Thrill seekers, gamblers and high-risk investors share a passion for the big payoff. At the same time, they also weigh potentially high risk against those potential high rewards. “It takes a special kind of investor to work in new financial frontiers with limited infrastructure and corporate governance,” said Steven Jasmin 05BBA, chairman and managing director of Smart City Clearing Company Ltd., a frontier market merchant bank based in the British Virgin Islands. “In frontier markets like Guyana, everything is in play.”
Since 2017, Jasmin has built a core team in Guyana and invested off his own balance sheet. In 38 months he’s helped to finance critical country infrastructure improvements and to assist with capacity building in the Oil and Gas Sector, including launching the country’s first full-service, western style commercial real estate firm – Acarai Properties Guyana. According to Jasmin, he’s helped lease over a half a million square feet to oilfield service companies; established a multinational joint venture in the oil and gas services industry; and is in the pre-development process of building an eight-acre, 600,000 square foot medical complex; and is working with partners to develop vital commercial and industrial sites to support the growing oil, gold mining and agriculture industries through Acarai Properties.
“The personal sacrifice is absolutely worth it. Now, it is mission above self,” he said. “Laws here are underdeveloped. Businesses need to be built from scratch with corporate structure, support staff and funding. I’m the boots on the ground to run those businesses as a private equity partner.”
Many say, “Globalization will lift all boats”
“Unlike in mature markets with established stock exchanges and substantial financial checks and balances, frontier markets typically have less developed stock markets, less foreign direct capital investment and an economic landscape dominated by four or five companies that were formally state-owned, such as phone, oil, gas and banking,” said Mark Bell, adjunct finance professor at Goizueta and head of private capital at Balentine.
“Some investors have long held the view that frontier markets are the right way to go as an early mover,” Bell said. “Yet we’ve continued to see economic growth somewhat stunted in some of those markets. Economists have historically speculated that in 15, 20, 30 years, as international restrictions in trade would diminish, economies would only become more integrated. But today, from the political perspective, imposing trade restrictions and tariffs influences financial gain. If the United States becomes more isolationist in the post-COVID-19 world, what will that mean for frontier markets?”
The financial risks are weighty. “Frontier markets are extremely risky and are known for high volatility with potential for growth,” said Klaas Baks, professor in the practice of finance and co-founder and executive director of the Goizueta Center for Alternative Investment. “These markets can be equated to an early-stage startup before it gets funded. As an investor, you stand a good chance of losing money and know that a financial return could take a long time.”
Guyana, a small country with a gross domestic product of 3.9 billion U.S. dollars, is experiencing an economic boom due to oil production that began in earnest in December 2019. “A primary driver of our positive investment thesis on Guyana is the simple fact that Guyana is currently forecast to be the single fastest growing economy in the world,” Jasmin wrote in a LinkedIn post titled, “Guyana’s Economic Outlook: A Rising Tide Lifting All Ships.” “Before the COVID-19 global pandemic, the growth rate was predicted at 85.6% and has since been revised to more than 50%. Guyana is projected to be among the world’s largest per-capita oil producers by 2025.”
Baks posed the question, “Is oil production truly a win for Guyana? Historically, we often see a negative trend. When countries, like people, get rich, some underlying problems worsen,” he said. “The second stage for countries that find riches from natural resources such as diamonds, gold and oil, is that development tends to be uneven or non-existent.”
To Baks’ point, Jasmin cites a colloquialism: “The international community counts on Guyana to experience the ‘crabs in a barrel’ mentality, where instead of working together, locals will tear each other down to get to the top.” Still, Jasmin remains confident and optimistic about his commitment to growing Guyana’s market. “As the local economy begins to experience tremendous incremental investment in all sectors, driven by the windfall of oil production royalty revenue, we believe Guyana—and nearly all local businesses—are poised to benefit.”
Challenges and caveats for investing in frontier and emerging markets
“Frontier markets are less advanced capital markets in the developing world. A frontier market is a country that is more established than the least developed countries (LDCs) but still less established than the emerging markets because it is too small, carries too much inherent risk or is too illiquid to be considered an emerging market,” according to the definition in Investopedia. “Frontier markets are also known as ‘pre-emerging markets.’”
To enable overseas investing, Lucas Marulanda 08MBA, a director for a United States–based private equity fund with a global presence, noted that “Most countries have agencies to incentivize foreign investment. It’s a good way to understand things like taxes, regulations, trends and more,” he said. “Of course, finding really attractive opportunities would require additional work and, depending on the size, perhaps the assistance of local financial advisors or legal counsel.”
American businesses may also look to broaden their corporate portfolios with foreign market investments. Marulanda said, “This opens doors to relatively large countries like Mexico, Argentina, Brazil, Peru and Colombia, which together have more than the population of the United States, a growing middle class and a fairly young population. Putting all of these factors together, you have markets growing in the 5 to 10% range and local players with limited resources and some industries with the potential for consolidation.”
For investors considering the move into the frontier of Guyana or more emerging market economies like those in Chile or South Africa, “Local knowledge is key. The language barrier still exists, and these are small economies where knowing who is who matters,” Marulanda said. “We have a good balance between best international practices that we share across the globe and local teams with in-depth business connections and understanding of the local dynamics.
“The challenges investors face in conducting business in a growing and potentially illiquid economy are debt availability, exit and potential target,” he continued. “Commercial banks and bondholders normally offer higher interest rates and shorter tenures for debt instruments vis-à-vis the United States. This limits the amount of leverage and lowers the expected returns. As a result, investment opportunities require high conviction on organic growth, margin improvements or mergers and acquisitions.”
Marulanda explained, “The IPO market is limited even for large companies in most Latin American countries, therefore, buying a private company requires a profound understanding of who will be the buyers five to seven years down the road and, particularly, of the multiple exit mechanisms embedded in the transaction documentation if one is buying a minority stake.”
In the past, “When buying a business with other people, the capital of the business would be restructured,” Baks explained. “Today, private equity is more focused on operational value creation. Money has become very competitive. Purchasing small businesses that can be easily molded may have more impact with a three- to five-year exit strategy.”
Bell noted that as U.S. private equity has become more competitive, investors begin to look abroad with a revised buy-and-hold strategy. “Big endowments that invest billions in private equity may invest in areas that have inefficiencies and redomicile businesses in tax havens to avoid double taxation. When that investor holds a business for 100 years and aligns for the long term, generational wealth is created.”
Frontier and pre-emerging markets do offer high risk/high reward opportunities for investors. “I grew up as a blue-collar kid from Perth Amboy, New Jersey,” said Jasmin. “My Goizueta business education, my corporate experience and my family background prepared me for the challenge of working here in Guyana. To literally have a hand in building a country’s skyline is a once-in-a-lifetime opportunity.”
Want to learn more about “frontier assets” like cryptocurrency, reinsurance, intellectual property, royalties and the impact of illiquidity? This fall, Baks and Bell will teach Frontiers and Illiquidity in Alternative Investments. The course, offered through the Center for Alternative Investments, “Examines the illiquid aspects of modern alternative investing. The explosive growth of investments in highly illiquid instruments, driven in part by increased competition for excess returns and in part by changes in views of portfolio allocation, has made this an important area for students,” Baks said. “Just as private equity and venture capital were relatively esoteric topics over a decade ago, today sparse attention is paid to the important activity at the periphery of the alternative space, which this course terms ‘frontiers’ and many others are increasingly calling ‘alternatives to alternatives.’ These frontiers, and the implications of their illiquidity, are the focus of this course.” Learn more here.