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LAVCA in the News

In Frontier Markets, Steely Nerves Required

2 April 2008

Heather Timmons
New York TImes DealBook
New York, NY
United States

In Frontier Markets, Steely Nerves Required

FORGET Hong Kong, Beijing, Moscow and Mumbai. Intrepid bankers, investors and hedge fund managers are journeying to farther corners to do deals.

As the subprime crisis and economic slowdown ripple through the United States and Europe, and overinvestment in China and India threaten to create asset bubbles, some long-ignored areas are experiencing unrivaled growth. Financial pioneers are entering the scene from many of the largest Wall Street banks, along with hedge funds and sovereign wealth funds.

Many of the new investment targets are mineral- or oil-rich nations, like Ghana, where high commodity prices are spurring domestic economic growth, the political framework is solid or stabilizing, and doors are opening to foreign investment. Others, like Vietnam, are adopting capitalism and creating industries. Most of these places have large young populations that are moving from rural economies into cities, eager for cellphones and cars.

Some investors and deal-makers call them “frontier” markets, but there are plenty of other names for these nations. A Merrill Lynch analyst refers to them as “emerging emerging” markets, while Goldman Sachs focuses on the N-11, or Next 11, developing countries.

Deal-making in these countries involves local connections, long courtships of governments and industry titans, as well as a double layer of due diligence. Many of the most successful bankers in the Next 11 have personal ties to the area. They also need a healthy respect for what one banker calls the “hell in a handbasket” factor — political stability that can turn into chaos practically overnight.

“We’re looking for new markets and new areas to add to our bottom line,” said Yvonne Ike, senior country officer for sub-Saharan Africa at JPMorgan Chase. “There are deals to be done where valuations can be quite rich and yields are much higher” than in Europe or elsewhere, she said.

Companies and governments are eager to find money for projects that range from bridge building to telecommunications tower installations. Investors looking for higher returns are racing to provide this cash, and deal-makers are reaping the rewards. “Too many people think of emerging markets in a general basket,” but they have very definite stages of development, said Norman Villamin, head of research and strategy group investments for Citi Global Wealth Management, Asia Pacific. Citi is advising investors to concentrate on markets that are “one step below the recent maturation seen in markets like China and Korea,” he said.

These markets face a “two steps forward, one step back” approach to financial liberalization, Mr. Villamin said. “The banking systems don’t function that efficiently yet,” he said, so foreign money flowing in tends to be quick, sometimes inflating prices and causing an overdone regulatory reaction.

Investors in emerging-emerging markets are willing to take that risk. “If you do an overall move away from risk, you do an overall move away from profits as well,” Ms. Ike said.


Tutu Agyare is so certain that the time is right to invest in Africa that he left the bank he worked at for 20 years to do so. Mr. Agyare, who until November was the global head of European emerging markets at UBS in London, left to start Nubuke Investments, a two-fund shop that will invest only in Africa. The London firm will have several hundred million dollars under management and a dozen analysts when it opens in the next few weeks, he said.

Mr. Agyare, 45, was born in London, grew up in Ghana, and has spent nearly all his career in London, where he started trading derivatives for the Chicago firm O’Connor Securities in 1986. He was the first black trader on the floor of the London Stock Exchange.

“Africa is not just commodity led,” he said. “We’re seeing a lot more balanced growth, consumer spending and investment in infrastructure.”

Africa amassed $60.1 billion in announced mergers and acquisitions in 2007, according to Thomson Financial, up nearly 47 percent from the year before. Foreign direct investment in African countries reached $35.6 billion in 2007, according to the United Nations Council on Trade and Development, twice the amount in 2004.

Even the most stable African markets, however, have been rocked by turmoil. The Nairobi Stock Exchange in Kenya was one of the best-performing markets in 2006, but shares plummeted because of ethnic violence that led to at least 1,000 deaths after the presidential election last December. “There are significant risks,” Mr. Agyare said, that require a “deep knowledge and understanding of the history and people involved.”

