Wednesday, September 5, 2012

Investing in resource-rich frontier markets | World Finance

Silk Road Finance (SRF) is developing successful investment banking business focused on strong frontier markets. The M3: Mongolia; Myanmar; and Mozambique.? We firmly believe that these three countries will be among the world?s top five fastest-growing economies over the next ten years. Our overall strategy is to provide investors an early access to beneficial frontier markets, and allow them to benefit from rapid economic development, especially in these three natural resource-rich countries.

Affluent in oil, gas, and mining, these countries have land at their doorstep available to the strongly expanding BRICS economies. Opening up to international investors, the transition to a democratic form of government, and introducing market economy principles, make these countries lucrative for early investors.

If the governments of M3 countries continue pursuing pro-market policies, I believe the investment community will witness strong performance of their economies in the upcoming years, and benefit from tapping early opportunities. Various asset classes across many industries are set to emerge on the back of such growth ? public and private equity; real estate; fixed; and current income. We expect growth in the capital markets ? there will be more international and local IPOs of M3-focused companies, inflow of foreign investments (both strategic and institutional) and an increase in interest among institutional and individual investors in local equities.

With such a promising market outlook, SRF are one of the first investors to join these countries, and are expecting to provide much-needed investment banking services to various client groups. SRF may offer its capital raising, M&A advisory, brokerage and research services to state-owned enterprises, and are expected to be privatised through IPOs with private, local, and foreign invested companies. Secondary offerings include: strategic investors; local companies seeking foreign partners; high-net-worth individuals; local and foreign individuals, who all invest on the national stock exchanges. With its successful experience in Mongolia, SRF has an advantage of replicating that expertise in Myanmar and Mozambique.

SRF has already started offering a unique product to investors. Later this month we are launching ?Silk Road M3 Fund? with a clear focus on these three countries. The fund will invest in such asset classes as public equities (international and selected local equities), currency and fixed income. This fund is an innovation that will offer untapped and attractive opportunities for investors.

Creating a unique focus
SRF is unique in its focus on our M3 concept countries, which appear to have seemingly
little in common. However, these countries have similarities in historical and economic context of development. All three countries had failed socialist models of development and planned economy in the past. Currently, M3 economies are at various stages of transition to the market economy.

These countries are undergoing a period of tremendous change in economy, politics and society. In our view M3 economies will be among the world?s top five fastest-growing economies in the next decade. With an annual growth rate average of 15 percent, we expect Mongolia to be the world?s fastest-growing economy in the period. Myanmar could be the third fastest-economy with an average of 12 percent annual growth, while Mozambique has an annual growth rate of 10 percent, and the country could become the fifth fastest-growing economy globally in the next decade.

M3 countries also have close ties with BRICS: Mongolia is located between China and Russia ? the country has close historical and economic ties to both countries. China and Russia are two of the largest trading partners of Mongolia. Myanmar?s geographic location is even more remarkable. The country is strategically located between China and India, in a fertile region with easy access to seas ? the country effectively connects the world?s two most populous countries. Finally, Mozambique neighbours South Africa, and maintains linguistic and cultural links to Brazil.

Targeting this unique region, SRF can leverage its experience and success in Mongolia, the fastest-growing economy globally last year, as we established outstanding investment banking operations in the country. Building on unrivalled research and an extensive network of international and local contacts, SRF subsidiary Eurasia Capital became one of the leading IBs in Mongolia. In 2011 Eurasia Capital helped to raise over $150m in equity capital for companies and investment funds, while its brokerage arm consolidated its position among the largest Mongolian brokers by trade volume. Eurasia Capital?s research provides in-depth coverage of Mongolian equities, assets and economy as a whole. In recognition of its continued excellence, Eurasia Capital was awarded Euromoney?s ?Best Investment Bank in Mongolia 2011? award, Finance Asia ?Best Investment Bank 2012? and a number of other awards.

