The opportunities for private equity still available but investors more selective19 Jun 2020
Private equity investors are seeing no lack of opportunities in Myanmar and have no plans to change strategy when it comes to investing in the country, although heavy travel disruptions have made assessing new investments harder.
The investors said COVID-19 has allowed them to spot the “camels” - companies that are resilient to tough business environments and able to conserve losses and preserve revenue - from the “unicorns”, startups with valuations exceeding US$1 billion.
While lockdowns in parts of Yangon and the suspension of business activities due to COVID-19 has added to the difficulties in assessing new investment opportunities and lengthened the time taken for deal sourcing, there is still a steady stream of investments taking place in the country.
In late March, early-stage investor Emerging Markets Entrepreneurs closed its largest deal to date with a $750,000 investment in baby product start-up Kyarlay alongside a Japanese investor. It announced in April the intention to raise $20 million by the end of 2021.
Singaporean wealth fund GIC and Norfund of Norway in April announced plans to acquire a minority stake in Yoma Bank for US$94 million.
In fact, an April poll conducted by the Myanmar Private Equity and Venture Capital Association showed that around 10 members would be looking to actively pour their money into Myanmar firms over the next six months. Almost similar numbers of investors reported that they are currently seeking to build deal pipelines with existing funds.
If anything, the pandemic has spurred funds to sharpen their focus and exercise more disciplined when it comes to pursuing investments in Myanmar.
Josephine Price, co-founder of private equity fund Anthem Asia who also chairs the association, said investors are looking for companies which have good corporate governance. “We’re looking for management that is disciplined, that has got a lot of grit, and people who are resilient,” she told The Myanmar Times.
The pandemic has also led investors to focus on firms that are more regimented in terms of costs and able to financially survive for the next 12-18 months, she said.
Fund managers are also being driven to up their game. Trent Eddy, director of Emerging Market Investment Advisers, a Singapore fund, said managers are now forced to show their “capability, adaptability, and ability to make difficult decisions and compete in difficult times.”
Mr Eddy said the crisis is testing the business models and exit strategies of the various Myanmar-focused funds. He added that Emerging Market Investment Advisers’ approach has not changed even though its portfolio companies have been affected by COVID-19. The fund has a broad portfolio of companies in Myanmar, Cambodia and Laos, and began fundraising last September, targeting US$120 million.
For Lim Chong Chong, founder of Ascent Capital, the virus has accelerated digitisation and the need for companies to raise their game in technology to stay afloat. “[As such], we would be actively looking at tech-enabled businesses, whether it is consumer, education, financial services or healthcare,” Mr Lim said.
Less venture capital
The situation is different for venture capitalists in Myanmar though. Whereas private equity firms invest in more mature companies during their expansion stage, venture capital firms typically focus on early-stage startups.
“COVID-19 has absolutely obliterated any hope of people being interested in venture capital in Myanmar,” said Field Pickering, managing director of Seed Myanmar, a venture capital firm founded in 2016.
Mr Pickering said Seed sees no potential of raising a second round of funds to invest in the country even after its success in the first three years. “Early-stage companies will have a hard time fundraising now and Myanmar in the medium term will face extreme challenges in attracting capital from outside the country,” he said.
In fact, there was a period of surging interest from regional venture capitalists after 2011, many of whom were betting on Myanmar’s potential to become Southeast Asia’s next growth market, much like Vietnam or Indonesia.
But Mr Pickering said investor interest had fizzled out by 2018 and 2019. “It was not a market that was attracting a great deal of foreign investor interest even before COVID-19.” He estimates that venture capital investing has seen a decline of 75pc in March this year compared to the same period in 2019.
Chief among the reasons for this is the need for a better business environment, less red tape and more room for foreign money to take stakes in the market, investors said.
Although advancing, Myanmar still ranks at the bottom of the World Bank’s latest ease of doing index, for example. It is currently ranked 165th among 190 economies. Ray Yee Latt Aye, director of private equity firm Delta Capital, said a strong regulatory framework makes a difference in the fund’s ability to strike deals, noting improvements since the introduction of the new company and investment laws.
There must also be viable exit options available. For example, the opening up of the Yangon Stock Exchange is important because it is a common exit option for private equity players, he added. But although regulations that allow foreign institutions to invest in listed firms were announced earlier this year, implementation has yet to catch up.
While familiarity with foreign private equity and venture capital has increased among the Myanmar business community over the last three years, COVID-19 has exacerbated the need for working capital among most local businesses.
According to the Asia Foundation, national-level estimates of additional cash flow requirements to September for enterprises amount to around K900 to K2100 billion, equivalent to 0.7pc to 1.7pc of GDP.
Mr Eddy said local companies would have to “open up” to the idea of partnerships with foreign investors in order to attract capital needed for survival. “Ultimately, local companies need to appear interesting to foreign investors for deal flows to pick up,” he said.
He added that many small businesses are in need of capital, but said that only those who are receptive to the demands of investors like private equity would be able to tap those investments.