For Myanmar, one of the few bright spots on its near horizon comes from private equity investors, those intrepid pioneers of business opportunities in the most ‘frontier’ of emerging markets. Myanmar-based private equity players closed on more than $100m in investment commitments even in a difficult year such as 2018, but the going promises to be tough in the near term.
The rewards should be there in the long run, however, including the kudos that comes with helping to build up Myanmar’s fledgling private sector.
Back on the outside
Myanmar, a pariah state not too long ago, is definitely back in the international doghouse. The military attack on the Rohingya Muslim minority group in Rakhine State in August 2017, which sent 700,000 refugees into neighbouring Bangladesh, shocked the international community and is likely to have repercussions on the country’s investment climate for years to come. The UN Human Rights Council issued a detailed report in September on the incident, labelling it a clear case of “ethnic cleansing”, and called for investigations of the responsible generals.
Myanmar’s civilian government, headed by state counsellor and de facto leader Aung San Suu Kyi, is unlikely to comply given its virtual joint venture with the military who under the 2008 constitution control 25% of the parliament and three crucial ministries: defence, the interior and border affairs.
Repercussions from the Rakhine incident are already being felt. Applications for new foreign direct investment (FDI) in Myanmar fell by almost 45% year on year in the April to September period of 2018, with a noticeable decline from Western companies. Western tourists are also avoiding the country. The EU is considering rescinding Myanmar’s generalised system of preferences privileges unless positive action is taken in Rakhine, a move that could undermine the country’s nascent garment manufacturing sector, whose exports of $2.7bn in 2017 were its second largest foreign exchange earner after the oil and gas sector. The World Bank recently downgraded Myanmar’s economic growth forecast for fiscal year 2018-19 from 6.8% to 6.2%.
Reforms needed
Perhaps more disturbing for the country’s long-term prospects has been the failure of Ms Suu Kyi’s National League for Democracy (NLD) party, which won the November 2015 election by a landslide, to continue the reform momentum initiated during the pseudo-democratic regime of former president Thein Sein. Mr Sein did much in terms of both political and economic reforms. He shelved the controversial China-backed Mitzone Dam project, opened the door for Ms Suu Kyi to join the political process, leading to the dropping of two decades of economic sanctions by Western democracies in 2012, allowed two international telecom companies – Telenor and Ooredoo – to win mobile phone network concessions (mobile phone penetration in Myanmar has jumped from 10% in 2011 to about 90% now), and granted 10 foreign banks licences to operate while farming out new oil and gas concessions.
The NLD’s mid-term performance (a general election is due in late 2020) suffers in comparison. The NLD has put in place a new FDI Law, levelling the playing field between local and foreign firms, and amended the archaic Companies Law, making it easier for foreigners to invest in Myanmar firms. On November 8, the central bank released restrictions on foreign banks, allowing them to lend directly to local companies. But opportunities remain to stimulate the economy despite the Rakhine incident.
Some have suggested that the party should allow local banks to set their own interest rates, a move that would facilitate lending, especially to the needy small and medium-sized enterprise (SME) sector. Others have claimed that the NLD could make possible foreign investments in Myanmar banks, allowed in theory but not yet in practice. There are also calls to grant insurance licences to foreign players, which have been waiting for years to enter the near-non-existent insurance market. In addition to this, there is a widespread feeling that the ruling party could better co-ordinate among the ministries to make sure projects are approved quicker.
A number of market-watchers in Myanmar believe that of these reforms could stimulate FDI and the economy. “The [Rakhine incident] creates negative sentiment and does impact upon investment, but if the economy is strong I would bet that commercial investors would come in anyway,” says Thiri Thant Mon, managing director of investment advisory group Sandanila.
Ironically, the Suu Kyi regime is seen by many to be less private sector-friendly than its military-run predecessor, a fact that might be explained by a deep mistrust of the private sector fostered by decades of socialism (1962 to 1988) followed by the rise of crony capitalism under military juntas (1989 to 2010). “The overhang from socialism and cronyism means that this government is very suspicious of business,” says Ms Thiri. “Business people equal greedy people [in their minds].”
Fearless pioneers
So who dares to invest in such a climate? Welcome to the private equity world, and its private equity counterparts, publicly traded listed companies that specialise in risky Myanmar investments. There are three such listed firms: Myanmar Investment and Myanmar Strategic Holdings on AIM, the London Stock Exchange’s international market for smaller, growing companies; and Singapore Myanmar Investco on the Singapore Stock Exchange. Private equity investors entered Myanmar in 2011 and 2012 when the country opened up and Western economic sanctions were dropped.
TPG, one of the world’s largest private equity funds, which manages $94bn globally, of which $7.8bn is in Asia, was one of the early entrants in Myanmar. The company appointed YGA Capital managing director Thura Ko Ko as its representative in Myanmar and has become the largest private equity player in the country. It has invested about $200m in Apollo Towers Myanmar, a company erecting telecom towers to support the country’s fast-growing mobile phone networks, and a stake in Myanmar Distillery Company. The latter was quickly sold on to Thailand’s Thai Beverage for $494m. TPG paid $150m for its equity in the company in December 2015. TPG is working on a merger with another telecom tower provider, Pan Asia Majestic Eagle, that, if successful, would make the latter the local market leader.
