Menno Derks was interviewed for issue 1 2019 of Financial Investigator magazine. Below is an English translation of the original article by Rene Boogaarts. We have attempted to provide an accurate translation of the original material in English, but due to the nuances in translating, slight differences may exist.
Sarona has something to offer for long-term investors
[Originally published in Issue 1, Volume 11 of Financial Investigator magazine]
By René Boogaarts
Canadian asset manager Sarona, with a presence in the Netherlands since 2011, focuses on emerging markets and sustainability. According to partner Menno Derks, there is a need for this amongst long-term investors.
Emerging markets will be a key topic in the coming years, according to Menno Derks. “In emerging markets, the middle class will grow by three billion people over the next twenty to thirty years. These are people who will all need certain goods and services. That is where, as an investor, you want to be.” And when it comes to investment, it’s also about sustainability, according to Derks.
Derks is a partner at Sarona Asset Management. At this Canadian asset manager, he is responsible for global investments in emerging markets. Sarona established itself in the Netherlands in 2011, one year after its spin-off from the Canadian development organisation MEDA.
In 2013, when Derks came on board, he was employee number three. Now five people are working at the Dutch office in Amsterdam and, according to Derks, that number will grow in the coming years because Sarona wants to spread its wings. “We are world famous amongst a small group of investors,” Derks chuckles. If it’s up to him, this will change soon.
Currently, Sarona has around USD 200 million AUM. Approximately 70% of this derives from wealthy entrepreneurs, family offices and pension funds, mainly in the USA and Canada. OPIC, the US government’s development finance organisation, has also allocated money to Sarona. The rest of the assets derive from Europe, mainly from the United Kingdom. “These are long-term investors who are interested in impact investing and have patience because the only guarantee we can offer is that they can’t touch their money over the next five years,” Derks says laughing again. “That’s unavoidable because if you really want to make impact, it takes time.” At Sarona the minimum ticket is USD 250,000.
At the time, the primary reason why Sarona established its European office in the Netherlands was the simple fact that it was cheaper, according to Derks, than opening a branch in London, Frankfurt or Paris. “But in the Netherlands there was also talent to be found and there was a clear community of investors who are interested in emerging markets and ESG investments. Take as example institutions like Oikocredit and Triodos Bank. We are under the impression that this community is growing, certainly also in the Netherlands. In hindsight, Sarona’s choice to have a presence here was the most logical.”
To date, relatively few Dutch parties have invested with Sarona, but that will change soon, according to Derks. “Because they need a wide spread, emerging markets are becoming increasingly important to Dutch pension funds,” he says. “For such parties, as well as for family offices, ESG criteria are also becoming increasingly important. For Sarona, this has always been important,” states Derks.
ESG matters are at the root of Sarona’s origins. In 1953 a group of socially involved Mennonite industrialists together with local farmers in Paraguay decided to set up a dairy cooperative. That was Sarona, and that developed into the country’s largest dairy company. Those industrialists later founded MEDA, now a global welfare organisation. For years MEDA was also actively involved in investing, but in time they decided to make this activity independent. Therefore, Sarona Investment Management was founded. The company operates in complete independence, although MEDA still has 10% of its shares.
Sarona focuses entirely on emerging markets in Africa, Southeast Asia and Latin America. India, Mexico and Nigeria are the largest countries. When asked why Derks answers: “First and foremost from an investment perspective. There we see the middle class is growing, not in America or Europe. As an investor, you should be where these new products and services are needed and are produced and supplied.”
Immediately Derks adds that this focus is perfectly in line with his own interest. “In Twente province, I studied technical business administration, but I was always interested in other cultures. I went on a study trip to Latin America and my graduation project took place in East Java. After my studies, I joined the corporate finance department at ABN AMRO and I ended up in the Asset Management department. After a few years, I made the switch to the development bank FMO, where I really learned the profession of investing in emerging markets. After that, I was allowed to do this on a larger scale at PGGM. I believe in it. I like working with entrepreneurs who really, and responsibly, want to grow.”
According to Derks, investing in emerging markets can also directly serve ESG matters. “Absolutely,” he says enthusiastically. “We are helping those countries to move forward. We support companies that actively want to improve something. We teach them why and how they can do this. Why they should put people on their payroll, as an example, and why maternity leave is logical. I have seen this change in recent years. When in India in 2005 for FMA I addressed social issues, I saw when such social issues were raised, they looked at me with questioning eyes. Entrepreneurs finally addressed this, since they needed our loan. Now that it is integrated, customers are asking for it, and young employees want the company they work for to handle issues responsibly. It might sound odd, but in fact, certain ESG matters are better integrated in these countries than in Europe or in North America.”
Derks is the first to admit that social standards and government oversight are not very well arranged yet. “The risk of corruption is enormous,” he says. “That’s why we stay away from industries such as oil, gas and mining, or large infrastructural projects. We opt for small and medium-sized companies. We rather choose entrepreneurs who are up for the challenge, rather than those looking for the easy way out. Moreover, we often collaborate with organisations such as FMO and IFC, a member of the World Bank. They have, just like us, a zero-tolerance policy towards corruption.”
Sarona is not only guided by ESG principles, it also likes the financial side of business. “We often see that NGOs invest in young small businesses in Afghanistan. That is all very well, but we won’t do it,” says Derks. Even when it concerns is the often-fluctuating developments in emerging markets, Sarona makes straight choices. “When the Turkish lira plummeted, we were prepared for this. We have a good portfolio there and our outstanding loans are in local currency, not dollars or euros. The export-oriented companies in which we invest benefitted from lower costs and cheaper exports. ‘Our’ companies in Southeast Asia have already been moving their supply chain to other countries, in connection with a possible Chinese-American trade war. And the companies in Mexico are currently suffering from the complications around NAFTA and the impending construction of ‘The Wall’, yet they are thriving.”
This critical attitude has been very beneficial to Sarona in recent years. The investment fund, which had a final close at the end of 2014, already has a net yield of 8%. “We aim for a return of 20%, but due to costs and investments, that is not feasible for a young portfolio like ours. I am very confident. Private equity funds normally only show higher returns in the later years.”
Read the original article in Dutch / Lees het originele artikel in het Nederlands: