Expectations v. Reality

One thing that never ceases to entertain me is when an institutional investor says s/he expects 3x from an emerging market private equity fund.

“We want to be compensated for the risk we’re taking.”

Makes sense.

But how is that risk measured? People don’t seem to be using a Sharpe ratio, or some such analytic that disaggregates measures of alpha per quantum of risk.

According to Aswath Damodaran, the equity risk premia between developed and emerging markets have converged since the turn of the millennium. One could argue that investors should accordingly expect a lower premium from EM PE over time.

Using the spread between U.S. Treasurys and local sovereigns for a risk premium seems lazy. Private EM companies can be better credits than the countries where they operate, and actually have a lower risk profile than publicly listed companies (e.g., mining, oil & gas).

Also, it’s 2019.

Are we going to act as if many of these countries don’t have banks, and insurance companies, and mobile network operators now? There is a lot more competition, and a lot more capital scouring the landscape for deals (much of which is neither institutional nor residing with asset managers seeking PE-like returns).

Yet these markets are dynamic, and exciting, and they present an opportunity for investors to build great businesses. It’s not like the pass-the-parcel, value-transfer game in developed markets.

To be clear, there absolutely will be EM deals and perhaps some funds that deliver ≥ 3x net DPI at the end of their life. But if you’re an institutional investor investing in institutional-quality funds, what are the odds that you’re going to pick one of these winners?

Low. In all likelihood, you’re probably going to wait until the firm has a track record and built up its back office to satisfy your trustees.

By then, said firm will have scaled and begun investing in larger companies, and the economies and sectors in which they’re investing will have evolved materially.

All of these behaviors are reasonable. But the idée fixe of getting 3x is not.

If you’re going to wait for managers and markets to institutionalize and de-risk, then you should be willing to give up some of the upside. You don’t deserve it.

How realistic is the expectation of 3x, anyway?

Take a look at CalPERS’ experience (see below). Of the 268 PE funds in its portfolio (excluding vintage years 2016-18), only two funds clear the 3x hurdle.

Screen Shot 2019-02-11 at 8.29.04 AM

Only 36 funds (~13%) have delivered at least 2x. Meanwhile, 80% of the funds sit between 1x and 2x, and nearly half are valued at less than 1.5x.

And lest we forget, these are with PE firms’ marks …

We could tie ourselves in knots in a discussion over the suitability of CalPERS’ portfolio as a data set, but a bogey of 3x in EM just seems unreasonable.

New rule: stop being unreasonable.

Alla prossima,
Mike

———

Liquidity

Investors often talk about the need for private equity firms to harvest an illiquidity premium — an incremental return above that generated in public markets.

The idea makes sense …

… when public markets are liquid.

But what happens when an exchange can’t absorb trading volumes? What if it fails in its job of serving as a market maker?

You should probably ask the people who tried to sell shares of Jardine Matheson Holdings Ltd. — one of the largest listed companies on the Singapore Exchange — at the market’s open on January 24th.

Says Bloomberg:

Shares sank just before the regular session began, with about 167,500 changing hands at just $10.99, compared with Wednesday’s close of $66.47. Jardine, the flagship investment firm of a 186-year-old conglomerate, soon recovered from the $41 billion wipeout and ended up closing 0.5 percent higher.

Selling at an 83% discount seems … not to be a great advertisement for the benefits of liquidity.

CMC Markets Singapore analyst Margaret Yang Yan is a bit more candid:

This kind of stupid mistake shouldn’t have happened in an established stock exchange. It is the largest exchange in south-east Asia … It’s ridiculous.

Also ridiculous: not putting in a limit order?

This markdown never would have happened if Jardine Matheson were a PE portfolio company. But then …

———

Sell!

The trickle of exits / distributions from EM PE funds is a fact of life. We often hear about structural reasons for this logjam — the depth of local capital markets, for example.

But, what if it has little do with EM, and more to do with dealmakers’ biases? What if (most) everyone’s actually good investing?

In “Selling Fast and Buying Slow: Heuristics and Trading Performance of Institutional Investors,” a group of researchers analyzed 783 institutional portfolios with an average portfolio value of ~$573m. The dataset included 4.4 million trades between 2000-16.

