A host of foreign firms are seeking to leverage on the growth of Myanmar’s economy, and this trend has been further strengthened by the Asian Development Bank (ADB) recently pledging US$1.75 billion in loans to Myanmar over 5 years from 2017, even as political and economic reforms designed to support such growth make headlines worldwide. While the country has no shortage of deals, especially in the infrastructure space, investment group Anthem Asia, is only looking at the SMEs, its director & co-founder Genevieve Heng said in an interaction. Heng, who previously worked for a Hong Kong-based private equity firm, and also served as a managing director (growth & expansion capital) for CLSA Capital Partners in Singapore, cautioned that if new PE players with little understanding of frontier markets like Myanmar, were to wave larger cheque books around, it could lead to unsustainable valuations, distorting the market.
Big picture: What are the opportunities and challenges in Myanmar’s nascent but growing private equity space?
The opportunities and challenges facing the PE space mirror the opportunities and challenges facing the country. The former are all the potential positives such as size, energy, agricultural and natural resources; a young population, high literacy rates, rising urban and middle class, and integration in ASEAN and the regional and global economy.
The list is long. The list of challenges is also long. The lack of sufficient skilled people—the capability gap; poor infrastructure and lack of power; the need for a robust and modern legal and regulatory framework; the lack of access to capital; and so on.
These are all issues that Anthem Asia and others in the PE space in Myanmar accept by being active in the market. One PE-related issue is deal flow. We have no lack of deals, but our interest is at the SME level—what we hope will be the leading Myanmar brands of tomorrow.
However, there is a lack of viable larger deals outside of infrastructure and energy and if one excludes property development. There are some and there will be more.
The danger is that new PE players with either little understanding of frontier markets or Myanmar will wave larger cheque books around. We know from other markets this can lead to unsustainable valuations and unhappiness when things don’t work out as everyone hoped.
Will the poor global investment climate, turn out to be a blessing for Myanmar, and in turn help propel the country’s PE/VC prospects?
Myanmar is blessed with abundant natural resources, from fertile soil to water to energy. It does not have to rely on low-cost manufacturing to grow its GDP. It has lots of young people – the demographic dividend, critical mass and high literacy rates.
Moreover, Myanmar benefits from its place within ASEAN and geographic position between India and China and in the mid to long term, will benefit from the ASEAN Economic Community. All these factors combined make it a strong case for Myanmar. However, the “plumbing”— infrastructure, regulations all have to work to make it attractive to PE/VC investors.
Foreign investors including global PE firms have limited knowledge and information on Myanmar companies. How big a challenge is this in the private equity due diligence process? Besides, for global PE firms, when evaluating deals, are they confident on local accounting and bookkeeping standards, and on local corporate governance rules?
The advantage that Myanmar has is that the Common Law-based Companies Act and legal system have been based on the British system. This provides some assurance especially for Anglo-American investors. However, accounting standards and corporate governance have not been particularly strong.
Finding accountants, lawyers, auditors and other skilled staff capable of handling such matters is hard. Like many emerging economies, there is often a lack of information and some of the information that is available is of limited validity. Yet, we mitigate our risks as best we can.
We work on the information that is available. We tease out additional data where we can. We conduct legal and accounting due diligence as one would do in any other PE investment.
Overall with our strong understanding of the local market -including what we know we don’t know!, a good network, and building relationships with potential partners, we are comfortable with our approach. A lot involves developing trust and making considered investment decisions on the basis of incomplete information.
In new markets like Myanmar, where PE remains a foreign concept, there is always a hesitation towards equity sharing – is this assumption correct?
From our experience in working on PE deals across Asia, business owners are often reluctant to dilute their ownership. They have built a business and see their company almost like their ‘baby’.
We expect and see this dynamic among some of Myanmar’s more established and larger business and family groups. Entrepreneurs in start-ups and early stage ventures are generally more receptive to sharing equity. They see the value that a PE investor brings to the table – expertise, networks, mentorship, as well as capital.
Legal and regulatory roadblocks/flip-flops – how big a challenge is this in Myanmar?
The previous government put in place a solid set of business and investment laws. But these have thrown up issues of implementation in practice. The new government with its strong popular mandate, is not expected to change the direction of reform. It has yet to fully articulate its economic policies.
The incoming administration has been reviewing earlier decisions and is reviewing some of the many draft laws that are in the works. For example, the new city authorities in Yangon have been scrutinising previously issued permits for high rise building developments.
Overall, we do not expect any change in the direction of reform but we also do not expect laws to be quickly passed and regulations to be implemented at great haste. Clearly, this does provide some degree of uncertainty for investors and might affect near term investment activity. On a longer term, the country’s well known fundamentals are attractive and we have a positive outlook on growth and investment.
