Sarona Asset Management is a boutique investment firm with the goal of achieving triple bottom line targets: profit for its investors, economic benefit for developing countries and reduced impact on or improvement in a focus on the environment. Its newest fund, the Sarona Frontier Markets Fund, is focused on harnessing the growth and vitality of micro-, small and medium-sized enterprises (MSMEs) in developing countries.
Mr Serge LeVert-Chiasson is Vice President at Sarona and has over ten years of experience in private banking, international commercial lending, international accounts receivable insurance and international investment management. Mr LeVert-Chiasson also holds a Masters in Accounting and Finance from the London School of Economics, is a Chartered Financial Analyst (CFA) charterholder and has completed an international MBA at the Schulich School of Business (Toronto, Canada). He currently serves as chair of Agro Capital Management in the Ukraine and is an ex-officio officer on the board of the Working Skills Center (Toronto, Canada).
MicroCapital: First of all, would you please provide us with your interpretation of what “impact investing” means in relation to the microfinance sector and regulated banking channels?
Serge LeVert-Chiasson: We first must recognize that microfinance is a subset of impact investments. My interpretation of impact investments would include investments that seek a triple bottom line. It impacts those communities they serve in a positive way. This means better jobs, increased employment, as well as taking a strategic view on environmental issues that seeks to minimize any waste in the processes of their normal business operations. So it is a triple bottom line that includes a value set that aligns to what the community would deem as beneficial to its interests including the environment. It’s a holistic approach to investing.
MC: What do you think is the growth outlook for impact investing over the next 5 to 10 years?
SL-C: The impact investment industry could grow as much as USD 500 billion in the next 5 to 10 years based on research that I have read. This estimate is a little bit aggressive, but it is quite possible given the interest and alignment of not only just fringe asset managers, but also large institutional investors and asset managers such as JP Morgan. The view of large asset managers is that the future of these developing countries must include long-term improvements in the lives of the people living in those communities of need.
MC: Please tell me how the Sarona fund group came to fruition within Mennonite Economic Development Associates (MEDA).
SL-C: Sarona Asset Management Inc is a MEDA company based in Waterloo, Ontario, Canada. MEDA started off as an investment fund group that later evolved into an economic development agency working in over 40 countries as of 2009. Much of our work now relates back to microfinance consulting. So we try to work with microentrepreneurs and farmers. We also work in asset management. The mission within Sarona Asset Management is to establish private capital as an effective tool to combat poverty. Thus, we work with investment partners in creating new vehicles that bring capital from North America and Europe to developing countries. That capital can be used to bring hope and change to many lives in developing countries.
Within the company we have two major groups of funds. First is the MicroVest group of funds; we own 45 percent of their asset management company. We take a very active role in its governance and management. We are always looking forward to new developments and partnerships. We hope to move microfinance into a more respectable view from the perspective of Wall Street and Main Street in terms of it being an investable asset class.
The Sarona group of funds that Gerhard Pries and I manage focuses on small and medium-sized enterprises (SMEs). The objective is to provide capital to those businesses that have a double or triple bottom line. The newest fund that we have is called the Sarona Frontier Markets Fund I, LP. Effectively, it’s a fund of funds that focuses on some of the world’s best and most proactive SME fund managers.
MC: What is the Frontier Markets Fund’s pipeline for SME investments?
SL-C: I can tell you at this time that we have subscriptions in excess of USD 12 million. Our minimum closing was originally USD 5 million with a stretch goal of USD 10 million. So we have exceeded our stretch goal and are very pleased.
If you are looking from a macro perspective, fund managers in the SME sector are seeing an annual return on investment of 18 percent. What that tells me is that there is a great deal of opportunity to invest in this field with greater rewards for those investors wanting to take those risks. The challenge is that there aren’t many investment vehicles available to North American clients who want to take advantage of this new space.
MC: What particular sectors and/or geographical regions are you focusing on?
SL-C: We are not focusing on any particular region. We are generally not very supportive of fund managers that manage assets out of Canada or the United States and then make investment decisions on a wide geographic area. We generally prefer fund managers that are locally based or have strong local teams that make investment decisions within a geographic area that makes sense.
MC: What type of due diligence is involved in selecting the best fund managers?
SL-C: There is an extensive due diligence process. What we are evaluating is the fund management and its ability to succeed in its investment thesis. I had the opportunity to have good conversations with the Inter-American Development Bank (IADB) and the International Finance Corporation (IFC). We are likely going to speak with the Overseas Private Investment Corporation (OPIC) and share our own perspectives and processes to build upon everyone’s experience and improve the investment decision-making process.
The process that we have right now is built on 12 years of fund management experience and a combined 57 years of investing in the SME sector. The due diligence process is a commercial approach. It begins with a simple conference call that consists of an exchange of information such as a pitchbook with marketing material. It follows up with an extensive conversation and review of the legal material in greater detail. The next step in the process entails a visit to the fund manager’s office coupled with a visit to 2 to 4 investment or prospective investment sites. We will also look at the track record.
Of particular importance for us is the environmental, social and governance process. We are very interested in understanding how they submit a proposal and evaluate criteria when they make a decision to invest. Lastly, we look at how they monitor and report that information to their limited partners. We then draft an extensive investment memo, assuming that we are pleased with their process.
MC: Fund-of-funds in the U.S. have fallen out of favor in the past year. Investors are requiring greater due diligence on the investment mangers selected. How does Sarona insure that the funds themselves are properly managed and that they truly invest in SMEs?
SL-C: Performing onsite due diligence is critically important for us. We don’t invest with any fund managers unless we speak to at least 2 to 4 committed investors. Generally there are other institutional investors involved in the analysis when we perform this process. If it has gone through their due diligence process, and they have thoroughly evaluated the management teams, then we include their recommendations with our own analysis.
We come in as a private investor and like to see that investors have done their own due diligence. We are looking for ethically and socially motivated fund managers who are professional and responsible, coupled with their ability to provide proper governance for their investors.
By Zoran Stanisljevic
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