Frontier Markets Private Equity: The Upstart That Displaced Emerging Markets PE with One Swift Knockout Punch?

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Frontier Markets Private Equity

It used to be that emerging markets – mostly the BRIC countries – would race ahead of developed countries and attract investors in droves.

But most of these “predictions” were based on China’s GDP growing at over 10% for 100 years, which is about as reliable as the revenue growth assumptions you see in most financial models.

So some firms have been seeking out new markets that most firms aren’t even operating in yet.

One firm in this category is Leopard Capital, which focuses on frontier markets private equity (“frontier markets” = much of Africa, central and eastern Europe, parts of the Middle East and Southeast Asia) – or more precisely, investing in “pre-frontier markets” such as Bhutan, Bangladesh, and Haiti.

You could unearth a diamond in the rough in these countries… or you could get screwed by a hostile government that suddenly kicks out all foreign firms.

In either case, you’re sure to get more entertaining stories than you would anywhere else in the world.

Today’s interview is actually a group interview with 2 employees at Leopard Capital, both of whom started out there as interns.

They’ve both worked in the firm’s Bangkok office and can tell you all about what it takes to break in, the candidates they’re looking for in these regions, and yes, maybe even how to run public comps when there’s no stock market.

Breaking Into Bangkok

Q: First off, I really like the firm name. You can’t go wrong by naming the company after a fierce animal.

A: Thanks – our Founder thought the same and he picked the name because he imagined a leopard climbing up a tree to scout out opportunities that others aren’t seeing.

It’s a nice metaphor for what we do when investing in these countries.

Q: I’ll agree with that one. Sharp claws help in both scenarios as well.

So how did you both get started here? Most firms based in Thailand or in frontier markets don’t exactly come to university campuses to recruit.

Interviewee 1: I grew up in Thailand for over 10 years, and I wanted to return and get work experience there.

At the time, I had been working in the US at an impact investing fund for close to a year. One day, the Founder casually stopped by and we had a chat about impact investing and PE in emerging and frontier markets, and he mentioned Leopard Capital.

I had already been researching the market in Thailand so I knew the name as well. I followed-up with our Founder, asked more about Leopard Capital, and had him send over my resume and put me in touch with the top people there.

He was fine doing that because my gig at the impact investing fund was not a permanent full-time role, so he didn’t see it as “losing me.”

I spent around 2 months going back and forth via email and doing a few phone interviews with them, after which I eventually won my offer there.

Q: And let’s go through your story as well.

Interviewee 2: I had already been in Bangkok for 7 years and had experience ranging from working at another investment fund to working at a radio station. I had even completed a Master’s degree in Southeast Asian Studies here.

I heard about Leopard Capital via a Bloomberg feature, and their expansion into Myanmar interested me.

I sent in my CV, didn’t hear back, and then reached out to a contact at a hedge fund who knew the owner. I got him to pass along my CV, which then went directly to the CEO, and I eventually won an offer by going around the official process like that.

One advantage of this fund is that the CEO is very hands-on with everything, including the hiring of interns – it’s not like large PE firms in developed markets where the Founder/CEO rarely even speaks with interns.

Of course, we also don’t receive a flood of resumes.

It might be 2-3 applicants every 1-2 days, so it’s nothing like the volume of submissions at large firms in the US.

Q: So I’m assuming that the interviews were also quite casual?

A: Yes, the process is almost entirely fit-based. Interviews are conversations where they assess where you might fit in, given your past experience.

For example, one intern here had real estate brokerage experience in Thailand, so it made sense to send him to work for a property fund we operate in Myanmar.

Having industry expertise is crucial because it’s much, much harder to find information on these companies.

You can’t just pull an IDC report and figure out the real estate market in Myanmar.

They gave me no formal modeling tests or case studies – interviews were primarily fit-based, and they evaluated how well I’d live in and work in these countries as much as my technical and investing skills.

With that said, our understanding of how private equity works was also thoroughly assessed in the interview process.

The fit portion, coupled with our understanding of the fundamentals of private equity investing, ensured that we were able to hit the ground running when the internships began.