For PE, exits are part of the business. But in the case of Myanmar, currently there is an absence of a well-functioning capital market. Over the next few years, do you see the Myanmar stock exchange become a robust trading platform, and will the country go on to having a capital market landscape that offers an exit route to potential investors?
Some of the key attributes for an attractive well-functioning capital market are: a clear set of financial and legal regulations; international standard accounting standards; and a robust banking system. While Myanmar is developing in all three, progress is slow. We are expecting the new government to start to address the regulatory and policy issues.
For instance, there are indications that foreigners will be allowed to invest in the new Yangon Stock Exchange. The effectiveness of the stock exchange will depend to a large part on the quality of companies coming to market. And that, in turn, runs up against the wider issue: it will take time to put the skilled talent in place to implement all these reforms.
There is a shortage of skilled labour at every level from bookkeepers to bank officers to government officials to CEOs. These will all start to appear in due course. Investors will also look at alternatives of course such as trade sales or listing on other, international, stockmarkets. Either approach of course requires well-run firms with recognisable financials.
In this context, when it comes to Anthem Asia, in the investments that you currently have, going forward, will you be looking at strategic sales, or selling your stake in local investments to multinationals seeking market share in Myanmar, as your exit strategy?
We look at a variety of exit options. Trade sales are the obvious option in a frontier market.
Infrastructure apart, what are the growth industries that PE/VC firms should target in Myanmar?
We see interest in digital and telecommunication services. This is driven by the fact that Myanmar is experiencing a digital leapfrog. The country is moving directly to a digital and mobile driven consumer market.
Mobile penetration has quickly expanded across the country and people are getting connected via smart phones and tablets. Local firms with smart ideas and insights into local consumer behavior are setting up and competing. From fast food to toothpaste to online gaming, companies are building their marketing round mobile digital platforms from the start.
Hospitality continues to be attractive. There are many parts of Myanmar that have still to be developed to receive visitors, particularly from ASEAN and other Asian markets. There are also opportunities in related food and beverage businesses that are aimed at serving local consumers.
There are opportunities in helping modernize the banking and finance systems improving payment systems as well as access to credit. Away from banking where the authorities remain cautious in allowing foreigners to compete with still-weak local institutions, there are opportunities in microfinance sector and developing mobile payment offerings.
In an earlier interaction with DEALSTREETASIA, Peter Witton had said. ‘patient capital works in Myanmar’. PE firms – rather the funds they raise – have fixed tenures. Ditto for VCs. Is the average tenure of a PE/VC Fund long enough, to show returns and return money to investors, when it comes to Myanmar?
What Peter Witton said earlier remains very true. Patient Capital is very important. There is still a gap between the fund structure and what the investor / GP on the ground needs.
Looking through your investments in Myanmar, be it Thahara , or Xavey, Zagar, Blink, Move, or even Revo Tech, I can’t find a common theme, except digital in some cases. These investments appear diverse (across different segments). Take us through your investment logic? Does the Anthem Asia team have the expertise to guide companies across different sectors?
The common aspect is backing growth in domestic demand and building local brands, especially in the consumer and services sector. Myanmar benefits from a positive demographic profile with a young population and a rising urban and middle-class population. If you look at the investments we have made, these companies fall within the areas we are interested in, both in B2B and B2C. We have the benefit of working with good local partners as well as leveraging the years of experience of the Key Principals to mentor our portfolio companies.
For many of your investments, they are urban & Myanmar centric – basically, they hold a first mover advantage. What are the prospects for some of these companies to expand, or compete with larger players, when they enter these segments, or even expand to become regional player?
We invest in Myanmar with a view to building sustainable, scalable businesses. We would expect each portfolio company to be able to compete whether against local firms or foreign entrants. For those whose business models scale beyond Myanmar, we are keen for them to develop further.
What is the average ticket size for an Anthem Asia investment?
Our philosophy is to back SMEs in Myanmar. Our investments thus far have been first phase and early expansion. We typically invest up to US$1 million at this point. The investment size can easily grow as the investees scale up and require subsequent rounds of funding.
How do you see the tech start-up scene in Myanmar? Is there enough risk capital available for such companies?
Myanmar’s tech start-up scene is buzzing and there are young entrepreneurs looking to establish businesses. Is there sufficient risk capital? We see regional Venture Capitalists starting to take notice of Myanmar tech companies and there have been examples of VCs putting risk capital to work in Myanmar. We believe that the potential digital leapfrogging will attract more VCs to Myanmar.
Will you (Anthem Asia) also look at other frontier markets in Asia?
Anthem Asia is a Myanmar focused investment and advisory group and our objective is to help build sustainable business in the country. Occasionally, we do come across opportunities involving other often neighbouring countries. We do consider them if there is a Myanmar element. If attractive, we look at co-investing alongside our friends in the private equity world.