Capex Asymmetric Trader

A Blueprint for Investing in Frontier Markets

Frontier Markets Table

By: Mark Wallace

Our friends at Pathfinder Capital have created an excellent report on frontier markets. These guys live and breath the frontier, putting boots on the ground where most of us wouldn’t care to visit.

Both of the founders are ex-military guys who cut their teeth in places like Libya, Iraq and eastern Europe. Chris and I have spent a lot of time with them, including at our Meet Ups in Mongolia, Cambodia, Singapore and Sri Lanka. We really respect their analysis and expertise. We recommend taking the time to download and review their report linked at the end of this post.


Courtesy of Pathfinder Capital

Last week we attended an asset management conference in London, in which the agenda featured several prominent speakers and a panel conference on emerging markets. We noted that some of the UK’s largest fund managers would be represented in the discussion, so with our curiosity piqued we walked down to Threadneedle Street in order to listen in.

For the most part the event did not disappoint – it’s always useful to hear other fund managers discuss the issues that keep them awake at night. However we were somewhat taken aback by one comment at the emerging markets panel; in general, this person (a partner at a firm claiming to focus on the emerging markets) told the audience that he didn’t see any reason to distinguish between the emerging and frontier markets, given the relatively high correlations of their currencies and equity indices.

Emerging and Frontier Markets Performance
In our opinion, this comment couldn’t have been further off the mark – and we have the empirical evidence to back it up. At the bottom of this post you can see a link to our latest white paper “Introducing the I-3″. We have spent the past several months building this document, with special thanks to our friends Owain Mulligan (currently at London Business School) and Joe Holliday (currently at Harvard Business School) for their invaluable assistance.

Many institutional investors have acknowledged that frontier markets deserve consideration as a distinct asset class. After twenty years of strong growth, the “traditional” emerging markets (the famed BRICs of Brazil, Russia, India and China) are beginning to resemble developed Western economies. However, the majority of global growth in the next decade will instead be generated by “frontier markets”. Indeed, over the past five years, 43 of the 47 highest-growth economies have come from the frontier. Less than one third of those are represented on mainstream equity indices.

Kuwait Stock Exchange
Traditional definitions of the frontier market are unsatisfactory. They are typically defined as “those markets that are not yet classified as developed or emerging markets”. While this is technically true, and a valid first step, frontier markets can also be defined by the specific characteristics they exhibit in comparison to more developed economies:

  • Lower liquidity
  • Smaller market capitalization
  • Higher trading costs
  • Higher volatility
  • Reduced transparency
  • Higher geopolitical/sovereign political risk

It should also be recognized that frontier markets are not homogenous. In fact, they can be further broken down into three distinct categories that we have identified as the I-3:

  • Indexed Frontier. Countries that are included on mainstream equity indices.
  • Illiquid Frontier. Countries that have small stock exchanges with low trading volumes and low market cap-to-GDP ratios.
  • Isolated Frontier. Those high-growth economies that do not have a sovereign stock exchange, or participate in a regional stock exchange.

Between 2008 and 2012, forty-seven economies achieved an average annual GDP growth rate greater than 5% (see Figure 1). Of these, none were developed economies and only four were classified as emerging markets, leaving 43 from the frontier.

Frontier Markets Table
Most investors overlook frontier markets due to perceptions of higher risk and, often more so, a general lack of familiarity. Frontier markets also have little or no representation in mainstream equity indices and are therefore not easily investable. While a handful of frontier-focused indices exist, their market capitalization remains very small when compared to emerging markets equity indices. This lack of representation creates difficulties for the investor who seeks exposure to this exciting asset class. In this era of quantitative easing and negative real deposit rates, investors are increasingly turning to the high growth opportunities offered in the frontier markets. After reading the attached document, we believe that the reasons behind this trend will become plainly evident.


You can read Pathfinder’s latest “Introducing the I-3″ white paper here.

