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Not all countries are created equal, of course; and not all emerging markets are equal, either — and especially not in the eyes of investors. A large part of the appeal of emerging markets in general right now, commented HBS associate professor Walter Kuemmerle, as he marveled at the high turnout for a panel on the subject at the VCPI conference, is the fact the U.S. venture capital market has taken a downturn.
Given the current economic scenario in the U.S., Kuemmerle noted, it's no surprise that emerging markets have become "very, very attractive," not just to institutional investors, but also to jobseekers and venture capitalists.
According to a set of investment experts who shared viewpoints at the panel discussion, it is quite a different experience to put investments in what one panelist called "the real garden stocks": Brazil, Mexico, Argentina, and South Africa, than it is to invest in Tanzania and Indonesia, for instance.
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| You really have to be prepared to take your knocks when you invest in the poorest countries, and go back to the basics. | |
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| Andrew Reicher, Commonwealth Development Corporation |
In emerging markets, remarked Andrew Reicher, of Britain's Commonwealth Development Corporation, "We have things they don't have in developed markets. We have earthquakes and revolutions."
Eastern and Central Europe, for example, are far better propositions than many other emerging regions, observed Nicholas B. Callinan, managing director of Advent International. The closer the market compares to the typical U.S. model, he added, the more likely funds are to be successful. (This U.S. model for private equity and venture capital investing, which Kuemmerle called "the plain vanilla U.S. model," assumes that funds are raised over 10 years by a small number of partners, who exit primarily through public markets, raising another fund as part of the cycle.)
"An emerging market, by definition, has no history in this sort of area at all," Callinan remarked. In addition to coping with a different legal environment and different accounting systems, he said, "You've got suspicious entrepreneurs who have never done this before. And they're sure that everything you're doing is to rip them off."
The myriad obstacles for investing in developing nations can be tremendous, of course, even without natural catastrophes and political insurgencies. Yet the opportunities for gain are there, too, agreed all panelists, who represented old guard firms as well as newer outfits such as Reicher's. CDC, which is wholly owned by the British government and is now being partially privatized, used to be a development lender in the traditional sense. For the past four years, however, it has only made private equity investments. The mandate of CDC, Reicher said, is to invest in the poorest countries, where other private equity investors don't like to go, in order to break a path for other investors to follow, with the goal of alleviating poverty.
"The issue is always that the unexpected is going to happen," Reicher said in reference to emerging markets. "The government is going to change the rules on you. [The concern is] not just property rights, it's the whole way in which people deal with each other.
"You really have to be prepared to take your knocks when you invest in the poorest countries, and go back to the basics. Are you in the right business, does it generate cash, does it have customers, do you have the right management, are you paying the right price, is there an exit?"
Not cash, cash, cash
When GE Equity headquarters burned down in Indonesia, according to Ben Gerig, who represented the firm at the conference, it was not an event that had been modeled into their business plan. However, he suggested, there are some management issues that can be controlled. His group tries to bring the GE imprint — its standards for doing business — from the U.S. to its offices abroad. Part of the challenge, he said, is to "manage management's expectations" of how deals are done.
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"GE has a vigorous underwriting approach to looking at opportunities," Gerig explained. "Prior to five years ago, most of the deals that were done were friends and family." The challenge, he said, comes in relaying what GE expects, during the underwriting process as well as afterwards: the kind of information that is needed, and the transparency that is required. One of these givens is a monthly financial statement, ideally to be provided without a fervid request every month.
According to Reicher, investing in emerging markets also requires a mindset that holds sound management even more valuable than cash.
"Nowadays, people [in the U.S.] and in Western Europe will go out and buy companies, and not worry about the management," he said. Management apparently is considered another resource that could be plugged in later, he speculated.
"Management is absolutely critical in emerging markets," Reicher stressed. "I cannot overemphasize it." The mantra should not be "cash, cash, cash," he proposed, but rather "management, management, management."
The character of money
The notion of doing good while also doing well also stimulated friendly debate at the panel discussion. According to Reicher, not-for-profit equity investing is equally as bad for the recipient of the money as it is for the company making the investments.
"Where I believe we are doing good is in trying to make the effort in the first place; because, ex-post, our returns are probably not going to be as good as putting in money through the Sprout Group," he said. Reicher added that, in his view, people tend to appreciate groups along the lines of the International Finance Corporation and the World Bank Group, in addition to foundations, that have a social agenda as well as a profit agenda.
Callinan capped the conversation on a rhetorical note. Referring to his experience in Central and Eastern Europe, Callinan said, "the trailblazing money" from not-for-profits that followed the collapse of the Iron Curtain was very important in getting investment started in the region.
"But at what point does that money have to change," he asked, "either in character, or to just be wound up and pulled out?"
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