While doing business in Myanmar may be tough (the World Bank’s Ease of Doing Business ranking puts the country at 171st out of 190), private equity funds such as TPG have proven that it is possible. Delta Capital Myanmar closed its second Myanmar-focused private equity fund in September 2018, raising $70m, half of which came from development finance institutions (DFIs) such as the World Bank’s International Finance Corporation (IFC) and the UK’s CDC Group. The Rakhine incident had put a dampener on enthusiasm for the new fund, which initially targeted $100m. “I would say that if the Rakhine incident hadn’t happened we would have raised $100m,” says Delta Capital managing partner Nick Powell. Altogether the two Delta Capital funds are worth $120m.
Mr Powell remains bullish on Myanmar’s opportunities. “The thing about this market is that there are no big barriers to entry,” he says. “You can become the national leader of anything here. There is no other county I know of where you can literally start from scratch a nation-leading company in three to five years.” The first Delta fund, for example, has invested in Frontiir, which is now the lead internet service provider in the country, and local microfinance operator Easy Finance.
Recovery at last
Myanmar’s private sector is only just beginning to get back on its feet. During the socialist era under Ne Win (1962 to 1988), the private sector all but disappeared. During military rule (1989 to 2010) there was crony capitalism, and scores of businessmen prospered by winning lucrative mining and forestry concessions in return for investing in government-backed projects. These conglomerates pose legacy problems for many foreign investors. The remaining private sector pool is shallow and generally unfamiliar with international standards on accounting, transparency and good governance issues. For the private equity pioneers, finding good investments has often amounted to creating new companies.
Anthem Asia, which began in Myanmar in 2012 as an independent private equity investment firm backed by Asia-focused investors, has taken shares in 10 companies over the past four years, including the Rangoon Tea House, one of Yangon’s leading restaurants. Having specialised in smaller investments, Anthem Asia announced the first closure of its Myanmar SME Venture Fund on August 30 having raised $34.5m from three DFIs: the IFC, the Dutch Good Growth Fund and CDC Group. “We see successfully raising this money – given the tough headwinds that buffet Myanmar – as a vote of confidence for the fundamentals of what can become a significant Asian market as much as in our own track record,” says Anthem Asia managing director Josephine Price.
Myanmar is considered to be a good market for DFIs, which tend to combine the goals of boosting private sectors in emerging markets with making a modest return on their money. Unlike commercial investors, the only stakeholders DFIs have to worry about are the governments that sponsor them, so the Rakhine situation plays less of a role in investment decisions than it might for multinational companies, which need to worry about their international reputations and consumer boycotts.
“Many in the international community understand the nuances of the country and continue to engage regardless of the [Rakhine] issue. Private sector development leads to social and political development in the long run, provides better jobs and better lives,” says Ms Thiri, who also acts as an advisor for CDC Group. “Development finance institutions continue to invest in private businesses and also through private equity funds and impact investors, who then invest in SMEs.”
All in prospect
Emerging Markets Investment Advisers (EMIA), a Singapore-regulated private equity fund manager, has launched two funds focused on the frontier markets of Cambodia, Laos and Myanmar. While Cambodia has taken the lion’s share of the company’s investments to date, Myanmar is now arguably looking to be a better prospect. “We view Myanmar as a great investment destination today if you have a long-term view of the market,” says EMIA CEO Joshua Morris. “The valuations sought by entrepreneurs in Myanmar are still quite high, although coming down from their highs in 2015 and 2016, in part due to the challenges now facing the country.”
Private equity investors, perhaps more so than other investors, aim to get in during the down cycle and exit in the up cycle. “Globally, for private equity, when you make the least amount of money is when everybody is pouring in,” says Ms Price. “So if you look at the Myanmar market, we are at the bottom of the throw so in theory this is the best time to invest.”
What remains to be seen is whether local companies realise that the euphoria over ‘Brand Myanmar’ is now gone. “I think getting in today is a little riskier than it was before,” says Myanmar Investment managing director Aung Tun. “The flipside to that is if one is disciplined and the companies are more realistic then you should be able to invest at a better price.”
Most investors in Myanmar are in it for the long term. Enrico Cesenni, CEO of Myanmar Strategic Holdings, came to Myanmar in 2012 and was impressed by the country’s seeming openness to change. Mr Cesenni, a former Goldman Sachs merger and acquisition banker, is the company’s main shareholder. “Then there is a group of investors mostly from Europe,” he says. “What pulls them together is the time horizon. All of them are looking for an investment that will make them 100 times their money in 20 years.” Myanmar Strategic Holding has opened a Wall Street English language school franchise, and operates the largest security guard firm in Myanmar, among other investments. Its investments were all started from scratch.
While private equity’s financial contribution (about $500m in total) to Myanmar pales in comparison to the country’s needs, its impact on the private sector could prove pivotal in the long term. For example, Singapore-based venture capital group Seed Myanmar has already invested in seven tech start-ups since launching in 2017. While Seed’s investments are small, between $50,000 to $250,000 each, its potential impact is huge. “The kids we are investing in are the ones who in 10 years time are going to run the country,” says CEO Rita Nguyen. Given the current state of Myanmar’s economy, many will be joining Ms Nguyen in hoping that this prediction proves to be true.