- Mark

“Country selection is more important in frontier markets than in emerging markets.” – Cliff Quisenberry, Caravan Capital Management

These 7 Traits Make For Great Entrepreneurs


By: Chris Tell

There is a scene in the movie “Madagascar”

Skipper: “We’ll fix it.”
Alex: “How are you gonna fix this?
Skipper: “Grit, spit and a whole lot of duct tape.”


The Penguins had what it takes

This attitude epitomizes one of the traits we look for in founders. Great businesses are not dumb luck, they’re usually the result of some unique traits.

In a post entitled Dangers of a Single Founder Business and “Ideas” I alluded to one element to look out for in founders. Today I’d like to cover some of the characteristics we look for in founders.

You can’t always find all of these characteristics but a preponderance of them is a good sign.

1. Integrity
This could easily go under the moniker authenticity. Included in this is honesty. Honesty and integrity are bedfellows. The slightest sign of dishonesty or lack of integrity and I’m gone. Next please.

2. Promotion
This gets a lot of bad press. Visions of used car salesman swim through people’s heads, but consider the following people and then tell me what they do for the companies they work for:

  • Richard Branson;
  • Larrry Ellison;
  • Oprah Winfrey;
  • and, Martha Stewart.

These are all people who can compellingly convince customers to buy what they’re selling. This is also a great trait for a founder since he or she is the one who convince employees to sign on, often for less money than they may get elsewhere, and also must convince early investors to fund their business. Ultimately every company needs promotion.

3. Technology Savvy
This one may surprise readers. Many people who think of startups automatically think of Facebook, Zenga or some sort of technology-driven company. It’s obvious nonsense of course. We have for example a company in our portfolio which manufactures machinery used in logistics. Here is the thing though, technology is THE key driver of scalability and cost reduction, and it is for this reason that founders of almost ANY business in the world today HAVE to have some tech savvy.

4. Passion
Its not just something for the bedroom…or dining room table. The greatest businesses are built on a passion for the business, never with the sole intention to buy that “Lambo”. Being an entrepreneur will test you and you’ll fail unless you’re passionate. It is passion that will keep your energy levels high when you’ve only had a couple hours of sleep and are due for an 18 hour day. Our rule: no passion, no money.

5. Homework
I’ve met far too many entrepreneurs who just haven’t done their homework. They’re already at the stage of raising capital and have not done thorough research on their market, built a business plan, prepared budgets, or trialled their product (depending on the product). Founders have to become experts in their chosen field. You wouldn’t go get eye surgery done by a mechanic. Don’t invest in founders who are setting out to become eye surgeons with a mechanics skill set.

6.  Knowing themselves
One of the most difficult things for a founder is to give up his baby. They’ve sweated over it, cried over it, lost sleep over it, often jeopardized relationships over it and now the time comes when their skills are not sufficient to take the company to the next level. It takes a maturity to understand that you as a founder are not the best CEO, or that in order to trade sell or IPO a different skill set will need to be brought in to take the company to that next level.

7. Grit Spit and Duct Tape
This one covers many aspects for me. It’s all encompassing. One of our portfolio companies brought a woman into the company, actually she found the company and asked to join, but that’s a story for another day, who’s mission it was to position them for a trade sale. When we where first introduced to her we were told she was “scrappy”. Oh boy, is she ever.  She is a veteran in the startup field and has dealt with her fair share of venture capitalists and all manner of other inevitable obstacles that young companies encounter. Gritty, Scrappy, call it whatever you will but a founder (or very senior team member) with duct tape skills is invaluable.

The last thing I’ll say is that there is no specific “bucket” that entrepreneurs need to fit into. The skillsets needed to run a business are varied. Do your homework on the guys and gals driving the bus!

- Chris

“I am prepared to try anything once.” – Sir Richard Branson

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hype cycle

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By: Chris Tell Nearly 4 years ago I penned an article entitled Open source world. In it I described a variety of changes taking place globally and how the status quo was being broken by open sourcing, led predominantly by technological innovation freeing up information. I discussed the legal industry and how increasingly lawyers have […]

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