Frontier markets investments showcase growth and opportunity

Days later, in conjunction with the firm's announcement that it would take a 2.32% stake in the soon-to-be publicly listed Laos hydro-electric power company Electricite Du Laos Generating Company, Leopard and its co-investors said that they would boost investments in three Cambodian portfolio companies: ASA Plc., which will rise from a 2.58% equity stake to 10.3%; Nautisco Seafood Manufacturing Limited, which goes from a 31% stake to 38%; and Kingdom Breweries (Cambodia) Ltd., which rises by an undisclosed amount.

Leopard further disclosed that, following the completion of these transactions, more than 70% of the Leopard Cambodia Fund will have been committed. At that point, Leopard Capital looks to launch its Leopard Cambodia-Lao Fund II L.P. in the first half of 2011, targeting business in Cambodia and Laos.

Frontier markets on the rise

In other frontier markets news, Aureos Capital and Mitsui Sumitomo Insurance Venture Capital (MSIVC), the VC arm of Japan's largest insurance company, have teamed to launch a program to allow the portfolio companies of each firm, in Southeast Asia and Japan, to gain exposure to each other's markets. The announced deals and partnerships suggest that frontier markets' prominence could be on the rise.

According to the Emerging Markets Private Equity Association data, this doesn't appear to be scaring investors away. Private equity investment into this area more than doubled in 1H10, and the MSCI Frontier Index indicated that overall returns grew by 8%.

Cambodia's 2010 GDP is estimated at $11.36 billion, and according to the Asian Development Bank Cambodia's real GDP growth rate is expected to realize 4.5% for 2010 and 6.2% in 2011, outpacing 2008's figure of 5.5%. In accordance with this growth, Huot Chea, an economist at the World Bank in Phnom Penh, forecast FDI at just $390 million in 2009 after $790 million last year, but he expected an increase to $500 million in 2010.

Cambodia's economic growth has accelerated over the past decade since the end of the country's civil war, thanks to exports of garments to the United States and European Union, a boom in tourism and bountiful agricultural production. Today, a particular advantage that Cambodia enjoys is that of being a down-on-its-luck house in a rich neighborhood. Surrounded by the wealth in China, Thailand and even Vietnam means that investment interest emanating from companies in those places is becoming more acute. There is also infrastructure connectivity in the country, and politically it has been run by the same party for 22 years, meaning policies that have long been largely business-friendly remain.

"The downside is there's no track record for the country," MD of Leopard Douglas Clayton explains. "Nobody has ever delivered returns or exits. So we have to demonstrate why we can achieve that."

"Most countries don't get destroyed over 35 years the way Cambodia did. But it's been stable for some time now, and we see it as an economy that should be in the $100 billion range. It was quite successful in the 1960s before the Vietnam War spilled over its borders. Today it stands at about $10 billion. That creates venture-style investing opportunities, filling in missing sectors... re-creating the sorts of businesses that used to thrive there and need to be rebuilt."

Leopard Capital favors acquisitive industries, and they've just launched a greenfield beer company. The strategy is that if it is successful, it will be targeted by many bidders drawn to an independent national brand. Self-liquidating investments are another approach the group has used successfully. And another firm, TLG Capital, has invested in Cambodia's oldest river cruise business, which profits in part by the lack of land transport options as well as a growing tourist sector.

Like any market, however, there is certainly a prize for first movers, and so far that title is still largely up for grabs.

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• Topics
• Southeast Asia
• Investments
• Funds