Say the authors:

We document a striking pattern: while the investors display clear skill in buying, their selling decisions underperform substantially. Positions added to the portfolio outperform both the benchmark and a strategy which randomly buys more shares of assets already held in the portfolio … In contrast, selling decisions not only fail to beat a no-skill strategy of selling another randomly chosen asset from the portfolio, they consistently underperform it by substantial amounts. PMs forgo between 50 and 100 basis points over a 1 year horizon relative to this random selling strategy.

Basically, one way to enhance performance is to become a better seller.

Maybe this could be a new skillset to hire for? Someone who sits at the table during portfolio reviews and offers constructive comments, such as, “Maybe we should sell [company].”

Or someone who walks around the office offering a helpful feedback.

Deal Gal: This promoter is a pain in my rear. The board meetings are a shambles. He won’t listen to anything we have to say.

New Guy: Hmmm … [pauses for dramatic effect and adopts hipster podcaster voice] Have you thought about selling it?

Deal Gal: But he knows what he’s doing! If we hold on to this company for another 18 months we could be looking at a 3-bagger.

New Guy:

———

Emoji Compliance

In Portico’s first research piece, I noted that the growing costs of compliance were taxing the bandwidth of smaller fund managers, and regulatory complexity was making it more difficult for firms to raise capital.

[You can envision billionaires at mega-cap firms pulling up the drawbridge behind them as regulation stifles competition and entrenches their firms’ market position.]

Well, Kirkland & Ellis sent out an update about some recent Delaware decisions regarding text messages, personal emails, and corporate litigation that brought home how absurd the world has become.

Chancellor [Andre] Bouchard added that he often finds texts to include especially probative information, particularly when covered in emojis. In a recent decision (Transperfect), he attached significance to a smiley-face “emoticon” included in one of the party’s texts as evidence of the malign intent of the sender.

Look, I am out of my depth when it comes to the legal implications of emoticons. But what’s the over / under — in months — before a DDQ contains responses to one of the following questions:

  • What is your policy on emoticon use?
  • Have you disabled controversial emoji across all devices, messaging, and email clients?
  • Have you staffed up your emoji compliance function with digital natives who can discern malignant intent amongst the extant universe of 2,500+ emojis?

———

Blackstone Quits Africa

No surprises here. Secondo Il Sole 24:

Il problema, sembra, è che Blackstone non ha trovato grandi operazioni da finanziare [emphasis added]. E la competizione cinese ha complicato la situazione. Anche KKR incontrò difficoltà simili tanto da smantellare nel 2017 il team di persone dedicate al continente africano e vendere il suo unico asset in quella regione, un produttore etiope di rose.”

QED.

———

Inspecting the Books

Catalyzing private capital is one of the core missions of the development finance institutions. Oftentimes, in EM private markets, this takes the form of seeding local managers and building them into institutional-quality firms (see intro).

But, what if there were another way? One that didn’t take so long. One that evoked the spirit of a place, and its people, and it propelled you to book a ticket to visit that manager in Poland or wherever.

Then you might learn about the 1 million family-run businesses that are in need of succession planning. Or the scarcity of expansion capital in a market of ~ 40 million consumers.

You might put down some Żywiec and pierogi, and get lost in Warsaw.

You might, actually, feel alive.

Manager visits wouldn’t be like those depressing trips where you eat Panda Express in a Holiday Inn Express, and the view out your window is of a half-vacant parking lot and a highway.

The EBRD has released the longlist for its 2019 Literature Prize, and until this moment I didn’t think I wanted another job, but I will read books and tell you which ones I like if you pay me to do so.

It’s a pretty cool looking collection from EBRD’s geographies. Hope you find something you like.

———

From the Bookshelf

For the first time in my life I understood that the sense of poverty is not the result of misery but of the consciousness that one is worse off than others.

Providence is no substitute for prudence.

— Jan Karski, Story of a Secret State (Houghlin Mifflin Co.: 1944)

# # #

Haven’t signed up for our newsletter yet? Sign up now.

# # #

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.

The Work

September is upon us, and Portico is marking the beginning of its third year in business. We’re not popping champagne bottles to mark the occasion, but it’s pretty dope to be here plugging away. After all, roughly one-third of U.S. businesses close within their first two years.

It’s not all peaches and cream, of course. EM PE is a hard-driving, competitive industry — and it’s one going through hard times.

During a recent discussion with a client, I shared my reservations about launching an advisory firm that caters to a shrinking industry.

“One of the challenges of managing a firm in this business,” he replied, “is that the downcycles are so brutal. Good people get discouraged waiting for the cycle to turn, and they walk.”

