An Interview with Steve Beck of SpringHill Equity Management

By Nan Mooney 11/05/2010 16:40

Steve Beck is the co-founder and CEO of SpringHill Equity Management LLC, a private
equity fund manager providing growth capital and support to small and medium sized enterprises in Africa. He also serves as a senior fellow at the John Templeton Foundation. With over 10 years experience in international philanthropy, he’s a published expert in philanthropy, social investing, and international development.

SpringHill Equity calls itself a social private equity fund manager. What exactly does this mean?

It means simply that we are intentionally screening investments for social benefit as well as for financial return to the investors. We are looking to have our cake and eat it too… to do well and good at the same time. I wish we didn’t have to “qualify” the private equity fund with the word “social.” I genuinely believe that great businesses generate significant social benefits, because great businesses do four things exceedingly well:
1)    Create unique value for customers through differentiated, innovative and complex products and/or services.
2)    Generate a sustainable profit for owners commensurate with the risks taken by investing in them.
3)    Engage and invest in their workers through training and education, safe working conditions, and high and rising salaries.
4)    Protect the future by operating in ways that strengthen the community and environment.
The reason we have used the word “social” to describe our fund is to underline our intentionality, which goes beyond short- term profit, which is sometimes the only motivation of investors.

What makes social investing different from conventional investing? What must investors consider?

Most of what has come to be called “social investing” has relied on negative screening. That is, funds that exclude so-called sin stocks like tobacco, alcohol, arms manufacturers, etc. Social investment funds like this have grown in popularity but this is not what we mean. Ours is a positively-screened fund, proactively looking for measurable, verifiable social benefit from the investments we make in low-income countries in sub-Saharan Africa, including: increased number of jobs, increased wages, improvements in non-wage benefits, delivery of essential, high-value-added products and services to the poor (and the life-changing impact these have), growth of suppliers’ businesses, increased tax base and export income, improved corporate governance, business practices and financial accountability, and ultimately improved access to capital. When you add up all of the quantifiable improvements you can establish the total economic return on investment, the proceeds of which are shared between the investors, entrepreneur, and the community that is served.

What kind of financial returns can investors typically expect on social investments?

Of course, the answer to this depends on the particular sector, geography, approach, and competence of the fund manager. Our focus is on small & medium-sized enterprises in southern and east Africa where we can see annual financial returns in the 15-20% range.

Does SpringHill cater to smaller investors as well or is it geared to people with more money?

As a private equity fund with a limited partnership structure, SpringHill is only set up to serve accredited investors – either institutions or high net worth individuals. Our hope is to play our part in a broader movement to promote an asset class – small & medium sized enterprises in frontier markets. Over time, I think we will see listed vehicles in which investors of all sizes can participate.

How did you personally develop an expertise in international philanthropy?

In late 1999 I got involved part-time with a then nascent organization called Geneva Global, backed by private investors/philanthropists. Geneva Global is a philanthropic advisory firm providing independent research, advice, and grant management services to donor clients focused on international development. Essentially Geneva Global applies rigorous investment discipline to international philanthropy, focusing extraordinary effort on discovering how to achieve the greatest “bang for the buck.” In 2002, I took a leave of absence from the strategy consulting firm - Monitor Company - where I was a senior partner and managing director of our Europe/Middle East/Africa business based in London, to help lead Geneva Global. From 2002-2007 the firm became a recognized leader in international philanthropy, managing more than $80 million of grants in global health, human liberty, economic empowerment, education, and conflict recovery.

Besides the obvious matter of location, how does international philanthropy differ from domestic?

Put simply, international philanthropy is on a different risk/return frontier. On the risk side, there are more things that can go wrong with a remote grant into an unfamiliar setting. That’s why a professional intermediary with local presence is so important. However, there is no doubt that well-placed grants can make a much bigger difference to more people in Africa and many parts of Asia, even Eastern Europe and Latin America than comparable domestic grants here in the US or in Western Europe. The challenge is to identify effective locally run initiatives that can scale. Because of the risks, we never recommended funding start-up programs – only those initiatives that the local community was already supporting with their own scarce resources. That policy helped us ensure we were backing projects that were already a high priority in the community.

Sub-Sahara Africa has been a particular focus of yours and of SpringHill. What are the specific considerations when investing in this region?

