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Biz Talk: A fund with a future in Cambodia

Joshua Morris, managing director of Emerging Markets Investment describes a $10m venture

When did Emerging Markets Group, which runs a consulting firm in Phnom Penh, decide to start an investment business?
The idea for Emerging Markets Investments began about 18 months ago when we started to look at what we wanted to achieve with an investment fund. It took us about a year and a half to do the fundraising, and we had our first close in December last year. We raised US$10 million and called it the Cambodia-Laos Development Fund.

Three investors came on board: the International Finance Corporation, Norfund, which is the Norwegian government’s development finance institution, and Finnfund, which is the Norfund equivalent in Finland.

What are the aims of the new fund?
We have two primary objectives. The first is to provide a commercial competitive return for our investors – a rate of return consistent with international private equity funds.

At the same time, we very much seek to have a positive developmental impact on the economies in both Cambodia and Laos, which we hope to achieve by providing growth capital to transparent, professionally managed, and innovative [small to medium-sized enterprises] in both countries.

Why only Laos and Cambodia?
First, our knowledge base is Cambodia and Laos. In Cambodia we’ve been consulting since 2003.

We know the challenges businesses face, but we also know the opportunities that those countries present to local businesses.

Secondly, we think both of those markets have great growth opportunities. Both have experienced really robust growth over last five to 10 years, taking away last year’s crisis.

Both have a lot of natural assets they have that are building and growing, so it’s the right time to get into these markets.

What are the challenges to investing here as opposed to investing in, say, a First World country?
In terms of comparison, there are two dimensions. You have to look at it as investing in emerging markets versus developed markets.

One of the challenges investing in emerging markets such as Cambodia and Laos is the limited human resources for business management – you don’t have as deep a pool of seasoned and experienced business managers, although I have to say particularly in Cambodia that’s changing dramatically.

The emergence of high-quality business managers here is one of the drivers of the fund. You also have issues of contract enforceability, and challenges in legal and judicial systems.

That makes you much more selective in terms of who you invest in and who you partner with. There are also core infrastructure challenges you can face.

What are the upsides to investing here?
In both Cambodia and Laos you experience much more upside in terms of growth. If you’re in developed markets it’s harder to find pockets of growth, but here there’s huge opportunity in key sectors to have substantial growth in the relatively short term. It’s simply a matter of unlocking their potential.

For human resource-intensive businesses, you have opportunities for much cheaper labour. And for exporting you have significant tariff relief benefits for exporting into certain developed economies. Then there’s limited competition for strong players.

For us there’s a new breed of entrepreneur-manager here – managers that have either worked for international organisations locally or have experience through education or work abroad.

They are building businesses that compete on the quality of their products and their services, rather than on the strength of their relationships.
For us, that’s a critical difference and a key driver for how this economy will develop.

How do you cope with the level of financial transparency here?
Many businesses in both countries have below international standards in terms of financial controls, financial reporting and compliance with local laws.

Part of our role is to identify those businesses we see as opportunities and encourage them to engage in the formal private sector, to demonstrate the benefits as a business they’ll get from that.

Our view there is that if you were building a business for the long term and you want to attract outside capital and offer equity in the business, you need to have these systems in place.

What sectors are you particularly interested in?
We are open to investments in all areas. While we haven’t made a specific investment yet, we are interested in business services. It’s somewhat recession-proof in markets like Cambodia and Laos with significant NGO and aid agency presence.

Financial services is another area, and light manufacturing is also a key area for us.

The establishment of basic manufacturing to support both the domestic markets as well as export markets has a huge opportunity here.
The university sector is a huge and growing market. We’re also interested in hospitality and retail.

How much do you think you will invest per company?
Our investment size per investment is a minimum of $250,000 and a max of $2 million, so an average of about $1.25 million per investment.

Where is the fund in terms of its investments now?
We’re expecting to make one or two deals by end of summer, and then have another completed by the end of 2010.So we’ll have invested in three companies by the end of the year.

There are a number of companies in our pipeline that we’re very excited about, but at the same time you want to make sure that you’re investing in the right opportunities with the right management.

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