Big projects loom on the horizon. South Africa needs to add 17,000 megawatts of electricity and Algeria needs to spend $50 billion in the next five years to create new housing, Mr. Agyare said.

Mr. Agyare said he expected his financial analysts to spend half their time in Africa. He plans to spend a third of his time there. To do well in Africa, “You need to have an affinity for the country, and affinity for emerging markets and curiosity,” which prompt you to look below the surface, he said. “You can’t just take the annual report and use it as a given.”


When Gita Wirjawan, senior country officer for JPMorgan Chase in Indonesia, flew to the cold plains of Wisconsin from Jakarta for school when he was 17 years old, his intention was to become a famous jazz pianist. When he transferred to the University of Texas at Austin and warmer climes, he was already an accomplished musician.

But, he said, his parents thought better of all that. “I was a music nut,” he said. “But they didn’t like me majoring in music, so I walked down to the registrar’s office and asked what the most popular major was. They said accounting.” Two decades later, at age 42, Mr. Wirjawan is one of the most highly respected deal-makers in Jakarta. He is on the verge of successfully negotiating the merger of Bank Niaga and Bank Lippo, an essential first step in Indonesia’s plan to consolidate its consumer banking industry.

Last December, he transacted a 16 percent sale of Indonesia’s third-largest mobile phone company, Excelcomindo, to Emirates Telecommunications for nearly $438 million, a major investment in Indonesia from the Middle East.

“I am happy here because the complexities are very interesting and that keeps me stimulated,” Mr. Wirjawan said. “I mean, for example, many people ask me about what the tariff structure will look like in the next five years. In other countries you can have a ballpark view of what it will be. Try answering that question here. I often just say, I don’t know.”

Mr. Wirjawan worked at Citibank and a securities firm before going back to school at the John F. Kennedy School of Government at Harvard, where he became friends with Felipe Calderón, now the president of Mexico.

It was at Harvard that he began to see what he calls his endgame materialize. “I see myself in public service,” he said, adding that he didn’t intend to run for office but to help good governance.

“I take a very long view of Indonesia; it’s the only way I can justify staying here. Despite the mediocrity within the leadership here in the past, our economy is still growing 6 or more percent. So you are looking at a huge economy 20 years down the line. That should make Indonesia pretty relevant.” PETER GELLING


Last spring, Adel Kambar, a British banker, left a job at Merrill Lynch in London to work with a Russian investment bank’s office in Almaty here. At the best of times, this would hardly be an obvious career move. As it happens, Mr. Kambar’s jump from London to Central Asia also coincided with an unraveling in the international lending that had sustained Kazakhstan’s banking sector. So by the time he stepped off the plane to become a banker in Kazakhstan, the financial sector there was drying up as surely as the cracked-mud surface of the shrinking Aral Sea.

Still, Mr. Kambar said he had no regrets. He called the move emblematic of a shift under way in the financial world. Financial services, he said, are moving from London and New York to emerging markets. Bankers are moving, too.

“I’m a long-term believer in emerging markets,” Mr. Kambar said. “This is a generational thing.”

Meanwhile, Kazakhstan’s cushion of oil wealth caught the banking sector’s collapse last fall. Now, paradoxically, Mr. Kambar’s job might look more secure than those of his colleagues in New York, though steely nerves are still part of the job description.

Like many emerging-market bankers, his own background is global. His father is from Kuwait and his mother from Russia. He left Merrill Lynch for Renaissance Capital, which is based in Moscow. He is its chief executive for Central Asia, working in Almaty.

The country holds two-thirds of the crude reserves in the Caspian Sea region and is a magnet for Western oil giants like Exxon Mobil and Chevron, as well as competitors that include Gazprom, the Russian state gas company, and the China National Petroleum Corporation.

