The World Is Not Very Flat In Emerging Markets......

Canada: An Emerging Market?

For those who follow the energy sector, the US government blocked the construction of the Keystone XL pipeline several weeks ago. The proposed pipeline was to transport oil from Alberta to the Gulf of Mexico where it was to be refined and then either exported or sold into the US market. We all know that politics in the US has hit an all time high on the 'slime' meter, but what shocked me most was the reactions of Canadians. 

One question: Is Canada so dependent on one pipeline and one product export that the entire stock market can drop by the cancellation of one project?

The type of economic, political and media reaction was one that is typical to those that we see in an emerging market: where there are only a handful of projects that make up a large portion of an economy and if one fails, the entire country is rocked to its foundation. 

The Canadian reaction to the Keystone decision is a reflection of a failed national energy strategy as well as a failed national strategy to diversify the economy while reducing its dependence on the US. If Canada is to secure its economic future, it needs to make sure that it produces more and exports more to countries other than the US. 

 

The Great Greek Sucker Punch

Mr. Papandreau is a career politician, a true political survivor.  With the announcement of a referendum on the bailout, he has single handedly managed to hand over responsibility of a hard default to the masses.

For those who are wondering what the real spirit behind the referendum is, it is essentially the single most important step toward adopting the Drachma and therefore letting go of the Euro.

Of course, all this comes at the expense of Mr.Sarkozy and Mrs.Merkel. I would argue that this referendum represents one of the greatest sucker punches ever to have been delivered to the EU by Greece (even when you consider how they actually got in to the monetary union in the first place). It’s now time for Mr.Sarkozy and Mrs.Merkel to answer to their respective constituents. I doubt they will be so generous with Greece from now on.

So, what is Greece to do now? I wrote about a Greek default several months ago and in short, there is light at the end of the tunnel… however only after a restructure plan that will hurt much more than any EU bailout. The Greeks have lost at least one (possibly two) generations to debt. In a sense, I guess the Greeks have chosen to pull the trigger themselves rather than have it pulled by the international community.

As a Turk, I know about depression and economic volatility so I’m a bit torn between the virtues of the proposed referendum. On one side, I think that Greece should have taken the EU handout as very few countries in the history of the world have ever received so much benefit of the doubt. On the other side, having forced to report to the IMF or other international institutions every time you sneeze can be extraordinarily humiliating.

At the end of the day, investors must realize that these are the hard facts about emerging markets. Not just Greece but all emerging markets. We will find a way around these crisis and believe me, given the right information and guidance, there will be many investors that will come out wealthier at the end of the process.

 

Raising Funds in Emerging Markets

The private equity industry in the emerging markets have been growing at astonishing speeds, however the bulk of capital has traditionally been sourced from North American and European institutional investors. There is serious change in progress. As economic stagnation continues in the developed nations, general partners are looking to institutional investors from many of the emerging markets.

To this end, general partners are realizing that traditional ‘unwritten rules and understandings’ between GP’s and LP’s, so strongly advocated by organizations such as ILPA, are being ‘re-written’. When approaching investors from emerging markets, one must first understand the business culture in an emerging market. At the risk of over-generalizing the facts, there are many similarities in how investors approach deals in any emerging market.

The first thing any general partner will notice is that many institutional investors from emerging markets will want to take part in the investment decision. The second thing any general partner will also notice is that institutional investors will want quicker exit times from portfolio companies and ultimately a shorter life-cycle for the fund itself.

So why do investors from emerging markets want these provisions before making a commitment?

We need to understand the dynamics of an emerging market before we can answer this. Tracking of an investment and a lack of world class (and... trustable) management has always been a point of concern in the emerging markets. One way to solve the problem was to have the investor take an active role in the company in order to protect its interests.

Wild economic swings are a common characteristic in any emerging market. The term ‘long term asset allocation’ has a different meaning to an investor from an emerging market than to an investor from a developed market. Traditionally, investors in emerging markets like to exit within two or three years from any deal.

Many traditional investment ‘rules’ have clearly been transferred to the private equity realm. The rules are changing and many general partners and industry organizations from developed markets must adapt if they wish stay in the business.