If the figures in this EM PE talent management survey are to be believed, fatigue with the industry explains more than 20% of staff turnover. Boy, do I feel that fatigue sometimes — and I’m not even working in an EM PE firm.

All that said, Portico’s still profitable with zero debt. We missed our (über-) aggressive revenue target, but that’s okay. It was at odds with two other goals I had for the year: launching a product (accomplished, but a serious time commitment) and making sure we had happy customers.

On the latter, we conducted a client survey over the summer to gauge our progress. The findings were favorable: all of our clients were “very satisfied” and our Net Promoter Score is maxed out at +100.

The other encouraging indicator is that all of our new clients have come through referrals.

Portico-Net-Promoter-Score

As for new targets, I experienced an epiphany last month. It came to me shortly after I’d achieved one of my personal goals for the year (attaining two stripes on my belt in BJJ). The epiphany was this: the stripes didn’t matter. I still get crushed, sometimes even by people with less experience. The value (and the pleasure) is in the work itself.

So, no hard targets for year three. I’m going to focus on doing the work and being helpful to others.

Entrepreneurship is way overhyped, but the liberty to chart one’s course makes for a gratifying odyssey.

Two closing thoughts:

First, I’m contemplating some content ideas for year three — a podcast (I know, saturated) and / or in-depth interviews with investors, thinkers, writers, etc.

Which of the following interests you most?

  • Podcast exclusively on EM private markets
  • Podcast on EM private markets + other topics
  • Transcripts of interviews exclusively on EM private markets
  • Transcripts of interviews on EM private markets + other topics

Second, I will be in London in October. Please drop me a line if you’d like to grab a coffee.

Alla prossima,
Mike

Advent + Walmart Brazil

Advent International completed its acquisition of 80% of Walmart Brazil, and it’s reportedly planning to invest an additional $485m across its existing stores. As we discussed in February (Always Low Prices), Walmart’s footprint of 471 stores generated revenues of $9.4B in 2016, but delivered seven straight years of operating losses. Why? “[P]oor locations, inefficient operations, labor troubles and uncompetitive prices,” apparently.

Advent purportedly plans to convert Walmart’s hypermarket formats into cash-and-carries, a format that is growing in popularity amongst local consumers. This should help the company improve one of the 5Ps — Price — by extending steeper discounts to customers.

But I’m curious as to how Advent will address another P — Place. Allegedly, Advent does not expect to roll out new stores; how will they address the so-called “poor locations”?

No clue, but it will be one of many interesting stories to watch in Brazil in the months to come.

African PE: Quo vadis?

Earlier this year, EMPEA released a report on The Road Ahead for African Private Equity. It’s quite good and it contains some refreshingly candid observations on the region.

There is a compelling exhibit that hits at one of our biggest frustrations: the concentration of capital in larger segments, and the relative scarcity of capital available for small and mid-size businesses (see below).

EMPEAAfrica

While the chart includes only a handful of countries (and excludes South Africa), I think it’s directionally accurate — the featured countries accounted for roughly half of the investments that took place in Sub-Saharan Africa between 2015-17.

Five additional findings jumped out at me:

  1. Growth equity deals have evaporated, declining by 45% from 2016 to 2017, reaching the lowest total since 2009.
  2. Managers need to bring more than money to the table — operational capabilities are required.
  3. Deal structuring needs to be more flexible and sophisticated. As one endowment representative lamented, “Many GPs are inclined to throw common equity into companies and call it a day.”
  4. Tech-enabled business models are appearing across verticals, creating a richer landscape for VC and PE alike.
  5. Permanent capital vehicles may be a better fit with the investable market than the traditional PE model.

Creador + Goldman Sachs on Asia

Brahmal Vasudevan — founder and CEO of Creador — recently shared some views on PE in Southeast Asia (where performance has been “quite poor”).

Of course, he’s talking his book at a time when Creador is marketing its fourth fund (which it will undoubtedly close at or above target).

Nevertheless, several observations jumped out at me, including:

  • The diversification benefits of regional funds;
  • The merits of maintaining discipline on fund size;
  • The relative scarcity of “high-quality companies that are growing rapidly and need private equity capital” in select markets; and,
  • The potential for adverse selection in control deals.

It’s an interesting contrast with this recent Exchanges at Goldman Sachs discussion about PE in Asia.

