Equity funds find a new frontier

The Phnom Penh Post

Written by Cat Barton
Friday, 27 June 2008

As international interest in emerging markets surges, Cambodia’s profile is rising as a key frontier for private equity, with three major funds looking to pour upwards of $450 million into the Kingdom’s economy.

Cambodia stands out as a rare safe haven from the global credit crunch, due to it un-leveraged economy and bountiful natural resources, said Douglas Clayton, a managing partner of Leopard Cambodia, which is raising $100 million for its Cambodia fund.

“Cambodia offers the best reward to risk profile in the region now, as competition is still low and the country has such vast potential,” he said.

Leopard Cambodia was the first fund to launch in April after raising around a tenth of its targeted $100 million. It is looking for investments of between $5 million and $15 million and its first project is a tourism property development in the Angkor temple town of Siem Reap.

“We are very bullish on tourism growth there, and expect a robust return on this project,” said Clayton.

Leopard was followed into Cambodia’s investment-hungry economy by Frontier Investment & Development Partners (FIDP), a $250 million fund that launched three weeks ago and has so far had strong interest from investors, said its CFA Marvin Yeo.

“Cambodia has untapped oil and gas reserves, large amounts of fertile agricultural land, low labor costs, a stable democratic political system and a dollarized economy with no capital controls where companies can be 100 percent foreign owned,” he said, explaining why so many investors are now flocking to the Kingdom.

“The highest growth levels are found in resource rich frontier economies,” he added.

Yeo said he could not disclose the exact amount of money raised until the fund had achieved its first close. The fund sets a $10 million minimum investment per institution.

“I’m absolutely in no doubt that it [raising the necessary capital] will happen over the next few months,” he said, citing the fund’s investment platform and deals already in the pipeline as key factors in its future success.

The Kingdom’s other major new fund, Cambodia Emerald Limited Partnership, which is looking to raise $100 million to invest in a range of sectors, most importantly agri-business, tourism and real estate, closed its seed round of financing in late April when two investors agreed to back the fund and provide an unspecified amount of capital. The company is now set up and operating and actively looking to do deals.

“We are not in a position at this time to discuss our first projects or targeted returns,” said Peter Brimble, managing director of Cambodia Emerald. “In general, we expect our returns to be consistent with international investors’ expectations for a market like Cambodia.”

Both Leopard and FIDP are expecting returns of least 25 percent on each investment they make.

High rates of return coupled with a business-friendly environment and emerging political stability help explain the record levels of attendance at the Cambodia Investment, Trade and Infrastructure 2007 last November as well as a conference in Siem Reap last month – organized by Leopard Capital – at which 22 mainly US fund managers met assess future opportunities.

“The double-digit economic growth rates of the past few years and indications of relatively high economic growth in the future suggests strong potential for capital gains in Cambodia,” said Brimble.

The recent flurry of high finance activity belies the fact that Malaysian interests have been active in the Kingdom for years and South Koreans have long been investing in banking and property, with a $2 billion satellite city on the outskirts of Phnom Penh and a city-center skyscraper now under construction.

Much to the chagrin of the longstanding expatriate business community in Cambodia, the Kingdom still suffers from something of an image problem – another legacy of the devastation wrought by the 1970s Khmer Rouge regime and the ensuing years of civil strife.

Moreover, rampant corruption – the Berlin-based Transparency International ranked Cambodia the 14th most corrupt out of 179 nations in its 2007 study – and a weak legislative framework have served as a deterrent to large-scale FDI for years.

Despite all the media discussion of these issues in Cambodia, most foreign investors who have been here a while are seeking to expand their Cambodia businesses, not sell them, said Leopard’s Clayton.

“I think that says a lot,” he said. “We expect the emergence of a stock exchange in Cambodia will increase business transparency here, as has been the pattern throughout Southeast Asia.”

For Emerald’s Brimble, there has been a “significant misunderstanding of the Cambodian situation.”

Major improvements in the regulatory and legal environment for business have been quietly inspiring substantial increases in FDI in recent years, he said.

“Ongoing improvements in levels of corruption and the business environment will enable FDI to grow and to thrive,” he said.

Finding enough suitable opportunities to absorb hundreds of millions of dollars of private-equity capital may be another issue for the fund pioneers to grapple with in the not too distant future.

FIDP’s Yeo is confident that it is possible due to the potential of key sectors such as agriculture, infrastructure, oil & gas and real estate which are largely private sector driven.

“Cambodia needs very conservatively at least $5 billion of investment over the next three years,” he said.

“Given that the domestic debt markets are still in their infancy (and that the international debt markets have been largely closed off to Cambodia) and the lack of any domestic public capital market to raise funds, private equity funds and direct investments ... are pretty much the only ways for projects to get funded.”