Mr. Kambar said that living here was essential for building client relations. Kazakhstan’s society is built around allegiance to clans or tribes where personal and family ties play a huge role.

“There’s always something unusual about it,” Mr. Kambar said of his new beat. “It’s more than the generic G-7 banking.” ANDREW E. KRAMER


Bassam Yammine, a managing director and co-chief executive of the Middle East at Credit Suisse, recently took a colleague from the bank’s London office to see a client in Saudi Arabia. He noticed his guest’s discomfort when, 40 minutes into the meeting, Mr. Yammine, a 40-year-old Lebanese banker, and the client were still chatting about politics and the weather. His colleague shot him a panicked look when everyone got up to leave, still not having mentioned business deals. Halfway out the door, Mr. Yammine turned around, quickly discussed the deal and he and his colleague left the meeting with a check.

“In this part of the world, that’s how you do business,” said Mr. Yammine, who spends his time in Riyadh or Dubai and traveling the region. “Relationships are an important factor in clients’ decisions.” Mr. Yammine is proud of his relationships, including one with Saudi Telecom and some family offices, which he started to build in the mid-1990s, when he helped set up Lebanon Invest, Lebanon’s first investment bank.

Much has changed since then, he said, recalling how he had managed the first private placement in the region for the Lebanese bank Byblos and helped raise debt and equity to finance the refurbishment of the old InterContinental Hotel in Beirut. Of course, rising oil prices created wealth and helped the economy boom, but the 9/11 attacks were also a major turning point for the region’s development, said Mr. Yammine, who has an M.B.A. from the University of Chicago.

“Before 2001, the Arab world was fragmented, and investments either stayed within one country or moved to the United States or the U.K.,” he said. “Sept. 11 made the Arab world think more about investing in their own region.”

Mr. Yammine, who likes to return to Lebanon for skiing and hiking trips with his wife and two daughters, perceives opportunities in linking Credit Suisse’s investment bank, private bank and asset management closer together and in advising sovereign wealth funds on how to make their dealings more transparent. This way, they can try to avoid a backlash from the United States two or three years from now, when their money may not be needed that desperately anymore. JULIA WERDIGIER


Most days, Patrice Etlin runs the São Paulo office of Advent International, a private equity firm. But he relaxes by heliskiing, jumping onto untouched pistes. On two occasions, he watched his guide and his brother get swallowed up by avalanches. Both times he emerged unscathed and got help. “I escaped,” he said, before adding with a laugh, “I am in a risky business.”

There could be a message to investors in those close calls. Mr. Etlin might take a chance. But he is a survivor.

He opened Advent’s Brazil office in 1996, arriving in a boom that was inevitably followed by bust, with the Russian crisis, the Asian crisis, a Brazilian devaluation, economic collapse in Argentina, the bursting of the Internet bubble and Sept. 11 taking their toll.

Mr. Etlin, who is half-Brazilian, half-French and a former electronics engineer, made it through what he called “the nuclear winter” and is now reaping the benefits. His first two funds, in 1996 and 2001, raised $235 million and $265 million, respectively. Last year, his third brought in $1.35 billion.

Latin America’s private equity firms are enjoying plenty of interest from emerging-market investors. Firms raised a record $4.4 billion in 2007, according to the Latin American Venture Capital Association. Initial public offerings on the Brazilian stock exchange took in a record $32 billion last year.

The newfound clout of Brazilian companies, particularly metals, mining and agricultural firms, means they are now buying overseas competitors. Domestically, where Advent is most active, business is also booming. Advent specializes in taking over family-run firms, so that Mr. Etlin’s efforts are spent forging relationships and building trust.

That methodical approach seems to suit a man who says he considered becoming a professional chess player. But it doesn’t mean he is ready to forsake the adrenaline rushes of deal-making. “There will be volatility,” he said. “But I know how to navigate the risk. In the long term, the appetite for Brazil will remain.” ANDREW DOWNIE