Issue 3 - November 2010
A World Of Growth
Lord Mark Malloch-Brown, who recently joined FTI Consulting as Chairman of the Global Affairs Practice, discusses the opportunities and challenges facing private equity firms in emerging markets.
Lord Mark Malloch-Brown is one of a handful of global leaders who have both successfully assisted developing nations in growing their economies and counseled investors seeking opportunities for creating wealth in those countries and beyond. He served as Minister of State in Prime Minister Gordon Brown’s
cabinet, where he had particular responsibility for strengthening relationships with Africa and Asia. In addition, Malloch-Brown has served as Deputy Secretary General and Chief of Staff of the United Nations under Kofi Annan and, for six years before then, as Administrator of the UN Development Programme, where he led development efforts around the world.
He is equally well versed in global markets, economics and investing. After an earlier career in consulting, he was the Vice Chairman of Soros Fund Management until he entered the British government. Throughout his career he has had frequent interactions with finance ministers, principal economists and
high-profile business leaders. Moreover, his heavy involvement in the G-20 summits, his tenure at the World Bank and his private sector experience providing financial services and investment strategies for various funds, as well as his early years as a journalist for The Economist, afford Malloch-Brown a unique and nuanced perspective on a wide array of global economic, political and social issues, including private equity and capital flows.
For this issue of FTI Journal, the editorial staff sat down with Malloch-Brown to discuss private equity in emerging markets — especially those beyond the BRIC countries — and to outline some of the opportunities and challenges facing private equity firms seeking to invest overseas.
From your vantage point, what is the current investment climate in emerging markets, and how should private equity investors consider it?
MALLOCH-BROWN: Right now developed markets are experiencing an economic hangover. There are limited growth prospects for companies providing goods and services in these markets, which have matured and continue to face structural deficiencies that impede demand. The prevailing wisdom is to invest in markets showing prospects for rapid growth — whether it’s private equity seeking investments or multinationals doing M&A — and these areas are increasingly not only in the BRIC countries but also beyond them in a second circle of growth, which includes Indonesia, Malaysia, Thailand, Singapore, South Africa, Nigeria, Colombia, Chile and Mexico.
In the BRIC countries, asset values are already high, and it’s hard, although not impossible, to find attractive deals. In contrast, a number of attractive opportunities clearly exist in the second circle. On the other hand, deal sizes can be smaller and exits can be a challenge. As a result, successful investing in these areas requires a very careful balance between deal size, due diligence, knowledge of local environment and an ability to get involved in the operations.
What would you say are the most attractive geographic targets?
MB: Attractive geographic markets that lie outside of the BRIC states include countries in Asia, Africa, Latin America and the Middle East, but the pros and cons of each of these regions must be weighed carefully.
Asia as a long-term option is one of the more important investment alternatives, largely because of its sheer size. Asia already accounts for more than half the world’s population; in contrast, by 2050 the U.S. and Europe will account for less than 15%. The size of the Asian market of consumers and industries means that investors can’t ignore it.
But Asian assets can be expensive, and depending on what you characterize as Asia — India, Pakistan, North Korea, Thailand, Myanmar — it is a region of the world where there is considerable territorial and sectarian conflict, and the effects of very rapid economic growth on economic inequality are also risks. Finally, while the sheer size of Asia makes it attractive, the rapid population growth and rate of urbanization have led to major environmental challenges. So this idea of Asia as El Dorado is not accurate, as attractive as the macroeconomic picture may be.
By contrast, Africa is just now finding its feet in terms of being a target for private equity investors. It is a very small market — unless you have an Africa-wide roll-up strategy — but especially for the long-term players, there are pockets of opportunity across the continent. Corruption remains a challenge in some countries, as well the fact that outside of such countries as South Africa and certain North African ones, investments in roads, infrastructure, health and education are only being made in fits and starts.
Would you say these areas are pro private equity? Are they accepting of Western private equity investment?
MB: Across much of Asia there is a continued desire to attract overseas investment. Hong Kong and Singapore are already highly sophisticated financial centers with homegrown private capital and public markets. But Vietnam and its neighbors — Cambodia and Laos — are now increasingly opening up to overseas private equity, as are South Asian countries such as Bangladesh. Asian countries are divided into the “fashionable” markets, if you will, which are more expensive but easier to enter, and the “less fashionable” markets, which are cheaper but in which success is perhaps harder to achieve.
In Africa, South Africa has a well-managed and sophisticated financial sector. Nigeria is a huge market that is rapidly developing, but it lacks the rule of law and transparency that Western investors generally seek.
Chile, Colombia and Mexico are also well-run countries with investor protections, solid infrastructure and a pro-investor mind-set.