Q: So I’m assuming they’re looking for candidates with previous experience in other emerging or frontier markets?

A: That definitely helps. You need to be passionate about these markets because this is not exactly a plain vanilla PE job.

At our Haiti Fund, for example, most of the senior leadership has extensive IB/PE experience in the US, but they’ve also all spent at least 15-20 years in Haiti… or they’re Haitian-American.

Beyond that, a lot of it comes down to the specific country. Sometimes language requirements are essential, especially if the fund you’re at focuses on one country – you can’t exactly go a small country in Southeast Asia and expect to communicate with local real estate developers in English. This makes the development of a local team crucial.

But if your role involves working with international investors and/or clients or you work on cross-border deals, language skills might not be as essential.

For example, our Bangkok office works in several different markets – Thailand, Bhutan, and Myanmar – and it’s highly unlikely that one person would be able to speak all those languages.

Moving to the Frontier

Q: Great. So before we move on, can you explain what exactly a “frontier market” is and why they’re getting so much attention?

A: Sure. There’s no exact definition, but frontier markets are a subset of emerging markets, with smaller economies and less liquidity than the bigger emerging markets.

Wikipedia has several lists. In short, “frontier markets” consist of many countries in Africa, a few in central/eastern Europe and the Baltic states, and some in the Middle East and South / Southeast Asia.

In some cases, our fund actually focuses on regions before they are classified as official “frontier markets” – we invest in Southeast Asia, Bhutan, Bangladesh, and Haiti, for example.

Investors have started paying attention to these markets for a few reasons:

  1. Little to No Foreign Debt – Debt limits economic growth once it reaches a certain level and it makes countries more dependent on foreign lenders and their economies. Most frontier markets have relatively little debt, which increases their growth potential.
  2. Little Correlation to the Rest of the World – While developed markets and larger emerging markets are linked very closely, there’s much less of a correlation in frontier markets and pre-frontier markets (some economists have even stated that R^2 is 0.3).
  3. Positive Demographics – One weakness of China, for example, is that the population is set to age and decline in future years due to the one-child policy; in most frontier markets, the population is much younger, it’s growing rapidly, and worker productivity is rising.

To give you an idea of the importance of these markets, 22 of 25 of the fastest-growing economies over the next few decades will be frontier markets.

If you look at a place like Myanmar, it’s a relatively new democracy with a population of over 50 million, many of whom will be entering the middle class soon.

That creates a huge number of jobs and economic growth that you don’t see elsewhere.

Additionally, Myanmar has recently opened itself up to foreign investment, which has spurred much hype from multinational corporations and a couple private equity funds.

Finally, it’s really, really hard to find good opportunities in these countries.

And that is what makes it so appealing to us – most other funds don’t want to do the work.

It is not like China or the US where the best companies are well-known and where there’s a lot of data on promising private firms – you need to go on a scavenger hunt to even begin thinking about investing in fast-growing companies in a place like Bangladesh.

Q: That brings up an interesting point: how many other funds operate in these frontier markets?

It sounds like a small industry.

A: It depends on the country – Vietnam actually has quite a few PE funds now, and some of these funds even have over $1 billion USD in AUM (although by most classifications, Vietnam isn’t a frontier market).

Africa also has larger funds that invest across different countries there.

In countries like Myanmar and Cambodia, there are also a few funds in addition to ours, but they tend to do smaller deals in a limited number of sectors.

We were the first ones, or among the first ones, to focus on larger deals. And in some markets, such as Haiti, we’re the only PE fund operating in the country – which give us quite a bit of clout.

Some of the mega-PE funds and larger investment management firms in the US are devoting more resources to these markets, but very few have teams on the ground because the deal sizes are too small for them.

Deals, Deals, and Due Diligence

Q: So what deal types and industries are the most common in these places?

A: Again, it differs based on the country but you see a lot of investment activity in the “building blocks” of the economy – infrastructure, telecom, banking (depending on regulations), transportation, consumer goods, and so on.

