Arif Naqvi has been trying for years to break investors of their short-term mindset. Now he has the short-hand to make them see what he is talking about: the Sustainable Development Goals.
The founder of Abraaj Group, the $10 billion private equity firm headquartered in Dubai, Naqvi says long-term value creation requires investors to focus on global challenges and building the companies addressing them over time.
Naqvi told a hall of seasoned financiers in the Beverly Hilton at the Milken Institute Global Conference this week that the Sustainable Development Goals for cities, food and agriculture, health and education, and energy lay out challenges long-term investors should be interested in solving.
“Those challenges are out there. They’re called the SDGs,” he said. “They are a phenomenal investment opportunity,” he added.
Naqvi doesn’t use the term “emerging markets.” He calls them “growth markets,” because two-thirds of growth and the majority of consumer spending over the next fifteen years will happen in Latin America, sub-Saharan African, South Asia and other, uh, emerging markets. That shifts not only the perception of risk, but of time horizons.
Meeting the needs of “growth markets lead to long-term investments,” says Naqvi.
Talent and scale
Born in Pakistan, Naqvi in 15 years has grown Abraaj into private-equity growth-markets powerhouse. The firm has investments in Asia, Latin America, Middle East and Turkey, and the largest pool of capital targeting sub-Saharan Africa.
With more than 300 limited partners, including the Gates and Skoll foundations, the International Finance Corp. and the European Investment Bank, the firm has returned a 17 percent annual return since its inception, according to Forbes.
Lasting value, said Naqvi at the Milken Institute’s annual conference, comes from top talent thinking long-term about global challenges. With more than 20 offices and 300 employees spread across regional hubs in Dubai, Istanbul, Mexico City, Nairobi and Singapore, Naqvi wants Abraaj to be positioned to understand growth opportunities.
Abraaj looks for companies that generate growth far beyond their initial return. The ability to scale means looking for Facebook-like reach but in sectors like healthcare and education. “Great businesses are fundamentally addressing societal challenges,” says Naqvi.
Jean Hynes, a managing director and partner at Wellington Management, a firm with nearly $1 trillion in assets, agrees “companies that are mission-drive, doing good for the world, and have a governance structure that enables that — those are the companies that have created the most value in my career.”
The key to investing long-term in healthcare is to “figure out where medicine is changing over three, five and 1o years,” says Hynes, who specializes in public equities in pharma and biotech. Wellington encourages a long-term mentality in its partners and managing directors by allocating 50 percent of performance incentives based on five-year performance, 25 percent on three-year and 25 percent on one-year.
“I’m thinking about investing for the long-term and don’t worry about short-term performance,” she said.
A 2015 survey of public and private pension plans and sovereign-wealth fund managers with assets totaling $5 trillion, concluded that “long horizon investing is a valuable activity for both society, and for their own funds.” There was a broad consensus that regulations and compensation incentives and an absence of a long-term investment model and performance metrics encourage short-termism.
Private equity fund structures have an advantage over public equity funds, says Brian Gildea, a director at $40 billion private market investment manager Hamilton Lane. At least private-equity firms have capital for 10 years, making them more able to buy and sell at the right time.
“That’s medium-term in my book…long-term is more like 20 years,” scoffed Steven Goulart, the investment chief at MetLife, with about $500 billion in assets, with large investments in infrastructure.
Goulart says no major airports have been built in the U.S. in the last 20 years, while China has built more than 75 in the past decade.
Naqvi jumped in. “U.S. infrastructure is the biggest opportunity on the planet.”
See more of ImpactAlpha’s coverage of the 2017 Milken Institute Global Conference: The impact disruption at Michael Milken’s annual conference