Is EM PE Dead?

When Portico launched four years ago, I asked “Is Emerging Markets Private Equity Dying?

There’s no need to ask the question anymore.

It’s dead.

You don’t have to take my word for it — the DFIs are telling us so.

For instance, Clarisa De Franco, Managing Director for Africa Funds, Funds and Capital Partnerships with CDC Group, recently told PEI:

I also think we will see fewer new funds emerge as fundraising becomes challenging and consolidation plays out. Our strategy now is two-fold: continue our engagement and innovation with teams that are addressing specific market inefficiencies (including first-time teams) and to back strong-performing existing GPs, with fewer new managers than previously because we believe that will help create a stronger industry that can focus on both financial and developmental outcomes.

Or, look at IFC’s recent report on EM PE funds in the era of Covid-19:

Fundraising in EMs is expected to become more challenging in the next two to three years, especially for funds targeting small and midsize companies. These funds will struggle to survive, while larger and more established funds will be less impacted but still need DFI support. The composition of the Limited Partner (LP) base in EMs will shift, with international institutional investors being constrained in their asset allocations to EMs. The life cycle of funds will see a lengthening in light of longer fundraising cycles and longer investee holding periods due to challenges in achieving exits.

(Also, Actis is eschewing the traditional PE model in favor of hard assets.)

Will there be traditional PE fund managers that raise capital in EM?

Of course.

But a vibrant, growing industry?

Forget about it.

There are capacity constraints, and there are different structures for investing in EM private companies.

Work on a Portico Pivot™️ is underway. 

* * *

 I recently recorded a podcast episode about private equity in Russia. I hope we get to release it.

During the conversation, the guest and I got to talking about the transition from the Soviet Union to what came after, and how generations experienced the shift differently. For instance, people aged 40+ often had difficulty adjusting to new conditions, while younger people benefited from a lack of habits and legacy thinking that communism had engrained in the older generations.

The discussion reminded me of a passage from Sebastian Haffner’s Defying Hitler. Recalling events in Germany in 1923, Haffner wrote:

The old and unworldly had the worst of it. Many were driven to begging, many to suicide. The young and quick-witted did well. Overnight they became free, rich, and independent. It was a situation in which mental inertia and reliance on past experience were punished by starvation and death, but rapid appraisal of new situations and speed of reaction were rewarded with sudden, vast riches.

Speaking of Weimar, the feeling that the United States is on the cusp of a crucible is palpable.

It’s banal to say that Covid-19 has been an accelerant for long-standing trends, but in the last couple of months it feels as if the fissures have broken open.

Perhaps it’s the paranoia of a c. 40-year-old American who fears getting caught flat-footed, but the international system that has defined my existence is gone, and it’s not going to be reclaimed.

The urgency to adapt is acute.

 * * *

If you are a U.S. citizen, please vote in this year’s election.

Election Day is Tuesday, November 3rd.

The website www.vote.org is helpful for finding out which voting options are available in your locality (e.g., early in-person, absentee by mail), and locating your polling place. 

Vote!

Alla prossima,
Mike


Asia

Two recent pieces on private equity in Asia caught my eye. 

1.McKinsey & Company interview with Baring Private Equity Asia Founding Partner Jean Eric Salata.

Insightful take on the deepening of the Asian market — not only in terms of the strategies and sectors that attract investment, but also in terms of the evolution of human capital and the professionalization of asset management firms. Particularly thoughtful on the necessity of infusing digital capabilities throughout one’s operations and the investment cycle.

2. BCG report on The Promise for Private Equity in Asia-Pacific

There’s not much new in it, candidly, but it rightly points out the heterogeneity of investors in private markets, and it has a useful data nugget: “As of 2018, China, India, South Korea, and Thailand all ranked in the top 10 countries globally for number of family-owned businesses with market capitalization of over $250 million.”

While Portico has been cautious on investor exuberance toward mega-cap Asia and China-dedicated funds — and we watch the dogpile into Jio / Reliance Retail quizzically — the region is core.

On this point, Benedict Evans put out a thought-provoking essay on “The End of the American Internet.” Upwards of 90% of internet users are outside of the United States; China and India have 5x as many smartphones as the USA; and, the “RoW” (largely China) accounts for nearly half of global venture investment.


