Silk road plans investments for Myanmar fund: Southeast Asia

Silk road plans investments for Myanmar fund: Southeast Asia

Silk Road Management, an investor in frontier markets, will take stakes in three Myanmar projects by year-end, the first private-equity deals in Southeast Asia’s poorest nation as it emerges from five decades of isolation.

The Myanmar Human Capital Fund closed in September after raising $25 million from family offices and wealthy individuals from Mongolia, Russia and oil-rich countries in the Caspian region, said Alisher Ali, managing partner at Silk Road. The fund will invest in so-called knowledge-driven industries such as the Internet, information technology, education and health care, he said, declining to identify the companies.

“Myanmar’s gross domestic product may easily double within five years,” Ali said in an interview by phone from Hong Kong on Oct. 31. “And the industries we decided to focus on are going to triple in the same period.”

Investors are focusing on Myanmar’s economic potential after a half-century of neglect left the nation, formerly known as Burma, outside the global financial system. The International Monetary Fund said in September direct foreign investment will rise 40 percent to a record $3.99 billion this year.

The companies Silk Road plans to invest in may need as much as $100 million within three years as they expand, which may require more fundraising, Ali said.

The Ulan Bator, Mongolia-based company also manages the $30 million Mongolia Human Capital Fund, which it said is the first private-equity fund in the country. Mongolia’s MSE Top 20 Index has risen more than tenfold in the past decade, making it the fifth-best performer among 93 global stock indexes tracked by Bloomberg.

First-Mover Advantage

“Investing in Myanmar certainly has a first-mover advantage at this stage,” said Vishnu Varathan, a Singapore- based economist at Mizuho Corporate Bank Ltd. “There have been credible signs from the government that they want to increase transparency and create a sustainable framework for foreign investment. Having said that, we shouldn’t forget that the political and economic situation isn’t stable yet.”

Myanmar officials are preparing to take control of a financial system largely run on informal cash transactions as companies such as Western Union Co. (WU) and Coca-Cola Co. (KO) announce plans to operate in the country. Foreign-exchange transactions have started to shift from informal markets to banks after a managed float of the currency in April and the easing of restrictions on importers and exporters last month, an official with the country’s central bank said in September.

Irreversible Process

“I believe that the government has a strong will to go through its economic and political reforms,” said Ali, who has more than 16 years of investment management and banking experience in emerging and frontier markets including Mongolia and Kazakhstan. “The process is irreversible.”

Myanmar may expand 6.2 percent this year, the IMF said in its October World Economic Outlook. That compares with 5.1 percent in Vietnam, 4.8 percent growth in the Philippines and 6 percent in Indonesia.

Some of the companies will exceed gains in their respective industries, which are “already turbocharged,” Ali said. The Internet market is expected to post annual growth rates of more than 60 percent in the next three years, based on Silk Road’s estimates, while the media and information technology markets could expand 50 percent. Education and health care are expected to increase 30 percent a year, with telecommunications and the financial industries posting faster gains, he said.

Silk Road started Myanmar’s first property index in October to track real estate prices in Yangon, the nation’s commercial center. The company owns seven equity indexes in Asia, it said on its website.

Investment Banking

Silk Road Finance, the holding company of Silk Road, started Mandalay Capital, a Myanmar-focused investment banking company. The venture, started earlier this year, will connect investors with Myanmar business and help them with fundraising and advisory, it said. Silk Road Finance is run by Ali.

Still, frontier markets are set to underperform shares in developed nations for a second year. The MSCI Frontier Markets Index (MXFM) has risen 1.2 percent so far this year, lagging behind the 10 percent advance in theMSCI World Index (MXWO) tracking stocks in developed economies.

“At present, investing in Myanmar is something to be done by firms with an appetite for risk and those willing to commit in the hope of future returns that might accrue according to any ’first mover’ advantage,” Sean Turnell, an associate professor who researches Myanmar’s economy at Macquarie University in Sydney, said in response to an e-mailed query.

Myanmar said authorities seized weapons and made arrests in a bid to halt almost two weeks of clashes between ethnic Rakhine Buddhists and Muslim Rohingya near the Bangladesh border as the death toll increased to 89. At least 5,000 homes were destroyed in the fighting, leaving more than 32,000 people homeless, according to a statement released on President Thein Sein’s website earlier this week.

IPO Path

Companies Silk Road plans to invest in may go public in two to four years as the Myanmar stock exchange becomes “fully functional” by 2015, Ali said. Some of the companies could also have their initial public offerings in markets such as Singapore or London, which have exchanges set up for small-cap stocks.

“For every single company we are looking at investing, we clearly would like to have an IPO strategy, an IPO path,” he said.

Coming Election

Thein Sein has shifted Myanmar toward democracy since he took office last year to end about five decades of direct military rule. He is seeking to create jobs ahead of an election in 2015 that will include former political prisoner Aung San Suu Kyi’s National League for Democracy party.

Western governments are warming up to Thein Sein. The U.S. in July authorized the first investment in the country in 15 years, and Secretary of State Hillary Clinton, who met with the Myanmar president in New York in September, has announced that lifting the import ban signals the next step in “normalizing” their commercial ties.

Myamar was ranked 180 of 183 nations in Transparency International’s 2011 corruption index. Ali also said he’s optimistic the industries his fund is targeting aren’t tainted by corruption.

“Those are areas where there is no scope for corruption,” he said. “It’s all about human capital in terms of the expertise.”

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