In contrast to the instability in developed capital markets, a “new breed of private equity investor” in developing countries has been able to deliver capital while pursuing sustainable, long term returns for themselves and other stakeholders alike, write Gerhard Pries and Vivina Berla, partners of Sarona Asset Management. In the latest ImpactAssets issue brief published by this U.S.-based non-profit financial services company, they describe a successful private equity investment strategy that also delivers social/environmental impact.
Resources & Research
Investing in Frontier Markets Private Equity is not as risky as most people perceive, says the CIO of the private sector arm of the World BankMonday, June 25th, 2012
Rapid growth in emerging markets continues to attract investors, many of whom face pressure – against a backdrop of low performance of traditional investments – to seek the higher returns available in these markets, but face challenges determining where, how, and with whom to invest. Main observations regarding emerging markets private equity are:
(i) returns outperform both developed market private equity and emerging market listed stocks, while exhibiting low correlation with developed markets investment strategies;
(ii) the scope is broad and growing – Asia funds dominate by number, but the opportunity today is much broader;
(iii) risks are lower than conventional wisdom suggests and can be managed with sufficient resources and commitment
The difficulty with investing in the next big thing is that it is often not recognized as that until after it has become a current or former big thing. Before its arrival, it tends to be seen only as a crazy, risky thing or nothing at all. Emerging-market portfolio managers specialize in finding the next big thing. But after the transformation of many economies in Asia and Latin America in the past two decades and the strong returns and mainstream popularity of their markets, what’s left to be found?
While GDP growth has decelerated in recent months, the region’s economic outlook remains significantly more favourable than many developed economies, including the US and Western Europe. Brazil in particular continues to outpace many global economies — the country recently surpassed the UK to become the sixth largest economy in the world, despite a growth rate which fell from 7.5% in 2010, to 2.7% in 2011.
As such, PE firms and their investors will continue to focus their attention on the region and its long term trends; a growing middle class; favourable demographics; and an increasingly favourable regulatory environment, all of which will continue to create interesting opportunities for investors of many sizes and styles.
From China to Thailand and Indonesia, governments are committed to increasing living standards and reducing their reliance on exports. Large populations, growing incomes and urbanization are contributing to driving an economic transformation that will create opportunities for PE investors.
There are challenges. Substantial funds have been raised for Asia and competition is fierce, leading to very high pricing on some assets. In some countries there is also often a lack of clarity around legal systems and regulations, governance is poor and corruption is perceived as a problem.
Opportunity is certainly there – expect the shrewd operators to execute well and capitalize on it.
Sir Bob Geldof’s latest incarnation says something about Africa’s changing place in the world. Not for the first time, the Irish rock star turned campaigner for aid and debt relief in Africa has been seeking to raise as much as $1-billion. This time, however, he hopes to champion investment in a continent that he had tended to portray as a basket case in perennially urgent need of alms.
His transformation into private equity guru has not been seamless. The former Boomtown Rats and Band Aid frontman has struggled since the global financial crisis to raise sufficient financing to close his fund, 8 Miles, named after the distance between Europe and Africa at the straits of Gibraltar. But Sir Bob’s journey nevertheless chimes with a turnround in global perceptions.
The full Globe and Mail article can be viewed online here.
Over the past decade mobile phones have helped to transform African countries like Kenya, giving the financially excluded a cheap way to access credit through mobile banking. It has also been Africa’s most successful growth story: the mobile payment market is forecast to be worth $60bn by 2015. Today, information and communication technology (ICT) companies are building the infrastructure for what investors believe will be Africa’s next big growth story – PayTV.
On Monday Wananchi Group, a Kenyan media operator, announced that it raised $57.5m of growth capital to continue building fibre infrastructure for its triple-play service in Kenya.
The full Financial Times article can be viewed online by clicking here.
While some press reports have played up failures in India, the heart of the industry remains strong
Diego Treminio leans back in his rocking chair and gestures to the expansive patio that looks out onto the Nicaraguan hills. Whenever he makes money he invests in one of three things – his house, his farm or his children’s education.
On all three scores he has done well. Besides the patio, he has added several rooms to his house. He has tripled the size of his farm to 65 acres. Several children have graduated from university.
This, he says, is because of help from MEDA – both its sesame project that operated for several years, and its microfinance program, MiCredito, of which Treminio is a client.
He can’t say enough good about MiCredito and the way affordable credit can transform a small farm. He knows there are other microfinance institutions (MFIs) in Nicaragua, but he wants nothing to do with them. “They abuse the producer,” he says bluntly, “and they charge higher interest.”
Read more from the January/February edition of Marketplace Magazine.
Each month, an impact investor discusses with the GIIN his or her motivations, impact investment strategy, and challenges faced in this growing industry. This month, we spoke to Gerhard Pries, President of Sarona Asset Management, a boutique investment firm that has focused on impact investing since its inception in 1953. Sarona recently launched Sarona Frontier Markets Fund I LP, one of the first impact investing fund of funds.
Sarona Asset Management was recently featured in Venture Equity Latin America (May 15, 2010) By Dan Weil.