Someplace Else

The placement agent Eaton Partners conducted an LP Pulse Survey in September. They asked LPs which region is home to the best private market opportunities. 

The verdict: 

  • North America — 68%
  • Europe — 18%
  • Asia — 14%
  • “Someplace else” — 0%

Josh Lerner on U.S. Venture

One of the assertions I put forward last year is that the institutionalization of U.S. venture capital is leading to less innovation.

Josh Lerner and Ramana Nanda published a paper over the summer that argues a similar point. In short:

Three issues are particularly concerning to us: 1) the very narrow band of technological innovations that fit the requirements of institutional venture capital investors; 2) the relatively small number of venture capital investors who hold and shape the direction of a substantial fraction of capital that is deployed into financing radical technological change; and 3) the relaxation in recent years of the intense emphasis on corporate governance by venture capital firms.


Stash

Sometimes it’s fun to contemplate the embedded assumptions amongst the venture community.
 
For instance, Anish Acharya at Andreessen Horowitz wrote a blurb about Stash, a fintech startup that enables people to earn fractional shares as a reward when they use the Stash debit card at a merchant (i.e., you get a slice of Starbucks stock when you purchase a pumpkin spice latte or whatever).
 
Acharya believes bringing the ‘intelligent default’ to the 401(k) — making it opt-out as opposed to opt-in — is “one of the biggest forces for financial progress.”
 
Oodles of assumptions about financialization, ‘nudge’ psychology, etc.
 
Anyway, Stash is positioned as a way to help regular people build wealth … by spending their money. (There’s a monthly fee of $1 to $9, btw).
 
At first glance, this seems like a good idea. Rather than points or cash back, why not acquire a fraction of a share of stock?
 
But if you think about it for a minute longer, you’ll realize that it ‘nudges’ consumer spending toward large, publicly listed companies, leaving smaller, privately held businesses in a lurch.


From the Bookshelf

The boy thought he smelled wet ash on the wind. He went up the road and come dragging back a piece of plywood from the roadside trash and he drove sticks into the ground with a rock and made of the plywood a rickety leanto but in the end it didnt rain. He left the flarepistol and took the revolver with him and he scoured the countryside for anything to eat but he came back emptyhanded. The man took his hand, wheezing. You need to go on, he said. I cant go with you. You need to keep going. You dont know what might be down the road. We were always lucky. You’ll be lucky again. You’ll see. Just go. It’s all right.

I cant.

It’s all right. This has been a long time coming. Now it’s here. Keep going south. Do everything the way we did it.

You’re going to be okay, Papa. You have to.

No I’m not. Keep the gun with you at all times. You need to find the good guys but you cant take any chances. No chances. Do you hear?

I want to be with you.

You cant.

Please.

You cant. You have to carry the fire.

I dont know how to.

Yes you do.

Is it real? The fire?

Yes it is.

Where is it? I dont know where it is.

Yes you do. It’s inside you. It was always there. I can see it.

Just take me with you. Please.

I cant.

Please, Papa.

I cant. I cant hold my son dead in my arms. I thought I could but I cant.

You said you wouldnt ever leave me.

I know. I’m sorry. You have my whole heart. You always did. You’re the best guy. You always were. If I’m not here you can still talk to me. You can talk to me and I’ll talk to you. You’ll see.


Will I hear you?

Yes. You will. You have to make it like talk that you imagine. And you’ll hear me. You have to practice. Just don’t give up. Okay?

— Cormac McCarthy, The Road (Vintage: 2006)


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The information presented in this newsletter is for informational purposes only. Portico Advisers does not undertake to update this material and the opinions and conclusions contained herein may change without notice. Portico Advisers does not make any warranty that the information in this newsletter is error-free, omission-free, complete, accurate, or reliable. Nothing contained in this newsletter should be construed as legal, tax, securities, or investment advice.

Copyright © by Portico Advisers, LLC 2020, all rights reserved.

Impact Investing

The haters are coming out of the woodwork to kick impact investing while it’s down. Following the Abraaj fiasco and the sordid charges filed against Bill McGlashan, formerly CEO of The Rise Fund, people seem fairly gleeful to pronounce the death of impact investing.

