The military coup in Myanmar has forced investors, who had earmarked capital for the country, to go back to the drawing board.
While funds, such as Delta Capital and Anthem Asia, that solely focused on Myanmar are adopting a “wait-andwatch” approach as the political situation unravels, those with a wider geographic footprint are funnelling their money elsewhere — to Cambodia and Vietnam, in particular.
In the last five years, the Cambodia-Laos-Myanmar-Vietnam (CLMV) subregion has clocked a GDP growth rate of around 6% per annum — much higher than neighbours. And, investors have sought to make the most of this.
According to the Association of Southeast Asian Nations, foreign direct investment (FDI) flow into CLMV grew 6.3% year-on-year in 2019. While Vietnam topped in terms of value ($16.1 billion), it was Myanmar that registered the highest year-on-year growth of 55.9%.
The military’s seizure of power on February 1, though, has most likely put paid to the foreign fund inflow to Myanmar.
“Investor money that might have gone into Myanmar will not be going there. The countries around the region will benefit,” Dave Richards, managing partner of impact investor Capria Ventures, told DealStreetAsia in a recent interview.
In February last year, DealStreetAsia reported that the US firm will be investing up to $8 million in fund managers in selected countries with a focus on Myanmar and Nepal. “Capria’s efforts will focus on supporting local fund managers in Myanmar to strengthen their business, accelerate growth and build world-class investing operations,” it had said, adding that it will back two to three general partners from Myanmar to join its global network of 22 managers.
Many of those plans are now “on pause”. The firm is, instead, set to make its first investment in Vietnam this year, while looking for opportunities in Cambodia, Bangladesh, and Nepal. Meanwhile, many businesses have terminated partnerships with Myanmar entities that have ties to the armed forces.
Japanese beer maker Kirin Holdings, for instance, severed its ties with its partner Myanmar Economic Holdings Limited (MEHL), which provides welfare fund management services to the military. Singapore-based gaming firm Razer’s co-founder Lim Kaling announced recently that he is divesting his stake in a venture that indirectly owns an interest in Virginia Tobacco Company, which is linked to MEHL.
“The present coup suggests that, for the sake of wresting domestic control, the Tatmadaw [the Myanmar military] is ready to give up the diplomatic, trade, and investment gains of the last decade,” Romain Caillaud, a principal of the Tokyo-based advisory company SIPA Partners, told Nikkei.
Many Myanmar-focussed investors may now widen their footprint. “I expect a lot of investors that leave Myanmar to shift from a Myanmar-only strategy to a regional strategy,” said Andrew Durke, COO of Obor Capital. The Cambodian VC had plans to invest $13 million in startups in CLMV countries in 2020, DealStreetAsia had reported.
Entrepreneurs from Myanmar, too, may also move to other countries in the region to build and grow companies from there. “It would be Myanmar’s loss and Southeast Asia’s gain,” said Field Pickering, head of venture investing at Vulpes Investment Management, which launched the early-stage vehicle Seed Myanmar in 2016.
Vietnam in the spotlight
As investors and entrepreneurs look for safer shores, Vietnam is seen as an obvious choice in the CLMV region, generating interest from both commercial and development capital.
“For investors with set investment mandates in Southeast Asia and purely looking for financial returns, Vietnam remains a strong option for the same reasons that made it attractive in the past 5-10 years,” said Obor Capital’s Durke.
If countries like Cambodia and Laos present some opportunities for private equity investors due to the demand for more infrastructure projects, Vietnam stands out to venture capitalists as well thanks to its talent pool and the ecosystem that venture capital needs to support innovation at scale, according to Capria’s Richards.
From a development finance institution’s (DFI) point of view, the Dutch development bank FMO says the country has already built a business ecosystem that can facilitate investments from companies moving part of their supply chain from China. “A business-friendly government policy will help convince foreign investors to increase the capital allocated to this region,” a representative for FMO told DealStreetAsia.
Even as competition for deals in Vietnam is higher, fund managers believe it creates a healthy “next investor” dynamic in this market. Pickering said it was “something that never arrived in Myanmar”.
“Once borders open up after the pandemic, and Asian investors return physically to Vietnam, I believe it will be a feeding frenzy and you will see deal activity erupt pushing Vietnam to the top of the list of emerging markets attracting foreign investment,” he added.
More competition means more deal flow and a larger market with more exit options. All of these factors have made Vietnam the “track record” of the CLMV region, Durke asserted.
Cambodia: A strong alternative
Phnom Penh-based Obor Capital, which has invested in five Cambodian businesses and one Vietnamese company with ops in Vietnam and Laos, is betting on Cambodia as a preferred investment destination.
Durke expects Cambodia to write a story similar to that of Vietnam. Cambodia can absorb some more capital, especially for deals in the $500,000 to $3 million range, Durke opined. “Examining the characteristics that make Myanmar attractive to investors, I think Cambodia is the most similar [to Myanmar],” he said.
Cambodia has seen most of its investments going to real estate and infrastructure sectors so far, while investments in the consumer and tech sectors have not kept pace with the nation’s economic growth.
Cambodia’s economy has grown at rates above 7% since 2011, and the share of people living in poverty has more than halved in the last decade, according to the United Nations Development Programme (UNDP). The kingdom has set a target to become an upper-middle-income country by 2030 and a high-income country by 2050.
Digital technology in the majority of Cambodian businesses (over 90%) was still at a basic level, the UNDP said in an August 2020 report. But the country’s growing economy with increasing FDI flows and a young demography would generate opportunities to exploit new technologies to reach its national income goals.
Pickering from Vulpes Investment Management, however, is sceptical of Cambodia’s potential because of its small addressable market. Laos is even smaller, and it is “difficult to imagine homegrown companies there ever scaling to create venture-like returns”, he said.
However, as DFIs likely retreat from Myanmar, Cambodia is probably going to see more capital from these investors, according to Durke.
“Frontier markets like Cambodia are still very new to private equity and venture capital, so investing here is investing in the future. And there is a big advantage of being the first mover in this market and getting attractive valuations,” said Durke.
Emerging Markets Investment Advisers (EMIA), which has sealed the majority of its deals in Cambodia, says it continues to see strong interest from both existing and new limited partners, according to the firm’s CEO Joshua Morris. EMIA is raising its third fund with an up to $120 million target, and is expecting its first close next quarter.
Patient capital
The standard private equity and venture capital model is difficult to execute in frontier markets as it requires a more patient fund structure with hands-on solutions provided to portfolio companies.
“If you hold a fire sale, instead of holding on and developing the firms for one to three more years, you might end up selling what could be very good companies,” Durke said. Fielding with risks in CLMV countries is not about technology or bringing products to the market. “It’s a different type of risk, like finding enough good talents and understanding the legal framework,” said Durke.
High upfront costs, combined with relatively smaller market opportunities compared to larger ASEAN markets, is the likely reason why there are fewer active firms in these frontier markets, Morris points out.
That explains why more DFIs, which have a higher risk appetite for the region, join as limited partners in CLMV funds, compared with other investors. DFIs also have knowledge and networks in these markets. “Our mandate is to stay in tune with the needs of the entrepreneurs we empower,” FMO said.
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Originally published on February 23, 2021, by Nguyen Thi Bich Ngoc of DealStreetAsia
