The art of assessing the deal
Before MEDA invests in a company, a Sarona partner travels abroad to check it out
By Mike Strathdee
As printed in The Marketplace – July/August 2018
Serge LeVert-Chiasson is a firm believer in checking all the boxes en route to a potential investment decision.
“Making good decisions is more about the process around the decision and less about the people making the decisions,” he says.
LeVert-Chiasson is a Sarona Asset Management partner. Sarona is a private equity fund manager that grew out of MEDA.
Whenever MEDA is considering an investment, LeVert-Chiasson is called upon to kick the tires and look under the hood.
He travels about three months a year, typically researching two to four transactions for MEDA in a given year.
“My job is to think about all the worst possible things that can happen to that money, and to make sure that we’ve covered all of our bases, that we have a way out.”
Jerry Quigley, MEDA’s senior vice president, programs, and his team generally come up with investment ideas aligned with programs. LeVert-
Chiasson works with Gerald Morrison, MEDA’s chief financial officer, in bringing the best of these back to MEDA for consideration.
Sarona charges MEDA a quarterly advisory fee as a percentage of the amount invested for its work on these investments.
LeVert-Chiasson’s work with MEDA began in 2001, when he spent a year as an intern in Romania. He then worked for Export Development Canada for four years, did a master’s degree in accounting and finance at the London School of Economics, and then an international Master of Business Administration degree at York University’s Schulich School of Business.
In 2006, he rejoined MEDA’s investment fund department.
When MEDA wants to make an investment, its leadership team asks Sarona to begin a due diligence process.
After conducting due diligence research, he sends a preparatory memo to MEDA’s executive leadership team. “Then that’s where the real work begins.”
The next phase involves Sarona producing a detailed investment memo for a MEDA subsidiary to examine.
The 10-person Sarona MEDA Investments Inc. board makes a final decision on proposed investments and approves all exits (sales of investments). SMI is made up of past and current MEDA board members plus MEDA president Allan Sauder. It meets six times a year, primarily by teleconference.
Sarona tries to structure deals to minimize the downside for MEDA and maximize the upside wherever possible.
Investing in developing countries often involves considerable risk. Some firms will suffer defaults, clients who can’t or won’t pay. So how does Sarona decide how much risk to accept?
LeVert-Chiasson points to
MiCrédito, the Nicaraguan financial institution MEDA helped to start (and currently holds a 30 per cent stake in). He is on the board of this institution, which sets its default rate at five per cent or less.
“You have to take some risks,” he said. “I call them taking intelligent risks.”
“The worst thing you can do for the poor is to set up a financial intermediary to support them, and gain their trust, and the business goes under.”
“As long as the business is sustainable, a reasonable default rate is fine.”
Filters Sarona uses to assess a deal include five Ps and an S. The Ps are people, process, performance, pipeline (business opportunities) and product. The S is sustainability.
In some situations, MEDA has a commitment in a contribution agreement to support a commercial partner in a country where it is working and asks Sarona to evaluate potential partners to choose the best fit for the program.
In other situations, such as an investment in Ukraine, Serge found another partner that MEDA hadn’t even considered, but ultimately ended up working with.
The most recent deal Levert-Chiasson worked on, a $775,000 convertible loan investment in Tanzanian equipment leasing firm EFTA, closed in April, four months after he visited the firm.
Private equity firm has its roots in MEDA
Sarona Asset Management, a private equity firm that has grown to over $213 million in assets under management over the past decade, had its roots within MEDA’s finance department.
Investments were the first emphasis of MEDA’s work when the organization was founded in the early 1950s, but that waned over time.
When MEDA’s investment fund development department was re-started in the mid-1990s, Sarona president Gerhard Pries, who was then serving as MEDA’s chief financial officer, was one of the only MEDA staffers working on the project. Pries recalls working to recover lost investments in Latin America, Africa and Asia, and then inviting MEDA members and others to make loans to the organization. “We used this capital to make loans and equity investments, mostly in MFIs (micro-finance institutions) and agro-processing organizations.”
Serge LeVert-Chiasson joined in that work part-time in January 2006 and full-time as of May that year.
In 2008, Pries and Levert-Chiasson began thinking of a new strategy, including a conversation with MEDA’s management and board about buying part of the operation. They saw a number of private equity firms doing an excellent job and thought funneling money to existing funds would be a path forward. In 2009, they began working on a fund of funds.
They found it challenging to raise money under the MEDA brand, so they decided to further develop the Sarona brand, which had first been used for investment funds in the late 1990s. Sarona, the name of the Paraguayan dairy where MEDA’s founders made the first investment in 1953, had a good name.
The two Sarona partners moved across the street from MEDA’s Waterloo headquarters. Still wholly owned by MEDA, the firm consisted of two partners and an office manager, in a completely hands-on operation.
“I still remember fondly having to take the garbage out on Friday afternoons at the end of the week,” LeVert-Chiasson recalls.
Sarona’s first fund of funds closed in early 2010, with $13 million US of venture capital raised. While that initially seemed like a lot of money, they soon realized that lots of work is required to manage a fund of funds properly. It was also challenging to find high-calibre staff for a small operation.
Following a second fund closing, Pries found another partner who wanted to join the firm. “Stellar staff don’t want to work for peanuts, and they also want a share of the upside if things go well,” LeVert-Chiasson recalls.
By the end of June 2011, the Sarona partners had concluded a deal to buy 90 per cent of the firm from MEDA.
“It’s better to have 10 cents of something that’s going to grow 10, 20, 30 or 40 times the size it is today than to have 100 per cent of something that’s not going to grow, or that can’t be the best in the world,” he said.
Sarona now has 15 staff, of which 11 work in Kitchener. The rest are based at its European office in Amsterdam, including Menno Derks, who is a partner in the firm. They plan to add two to four staff later this year. ◆