Yes, investing in an emerging economy is challenging. Itís also incredibly rewarding Ė because, if you do it right, itís a way of making significant money while also making a direct and profound difference to the lives of ordinary people.
For private equity managers who work in developed market economies, raising investment capital is not difficult. Their track records, the scale and market awareness of the kinds of companies they invest in, and the robustness of the local capital markets all work together to create investor confidence.
Their challenge lies in identifying companies to invest in. In a saturated consumer market, itís hard to identify the kind of start-up business that will realise significant returns. The industry is awash with good concepts that cater to just about every consumer need. Finding the big idea that cuts through the clutter can be like searching for a needle in a haystack.
In fact, this market is so saturated that during the recent economic downturn, some larger private equity companies actually had to return capital to investors because they couldnít identify companies that would deliver a significant return on investment.
On the flipside, emerging markets are the opposite. Companies to invest in are more readily identifiable. Entrepreneurism is alive and well, and has two very active market segments to deliver to. There are grassroots populations who urgently need the basic essentials of life, and there is a burgeoning middle class that has a voracious appetite for the luxuries and the consumer and financial products of their station.
Businesses that cater to these needs have significant growth potential. Trouble is, they often donít have the capital and strategic financial advice to take advantage of the opportunities with which their market presents them.
An intelligent private equity manager therefore not only injects investment capital, but supports these small to medium sized companies in developing their offering, building their business model, complementing strategic shortcomings, and embracing the opportunities available to them.
Obviously, capital comes first. And this is the real challenge of working in the flipside. Investors are wary of the sometimes unpredictable forces governing emerging markets, and can be reluctant to commit their capital to businesses that they donít understand.
Fortunately, there are some companies that have dedicated their business to identifying opportunities in and understanding emerging markets. Their expertise lies not only in identifying those businesses with a good business plan to invest in, but in providing them with the support to realise significant returns. We, for instance, donít just invest, we participate. We give our clients the hands-on benefit of our insight to help them build more and better widgets to serve their target market.
Supporting them is not rocket science. The beauty of companies that cater to emerging markets is that their business models are generally simple Ė identifying what the market wants and responding to it. All they need is the capital to grow and to develop their product or service offering - and the expertise and insight to expand their business intelligently or correct problem areas.
For instance, implementing IT solutions helps them run more efficiently. Help in identifying more effective suppliers and more efficient routes to market makes them more profitable. Helping them respond to governance and legislative requirements makes them more acceptable and attractive as suppliers themselves.
In other words, those rare few organisations that understand the mechanisms and have a hands-on track record in growing the middle market in emerging economies provide an efficient way for investors to participate lucratively in those economies. In the process, the development activities in those economies translate into wealth and prosperity for local populations. Now thatís a win-win!