Identifying normality in emerging markets

12 Jul 2018

By Paul Broekhuijsen, CEO of ND Group

I recently read that the retail value of the beauty and personal care market in the Middle East and Africa totalled $32.7 billion in 2017. According to the same research, that figure is estimated to hit $47.5 billion in 2021.

Another recent report on the mobile market in Sub-Saharan Africa showed that, at the end of 2016, there were 420 million unique mobile subscribers in the region and that it will have more than half a billion unique mobile subscribers by 2020.

Having travelled and done business across both the Middle East and Africa, these statistics are not a surprise. Many countries in the Middle East have a substantial middle class and relatively predictable consumer behaviours. Sub-Saharan Africa, furthermore, is seeing progress in its telecommunications infrastructure and has a large youthful population, which relies heavily on mobile digital services.

Nevertheless, I am always drawn to statistics like this because they highlight a day-to-day normality that exists in countries and regions that people often unfortunately associate with volatility and risk.

The calculation of risk in emerging markets investment is a complex process and takes into account a host of issues, such as political stability, corporate governance, currency patterns and societal change. It has also developed as the world got smaller and emerging economies and their developed counterparts became more interdependent. Asset seizure, for example, is far less of a concern now than some of the softer regulatory risks we see as emerging market governments become more familiar with the value opportunities presented by foreign investment.

What has not changed, however, is that the type of routine normality described above persists all over the world and is increasing as the ‘consuming classes’ (those people with disposable incomes of more than $10 a day) expand. By 2025 it is predicted that, taking into account population growth, more than half of the world’s population will be in this group. The world will have an extra 1.8 billion consumers, the vast majority living in emerging markets. With that growth we will see increased requirements for basic human needs, such as food, energy, accommodation and better infrastructure.

This is a simple idea and it is by no means new. But the importance of finding these pockets of normality in even the ‘riskiest’ of markets is often overlooked and can be easily derailed by distant risk assessment and traditional ways of thinking.

At ND Group, our focus is on finding opportunities in emerging markets that, by many standards of risk calculation, may not appeal to traditional investors. We base our investment decisions on clear criteria, such as long-term growth, share value, buy-and-build potential and strong management. However, risk and returns aside, our fundamental focus is on the identification of ordinariness in a new market, as well as an understanding of the cultural dynamics that underpin it. Real people leading normal lives has to be the starting point.

This makes private equity investment a very local, human business. Investors need to have extensive local networks, from suppliers through to governmental contacts and agencies. They need to understand what the key due diligence points are, and they need to be able to spot leadership talent in different cultures. They need to be comfortable stepping away from desks and interacting with people and businesses on the ground. Too much emphasis on traditional risk calculation too early – or even worse, paying too much attention to media reporting – can distract from this important process.

ND Group is uniquely placed to play in the market at this local level. We are a mid-sized firm with private ownership, which provides flexibility in our decision-making. We can be fast and we can therefore hopefully be first. Crucially, we also have an existing footprint, through our portfolio companies, in some of the world’s ‘risky’ regions, including countries in Eastern Europe, the Middle East, Asia and Africa. Our portfolio operations and core competencies also align with many of the fundamental human requirements outlined above, including distribution, logistics and energy, giving us the hard experience to grow businesses in new and exciting regions.

This ‘hands on’ approach to private equity has consequences. It means that over a 12-month period our deal flow may be lower than that sought by traditional investment firms. However, our partnerships will be based on a deep understanding of the service or product we are supporting, and the cultural conditions of the region. It is also, we believe, more likely to lead to long term, sustainable, high growth investments.