The need for boots on the ground

While it’s possible to invest in foreign markets remotely, a presence ‘in-country’ helps to build better relationships with the local business community, source deals, and avoid mishaps, writes Rupert Hayward.

Investors who think they can make their decisions solely through business and market analysis should stick to developed markets. If you are going somewhere more exciting, where the risks and rewards will be higher, you need to have people on the ground.    

The risks inherent in foreign investment are obvious. Day-to-day involvement in the running of the business from a different continent is unwieldy and ideas of developed-world best practice can run against the grain of local business practices. Language may be an issue, along with a different legislative environment and due diligence on local partners must be performed without causing offence or leaving gaps.

Basic assumptions as to how businesses should be financed, leveraged and exited may differ from developing economies. Governments may have greater involvement in business decisions and place conditions on successful partnerships that demand investment in local communities. What’s expected from you as the potential investor in the wider context of the country may not be explicit at the outset.

In developing economies working-relationships and the ‘soft’ parts of the deal may be more important, often filling the gaps left by a bureaucratic vacuum. Similarly, trusted partners are essential to the maintenance of information-flow. Briefings, insights and reports may give an idea what’s going on in an economy, but without an idea of the ‘street-level’ sentiment they lack real value.

It’s very often the case, and it’s certainly so in Brazil where we have a number of investments, that partners you deal with want to have a relationship that is more than solely business related. They want to see you as a business partner and a friend and want an impression of you from the outset.

The best way to deal with these issues is by having someone who works for you in country, whose interests are completely aligned with your own and who understands the local environment and business and political communities. If you don’t have someone like this, you’ll have to rely on remote management and  robust shareholder agreements, which are blunt instruments that can cause ill feeling with the management of the portfolio company.

On-the-ground relationships and insights can pay dividends. A Brazilian government-backed housing scheme – ‘minha casa, minha vida’ (‘My house, my life’) – led housing developers in the country to invest heavily in relevant residential property. But while the money was available, the infrastructure to service mortgage applications was overwhelmed and so housing supply exceeded delivered demand. Through our contacts on the ground we spotted these difficulties early and reduced our exposure accordingly.

Rupert Hayward is executive director of Salamanca Capital Limited, a Merchant Bank