Goldman focuses on the “scale and sophistication” of managers, especially in China. But following all the bullishness and capital flooding into the region’s large / megacap funds, I wondered, “who’s the Muppet?”

Like, I don’t have any original insight on this. My rule #1 on China is: nobody knows anything about China — especially me.

But in my passive reading of the headlines from Zhongguo, I’m left with the impression that the winds of change are in the air. Maybe investors have grown complacent.

Mr. China Meets the Mekong

There are few laugh-out-loud books in the world of finance, but Tim Clissold’s Mr. China is one of them. So many instances of an investor being outwitted and outmaneuvered by a crafty operator.

One of the more memorable bits revolves around an acquisition of a Chinese brewery that (naturally) involved a joint venture partner tied to the central government. A few weeks after wiring $60 million to the JV, $58 million appeared to be missing.

Oops.

Missing funds are not at all the issue in this story about a deal-gone-wrong in Vietnam, but as I read the gossip piece, I couldn’t help but laugh.

I mean, it’s not funny … but it is.

Poultry firm Ba Huan JSC has sought the Prime Minister’s intervention in terminating its six-month-old investment partnership with Ho Chi Minh-based asset management firm VinaCapital. The firm said it agreed to investment terms it now claims to be unreasonable because they were initially stipulated in English.

In February, VinaCapital’s flagship fund Vietnam Opportunity Fund (VOF) had invested $32.5 million to acquire a significant minority stake in Ba Huan.

In its petition to the government, the poultry firm noted that VinaCapital is seeking an internal rate of return (IRR) of 22 per cent per year. It claims that the terms of the deal stipulate that in the event of the IRR not being met, Ba Huan will be fined or required to return the investment capital, along with a 22 per cent interest, or it must transfer to VinaCapital (or its partner) at least a 51 per cent stake in the company.

It also alleged that the partnership restricts it from engaging in any other business except chicken and eggs. Its litany of grievances includes what it claims is VinaCapital’s tendency to veto all board decisions, despite it being a minority shareholder.

So many layers.

I don’t know what’s true here … I don’t even have an opinion. I just take the chuckles when they come.

 

A Most Damning Indictment

Several years ago, I was in Marrakech for the UN African Development Forum. As I waited for a car to take me to the airport, a young man in a black suit was lingering nearby, and he was staring at me in a most uncomfortable way.

It got so awkward that I turned to him and asked:

Tatakallam engleezee?

Yes.

Hey man, how’s it going?

I am good, sir. Where are you from?

The United States.

America. I love the United States. I have applied for a fellowship there.

Where?

MIT.

MIT? Are you an engineer?

An economist. I have a master’s degree in applied economics.

Oh. Do you work for the UN here?

No. I am a volunteer. There are no jobs for applied economists in Morocco. Just with the government. I presented my thesis, which [something something labor market, econometrics, etc.]. But they don’t have any jobs. So, I want to go to America to get my PhD and find a job there. It is very nice there.

Have you been?

No.

[Chitchat about Atlanta and T.I. before car rolls up]

Now, as I rode to the airport, I thought about that young man and how frustrating it is to be underemployed — to have knowledge and skills that can be of value to companies and your country, and yet find yourself unwanted. And I thought about the fickle finger of fate that dictates the range of potential life outcomes based on where one’s born and to whom.

I thought about the PE firms pursuing higher education deals in Africa and across the emerging markets. And I thought about all these students (and their parents) paying tuition to get a handhold on the ladder to a better life, and the risk that new graduates might end up like this young man, with a degree that the market doesn’t value.

In development economics, increases in human capital are vital to long-term economic growth. But what happens if the gap between expectations and reality for newly minted college graduates becomes a yawning chasm? I think we know the answer …

Anyway, these musings came to mind recently after I read a most damning indictment of PE investments in for-profit universities. The academic study, When Investor Incentives and Consumer Interests Diverge: Private Equity in Higher Education, explored 88 investments in U.S. for-profit colleges.

What did they find? In summary, following the buyout:

  • Profits↑ by upwards of 3.3x, driven by higher enrollments (↑ 48%) and tuition increases (↑ 17% relative to mean);
  • Graduation rates↓ by 6%;
  • Earnings of graduates↓ by 5.8% relative to a mean across all schools of ~$31k;
  • Per-student debt↑ 12% relative to mean;
  • Educational inputs↓ in absolute number of faculty, with 3% ↓ in share of expenditures devoted to instruction; and,
  • Rent seeking: revenue from public sources (e.g., federal grants and loans) ↑ from 60-70% prior to the transaction to 80%+.

