Tales from the frontier

Frontier markets – essentially markets so nascent that they don't even count as 'emerging' yet – tend to be characterised by unpredictable governance, weak investor protection, lack of liquidity (if a stock market exists at all), an acute shortage of experienced management, and other significant risk factors. 
Nonetheless, GPs see opportunity in Asia’s frontier markets. Since 2010, $1.34 billion has been raised by private equity funds for Cambodia, Laos, Sri Lanka, Mongolia and Myanmar combined, according to PEI’s Research & Analytics division. 
Track records have not been established; indeed, relatively few deals have been reported. Total M&A since the start of 2010 across Cambodia, Laos, Mongolia, Myanmar and Sri Lanka has been just $1.7 billion, according to Mergermarket data. 
But a few firms have managed to generate returns, demonstrating what’s possible. 
Origo Partners, a UK-listed fund manager with mining-related investments in Mongolia, had a 2011 exit from Mongolian copper exploration business Kincora on the Toronto Stock Exchange, which generated a 3.5x return only 12 months after the original investment, according to Chris Rynning, Origo's chief executive. 
Last year, Leopard Capital, a frontier markets firm with a core focus on Cambodia and Laos, partially exited its investment in electricity company EDL on the Lao Securities Exchange (which opened only in 2011). The firm reaped an IRR of 44 percent, according to Leopard founder Doug Clayton. 


But there’s an uncompromising logic in frontier markets: as well as outsized rewards, they also bring outsized risks. Even though firms have only entered these markets in the last three years, some have already been involved in legal disputes. 

Leopard, for example, had a contentious disagreement with bankrupt portfolio company Nautisco Seafood, Cambodia’s largest seafood processor, over a restructuring plan. Clayton says the dispute was eventually settled in a Cambodia court, with the Leopard Cambodia Fund recovering most of the company’s assets (which are currently up for sale).   

“Clearly, it was the fund’s worst investment,” Clayton admits. “Fortunately the rest of the fund’s portfolio has performed well enough that the fund is generating positive net returns despite this particular write-down. That’s the logic behind portfolio diversification.” 

Frontier markets tend to have local tycoons – well-connected through family ties but not necessarily skilled at business – who sit on underutilised assets. Thus, certain sectors such as property, mining and oil can carry a higher risk, sources say.  

Casinos might be another addition to that list. Sanum Investments, a Macau-based real estate investment firm that owns casino and entertainment complex properties in Laos, is currently involved in international arbitration with the Lao government. 

In 2007, Sanum took a majority stake in Thanaleng Slot Machine Club, near the capital Vientane. The business grew, but the increasing top-line growth led to a rift with the local minority partners, Jody Jordahl, head of Sanum, told PEI in a previous interview. Last year, the Lao government seized the business, officially due to a contractual misinterpretation. 

Sanum, Jordahl said, followed all regulations, paid all taxes, established a profitable business and created local jobs. He says monthly revenues went from $100,000 at entry to $3 million at the time of seizure. 

“We are a victim of our own success to some extent,” Jordahl said at the time. “Once our partners saw how much money we were making, it was confiscated.” 

The situation became messy, with threatened arrests of senior executives and a proposed 80 percent tax that would put Sanum’s other assets out of business. In October, the International Centre for Settlement of Investment Disputes said the Lao government needed to leave Sanum’s remaining assets alone while the case remains ongoing.


But despite their first-hand exposure to the risks involved, firms continue to scout opportunities by riding further into the wilderness. Origo now has an office in Myanmar, where it has completed a joint venture with a local partner. Leopard is also interested in the recently-opened country, which has a population bigger than Spain and is hungry for foreign capital. 

Anthem Asia, an investment company set up by former private equity executives at CLSA Capital Partners, made its debut investment in Myanmar a few months ago, acquiring office services provider Hintha Business Centres for $1 million. 

However, Josephine Price, the firm’s co-founder (who previously set up the growth capital business at CLSA), says Myanmar will take maybe three years to become an investible private equity market. 

“[Private equity will] find it tough to do an investment outside of property or infrastructure that is more than a million or two in this initial phase,” she says. 

While Leopard’s Clayton agrees that frontier markets can be unpredictable, he is in the new territories to stay (his firm is also looking at Bhutan). 

“The key advantage is there are so few other institutional investors in these markets that the opportunity set is broad and the entry valuations tend to be more attractive, which is not the case in highly competitive developed or emerging markets,” Clayton says. 

That's the key to those potentially outsized returns – which, sources suggest, could average 30 percent IRR in some of these frontier markets.