Singapore-based Credera Group has got $50 million soft commitments for its $100 million Myanmar-focused fund that it has been raising since August 2016, Gaurav Manghnani, senior portfolio manager of Credera Group, told this portal.
“As far as the update of the fund is concerned, we are going to fully close our fundraising by the third quarter of 2017,” he said.
The Credera Myanmar Frontier Opportunities Fund will focus on investments in what it termed as “Strategic green field” projects. Credera said it would bring a strategic partner from aboard, and added that this partner and the fund would co-invest on deals in Myanmar.
Credera will use about $20 million for each investment and plans to close about five transactions from this fund and will be targeting sectors such as fintech, education, health and manufacturing.
“We will sign the anchor investor in quarter two of 2017, and the other investors to be done by quarter three,” said Manghnani during an interaction with DEALSTREETASIA. Following that, the firm plans to make its first investment in the fourth quarter of 2017 or the first quarter of 2018.
The Credera Group is led by Rahul Saraogi, chairman of the group who currently manages the $300 million Atyant Capital India Fund, focused on investing in small and mid-sized companies in India. The India fund, which is already 12 years old has made between to 35 to 40 investments in that country, and currently, have about 13 live investments out of that vehicle.
The first investment in Myanmar the Credera Myanmar Frontier Opportunities Fund plans to do is towards starting a finance company.
It is looking at setting up a finance company to lend money to small and medium-sized companies. Credera will invest $20 million, and its strategic partner is also slated to put in an additional $20 million, to take the total equity capital of this company to $40 million. It also plans to get a debt investment of around $80 to 100 million, which will give it a corpus of about $120 to 140 million for lending in Myanmar. The strategic partner will be bringing the expertise and will be run the operations of the company. Depending on the new regulations soon to come out, if required, Cruder also plans to bring in a local partner.
“Globally, finance companies will leverage their equity capital up to six times. But right now in Myanmar, the system for commercial paper and nonconvertible debentures are not there – we will explore different kinds of hybrid debt, with a target debt to equity ratio of between two to three times,” he said.
The finance company will focus only on productive assets like construction equipment financing for small and medium-sized businesses. The typical loan size will be $250,000 to one million.
“The financial company that Credera group will invest will give two to three-year loans and will create a multiplier effect on Myanmar’s economy,” said Manghnani.
The idea is to give loans to the local contractors whose access to finance is limited, enabling them to grow and to create employment in the local economy.
For investment in the manufacturing sector, Credera is looking into starting a 5000-tonne cement manufacturing plant. It plans to bring in a cement company from aboard to partner in setting up a plant in Myanmar where both parties will put in equity. The cement plant is expected to be an approximately $200 million investment where about $50 million will be equity and from $125 to 150 million will be debt. Credera’s portion will be a $20 million equity.
In the education sector, it is already in talks with a group of young local entrepreneurs for investment. “We are focusing on institutional building in Myanmar,” Manghnani said. That means, the focus will be on the curriculum, know-how and faculty development and not on the underlying real estate, he added.
Their investor base will be from development finance intuitions, ultra high net worth family office, foundations and impact funds, he said.
“Our investment horizon typically is five to seven years,” Manghnani added.
Creating doable deals
In searching for deals, Credera said that funds or investors were doing very small deals in Myanmar with about a million to US$ 3 million in investments, and added that there were not readily enough cooked deals available in the country.
Also, the firm said that entities in Myanmar found it difficult to find a finance company to fund their growth. “Because Myanmar is starting from a very base level, there is no available finance company in which I can invest for the growth. I have no choice but to green field with a strategic partner,” he said.
“Many investors confuse the non-availability of readily investable deals with an absence of need or opportunity in Myanmar. We believe that investors in Myanmar have to play a catalytic role in institution building and merely bringing capital to the table is not enough” Manghnani explained.
Credera shares the view that Myanmar’s economy is ready for investments but added that the outlook would improve further if the rules and regulations were clearly known.
Delay in government regulations
Government figures show that since 1988, Myanmar has approved around $68 billion in investments as of the end of 2016. The year 2016-17 saw $3.3 billion worth of foreign direct investments being approved, which is a steep fall from $9.4 billion in 2015-16 financial year. This is largely on account of the fact that investors have remained cautious about regulatory changes and the transition the country witnessed to at new government.
The regulations for the updated Financial Institutions Law are among the new rules that investors are expecting to be official in 2017. The market is also waiting for the regulations of the updated Myanmar Investment Law. The government previously said that the regulations would be ready by January 2017. The Company Act is also on the way, government officials maintain.
“We are quite disappointed because the bylaws have taken so much time. We feel that because of the delay, Myanmar’s small and medium sized companies are suffering,” he said.
“Most of our investors are very large institutions – multibillion-dollar intuitions. And this is just the starting amount to get a feel for the country. If the economic situation starts to pick up, we feel, the amount of money coming into Myanmar will be very large,” he said.
In January 2016, after the National League for Democracy party got a landslide victory in 2015 November election, Aung San Suu Kyi, the state counsellor said that the country’s peace process would be the priority of the new government. By mid-2016, the government had presented the economic policy of 12 points without mentioning any detailed plan of the system, which resulted in many critics stating that it was too vague.
“We are hoping that in their second year, the government (since the new administration took power in April 2016) will focus on jumpstarting the economy and clearing many fo the pending bylaws and regulations,” Manghnani said.
Investor’s perspective and Interest
Some investors see Myanmar as a long term commitment.
For the investment in the cement plant, Credera sees a demand as the country starts to pick up its infrastructure work. According to its study, with the supply and demand of cement currently are at about 4 million tonnes a year (down from 6 million two years ago), the demand for cement will reach about ten million tonnes and more in the next five years.
“Due to the need of the infrastructure, we believe the demand for cement will be very large in Myanmar,” Manghnani said.
He is also of the view that among different types of the investor base, there could be several large impact investment funds that may want to invest early in a country, which in turn is positive for Myanmar.
In October 2016, Myanmar had enacted the new investment law. The recently updated Myanmar Investment Law allows investors to benefit from certain tax incentives. Investment in the least developed areas will have up to seven years tax holiday, according to government officials.
However, Credera’s investment decision making depends more on the infrastructure and resource availability than on tax breaks said Manghnani. “For manufacturing in Myanmar, we have a very big concern on what will be the source of energy,” he added.
While Credera is taking an active interest in Myanmar, the group’s primary focus continues to be India. Saraogi, whose father and grandfather was born in Myanmar, said that the country and India has similarities concerning the system, laws, heritage due to their standard Buddhist value systems and British colonial legacy compared to other ASEAN countries. This was the reason it opted to set up a fund focussed on Myanmar.
“Many of our Indian portfolio companies have shared with us that they are interested in investing in Myanmar. We are co-investing with them in many of the ventures in Myanmar,” added Manghnani.