I do think it’s important that investors begin to look at many countries in Africa the way they look at other geographies. Too often, we adopt a default response to Africa that says, “Africa needs more aid.” “Africa is a special case.” On the contrary, we see no shortage of skilled entrepreneurs with profitable, growing businesses looking for patient growth capital because they are not well served by the local banks who find it easier to lend to governments than to the local businessman. So the primary considerations are the same in Africa as anywhere else, e.g., the quality and track record of the entrepreneur and management team (1st and 2nd level), the nature and size of the market opportunity, the strength and durability of competitive advantage, the business model, etc. In our sector (small & medium-sized enterprises) we must be able to provide more than money – what is the distinctive knowledge, experience or relationship capital that we can bring to bear to enable and ensure business growth and success? And in the African markets, we need to think more carefully about the exit strategy given more nascent capital markets and fewer third party buyers.

How do you identify potential investments?

We generate deal flow in a number of ways, including (a) the Pioneers of Prosperity Africa Awards, a program of former colleagues of mine at SEVEN Fund (http://www.sevenfund.org) and OTF Group (http://www.otfgroup.com) which last year screened over 1,400 small and medium enterprises to make 10 finalist awards; (b) the Transformational Business Network (http://www.tbnetwork.org), a network of more than 200 business people supporting micro, small, and medium enterprises in developing countries that was co-founded by my business partner, Dr. Kim Tan; (c) personal and professional relationships with local funds, microfinance institutions, development corporations, consulting firms, civil society and business leaders developed since 1992; (d) a dedicated regional presence with team in Johannesburg and Nairobi.

What did you learn from your experience in international philanthropy that you have applied to SpringHill?

There is no doubt that well-placed grants can change lives, build communities and address critical problems. I saw the life-changing benefits with my own eyes time and time again. Yet, there are particular dangers and limitations of philanthropy – even where one is as intentional and outcome-focused as we were at Geneva Global. The danger inherent in philanthropy is what I call the “messiah complex.” Well-intentioned philanthropy feeds our need to be needed and we unwittingly foster a dependency relationship with the grantee and beneficiaries. We may intend “partnership” and speak about “empowerment” but the fact is the relationship is almost always uneven. We want to be needed; we want to “save” people. And on the other side of the transaction, the best way to get money is to appear needy. That’s the key danger in philanthropy, and it’s a hazard for both the benefactor and the beneficiary.

Aid and philanthropy rarely yield scalable and sustainable impact. What happens when the grant money runs out? More is needed to scale and sustain the impact. Grant projects don’t typically generate their own income. For example, we brokered funding to a project that was rescuing small children from slavery in the fishing industry in the Lake Volta region of Ghana. The program was effective at rescuing the children and getting them back in school. But why were the children enslaved in the first place? Poverty. The fact is, their families were unable to feed and care for them so they were either sold or given to work in the dangerous and grueling fishing industry at the age of 7, 8 or 9. Any scalable sustainable solution to the problem required greater economic activity and opportunity in the “source” regions.

Commercial businesses are the only scalable, sustainable solution to poverty. They are foundational to economic development and are inherently scalable and self-sustaining. That’s why I am investing my time and resources into a Fund that is fueling private enterprise and profitable, growing businesses in Africa.

Is there something particularly exciting that you’re looking at now?

There are a number of deals in our pipeline that are very promising. Let me highlight two in particular.

One is a suite of products powered by solar energy: a small, unbreakable solar panel with connections to a 4-setting unbreakable LED light, rechargeable battery pack, mobile phones of various types and mobile radios. They product set will sell for approximately $16 and last for a minimum of 3-5 years. The transformative effect on low-income households is remarkable. Households currently spend $75-90 per year on kerosene (fuel for lanterns) and disposable batteries so there is a very rapid, tangible economic benefit to these families. Secondly there is a significant health benefit as kerosene lamps burned in confined spaces cause respiratory problems and are a fire hazard. And disposable batteries are a well-known environmental hazard. The company can get this suite of products to market and realize a 20% margin in the process. Talk about a triple win!

The second is a mobile phone information portal using existing short-code SMS (text) technology. If you travel in Africa you will notice that almost everyone has a mobile phone (there are 380 million mobile phones in Africa today, growing at double-digit rates.) Yet there is only 5% Internet penetration; Internet continues to be out of reach for the vast majority of the population. It is clear that the mobile phone is and will continue to be the information hub for Africa. This information portal will provide companies in Africa with a mobile presence via outbound text, while consumers will be able to access critical information using texts on the mobile phone… information that you and I would get via Google. Think of the difference this makes for a farmer in a remote location: he can now access weather information, current accurate crop prices so he’s not disadvantaged when he goes to market, healthcare information. The list is endless… and the market opportunity is enormous.

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