You see a lot of new industries opening up as regulations change – in Myanmar, for example, foreign banks are not allowed to operate (as we’re doing this interview), so foreign banks there only have representative offices.

As soon as it opens up to foreign banks, you can bet that capital will flow in and deal activity will heat up.

Q: Right, those sectors make sense.

But how do you think about investing in these countries, given that traditional exits (M&A and IPOs) may be tough to pull off?

A: That is a huge challenge. Sometimes, the country is so small that it doesn’t have its own stock market; or if it does, it’s completely illiquid.

IPOs are not viable in most markets we operate in, and M&A activity also tends to be minimal and not something you can rely on.

So you see a lot of “creativity” with the deal structures:

  • Self-Liquidating Structures – For example, an investment structured as a loan that’s designed to be repaid with the company’s profits.
  • High Cash Dividends – Rather than going for a typical exit, the firm might plan to simply dividend out as much cash as possible. It’s almost impossible to earn a high IRR like that, but it does take some risk off the table for the firm.
  • Convertibles – These are common with investments in these countries because they let us hedge the risk of an exit and simply get a lower, but still positive, IRR by issuing a loan and letting the company repay it rather than converting it into equity… if it turns out that an actual exit is not so viable.

Despite these options, sometimes firms here do invest without a clear idea of how they’re going to exit.

We try to use a more structured approach, but there are still a lot of unknowns and so it’s even more crucial to limit your downside risk.

Q: You mentioned the most common industries and how the deal structures reflect the uncertainty of a traditional exit, but what about the work itself?

How are market research, technical analysis, and deal negotiations different?

A: The main difference is an extreme lack of transparency into most companies. In some emerging / high-growth markets such as Thailand, the Philippines, and Indonesia, you can actually find information in the usual online sources (e.g. Euromonitor).

But in many markets we operate in, such as Myanmar, there’s virtually no publicly available information.

So the “sourcing” process might consist of flying to cities in Southeast Asia, attending events, and finding people who work in the region you’re interested in and who can make introductions.

As a result, the due diligence process is also much more thorough.

You need lawyers who understand local regulations, foreign lawyers who know the country well, engineers to assess the specifics of more technical telecom / infrastructure deals, and more.

Q: Right – but how much sourcing do you actually do there?

A: A fair amount, actually. It’s a smaller fund so everyone has to step up and contribute.

I do everything from marketing / investor relations to valuation, due diligence, and yes, even making coffee each morning.

Q: Right – the most essential part of office life, of course.

What about the valuation / technical analysis side?

A: The methodologies are the same, but the execution is tricky because of the lack of data.

Sometimes there are no comparable transactions in the country and industry you’re working in, so you have to be more “creative” with the analysis.

If you’re investing in a telecom company in Myanmar and you can’t find any comps, maybe you have to look for similar deals in Thailand from when it was in a similar stage of development and check those multiples.

We frequently look at neighboring countries with more established stock exchanges (e.g. Thailand and the Philippines), and then go through companies’ annual reports there to see how similar companies might operate in Myanmar or Cambodia.

It’s tough to quantify the risk factors and figure out how to mitigate them in deals – you have unstable governments, unknown regulations, infrastructure that’s not up to par, completely different monetary systems, and more.

This is part of the reason why relatively few Westerners are flocking to invest in these countries, even if the press is showering them with attention.

You must be willing to accept significantly more short-term risk, plan to hold assets for the long-term, and actually follow-through with that longer holding period.

Life on the Frontier… and Afterward

Q: Sounds like a walk in the park.

Any thoughts on the pay, hours, and culture at funds in these countries?

A: Pay varies radically based on the fund size and region – some funds in Africa and Vietnam have over $1 billion USD in AUM, so you can actually get paid pretty well there (though still at a discount compared to US/UK pay).

If you’re in a smaller country or at a fund with lower AUM, you’ll get paid far less than in developed markets, though you might still have a good lifestyle depending on the cost of living there.

Firms often have difficulty raising funds in these regions, and sometimes even the Founders go without pay for quite some time.

