The Nexus Between Private Equity and Development: A Look at Pakistan
The Fletcher School International Business Program’s Global Speaker Series hosted an evening event entitled "The Nexus Between Private Equity and Development: A Look at Pakistan" on January 31, 2007. Sponsors included The Organization of Pakistani Entrepreneurs of North America (OPEN), Techlogix, The Consulate General of Pakistan, Babur R. Mian, EVP and COO, Geocomp Corporation, and Rizwan Virk, CEO, CambridgeDocs and author of Zen Entrepreneurship.
Roger Berry, Managing Director/Principal at Liberty Global Partners, provided an overview of private equity in emerging markets, while Arshad Ashraf, Founding Director of TMT-SEAF Pakistan Growth Fund, described the challenges of running a private equity fund in Pakistan. A question and answer session moderated by Tufts graduate Ambereen Mirza, a Principal at Dawn Consulting LLC, and current Fletcher student Bryan Stewart (MALD ’07) followed the speakers’ remarks.
Berry co-founded Liberty Global Partners five years ago, at a time when people laughed at the idea of private equity in emerging markets, because the economies of India and China had not yet fully emerged into the powerhouses that they are today. Although Berry began his career in conflict resolution and policy advising in South Africa, his interest in the politics and stability of the developing world led him to his current position at Liberty Global Partners, a firm which provides analysis and advising to private equity firms investing in emerging markets.
Berry briefly outlined the private equity model, which at its core involves a private equity fund manager who goes to a "limited partnership to convince them to give him money to do whatever he wants with." The profit in private equity comes typically from a 2% management fee, which allows the fund manager to run the fund, hire people, and build a business plan. Additionally, private equity fund managers generally receive 20% of the profits of a successful investment, with the limited partnership that provided the funds receiving the first 8% of profits.
In contrast to publicly traded companies where investors may be able to vote at a shareholder’s meeting but have little say beyond that, Berry highlighted the centrality of contracts in distinguishing private equity from public investing. "Percentages of ownership, rights of governance and influence in decision making are dealt with in the contract," said Berry. "A lot of this business is [about] relationships and how you build confidence," he added.
Berry also described the rapidly changing landscape of private equity, which is related to the growing perception that the economic engine in emerging markets is moving quickly and there is money to be made. Economic realities, exemplified by the massive growth of India and China help make private equity a more attractive option for investors. As a result, private equity has witnessed a four-fold increase in fundraising in just the past few years, according to Berry.
The U.S. and Europe still account for the majority of private equity investment, with Asia accounting for just 9% in 2004. Russian funds have had the highest returns in the world over the past couple of years, outperforming even the U.S. markets, according to Berry.
With such large sums of money flowing into emerging markets, Berry questioned whether these markets are being over-funded. Yet, because emerging markets only account for half of the world’s GDP, Berry believes there is room to grow private equity funds. In the midst of such fast growth, producing top-notch fund managers who can carry out the investing is a top priority for the industry. Liberty Global Partners has spearheaded this effort through an association called Emerging Markets Private Equity Association (EMPEA), which produces a newsletter, conducts research, and holds two major industry conferences per year. Yet, demands are also higher for investments in emerging markets. A recent EMPEA/Liberty Global study shows that investors require a return 10-15% higher on investments in the Middle East and Asia than on similar investments in North America or Europe.
Arshad Ashraf is a Director at TMT Ventures, a $100 million private equity fund based in Pakistan. The firm provides operational skills and money to build companies and enable them to grow within the Pakistani context.
Ashraf provided a close-up view of the challenges and opportunities encountered by fund managers operating in Pakistan, a country that faces deep and complex external and internal challenges. In addition to the problems arising from the volatile region, the domestic political situation, poverty and illiteracy, Pakistan also confronts a heightened world perception of its high-risk environment. Acknowledging that in Pakistan "opportunity and risk…both intermingle," Ashraf nevertheless sees incredible potential for booming economic growth throughout the region if there were a favorable shift in the geopolitical situation. Pakistan’s strategic location could help it to "become a conduit for trade in region," according to Ashraf.
Ashraf described the largely untapped investment opportunities that currently exist in Pakistan. The population of 160 million is witnessing a massive increase in consumption fueled by local demand. Ashraf also sees potential for growth in the retail, real estate, telecom, and dairy sectors.
"It’s about getting businesses that have worked in other markets to come to Pakistan and give it a shot," said Ashraf. The explosion of the telecom sector in Pakistan is a success story and may be a sign of the latent demand in the Pakistani domestic market. Pakistan had just 3.5 million subscribers to mobile phones in 2004; by the end of 2007, subscriptions are predicted to climb to 65 million.
Ashraf noted that the business environment has improved due to the enactment of structural changes, and businesses have enjoyed a period of profitability over the last five years. Structural reforms include a broad array of tax and fiscal reforms, trade reforms, privatization, and financial sector reforms. These have substantially improved Pakistan’s placement on the International Financial Corporation’s "Doing Business" indicators.
Ashraf’s TMT Ventures develops institutions with mandates to invest in countries regardless of their country risk profile. For TMT Ventures, Ashraf said, "it is not raising the money that is the issue" but rather coming up with a satisfactory combination of local, regional, and international investors. Ashraf emphasized that a company must have some understanding of how the operating environment in Pakistan and a willingness to seek out opportunities. TMT Ventures carries out its work by "rolling up its sleeves, going to the hinterland, and looking for opportunities where others are not looking."
The importance of predictability as a factor in investment was highlighted in the question and answer session. "Pakistan won’t be on the radar screen" because "its borders won’t be predictable for ten years," Berry said. Ashraf agreed that to "use the word predictable and Pakistan in the same sentence…they just don’t stack up," but said there are different "appetites for risk and return in the investing community." Overseas Pakistanis have "played a tremendous role in breaking the perception and helping the country," Ashraf said, but how the people in Pakistan maximize that investment must be addressed.
Berry emphasized that intellectual capital will be essential to growth in emerging markets in the years to come, and that countries will need to grapple with providing more and better education to meet increasing demand for highly educated workers. The panelists agreed that academic institutions and industry will need to partner with each other to foster innovation that can propel future growth in emerging markets.