Basically, students end up paying higher prices for inferior products and shittier prospects. Presumably agriculture isn’t a popular field of study, otherwise customers would know where to find the pitchforks.

There are many interesting findings in the paper, such as the nugget that “the returns to for-profit education [for the consumer] are zero or negative relative to community college education.” So, dig in. The online appendix with even more data is available here.

Or, you can look at slides 2, 10-15, and 20 in this presentation to the NY Fed.

From the Bookshelf

In every venture the bold man comes off best, even the wanderer, bound from distant shores.

— Athena in Homer, The Odyssey (Robert Fagles, trans.; Penguin: 1996)

# # #

Haven’t signed up for our newsletter yet? Sign up now.

# # #

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 2018, all rights reserved.

 

More Dickensian by the Day

Greetings from Jakarta, home to 30 million people (metro) and half as many cars, judging by traffic. I’m nearly halfway through a circuit of Southeast Asia, where I’ve been meeting with some great managers and discussing the evolution of the region’s private markets landscape.

Over the last five years, LPs have consistently ranked Southeast Asia as one of the top two most-attractive markets for GP investment. Yet this year’s Global LP Survey from EMPEA highlights the perennial disconnect:

  • 41% of respondents plan to begin or expand their commitments to Southeast Asia over the next two years;
  • However, 32% say a limited number of established fund managers deters them from investing in the region (the highest percentage of any EM region); and,
  • 25% say the scale of the opportunity to invest is too small (also the highest percentage across all EMs).

We share a few our of key takeaways from EMPEA’s survey below, but the fundraising environment is becoming more Dickensian by the day.

In any event, I’m off for a weekend in Siem Reap to admire what Norman Lewis described as “probably the most spectacular man-made remains in the world.” Then, I’ll be heading to Ho Chi Minh City for AVCJ’s conference. Let me know if you’re in town.

If you’re interested in having Portico produce a report on the private markets landscape in Southeast Asia, then please drop me a line.

Best wishes,
Mike

A Grim LP Survey

Some depressing reading is on offer in EMPEA’s 2017 Global LP Survey. There are a number of interesting nuggets throughout the report, but I came away with three big takeaways:

  • Talk to the hand — The pie of capital earmarked for EM PE is shrinking. To wit, 25% of LPs plan to decrease the proportion of their PE allocation targeted to EMs over the next two years; this figure jumps to 36% for LPs that have been active in EM PE for more than 15 years.
  • Show me the money — The percentage of LPs expecting at least 16% net from their EM PE portfolios has continuously declined over the last five years: from 61% in 2013 to 43% in 2017. It’s also the first year that this figure dipped below 50%.Though only 17% of respondents expect ≥ 16% net from their developed markets portfolios, I suspect the drivers of these expectations are different: in EMs, it’s a lack of distributions coupled with FX, while in DMs, a surfeit of capital and leverage is fueling frothy entry valuations.
  • Chasing the rabbit — It’s hard not to think LPs are exhibiting some procyclical behavior: India rings in as the most attractive market while Brazil languishes at sixth; health care and consumer goods / services rank as the most attractive sectors.

    ¯\_(ツ)_/¯

A Platinum Lining?

I always make time to read what KKR’s Henry McVey has to say about the markets, and his latest report, The Ultra High Net Worth Investor: Coming of Age, is no exception.

Whereas family offices constituted 6% of the respondent base of EMPEA’s LP Survey (call it 7 or 8 respondents?), KKR surveyed over 50 Ultra High Net Worth clients (defined as investors with ≥ $30m in investable assets and including family offices). The findings should provide a modicum of encouragement to private markets fund managers, as UHNW investors have a tendency to adopt a genuinely long-term perspective, and embrace alternative assets (see charts below).

Money shot: The stock of global HNW assets stands at $60 trillion with a 5-year CAGR of 7.4%, compared to global pension assets of $36.4 trillion and a 5-year CAGR of 5.8%.

KKRUHNW

Ahlan, Bimbo!

