Risk

Risk

What Fusion does is risky. The environment in which we invest is usually regarded as being amongst the most risky in the world – for a good summary of the problems see Paul Collier: 'The Bottom Billion' (2008, Oxford University Press). The problems identified in such environments include:

  • institutional shortcomings (weaknesses in legal, financial and regulatory frameworks)
  • people problems (shortages of the right skills, as a result of the emigration of large numbers of talented and trained individuals)
  • capital shortages, (often as a result of capital flight, leading to unduly short-term oriented decision-making)
  • distorted markets (results of over-dependency of the economy on certain natural resources such as oil, minerals or other commodities)
  • cultural legacy problems (post-colonial disputes about land rights, or tribal resentments)
  • corruption (problems in getting incentives right)
  • lack of information (investment markets are small, there are few commentators, information is often opaque)
  • currency risk (currencies can be moved by key commodity prices or other world events), and
  • political risk

This is a formidable list of problems, to which must be added the fact that investing across cultural and physical distance is always going to involve increased risk. These are amongst the many reasons why Fusion invites investment only from sophisticated investors, who are also either very high net worth individuals or institutions, who can take a view on the risks involved.

We also, as it happens, believe that the risks can be overestimated, and that they can be managed within acceptable limits. Investor perception of risk tends to lag many years behind the developing reality, so that it is important to understand the direction of change within an investment market. For example, a country engaged in vigorous reform is highly likely to produce a series of newsworthy stories of corruption and institutional failings, just at the point where these problems are being solved, rather than being allowed to continue unchecked. Investor perception also tends to 'lump' large areas of the world together, regardless of local differences – so that 'Sub-Saharan Africa' is lumped together, without regard to the very considerable differences in the risks of doing business in (say) Kenya, Zimbabwe and South Africa. Finally, investor behaviour can itself exacerbate the riskiness of a market – irrational optimism, naivety, well-meaning but misguided social objectives, unrealistic timetables or volume objectives, desire for fast results – all play a part in making developing markets more risky than they need to be.

With these reservations, it is important to be realistic about the risks, which we manage in four key ways:

  1. 1. We only invest in environments we fully understand, and which have the institutional infrastructure to support our kind of activity.
  2. 2. We always work with and through our long-standing local relationships.
  3. 3. We only invest when the commercial case for doing so is compelling – we are not driven by an investment timetable, or by desire for market impact, or anything else.
  4. 4. We behave like good investment partners, so as to attract and keep faith with the best management teams – we are commercial, rational, supportive and decisive.