The National League of Democracy’s resounding victory in Myanmar’s national elections this month, ensuring that Aung San Suu Kyi serves a second five-year term, is set to stimulate stronger investor confidence in the country.
While deals are set to pick up in key sectors such as infrastructure, healthcare, and education, the country offers opportunities in a number of other industries where it has “natural strengths” such as agriculture and manufacturing, says Thura Ko Ko, managing director at Yangon-based advisory firm YGA Capital.
“With the uncertainty of the election out of the way, there will be renewed interest in Myanmar,” Ko Ko told DealStreetAsia in a recent interview.
“We are seeing infrastructure projects come into existence quicker. For example, money is coming in solar projects to be constructed,” he said. “The incumbent government has started to focus more on private sector cooperation in healthcare, insurance, etc, and we hope to see more of that.”
Since Myanmar’s economy started reforms in 2012, GDP has grown at 6-7 per cent per annum.
“Private capital plays a significant role in Myanmar much more than other economies because private businesses in Myanmar have only had private capital to rely on,” Ko Ko added.
YGA Capital advised private equity major TPG in its investments in Apollo Towers and Myanmar Distillery Company, respectively. Apart from TPG, the firm also works with investors such as UK-headquartered CDC Group on deal sourcing, deal shaping, and portfolio management.
Following the election results, how do you expect economic liberalisation to continue?
What we saw during COVID-19 is that our government, with limited resources, has done a decent job in healthcare to begin with, which has also helped with the economy. The government has been focused more on what the private sector need is. As soon as COVID-19 hit, we have seen support for both micro and SME businesses, the most important part of our economy, as well as larger businesses.
We are also seeing infrastructure projects come into existence quicker. For example, money is coming in solar projects to be constructed. The incumbent government has started to focus more on private sector cooperation in healthcare, insurance, etc, and we hope to see more of that. I also hope the government, with the strong mandate that it has, will use it as an opportunity to be even bolder on the policy.
How do you expect Myanmar to catch up with other economies in the region?
Catching up depends on what kind of strengths we have. Other countries are also fast-pacing their development and will shift their policies to adapt to the post-COVID-19 world. So, we should just be driven by securing the most potential we can get out of our economy.
If we do the right policies on what is needed for the economy, I think you’ll find Myanmar will catch up in many ways.
Take the telco sector, where we now have more towers per capita than the Philippines. Or our push into renewable energy is another space where we will not only catch up but will overtake others, because we never had carbon-based electricity to rely on, nor the money to import coal. Agriculture, because of Myanmar’s strategic advantage of landmass and population, will also take off with more investment and access to capital for farmers. Other sectors such as healthcare and education will take time because you cannot take shortcuts in these spaces.
Are there still macro challenges that could hold back the development of the local economy?
Infrastructure is the biggest thing that’s holding us back. We have to develop wider, faster highways and tollways to allow not just people but goods to go across the country. We also need to invest in other infrastructures like cold storage and warehousing.
The quality of our people [talent] has improved significantly. They are more confident in asking questions and raising new ideas and have developed different ways of looking at things. But there is still a lot to do, like getting more and more Myanmar people up the management level of larger businesses.
The banking sector is another [one]. A lot of our economy is centred around SMEs and micro-businesses. They have relied on microfinance institutions (MFIs) for loans, which are also impacted by COVID-19. That capital flow within the country requires us to move faster with banking reform.
What is the role of private equity in Myanmar and how has it evolved?
Working in investment banking, I returned to Myanmar in 2010 to explore what it was at the time. It was an incredibly exciting time for Myanmar as the first reformed government started to take shape. Funds from the region wanted to add Myanmar as additional geography, so we all started off this journey. The private investment space was generally MNCs coming into the country, having expected it to be easy in Myanmar to find some great deals, quickly raise a fund and get going. Those who thought it would be easy had been mistaken. A number of them have since moved on, and now we have only three to four Myanmar-dedicated funds. I think those who have stayed, who have had a lot of good deals and got some exits, will continue to stay.
Private capital plays a significant role in Myanmar much more than other economies because private businesses in Myanmar have only had private capital to rely on. The banking system, insurance sector, or nonbank financial sector are still developing. The government budget is tight. So, if you look at where capital is coming from, it has always been from your own pockets, friends, and family and peer-to-peer borrowing. So, when private equity and venture capital comes in, it fills the gap.
What were the challenges that made PE players walk away?
I think it was high expectations from some of the investors. Maybe they had anticipated to raise a quick fund, deploy capital and move on to the next. Even today, conventional private equity requiring exits within five to seven years is challenging. One of the expectation mismatches was the size of the deals. For those anticipating they would be quickly able to invest $30-50 million, the volume is quite limited. There’s a huge source of very good cash-generating businesses, but they are at smaller ticket sizes, and therefore require a lot more handholding. And they won’t have much disclosure on day one, so you have to work with entrepreneurs to figure out the history of the businesses and future projections.
There was some expectation from the entrepreneur side too, and they are also learning that Myanmar is not the only market that we can invest in, and they have to continue to work harder to attract the best capital into the country.
How have expectations changed?
