This article is the second of a two-part blog post from Justin Harlow of Emergo Partners, an emerging markets private equity firm.
Photo Courtesy of Emergo Partners
[Editor’s Note: In Part 1, Justin highlights some of the shortcomings of ‘traditional’ private equity and how it can be difficult to apply that model to the emerging and frontier markets. In this installment, he approaches the issue from the perspective of the local operator/entrepreneur. There are some useful ideas and advice here for many of our readers. You can find the original blog post here.]
In Part 1 of this series, we discussed how private equity firms can adapt their business models to enhance their investment activities in the emerging markets. In this final Part 2, we explore the role that local companies can play in increasing the flow of private equity capital to these markets.
1) Don’t Waste Your Time Targeting Irrelevant Investors
When seeking private equity investment, most companies in the emerging markets are drawn to the larger household names, such as KKR or Blackstone. However, such firms often only invest US$50million plus in any given investment. Given the smaller investment sizes in these markets, local companies would be better served targeting investors that invest in the sub US$50million bracket such as family offices or high-net worth individuals – these entities are harder to find, but are much more relevant.
2) Be Open to Active Investors
Many companies in the emerging markets are closely held or family-owned entities where external influence has been kept to a minimum. As a result, such companies tend to target passive investors who will interfere less in internal affairs. However, these companies would often benefit most from an active investment partner. Letting in outsiders can be difficult, but it can be of huge value in the emerging markets.
3) Aim Big but Stage Development
Most companies we come across in the emerging markets fall into two categories –those that are almost apologetic in their capital request and fall below the size thresholds of most investors or those that are so overly aggressive in their outlook that they lack the credibility required by larger-scale investors. We advise our local partners to aim big, but stage development. This allows smaller investors to participate and can also bring in larger scale investors that are willing to employ equity lines which can be increasingly drawn down over time as development milestones are achieved.
4) Only Approach Investors When You’re Really Ready
I’ve lost count of the number of companies that approach us that don’t even have a business plan. Some have even raised substantial capital historically, although normally from friends and family. Many of these companies tend to believe that their investment offering can be of a lower quality simply because they are an emerging markets company. This couldn’t be further from the truth. To convince investors to allocate capital to the emerging markets, you need to impress them more than a comparable US or European company not less. Don’t use the emerging markets excuse, be ready for investors and differentiate yourselves from the pack.
Private equity has been so underserved in the emerging markets; most local companies do not know which investors to approach or how to approach them. We strongly encourage local companies to target smaller more relevant investors that can be active partners throughout the investment life-cycle, but you often only get one shot to impress so be ready.