A Mongolian Capitalist – Part II

We left off before the 4th of July holiday last Thursday with Chris and Carlos speaking to Harris Kupperman, a successful hedge fund manager and now CEO of a Mongolia-focused venture.  Today we’ll talk more about his company and his plans for investing in Mongolia.

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Chris: Harris, you’ve said that you wanted to invest in Mongolia but couldn’t find a suitable vehicle to do so.  Like a true capitalist, you created your own!  For our readers benefit, please tell us more about Mongolia Growth Group (Editors note: Mongolia Growth Group is traded on the Canadian exchange under the ticker symbol “YAK“.  Investors in the US can find it listed over the counter as “MNGGF“).

Harris: We’re a company focused on real estate and financial services. Those are the two sectors that should be most leveraged to the growth of the economy and GDP. From a historical perspective, real estate in the downtown of the capital city of a country seeing a boom has always gone parabolic. We think a similar thing will happen here. We were recently granted an insurance license and are now the best capitalized insurance company in Mongolia. Finally, we are actively investigating other sectors of the financial services market to enter.

Chris: Investing privately is one thing, but you went the public vehicle route, which is a bit more complex at best. How did you go about creating the company?

Harris: When I first visited Mongolia, I saw the opportunity, but like you say, I couldn’t find a way to get appropriate exposure. I also couldn’t get comfortable with corporate governance and the accounting at the various public companies. I figured that my only viable alternative was to build it myself.

I built MGG because I wanted to invest my own money in Mongolia, as did some friends. Management and the board have now invested over $7 million in the company and I’m about half of that amount. No matter what happens in our business we can be confident that our accounting is done right. I couldn’t invest the sort of money that I’ve invested without that knowledge.

Chris: Mongolia Growth Group is a bit different from most other public companies in terms of compensation. Can you explain?

Harris: The company started with me asking friends to invest alongside me in Mongolia. I wanted a diversified company that would have adequate exposure to the Mongolian economy. I simply didn’t have the resources to do that myself.  I felt funny asking my friends to invest in my company and then tell them that I was going to take a salary and dilute them through stock options or any other scheme like that. Instead, I have decided to take no salary, stock options, performance allocation, bonus or anything else. I’m here in Mongolia because I’ve invested my own money in the company.

My Co-Pilot in this venture, Jordan Calonego feels the same way.  Besides, we’ve been investors for over a decade now and have been disgusted to learn that the CEO always seems to do better than the shareholders. Now that our roles are reversed and we are management, it would be wrong of us to do what we have always criticized. Investors need to think of this company as a business created by a bunch of very successful hedge fund guys who want to invest their own money in Mongolia. Minority shareholders can come along for the ride if they want without any of the onerous fees normally associated with hedge funds. It is the only company that I know of like this. I hope we can use this as a template for the next time that I complain that some Management team is overpaid, but that’s a different story!

Chris: Investing in foreign emerging markets entails a certain amount of risk for us “foreign devils.” Tell me about your local partners in Mongolia and how you’re mitigating risk by partnering locally.

Harris: I think you have an inaccurate impression about Mongolia. People are very happy to have us investing in the country and helping the economy to grow. A stronger country means they can stand up to the Chinese better. Of course, our foreign partners help us navigate business relationships and that is critical. Think of it this way, I’m from New York. If I moved to Boston, I could do business just fine. Of course it helps if you have friends in Boston, but you’d do just fine without any relationships. That’s how Mongolia appears to me. That said, we have amazing partners and they have made everything significantly more successful for us at MGG. We couldn’t have gotten this far this fast without them.

Carlos: Even though you are focusing on the FIRE sectors (Finance, Insurance, & Real Estate), was this driven by a natural resource thesis?  [i.e. in the context of economic growth derived from the natural resource sectors?]

Harris: Yes. We want leverage to the growth of Mongolia. These three sectors are very closely tied to economic growth which we think is about to significantly accelerate as new mines come online.

Carlos: For our readers benefit can you tell us what minerals and resources are found in Mongolia?

Harris: We are learning that Mongolia has everything. Just a few months ago, we learned that Mongolia may also be a significant oil exporter. They’ve already found coal, copper, iron ore, gold, uranium, rare earth elements and pretty much everything else.

Carlos: We all remember the Levi Strauss story back from the California Gold Rush.  Along those lines have you thought of jumping into the mining camp support business?

Harris: We are looking at everything. However, for now at least, we see the biggest opportunities in real estate. There are hundreds of millions being raised for Mongolia focused real estate funds. Prices will go simply nutty as they try to put that capital to work, and we want to get positioned before that happens.

Chris: Regulations, taxes and other such government ‘ahem… initiatives can, and often do, make enormous differences to investments. Currently agriculture is favored and doesn’t pay VAT or import taxes on farming equipment and supplies. This is because the Mongolian government wants food costs low. Normally this would allow fatter margins for farmers. Is this something of interest, and do you see any other opportunities arising due to government mandates and tax incentives/breaks?

Harris: We have looked at agriculture and have a joint venture with a Mongolian to finance the expansion of his potato patch; however this is quite small in terms of our company. In general, we want to focus on businesses tied to the growth of the broader economy and agriculture doesn’t fit that bill, at least for now.

Chris: You and I have previously discussed infrastructure in Asia, and agreed as to why neither of us would invest in early stage infrastructure.  At the same time we both know that infrastructure is absolutely critical to growth. Where do you think Mongolia is at with the critical infrastructure that is being built now, and needs building to enable the sustainable growth we expect?

Harris: Infrastructure is the main thing holding back the economy. As soon as you build a railroad, all these stranded mineral assets suddenly become economic. The same goes for road infrastructure, power, and water transport. Really everything needs investment, that’s the reason that I feel so confident that the government won’t do anything to hurt foreign investors, it would simply derail growth.

Chris: Here’s a problem I’ve been thinking of lately. It’s fair to say that since listing its shares publicly, MGG has experienced periods where the market clearly overvalued the company. This should be obvious to any investor performing some back of the napkin math. When insiders of a company see the market value of their company trading below their best estimates of fair market value they buy back stock. When the opposite happens it’s natural to offload stock. This is easy for me as a pure capital provider, and one not involved in strategic decisions or management.  But, I wonder how I’d deal with this situation where it’s my own company I’m running. How do you deal with this conundrum, given that I think we’re likely to see some extreme over-valuations at some point as the Mongolia story begins to unfold and the world wakes up to the opportunities?

Harris: I’m a long term investor. I have absolutely no intention of selling any of my shares. NONE. If our shares are undervalued, it would be great to be able to buy back shares. If we are overvalued, we just ignore it. Remember, that when an economy grows as fast as Mongolia’s, it’s very easy for our company to simply grow into the valuation. For instance, in the past four months, real estate prices are up between 20 and 50%. It doesn’t take many more months like that for a business to grow into and then exceed a current valuation.

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Mark again… Harris is as sharp as they come in our opinion.  We believe in him so much in fact that we participated in all three rounds of the MGG private placements.  So for purposes of full disclosure, Chris and I own shares.  You can figure out what we paid by looking at the SEDAR filings.  We also encourage anyone that is interested to review the Company’s website at: http://www.MongoliaGrowthGroup.com.

We’ll have more from Mongolia over the coming weeks. Chris knows a few more intrepid capitalists that have made Mongolia an important part of their investment activities.  Stay tuned, and let us know if you have any comments or questions.  Just post ‘em below and we’ll respond asap.

– Mark

“With Heaven’s aid I have conquered for you a huge empire. But my life was too short to achieve the conquest of the world. That task is left for you.”
– Genghis Khan, to his sons at the end of his life.

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