I was particularly tickled reading PEI’s prognosis a few weeks back (“Has Bill McGlashan poisoned the impact well?”), which oddly failed to mention that PEI itself named McGlashan “Game Changer of the Year” in 2018.

Oops.

The pickings were so easy that even I couldn’t resist tweeting, “Spare a moment for the LPs in the Abraaj healthcare fund …” (Nobody liked it).

Look, I of all people am skeptical about the term “impact investing.” It’s super squishy.

It is manifest that large asset managers are embracing the impact label to hoover up assets and collect management fees. And, it is nauseating listening to investors whose public appearances contain little more than sanctimonious virtue signaling, and whose marketing copy makes one retch in one’s mouth.

But before everyone dances on the grave of impact investing, let’s pause at GIIN’s recent research suggesting that the impact investing market has doubled to $502 billion.

And, while the financial services industry is teeming with unethical people, let’s not lose sight of the fact that there are decent, earnest individuals in the industry who actually live and breathe an impact mission. Investors who are actually building sustainable businesses and improving lives. Most of them just are not as well known.

I was reminded of this recently after I recited the previous paragraph to a journalist whose work I respect.

“Name one,” s/he said.

“[Firm],” I said.

“Never heard of ‘em.”

Skepticism is warranted. But where, I ask, was the skepticism when the banquets and award ceremonies were being thrown, and the ingratiating articles were being written?

Maybe — maybe — people shouldn’t chase shiny objects.

Alla prossima,
Mike

———

Manager Selection

Sometimes, the asset management industry is revealed for the grand kabuki dance it is: overpaid, mostly smart people developing overly complex narratives to justify their jobs / fees.

I am no Luddite.

I value data and evidence.

But who among us can quantify the life energy that has been spent datamining backtesting investment strategies to uncover a finding that has no utility in the real world?

It’s not just the asset managers. Consider the lifetimes that asset owners have spent developing frameworks for manager selection, or the billions of pensioners’ dollars spent on investment consultants in a quest to pick top-quartile funds.

Loads of acronyms. Loads of analytics and equations. Loads of paperwork and spreadsheets and meetings. Countless hours nudging shapes in PowerPoint.

And then you see a chart that lays bare how silly it is to think that anybody could reliably pick winners. Dan Rasmussen of Verdad uncovered a golden nugget from the Oregon Public Employees Retirement Fund (OPERF) demonstrating that “despite 30 years of experience and the best advisors money can buy, OPERF has been unable to consistently identify top-quartile managers” (see below).

Screen Shot 2019-04-06 at 2.40.46 PM

And yes, that analysis is weighed by dollars allocated, not number of commitments.

To be fair, it’s more flattering when done by the latter — which comically is a lesson the consultant (and the team?) learned for the 2019 report (see page 111).

But, it’s still less than one-quarter that fall in the top quartile. 😞

———

Winds of Change

One of the things we like to talk about around here is whether EM PE — as distinct from EM private markets — is an industry in structural decline. I’ve had too many conversations with investors lately to change my opinion. The anecdotes are becoming anecdata.

And one of the genres of marination we often ponder is the DFIs’ direction of travel on PE funds. On this ponderable, the chart below from the Independent Commission for Aid Impact’s performance review of CDC is quite telling.

Whilst CDC underwent a strategy shift in 2012, it’s rather remarkable to track the rate of change in the value of the organization’s funds portfolio (i.e., “intermediated equity”) on both an absolute (£2.6B ➡︎ £2B) and relative basis (88% ➡︎ 52%!) since 2014.

Picture1.png

Marinate on the decline for a bit and what it suggests about industry performance. We can surmise where the preponderance of future investment flows are likely to head (hint: direct debt and equity).

Whither EM PE (ex-mega-cap Asia)?

———

My Friend Wrote a Book

This is not at all related to EM private markets, but my friend, John Gans, wrote a book about the National Security Council. It rocketed to the top of the New Release charts on Amazon a couple weeks ago.

You should buy it!

And maybe even read it!

To whet your appetite, I conducted a bite-sized interview with the author.

