June 12th, 2008

Private equity funds turn toward Cambodia

Taken from the WSJ Deal Journal Asia, a short article on why Cambodia is being labeled the next frontier market for private equity.

The mood is set right from the beginning, by raising the question :

Can foreign investment flourish in a state notorious for corruption, weak laws and business secrecy?

While we could make up our mind right at this point, let’s continue reading. What kind of risks investors face then ? Entry-strategy risk ? Not only:

While finding suitable targets in Cambodia may be difficult enough, private-equity buyers are also certain to face challenges when they try to exit years from now. “This really is a frontier market,” said Chris Leahy, a managing director in Singapore at risk consultant Kroll Inc.

Then come the three major risk areas:

• Lack of skilled people

Roughly 1.7 million people, a fifth of the population, were killed during the communist Khmer Rouge’s reign of terror from 1975 to 1979. Special attention was paid to exterminating the educated. Three decades later, the consequences continue to ripple through the country; a lack of skilled people hampers efforts to lift millions out of grinding poverty.

• Corruption

Transparency International, of Berlin, ranked Cambodia the 14th most corrupt out of 179 nations in its 2007 study.

• Business contracts law enforcement

“There are issues in Indonesia or Philippines enforcing rights but it’s much harder in Cambodia,” said Kroll’s Leahy. “A creditor needs more than 400 days to get a claim enforced, and that’s assuming the court decides to side with a foreign creditor’s claim”

Despite this, what is attracting private equity funds then ?

“Cambodia offers an enormous potential for future capital gains,” Mr. Faber wrote in a recent newsletter for acolyte investors. Faber and Rogers are advising some of the private-equity firms that will pour upward of $500 million into Cambodia from already completed and continuing fund-raising.

Malaysian interests have been active in the country for years and South Koreans are investing in banking and property, including a $2 billion satellite city on the outskirts of the capital, Phnom Penh.

What is the key to success ?

Given the perception that large-scale business activities require an unsavory accommodation with powerful figures in the government, staying small may be the key to success for private equity investors.

“We want the small- and medium-sized investments below the political radar screen,” said Douglas Clayton, a managing partner of Leopard Asia, which is raising $100 million for its Cambodia fund.

Last but not leats…

But finding enough suitable opportunities to absorb several hundred million dollars of private equity capital is another issue facing investors. The challenge is finding companies with accounting and management standards that approach international norms, said Peter Brimble, managing director of the Cambodia Emerald Fund

So go or no-go ?

The money can be absorbed if the economy continues to grow strongly and the government continues to improve transparency and legal standards, Mr. Brimble said. “As we dig deeper into this country and connect with the entrepreneurial class we are finding a lot of opportunities,” he said.

Finally, this looks like a GO !

“Five hundred million dollars is really just a few golf courses and hotels. A lot more could be absorbed,” said Douglas Broderick, the U.N. Development Program’s resident representative in Cambodia

What I understand from this is that Cambodia actually offers huge opportunities for those who take risks, those who were among the first to step in and now don’t want too many people to join…

Even some of them wave the ugly flag of corruption to keep the big players away by now, I feel like Cambodia is one of the next frontier around here.

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