COVID-19 has been an extraordinary game-changer for all of us. If you compare Thailand and Myanmar, for example – Thailand was so part of global tourism that the percentage of GDP depended on tourism is now gone. Then you look at countries like Myanmar, the fact that we have closed from the global economy for so long means that somehow the hit hasn’t been that great.
But the reality is that we cannot shut our economies off for too long. The impact of the pandemic has been an important issue to address, particularly when we’re just beginning to figure out how to export and expand manufacturing. If we have these things stop because of lockdown, that’s no good for the supply chain. We could see a net gain in the supply chain mix, but we could also lose out in the short run if we’re not careful.
But equally, what COVID-19 has allowed us to do is that we’re now looking at new business models. We have embraced technology in a bigger way than we would ever have without COVID-19, in financial services, e-government and the banking sector. Entrepreneurs have also reinvented themselves because they don’t have the luxury of depending entirely on government support and social welfare. I think expectations will change. There’s room for optimism, as long as businesses and entrepreneurs can adapt quickly enough.
As it requires patience in a market like Myanmar, will the longer holding period affect expected returns?
The return expectations are also likely to be based more on the core growth of the business, so you have to be more selective in businesses. We cannot play with leverage and third-party financing to help with the returns. We also don’t have a fully developed stock market in the country. That said, more or less, expectations mustn’t change too much over the years. I think investors will probably expect the same returns, but maybe more backend in the earlier years.
It’s not to say there are no deals where an exit is not possible within the five-to-seven years’ time. I think there are plenty of interesting situations, but certainly, patience helps a great deal. And that’s why there’s a natural role to play for development funds here because they have their remit to help with the earlier phases. There is a natural role to play for venture capital as well, where they could take more risk in the earlier days. So, return expectations are not much impacted, but the timeline horizon should be different. One space where returns might be different is in infrastructure, particularly if the government is a partner. There, you may rightly expect lower but steady returns.
Do you think that in order to be successful in Myanmar, funds must have a local presence? What is YGA Capital’s role in PE investments in Myanmar?
That’s true. But that’s not unique to Myanmar. It makes a huge difference when you have someone on the ground, either your own staff or a partner fund that you work with. It gives a more holistic perspective. I think that’s how PE will evolve, not just because of COVID-19. If you have to rely on flying in and out, you can only look at the deals that are already packaged by advisors and intermediary firms.
You don’t necessarily need a single strategic partner throughout. In markets like Myanmar, flexibility is important, so the investment partner for a deal may change from time to time. But having a trusted advisor from within the country, whether that is a conglomerate or a fund, is extremely helpful in terms of both going into a deal and portfolio management. That also adds pressure to companies within the country like ourselves to be better connected and better informed, to become better partners to these larger funds.
Most of the work in emerging markets actually starts after a deal is done. To align the investments, where we are allowed to, we co-invest a small bit alongside.
What kind of deals that funds such as TPG are looking at in Myanmar?
Because of the size, it’s pretty much restricted to the top one or two largest companies in each sector, be it consumer retail, education or agriculture. The banking sector is slowly opening up, and once it opens up faster, you’ll find some of the larger players taking a look. We’ve seen some of the big groups, such as GIC, get a number of deals in the country.
In terms of the sectors of interest, you have to look at the competitive strengths of Myanmar. The interesting sectors for all of us are the enabling sectors that Myanmar has to fix. They are power and infrastructure like roadwork, tollways, rail transport and cargo ports. You’ve seen what the country can do when it puts its mind at work in the telecom space, which has done wonders for the economy.
You have sectors where Myanmar has some natural strengths, such as the consumer sector, where we have 55 million people whose disposable income continues to grow. Equally, this population is a resource for manufacturing, where products can be both for exports and import substitution. The other sector that we often overlook is agriculture. Then, there are other soft infrastructure sectors that are absolutely essential, like healthcare and education. A lot of that has to be driven by the public sector, but the public sector cannot meet everyone’s demands and aspirations and that’s where the private sector steps in.
For funds focusing on the consumer segment, do you think that there will be increased competition for local players in Myanmar, as the market is gaining more interest from regional funds?
With the uncertainty of the election out of the way, there will be renewed interest in Myanmar. There should be greater participation in the private equity space both domestically and from abroad. When we started, we were the early mover and looking at larger deals. But since then, the people we’ve brought in as co-investors are now doing their own deals. That’s all part of the healthy development of private equity. It gives the business owners a better choice of investors. Only when you have that match of expectations and understanding of challenges from both the investor side and the business owner side, you make a real partnership work. It puts us on our toes, but it also gives everybody a greater combination of how deals can be brought together.
As the market has attracted several large deals recently, the ones in Yoma, Wave Money or Frontiir, does that indicate that momentum is building in Myanmar, and the market is reaching the level where it can yield big deals for international PE firms?
What’s interesting is that these deals were struck in the midst of extreme political uncertainty. I think all those investors felt that there was sufficient momentum in the economy, and that government may change but there was enough stability in these spaces for them to make significant investments. The interest went away a little bit a few years back, but momentum has started to come back. And hopefully, with this election, as we realize that economies like ours will have to open up in a managed way, that momentum should continue.