised by their brother’s mate who once did an online course in financial literacy.
So from the alternative ESG strategy of Exit, Simplicity and Groups the summary is – be sure of the exit; understand the investment completely; and only deal with credible companies who value their reputation, understand and excel in their businesses, and accept their need for high quality external advice.
I do wholeheartedly believe in the Environmental, Social Impact and Governance translation of ESG as well. Last week I was presented with two investments – one in London and the other in South America. Both of them were presented by competent people, both of them had reasonably good track records, both of them will probably make money (especially the South American one) and both of them were predicated on the fact that in London and Lima you can find people who will work in the “gig” economy – pay based on deliverables, no minimum wage, no holidays, no sick pay and no workers’ rights. Both of them compared themselves to Uber, the ride hailing application loathed as a business by anyone with a soul or shred of humanity!
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The exits were clear. The business models were simple – one located cleaners via an app, the other delivered last mile packages also based around an app so that in both cases the poor could undercut the poor to win the low-paying job. And the people behind both these businesses were already running them successfully in other territories.
So whilst these opportunities passed my ESG test comfortably they failed the traditional ESG standards by some way. The thing that saddened me the most is that neither of the presenters could see why their businesses are completely un-investible to most of the modern investors that I know. We don´t want to make our money on the back of those who need a hand-up and not just a handout.
Jon Pedley is Chief Operating Officer, Investment Owl.
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