The culture here is more relaxed than what you see in developed markets, but there is still a hierarchy. Everyone is pretty friendly, though, and people tend to do whatever tasks are required, even if something is seemingly “below” them (see: the CEO reviewing interns’ resumes).

Q: And what do people do afterward, if they don’t want to move up the ladder in frontier markets PE?

A: It’s quite random.

Some people join other companies or funds in the region, some start their own companies or work at start-ups, and some even return to their home countries to work in the emerging markets division of a bank or investment firm, or even in impact investing.

Because of the high uncertainty around returns and because of how we do a lot of “basic building blocks” investing, almost anything could count as impact investing.

One option you won’t see too often is moving to a mega-fund in a developed country – the skill set is too specialized, you won’t get the required modeling/technical experience, and many large funds aren’t even thinking about these markets yet.

You really need to be on the ground working in the region to understand it well, which is why most people who start out here tend to stay involved in some way going forward.

Q: Yeah, I can see that. Thanks for sharing your experiences with us!

A: Our pleasure.

About the Author

is the Founder of Mergers & Inquisitions and Breaking Into Wall Street. In his spare time, he enjoys learning obscure Excel functions, editing resumes, obsessing over TV shows, and traveling so much that he's forced to add additional pages to his passport on a regular basis.

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15 Comments to “Frontier Markets Private Equity: The Upstart That Displaced Emerging Markets PE with One Swift Knockout Punch?”

Comments

  1. Abhinav says

    Hi Brian..As usual a highly informative article…very difficult to find anything on frontier markets..but this piece is amazing..!! Just a note on the risk and due dilligence process..Doesn’t seem all that different from india or even russia where getting solid information is tough..what do you think?
    Thanks Again…

      • Abhinav says

        Thanks Brian..Just noticed in your previous articles regrading deals in say Indian subcontinet, Africa etc companies like CA’s and CFA’s etc..Do you thnk there is a correlation with respect to market transparency and advanced accounting qualifications? In the USA i guess a good MBA is enough to get you a break as an associate..I just get a feeling developing countries focus more on accounting skills keeping in mind due dilligence process..Many Thank Again!!

  2. BDK says

    FYI — these guys haven’t upstage emerging market PE (not by a long shot).

    frontier market PE currently piggybacks off the DFIs, and (if lucky) gets some money from the occasional family office or endowment.

    the possibility for big returns are there (bc the markets are so dysfunctional), but so are the possibility for 100% capital losses. since (as they say) analysis is so limited, there is a lot of luck involved.

    • says

      Thanks for adding that. I didn’t say they had displaced anything – the title was a question designed to address that topic and see what the upsides and downsides of frontier markets are.

  3. SG says

    Very interesting stuff as usual. Would be very interested in knowing what risk premium they assume on average in these type of investments. On the one hand there is a significant amount of sovereign and political risk, but on the other hand there is low correlation with developed markets which might provide some interesting diversification benefits for U.S. investors…Brian, can we do some more interviews with these type of funds in the future? Would love to hear a more in-depth analysis of how they model risk and returns in frontier markets…

    • says

      Thanks! Yes, I’ll see if we can get that type of information in the future. I didn’t have much time to get into those types of details with them this time. But generally the risk premium would have to be a lot higher than what you see in developed markets. I’ve seen discount rates of 30-40% applied to mining projects in some of these countries (for example).

      • SG says

        It’s interesting because I have looked at regressions of the dollar investment returns of some of these frontier stocks against the S&P. The betas are pretty low…so I’ve always wondered how the pros price risk in these regions and what models they use. But thanks for the article Brian!

          • Bao Nguyen says

            Generally accepted equity risk premium in Vietnam is around 7%. Stock market in SEA is very volatile and the debt market is so immature that you can nearly never get a market value of debt when calculating WACC. Private companies normally have WACCs around 20% ( seriously ), at least in Vietnam. Not sure about other countries in SEA

  4. paolo says

    I never thought I’d live to see the day the exchanges of the Philippines and Thailand be referred to as “more established.” It kinda makes you wonder where growth will come from next when the frontier markets mature.

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