The Mexican behemoth Grupo Bimbo has acquired Moroccan baked goods company Groupe Adghal as its toehold in Africa. Three thoughts:

  1. Morocco continues to serve as a popular entrepôt for PEs and corporates to access Sub-Saharan African markets.
  2. Bimbo’s ambitions are truly global. They’ve swallowed up Thomas’ English Muffins, Entenmann’s, Arnold Bread, Sara Lee, and Boboli Pizza north of the border (wall?), and they’re planning to ramp up a growth through acquisition strategy in China.
  3. Personally, my heart warms at the prospect of children around the world sinking their teeth into a sleeve of ¡Sponch! cakes.

Speaking of Hispanophone companies pursuing acquisitions in Africa, there was a super interesting announcement from Helios Investment Partners and the Spanish multinational GBfoods earlier this month. The firms are pursuing a joint venture to create a leading pan-African FMCG franchise. I think we’ll continue to see PE firms teaming with multinationals to de-risk acquisitions and validate their entry into new markets; it’s a compelling proposition.

Out of curiosity, I investigated the number of Hispanophone acquisitions in Africa (excluding our friends at Mediterrania Capital Partners). Across 30 deals since 2008, six have been in metals and mining, and four in F&B. Small volumes, but the trend is up and to the right (see chart below).

May 2017 Hispanophone Exhibits

The Saga Continues

Baring Private Equity Asia and CPPIB announced that they are taking Nord Anglia private for $4.3B. Baring originally took the company private in 2008, led the firm through a $350m IPO in 2014, and a $170m follow-on issuance in 2015. Over the last four years, Nord Anglia executed at least seven acquisitions, according to Thomson Reuters Eikon. The company’s revenues grew from $323.7m in 2013 to $856m in 2016, with net income swinging from a loss of $23.3m to earnings of $47.1 over the period (and posting a 17% ROE in 2016).

Fashionably Late?

Blackstone has decided to join the private debt party in India. Apollo (through a JV with ICICI Ventures), Baring Private Equity Asia, Clearwater Capital, KKR, and Piramal—among others—have been in the mix for some time. It’s a huge market, but one wonders if the bar’s running out of elbow room.

From the Bookshelf

A seed that sprouts at the foot of its parent tree remains stunted until it is transplanted … Every human being, when the time comes, has to depart and seek his fulfillment in his own way.

— R.K. Narayan (trans.), The Ramayana (Penguin: 1987).

# # #

Haven’t signed up for our newsletter yet? Sign up now.

# # #

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 2017, all rights reserved. 

First Move

It has been five months since we released our first research piece, Is Emerging Markets Private Equity Dying?, and though Portico is still in its infancy, we’re excited about the doors this study continues to open, and the conversations we’ve been having with firms across geographic and market cap segments.

Two recent developments suggest that the trends highlighted in Is EM PE Dying? are unlikely to reverse anytime soon:

  • Fundraising data from EMPEA show that the number of final closes for funds <$250m in size continues to decline; meanwhile, capital raised for EM VC and private credit funds has reached all-time highs.
  • Apparently IFC is looking to commit up to $25m to Carlyle’s fifth Asia growth fund, underlining the trend of DFIs supporting established fund managers (that probably should have graduated from DFI capital).

Keep your eyes peeled for Portico’s forthcoming Middle Market Survey. We’d truly value your input. For those suffering survey fatigue, there will be a prize drawing for a Year in Books Subscription from the delightful booksellers at Heywood Hill in Mayfair.

Best wishes,
Mike

⎯⎯⎯

Coming to Southeast Asia in May

I’ll be traveling through Southeast Asia next month, with stops planned for Singapore, Jakarta, and HCMC. I’m looking forward to (re-)connecting with several firms, and to kicking the tires on a hypothesis that the region presents a qualitatively different opportunity set than was on offer five years ago. Back then, investors got bulled up on the region, but had questions about the investable market. Have things changed? (It’s a small sample, but Cambridge Associates Benchmark data show TVPI of 1.07 for 2010-13 vintage Southeast Asia funds).

I’m particularly excited about the visit to Vietnam, where there have been some big deals taking place, including:

  • KKR’s $150m transaction in Masan Nutri-Science, continuing the firm’s quality food thesis (seen with its Modern Dairy and COFCO Meat deals in China);
  • VinaCapital’s joint venture with Warburg Pincus to create a hospitality JV (valued at up to $300m); and,
  • TPG’s intention to acquire a stake in Vietnam Australia International School, providing a potential liquidity event for Mekong Capital.

If you’re in the region, I’d love to meet with you. Drop me a line and I’ll try to find a time that works for you!