Thumbnail on John: Previously chief speechwriter for Defense Secretary Ash Carter, senior speechwriter for Defense Secretary Chuck Hagel and Treasury Secretary Jack Lew. He also worked with Nancy Pelosi and Hillary Rodham Clinton, is published widely, and has an MA and PhD from SAIS. Big Bruce Springsteen fan.

Mike: First, thank you for writing a book that’s less than 300 pages.

Our newsletter has readers all over the world, many of whom may not have heard of the National Security Council. Why should people read this book?

John: This is the exact reason I tried to write an accessible book. The NSC is the most important and powerful entity in the U.S. government, with the influence to shape decisions that affect the lives of people in the United States and around the world. Yet few Americans can name a single member of the staff. This book introduces readers — for the first time — to the people and the power of the NSC staff. If you’re an American, these are your staffers, you should know them, judge them, and if necessary change them.

M: You interviewed an astonishing group of people for this book, including Dick Cheney, Donald Rumsfeld, Bob Gates, Susan Rice, and H.R. McMaster. What did you learn about the nature of leadership?

J: The most important take away for me is that each of these leaders is human. At the beginning of every course I teach about how government works, I start by reminding students that they are not that different than the people sitting in the Situation Room.

Barack Obama and Donald Trump, Dick Cheney and Susan Rice, are not much different than you and me. They may like politics more and be driven by a hunger for power, but they also have good days and bad, they laugh, they feel stress, and they worry about what people think about them. One of the keys to good leadership is remembering your own humanity and the humanity of those who you want to lead.

whw

M: Your book includes a series of case studies in which entrepreneurial civil servants develop and then sell a policy shift to the president — frequently during war or exigent circumstances.

Our clients are mostly entrepreneurs who sell people on investment strategies in emerging and frontier markets — frequently these are outside of institutional investors’ comfort zone. What made for an effective ‘sales’ technique for difficult decisions across presidencies?

J: My bet is that exigent circumstances make it easier to sell one’s ideas. After all, there are few better places to sell life preservers than on a sinking ship, and few easier places to sell an idea about war than in the Oval Office with a president who does not want to lose.

That said, as someone who has worked in government and now written a book about it, I think the critical lesson is not to count on getting lucky — always having the right idea at the right time in the right place — but rather in persisting with your core ideas and principles. Eventually the right time will come for you. And if you’re ready in that moment, you’ll win the day.

M: In my previous life working with former NSC staffers, a uniform sentiment was that personalities trump process. I’ve also found this to be a prevalent sentiment while exploring the topic of governance in EM private markets.

Did you find this to be true in your interviews and research? If so, are there processes we can embrace to insulate America and the world from the consequences of misguided personalities?

J: There is no process that can make a mediocre, misguided, or malevolent person a good one. But good process can minimize the risks posed by the middling or mischievous, and make good personalities soar.

I think a lot of process — in government, in academia, in the business world — is bad because too few people are self aware enough to know what works for them and what doesn’t.

One of the early doubts I heard in working on this book was that the individuals did not matter much to the power of the NSC. But that’s one reason why no one gets what the NSC is capable of — they haven’t spent any time figuring out what makes these people tick. That’s a lesson for understanding our government, or running one’s business.

M: Why are you so obsessed with Bruce Springsteen? Especially since Rage Against the Machine’s “Ghost of Tom Joad” is clearly the better version?

J: Fandom does not require an explanation, which is probably a good thing since love is hard to explain. But the assertion appears to answer the question: Springsteen wrote a rock song so good that a newsletter about private equity is talking about Tom Joad. How many artists can do that?

———

From the Bookshelf

… reporters, more often than not, heavily rely upon the help of powerful institutions, go through the motions of acting adversarial without affecting substance, and are distracted from the public interest by profit-minded news organizations and the changing demands for advancing journalistic careers.

— Timothy E. Cook, in Geneva Overholser and Kathleen Hall Jamieson (ed.), The Press (Oxford University: 2005))

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The information presented in this newsletter is for informational purposes only. Portico Advisers does not undertake to update this material and the opinions and conclusions contained herein may change without notice. Portico Advisers does not make any warranty that the information in this newsletter is error-free, omission-free, complete, accurate, or reliable. Nothing contained in this newsletter should be construed as legal, tax, securities, or investment advice.

Copyright © by Portico Advisers, LLC 2019, all rights reserved.