How an innovative new crowdfunding portal will transform the flow of capital to businesses in emerging and frontier economies.
When I first started researching Eastern European economies as an analyst many years ago – reliable information was steadily becoming more available, you could easily find solid data on the Russian banking or reinsurance markets, but similar information for smaller countries like Armenia or Georgia could still be tricky to source. Relying on a Russian dictionary and out of date figures were the basis for many investment memos back then. But then and now the most interesting and revealing sources of intelligence can be found from those doing business in the country.
Entrepreneurs can often feel which way an economy is moving way before official figures do and anecdotal information can often help you understand different sectors of an economy. The problem is that you have to be in the country to benefit from these sources or at least talking to people working there a lot, plus this can be highly time consuming compared to reading a few articles on the country.
Frontier markets also suffer from remoteness and lack of accessibility, if you want to invest in places like Malawi, Sri Lanka or Vietnam you have to go through an ETF or a mutual fund (who will take a cut) or do it yourself which is time consuming and risky. This also means that frontier markets themselves are missing out on much needed capital which could be helping to develop their economies.
All these factors means smaller investors are missing out on high growth attractive markets.
Which is why when I heard about Emerging Frontiers (EMF) efforts to launch a new crowdfunding platform I was extremely excited; this new venture promised the all strengths inherent in the crowdfunding model – but applied to frontier market finance.
Emerging Frontiers promises to allow investors to reach these high growth but remote and difficult to reach (physically and investment wise) locations, countries such as Nigeria, Cambodia and Mongolia.
To find out more I met the one of the partners – Paul Henderson in London and he explained the thinking behind the new venture
Over coffee Paul explained how Emerging Frontiers want to use the crowdsourcing model and apply it to projects in these countries; this will allow those with even fairly modest sums to invest in high growth economies with ease and transparency.
The team behind the company have wide ranging experience across emerging/frontier markets and have already run a significant frontier market focused venture in the form of Pathfinder Capital, together they have invested across four continents and various asset classes. For the crowdfunding platform the team plan to use a Special Purpose Vehicle (SPVs) to allow them to act on investors behalf. Once invested users will be able to monitor their investments and (hopefully) benefit from rising valuations. In addition investments in the SPV will be liquid and transferable, allowing the possibility of a secondary market developing around the trading of these securities.
Frontier markets have low correlation with developed markets making them a useful addition to an investment portfolio, but large companies in this class are often overvalued while the smaller end of the market is illiquid and difficult to reach.
Network, Network, Network
The team already have a strong network in place to source new investments thanks to their existing contacts in frontier markets and the crowdfunding portal will develop it further, this is a key strength of EMF and another aspect of frontier market investing that individuals cannot replicate across multiple countries.
A couple of years ago I applied to join an exciting new venture called Wikistrat, billed as a cross between Wikipedia and Facebook, the company would crowdsource political analysis and apply it to various national, regional and geopolitical scenarios, counting on the wisdom of the crowd to predict trends across the globe. After passing an interview I was allowed to join and soon got involved in analysing and predicting all manner of scenarios from the UK’s split from the EU, to the future of transnational crime in the Sahara region.
The beauty of the crowdsourcing model is that interaction around a subject benefits from multiple opinions and the fact that you face your inherent biases head on as others challenge and correct you.
The monitoring of the country and investments should also benefit from the crowdsourcing model as investors can actively monitor their investments and the locales rapidly changing political and business environment, incentivised by the ability to protect and enhance their investment.
Kiva and Kickstarter
There is little doubt the crowdfunding model is growing in size and influence, in a similar fashion Kickstarter has transformed creative start-up funding and others like Kiva have created new opportunities for those wanting encourage entrepreneurs in developing countries.
What’s the catch?
Of course there are no risk free investments and the countries targeted in the venture are called frontier markets for a reason, there is the very real risk of political or economic disaster, but then you probably wouldn’t be reading this if you were just interested in “ordinary” low risk investments.
Emerging Frontiers promises to be an innovative addition to the options faced by those interested in placing their cash in the world’s most exciting markets. By targeting high growth markets and a wide but savvy investor base Emerging Frontiers can help change the investment model as it stands, to a more democratic and transparent set-up, fit for the 21st century.