Investing in Bangladesh

Two days ago I attended a conference on untapped investment opportunities in Bangladesh. It was structured as a panel discussion and less interactive than the PE round table due to the large audience size, but insightful nevertheless. The panel included the MD of a large Bangladeshi corporation, economists from leading investment and development banks, and private equity investors. With the recent growth in Bangladesh, I was curious about its drivers and needs. Here are some of my realizations from the conference.

Drivers and Opportunities
Road to political stability. The caretaker government that was put in place on Oct.29,2006 following a period of violence and volatility has since instituted several reforms, including reconstitution of the Elections Committee. The government also recently created the Better Business Forum to improve interaction between the business community and government and establish the need for public private partnerships (PPP) for infrastructure projects. The impending election and government emphasis on business should decrease risk and attract foreign investment.

Investment climate. Bangladesh has a favorable investment climate with the government allowing 100% FDI and joint ventures with the private and public sectors. The government has also instituted no ceiling on investment, tax holidays, duty-free imports of machinery, etc. for export-oriented industries, and multiple entry visas for foreign investors among other incentives.

Economic indicators. A 7% growth in GDP is further bolstered by a shift to new industries such as services, which now accounts for 50% of GDP, and an increased shift of the informal sector to the formal which results in value that was previously not being recognized now counting towards the national output. The Dhaka Stock Exchange is also up 66% this year, making it Asia’s top performer after China.

Isolation. With a foreign investment being 1% of GDP and only 20% of GDP being exported outside its borders, Bangladesh’s market is decoupled from the rest of the world and thus, relatively uncorrelated. The government is also promoting self-sufficiency by encouraging foreign investment in sectors that will help import substitution, such as high-tech. Foreign investors seeking to diversify their emerging markets footprint should find opportunity here, though the correlation will increase over time as Bangladesh continues to integrate with the rest of the world.

Favorable demographics. With a population median of 22.5 years in 2007 and 33% of Bangladeshis being under 15 years age, the next generation will dramatically increase the number of consumers and demand for consumer products. Arif Dowla, MD of ACI Ltd. (leading provider of pharmaceuticals, FMCG, and others) even commented that it could be difficult for businesses to keep up with the demand growth. Further, a growing cadre of tech savvy and entrepreneurial Bangladeshis, many educated abroad, are fueling new business growth and remittances from an increasing number of non-resident Bangladeshis are increasing stability.

Barriers and Needs
Lacking infrastructure. Repeatedly prioritized by several panelists as the leading area for reform, including electricity which is only available to 15% of villages (World Bank), roads, railroads, and telecommunications. The government also needs to go to market for investments in infrastructure through public private partnerships.

Marketing and branding. David Fernandez, head of emerging Asia economic and sovereign research at JP Morgan, made a point repeatedly that what Bangladesh needs (but is starting to build) is a credible story for investors. This includes developing a brand for the country and promoting opportunities to the global investment community. The country also lacks a credit rating as the government has yet to decide when the right time to establish that would be.

Fiscal reforms. Peter Berezin, senior global economist for Goldman Sachs, pointed out the need for greater fiscal reforms, underscoring the need for tax collection reforms. Unless the country is able to significantly increase its tax collection, through better tax administration or expanding the tax base, it will not be able to meet fast economic growth without increasing the fiscal deficit.

Private equity and economic development in Africa

Last night I had a chance to join a round table discussion hosted by the Harvard Private Equity club on "Private Equity and Economic Development", featuring Roberto Mizrahi of the South North Development Institute (http://www.southnorth.org/). Though I was the only person there without a finance background, I was early to the event and had a chance to speak with Roberto in person about his work. As with others of similar stature in the world of investing for development, I found him to be a fountain of wisdom while maintaining a warm, inviting, and down-to-earth demeanor. And with a unique sense of humor; upon finding out about my experience in microfinance he made it a point, during the group discussion, to point at me every time he mentioned micro-credit. The discussion focused on Africa and Latin America as that was the focus of his work; here are some of my recollections on private equity, investing, and development.

1. Africa is going through an economic growth phase (GDP growth in 2006: 5.7%, 2007: 6.1%, expected 2008: 6.8%), primarily driven by the booming oil and commodities markets. It was pointed out that countries such as Nigeria and Kenya have active stock exchanges and have seen strong IPOs in recent history. Financial access to individuals has also been increasing.

2. Emerging markets private equity is a local game. One of the first points made by Roberto in the discussion was the importance of local talent in investing. True, there will always be a crucial role for US-based investors in developing countries because of the need for foreign capital, but local partnerships are necessary to build relationships, navigate the regulatory framework, and bridge cultural gaps.

3. Africa is not a country, it's 53 countries. And not only are there 53 countries, but these countries differ vastly in level of economic development, opportunities for local investment, and regulatory framework. Egypt and South Africa, for example, have more developed capital markets and some oil exporting countries are attracting significant investment, while in some parts of Sub-Saharan Africa, raising debt is still expensive and medium to large sized investment opportunities are few and far between. Hence, investors should look regionally for opportunities.

4. Private equity as a tool for development. PE itself won't solve the world's problems, especially in large parts of Africa where many key issues related to disease, AIDS, malnutrition, and poverty have yet to see market-based solutions. To this Roberto described PE as a vehicle for wealth generation, and that wealth allowing for the creation of foundations which can better address these fundamental development issues. In Africa PE can also be a direct tool towards development, with oil and gas, mining, infrastructure, and telecommunications being the most lucrative. And the poorest countries? Well, there may be a trickle down or halo effect, but that's more up to governments than the PE firms.

5. Innovation is still the key to double-bottom line investing. I've been saying it for years (ok, so I started saying it after I heard CK Prahalad say it...), but Roberto said it again. Standard business models for delivery of products and capital cannot be replicated in emerging economies. Instead, traditional models have to be redefined in order to be effective while profitable. He gave a great example in microfinance (while pointing at me); it isn't profitable to replicate the consumer bank loan model in a low-margin high-volume system (because of high unit cost). However, if one is able to create a system to approve a hundred loans in aggregate, it might be profitable.