Filling the gap in capital needs
SRF is seeking to offer its advisory services on expected waive of capital raising opportunities out of M3 countries. Given the fact that M3 countries are expanding their integration into the international trade and foreign investment community, SRF strongly believes the local government and companies are currently experiencing demand for much-needed capital. SRF will be targeting these potential clients to attract start-up and expansion capital from a broader network of investors, offering opportunities for these investors to diversify their portfolio at a new geographic market and various investment products. We believe that M3 country-focused governments and companies will launch multi-billion dollar privatisations, IPOs and secondary offerings on international stock exchanges in the short term, and on local bourses at a later stage once the local exchange becomes investable for international players. Currently, there are several international listed companies with $18bn market capitalisations operating in Mongolia; $53bn in Myanmar; and $35bn in Mozambique. We believe these figures will only increase.

Apart from equities on international stock exchanges, it is also expected the local bourse will further develop and offer opportunities for investors. Partnership with the London Stock Exchange in Mongolia and with the Tokyo Stock Exchange in Myanmar is set to bring investors to the locally listed companies. SRF will offer quality services to companies and help them fund their businesses with its underwriting and advisory services. Eurasia Capital has already proved to be successful in capital, raising deals in this resource-rich country. It has helped a number of Mongolia-focused companies in various industries, providing several millions of dollars in financing through IPOs and secondary offerings.

Growing interest on local assets
At SRF we believe M3 countries will offer tremendous opportunities from accelerated M&A deals, higher demand for consulting services, corporate restructuring and privatisation in the near future. All the M3 countries were under the socialist-style ruling, where the ruling party planned production and distribution of resources. Therefore, the majority owner of the enterprises in an M3 country was the single government. Now, since the M3 countries are undergoing a transition period at different stages to join the global economy, they are promoting economic policies to encourage international investments. Subsequently, many state-owned enterprises (SOEs) will be privatised, and have to go through significant corporate restructurings according to international standards, which will create a huge demand for consulting services.

Many major global players are entering the M3 markets seeking acquisition assets in natural resources, as all the M3 countries have substantial, largely untapped resources. SRF sees sizable deal opportunities in M&A activities in the resource sector following those major global players. In Mongolia, Rio Tinto is participating in construction of Oyu Tolgoi, the world?s second largest copper deposit; Peabody. China?s Shenhua and Japan?s Mitsui & Co. Ltd are bidding for development of Tavan Tolgoi, one of the largest coking coal deposits globally. Other key M&A deals in Mongolia include Banpu?s acquisition of Hunnu coal, and Mongolian Mining Corp acquisition of the Baruun Naran coking coal mine. In Myanmar, PTT Exploration & Production in Thailand is taking part in natural gas projects, while Mozambique Anadarko (US); Mitsui (Japan); BPRL Ventures and Videocon (India); and Cove Energy (Britain) are helping with Rovuma field exploration and development.

Value on domestic bourses investment
Brokerage services in M3 countries are at the early stages of development, and lack of experience to deal with international clients is a major issue. SRF will have an upper hand in providing high quality brokerage services in Myanmar and Mozambique, utilising its successful model in Mongolia, where SRF?s Eurasia Capital is a top brokerage house to serve international clients.

Although the local stock exchange is almost non-existent, in the coming few years the market is expected to become stronger, where privatisation of state economic enterprises is looking to be conducted through open tenders in 2013, and with the liberalisation of their operations. With the emergence of a fully functioning private sector, more companies are likely to raise capital through IPOs on the local stock exchange. Given the size of the economy and population of the countries, the brokerage business should offer strong opportunities for early investors. We believe that there are investment opportunities in the brokerage sector as the industry is due to experience rapid growth, and go through the consolidation process with the emergence of global and regional investment banks, and a number of acquisitions of local brokerage houses.

We plan to develop extensive Myanmar and Mozambique-focused research with the objective of providing top-quality market insights to international clients and partners.? Research would include macroeconomic views as well as detailed equity company research.? Our firm already has a strong track record in this area with transforming Eurasia Capital into the top research house in Mongolia.


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