⎯⎯⎯

Deal Flow in Africa

AVCA and EY released their latest study on exits in Africa, and the data point that jumps off the screen is the rapid growth of secondary buyouts as an exit channel, which hit *17* last year. There haven’t been more than 7 secondary buyouts / year going back to 2007.

The other dynamic at play—and I haven’t pulled data on this, so it’s just an impression—is a steady drumbeat of GPs co-investing in deals on the continent. Taken together, these two dynamics suggest that deal flow may very well be an issue in Africa (at least for firms managing traditional 10-year, closed-end structures).

But at the same time, the clear growth in secondary buyouts and (suspected) increase in GP co-invests may not necessarily be a bad thing. We could be witnessing a phenomenon similar to tier one PE / VC in the United States, where sequences / consortia of private capital investors scale up winner-take-most (if not all) platforms, or build out category leaders with decent moats. Time will tell!

⎯⎯⎯

The Gift that Keeps on Giving in Eastern Europe 

Speaking of secondary buyouts and private capital building category leaders, Zabka Polska—operator of convenience stores, Freshmarkets, and supermarkets—has been sold to a PE buyer once again. Over the last 17 years, Zabka has changed hands from:

PineBridge Investments Penta Investments Mid Europa CVC

The company’s growth over the last two decades is truly astonishing. For its part, Mid Europa reportedly fetched €1.1B after growing Zabka’s top- and bottom-lines 3x and 4x, respectively, and opening 500 stores / year. Na zdrowie!

⎯⎯⎯

Consumer Sentiment in Latin America

It’s not a good idea to try to call tops or bottoms—so I won’t—but one of the data streams I’ve been monitoring with interest is consumer sentiment in Brazil and Mexico. Given the political and economic turmoil in the former, and the fact that average manufacturing wages have been flat for a decade in the latter, it’s little surprise that consumers in these countries have been gloomy for five years running.

And yet, since the beginning of 2015, there has been a marked divergence in retail sales volumes across these two markets. Brazilian retail sales have declined in line with a contraction in consumer lending. By contrast, Mexican retail sales have been on a tear, fueled, in part, by a rapid expansion in household credit.

Brazilian consumer confidence is recovering, as are retail sales, and consumer credit growth remains restrained. Though the politics are slippery, it appears like a bottoming process is at hand. Mexico’s debt-fueled consumption binge, however, gives one pause. It’s hard to look at the chart below without contemplating a parallel to the morning after a night out in La Condesa, having imbibed too much mezcal and consumed too few tacos.

LatAmConsumer

⎯⎯⎯

From the Bookshelf

Earlier this year, I read Carroll Quigley’s Evolution of Civilizations (1961). One of Quigley’s core arguments is that societies create instruments to meet basic human needs (e.g., security, the accumulation of wealth and savings, etc.), but these instruments evolve into institutions, which over time become less effective at achieving their original purposes.

When discussing the interwar period (1919-39), Quigley makes an insightful point about the evolution of the economic system that seems germane to today’s debates about secular stagnation.

The purpose of any economic system is to produce, distribute, and consume goods … As [the economic system] became institutionalized, profits became an end in themselves to the jeopardy of production, distribution, and consumption.

The rub is that the expansion of profit margins through higher prices and lower costs of production ultimately reduced consumption, and increased wealth inequality. Quigley continues:

Such an inequitable distribution of wealth was a very excellent thing as long as lack of capital was prevalent in the economic system, but such a maldistribution of income ceases to be an advantage as soon as the productive system has developed out of all proportion to the processes of distribution and of consumption.To some extent this situation was made worse by the growing separation … between ownership and control of corporations, since this led to an increased accumulation of undistributed profits held by the corporations in control of the management rather than distributed as dividends to the owners. Such undistributed profits became savings with no possibility of serving as consumer purchasing powerIncreasing proportions of the national income were going to those persons in the community who would be likely to save and decreasing proportions were going to those persons in the community who would spend their incomes for consumers’ goods.

As someone who genuinely believes in long-term investment, the passage above left me wondering whether this world awash in capital—one in which U.S. after-tax corporate profits (net dividends) amount to $982 billion (see below) and the pension assets of 22 countries total $36.4 trillion—is one that consigns us all to Keynes’s paradox of thrift.

USCorpProfits

# # #

Haven’t signed up for our newsletter yet? Sign up now.

# # #

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 2017, all rights reserved.