While frontier markets in Southeast Asia provide growth potential and opportunities to investors, there is a need to build better infrastructure in these markets to support such growth, according to panelists at DealStreetAsia’s Asia PE-VC Summit 2020.
The outbreak of COVID-19 has accelerated the pace of digitalisation across the globe including the frontier markets in Southeast Asia as lockdowns and stay home orders supported the digital economy.
For Myanmar, one of the frontier markets in the spotlight, the country’s high mobile penetration, adoption of digital services provide opportunities for investors.
“There is a need to invest in logistics and to look into the interoperability of [various online] platforms, the interoperability of banking platforms,” Yangon-based advisory firm YGA Capital Ltd managing director Thura Ko said.
“We still need reforms in some places so that all the platforms can synchronise with each other. But once we’ve seen this potential, we’ll begin to embrace some of the reforms needed.”
Right infrastructure will also support online education and healthcare. “You’ll see opportunities in that space as well,” he said, as countries including Myanmar are adapting to the new norms with social distancing measures.
The digital economy in Myanmar has taken off as mobile penetration has grown from 8 per cent in 2014 to 85 per cent currently, according to Ko.
“Even the government which was cautious has adopted digital services with social welfare benefits and Covid payment done online across various platforms so I think the opportunity is there,” he said during the session on “The opportunity in frontier markets”.
Philippines-based Navegar fund managing partner Honorio Poblador IV (Nori) said investing in underlying infrastructure is needed for the digital economy to be successful.
The Philippines has seen some big-ticket transactions in the digital infrastructure space with private equity major KKR investing in digital tech firm Voyager Innovations and Warburg Pincus’s backing of broadband services player Converge ICT.
“Money has to go into those different sectors (payment, broadband, last-mile logistics) for the digital potential to be achieved,” he added.
The adoption of digital services is critical in generating new opportunities, said David Ireland, Partner at Southeast Asia-focused private equity Navis Capital Partners.
“Particularly in Cambodia, the connectivity has to be there. There has to be big investment into that…to be able to allow their citizens to benefit from the opportunities,” he said, as he shared Navis’s experience of investing in the education sector in Cambodia and Vietnam.
DFIs continue to play important role in frontier markets
In frontier markets, global development finance institutions (DFIs) are expected to continue to play a dominant role as the LP base for funds focused on these markets.
Ireland said DFIs will continue to play a critical role as they are knowledgeable and experienced in frontier markets while conventional LPs are also interested in these markets.
Mainstream LPs, though risk-averse and unfamiliar with frontier markets, do have an interest and appetite for some exposure, he added.
Navis, which is raising a $150-million Cambodia, Laos, Myanmar and Vietnam (CLMV) fund, may secure a commitment of up to $25 million from the International Finance Corporation, per our report in October.
“It is true that [DFIs do contribute the most] but other funds with a mandate to invest in these markets will also be participating in that. When people [LPs] invest in Navis, in the Southeast Asia fund, they know that there’s the possibility or probability that they’ll get some exposure to those markets,” he added.
For Navegar, which announced the final close of its second fund with $197 million in total capital commitments in July, Nori said the number of DFIs in the second fund had doubled to 6, but earlier investors including Japanese financial institutions and European family offices had returned as LPs.
Institutions from Asia and a US pension fund have also invested in the second fund, he said.
He observed that non-DFIs will take some time to understand the Philippines market before they commit to investing.
“I think it’s the same with GPs also. So if the LPs have done their work and have got comfortable with the Philippines, you know that they become invested in the market,” he said, citing the investment activities of investment firm KKR, CVC Capital Partners, Singapore sovereign wealth fund GIC and global PE firm Warburg Pincus in the country.
Political risks in frontier markets?
Political unrest, change of governments on top of economic headwinds could make frontier markets a more risky proposition for investors.
However, Ireland said that such issues are not only faced by frontier markets alone.
Ko observed that the recent election results in Myanmar bode well for continuity and stability.
“It may also encourage the NLD (The National League for Democracy) to be firmer in terms of economic reforms, and also political reforms,” he said.
“It’ll never be a straight line in any of the markets we operate. Staying close to your committee, LPs, and explaining to them the background behind some of these ups and downs is incredibly important,” he added.