PE firm rethinks Laos/Cambodia fund

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Lao farmers (photo: IRRI)

Financial Times | April 18 2010

By Elaine Moore

The fortunes of south-east Asian nations are becoming increasingly entwined with that of China, their powerful neighbour.

As China’s growth ripples across the region, it carries with it increased investment in infrastructure and commercial development.

This, according to Marvin Yeo, managing partner of south-east Asian private equity firm Frontier Investment and Development Partners, means that investment in China’s neighbours has become an option for those interested in China itself.

FIDP, which has offices in Singapore, Cambodia and Mongolia, has launched its Cambodia and Laos fund, and is due to start investing its first $50m (£32m, €37m) by July. The fund is “an extended China play”, designed to profit from exports to China as well as the shift of investor interest from west to east. It will focus largely on agriculture and infrastructure, seeking to benefit from China’s continued demand for raw materials and its desire for food security and the need to improve transportation links for trade

Both Cambodia and Laos boast swathes of undeveloped land and untapped reserves of resources. The discovery of oil reserves off the south-west coast of Cambodia has yet to be quantified and the potential for Laos to become a major source of hydropower using the Mekong river has also not yet been utilised. But, says Mr Yeo, these countries are primed for rapid growth.

And as roads are built and an unbroken rail network is created across the region, the proximity to China of countries such as Cambodia and Laos will provide them with an additional advantage over commodity exporters further afield.

China has provided large sums towards developing infrastructure and transportation links in both countries. In March, a Chinese delegation to Cambodia pledged to expand commercial ties between the two countries, including an agreement between telecommunication companies Chinese Huawei Technologies and Cambodia’s CamGSM.

FIDP is interested in investing in the development of onshore processing, something both countries lack.

“A lot of the value of the materials is lost as it has to be shipped out and processed elsewhere. We’re looking to invest in, for example, existing agricultural projects as well as some greenfield projects by getting land concessions,” Mr Yeo explains.

China has increasingly cast its eye over the border to look at the land of its resource-rich and development-poor neighbours.

Changing diets, in particular a greater demand for meat and dairy products, have put China under pressure to ensure agricultural self-sufficiency. While agriculture accounts for more than one quarter of Cambodia’s gross domestic product, the country has lacked the irrigation networks needed to increase rice production for export. This is due to change with a $310m government plan to invest in irrigation to increase rice cultivation.

The Cambodia and Laos fund requires a minimum investment of $5m, locked up for at least four years from the time the fund closes. Targeted returns are at least 30 per cent. The fund has a targeted size of $200m and Mr Yeo admits that attracting investment has become far more challenging since the global recession.

Originally, FIDP had planned to launch a fund that invested solely in Cambodia, impressed by its economic growth and liberal economic policies.

But investment potential, low labour costs and a young and enthusiastic workforce were no match for the recession. Investor interest in emerging markets in Asia shrank with global confidence, says Mr Yeo. “Interest in China has remained strong so we changed the theme of the fund to make it an extended China play, incorporating both Cambodia and Laos, and introduced the new Mongolia fund,” he explains.

The Mongolia vehicle will be launched in the second quarter of 2010 and will focus on sectors including mining, renewable energy and distribution. Though Mongolia has just 2.6m people in an area the size of France and Germany combined, the discovery of minerals makes it valuable to China.

No investor in Cambodia, Laos or Mongolia should be under any delusion about the risks involved. Investments require long-term money and patience.

Corruption is rife and regulation in its infancy. But perhaps of greater concern is the question of whether China’s growth can continue unabated. Mr Yeo, however, is not unduly concerned.

“There has been talk of a bubble in China for years,” says Mr Yeo. “But if there is one, then it will be in the property sector in large cities such as Beijing, and so long as the plan of fiscal spending continues then China could weather such a correction.”
Original source: Financial Times
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