Perhaps the biggest obstacle facing firms in emerging markets is a lack of capital to grow, there are thousands and thousands of ventures with revenues that run into millions of dollars a year which remain off the radar of overseas (and local) investors because the companies are not deemed investment worthy, they lack the plans, strategy and networks to make it to the next level where they can begin to start generating multi-million dollars worth of revenue. Sometimes these firms lack the vision or ruthlesnesss it takes to do this, this might mean disposing of non-core parts of their painstakingly developed business, instead focusing on one particularly lucrative sector. Ventures which have been founded and lovingly built up over many years by devoted owners can find it difficult to make this particular leap. At the same time the traditional private equity model does not adequately serve emerging markets, investors are unduly frightened by political risk and the lack of large volumes and are forgoing the higher returns on offer as a result.
This is where Emergo Partners come into the equation, the firm are perhaps unique in that their mission is identifying emerging market firms which are capable of growing rapidly and with their help able to successfully adapt and transform into highly attractive investment prospects. I spoke with Managing Partner Justin Harlow to learn more about the newly founded venture. The Emergo Partners’ “process” is to develop their clients over the course of a year with the aim of turning them into investable companies, ready for mainstream players with deep pockets, comforted by the fact they have benefited from working with the firm. The process typically includes developing local management, bringing the firm up to international investment standards and providing advice on how the firm can expand rapidly.
Ambassadors, CEOs and Presidents
The process aims to transform a firm’s business prospects in a short space of time, a tall order in any place, but even more so in the often tough environment that characterises frontier economies. However they do not aim to do this alone, but rely on a powerful network of emerging market players, ex-CEOs, presidents and company executives to provide the benefit of their years of experience, as Justin Harlow puts it “men and women who have run or started major enterprises but are now looking for a fresh challenge”.This blend of grey hairs and youthful exuberance in high growth markets is a powerful force which is crucial as the short and rapid transformation process is typically intense, with a lot of hard work and tough decisions to be made by all sides with a payoff that is uncertain in the short term.
Emergo Partners play a multitude of roles in this period, mentor, active partner, investor, manager and anything else that needs doing, this is a world away from the hands-off approach utilised by many other investment firms, the onus is firmly all hands to the deck. When I suggest to Justin that this a riskier model, he readily concurs buts adds that their approach is far more exciting and challenging as they simultaneously try and accelerate a client’s growth, develop a suitable strategy, mentor its leadership and line up long term financing.
Emergo Partners have no particular geographical or sectoral bias, Latin America is currently the most active region, but this could change rapidly given the firm’s strong ties with Africa and Asia. I was surprised they could spread their net so widely with such a small team, but as I have seen so many times before it is contacts and networks that are the lifeblood of any business – the firms’ access and partnerships with a variety of emerging and frontier market based executives built up over the partner’s long careers across the globe allow them to reach areas others cannot. Justin was at pains to emphasis that the number of firms which could work well with Emergo Partners is in fact fairly small, as they would have to show a high degree of flexibility in order to successfully undergo the firm’s process as well as a strong set of growth drivers.
SMEs in Emerging Economies
Traditionally the small and medium sized company sector has been neglected in emerging and frontier markets, often banks lack the means and credit information to trust borrowers and companies in turn are off put by high interest rates and burdensome loan processes. While there has been a recognition of the issue and solutions proffered, SMEs remain an underbanked sector. At the high volume end of the market many of the most attractive investments have been picked up by major funds, private equity houses and individual investors as interest in emerging markets has soared in the last decade.
Despite recent setbacks and slowing economies in places like Nigeria and Brazil, the overall long term outlook for emerging and frontier markets is strong, it is a well told story, but the mixture of improved governance, favourable demographics, trade with China and consumer demand has led to a boom in this admittedly wide spectrum of economies, multipling the number of thriving companies particularly in the consumer goods, finance, energy and natural resources sectors, all top growth areas in emerging and frontier markets.
All of this means deep value in the mid-cap sector, competition for transactions is lower and there is more scope for “hidden gems” to be found. Another firm that has followed a mid cap strategy is Asia Capital Partners – although they have targeted listed companies rather than private. Naturally any firm taking an innovative approach to investing in emerging markets is bound to face scepticism and then competition as well as all the usual problems of working in these economies, but Emergo Partner’s original approach make it an essential company to watch in the next few years.
Categories: Frontier Market Strategy