Capex Asymmetric Trader

Mongolia – It’s a Wrap!

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Well, that was exciting! Mark and I just spent an amazing month on the ground, networking and digging in with some of Mongolia’s best and brightest.

A few days ago we concluded our first Frontier Markets Meet Up in Ulanbaataar, the capital city. To say that it was a success would be an understatement. We had 25 of the brightest, most interesting and engaging attendees of any event I’ve ever been to. Mark and I are truly blessed to call ALL of these folks our friends now as well. We had a BLAST!

We heard from over a dozen professionals in various disciplines. Brokers, real estate tycoons, entrepreneurs, business professionals, exchange officials, bankers, lawyers and resource execs.

Our new friends learned how business gets done in frontier markets. Don’t ever let anyone tell you that you can invest in these places without visiting, establishing contacts and logging the hard miles.

There are some pretty impressive guys making fortunes as a result of their decision to base themselves there. There’s also a bit of a diaspora occurring.

We met a 21-year old Mongolian who has returned from living in Europe to make his fortune. To say he was an impressive young man would be an insult. He speaks 7 languages fluently for starters. He’s firmly grounded, considerate, calculating and ready to kick some ass. Several of our attendees pulled him aside for private one-on-one discussions. I’m certain that he’ll be doing business with some of them shortly.

I give all of these guys nothing but kudos, as frontier markets are tough, and Mongolia is no exception.

The pollution is horrible. Summer is better than winter, but it’s still awful. We heard several stories of guys leaving within months because they started coughing blood. I can confirm that reality after being there.

The traffic is insane and the roads are akin to a detonated mine field. The water and electricity are inconsistent and many Mongolians are not happy about the large foreign presence in their country. Many think that foreigners are there to steal their resources, which includes their women. Rightly so, they are pretty!

I saw a few black eyes, and our partner Scott saw an actual jaw lying in a pool of blood on the sidewalk. Yes, a jaw…nobody attached to it. Players beware!

There is still a good bit of corruption as well. It’s in pockets, but it does exist. You can steer clear of it, and it helps to have the right friends and advisors. Nevertheless, the “fool and his money” saying applies here as strongly as anywhere.

The good news is that opportunity still abounds. Real estate, small business, natural resources, professional services, equipment supply, agriculture, hospitality…these are just a few of the areas where low-hanging fruit exists.

Two Sides to Every Coin

About two weeks ago, as I sipped my morning coffee and looked down from the apartment I was staying in, I watched a drunken man stagger around on the footpath below. A couple hundred metres to his right two inebriated youths clutched a knee-high fence and shared the contents of their stomachs with the grime and mud of the children’s playground…Yummy!

Shortly thereafter I opened the door to head to the office and almost smashed the head of an extremely large, extremely drunk man sleeping in the stairwell, directly in front of my door. I’m pretty sure he had defecated and pissed himself. Ah, the wonders of alcohol!

A post-party cleanup/hangover service would likely do very well here. It would require close to zero start-up capital. Mark and I believe that in Mongolia a small fortune could be made in excrement remediation!

I’m told that 4 of the largest conglomerates in Mongolia where all built on vodka fortunes. That story is consistent with most of the CIS countries, so it may well be true.

I have no statistical evidence but there are probably more people losing their shirt here than those making lots of money. Certainly for naive foreigners this is likely the case. Massive influxes of capital always accompany fraudsters. Making money in frontier markets is akin to pizza without cheese…uncommon.

Incredible opportunity does not come without risk, and those that think it does are routinely and swiftly relieved of their wealth. Lest you think we are perfect, it happened to us in the past as well!

Just because a country is growing at anywhere from 15 – 20% a year means not that YOU will come out ahead. I’ve seen the story play out in other parts of the world time and time again.

That being said, when you have a massive economic tailwind behind you like Mongolia does, there are a few very good ways to play the trend.

How do we do it?

1) Buy the country’s stock index.

It’s a broad and easy-to-make investment, and as the country grows so too will the larger, higher-quality listed equities. Normally you’ll do OK, although at this time Mongolia does not have an index worthy of mention. You can piece together an “index” portfolio of your own by contacting any of the good in-country brokers (see #2 below). We’ve interviewed most of them in our Mongolia Report.

That being said, I’d scrap the idea until we get some liquidity in the market. Our on-the-ground sources tell us that up to 80% of the currently publicly listed equities in Mongolia will be de-listed with the new rules being implemented by the London Stock Exchange (LSE). If you see a company trading for a $700 market cap, it’s for good reason!

2) Buy the largest most liquid stocks on BOTH the MSE, as well as foreign-listed companies operating in Mongolia.

There is a decent bunch on the Canadian and Australian exchanges. Look forward to overpaying though. I see very little opportunity at this stage with this strategy, and mis-pricing of assets is rampant. Caveat emptor

3) Playing the currency arbitrage and yield differential.

Ultimately the Tugrik has to appreciate. This is simply a factor of supply and demand. Short term I’m not super bullish. I expect continued weakness. This of course impacts on the net yield achieved. Everyone who thinks they can fly in and get 16% risk-free on their bank deposit doesn’t understand how currencies work. It’s a two-way street my friends!

Oscar Mendoza…a gentleman far smarter than I, who runs the Mongolia Frontier Fund, enlightened our attendees at the Meet Up as to why they may want to wait a little while before deploying substantial amounts of capital into the banking system. My sense is that purchasing a variety of CD’s from multiple banks is a far better strategy.

Being one to take advantage of a well-thought-out and executed strategy, I’m more comfortable with buying the MSE Liquidity Fund offered by Rescap securities. It solves multiple problems while allowing for good upside potential via it’s exposure to the MSE as well as fixed-rate, short-term deposits.

4) Start your own business.

Opportunities abound in this space. See my excrement remediation example earlier. But seriously, as our friend Harris Kupperman said to us on multiple occasions, a bagel shop would kill it in UB; as would a natural products grocer, a plastic surgeon, a peddler of European luxury goods of any flavour, or the guy who can manage to get Starbuck’s to setup shop (or McDonald’s). A well-known US pizza franchise is opening 12 locations, they will kill it, that is if their delivery guys can actually get the pizza delivered in UB traffic before it’s a pizzicle. Lots of execution risk in that one!

5) Buy stakes in privately run companies.

Also known as private equity (PE). Most of the thousands of companies in Mongolia are very small. Right now there are literally dozens of private equity funds who want to participate in the PE market, with collectively hundreds of millions to put to work. Unfortunately, most of them are completely misguided and will end up torching their investors.

They are raising ridiculous sums looking to participate in a microscopic market. I wish them the very best of luck. Firstly, running something like this from an office in Singapore, London, N.Y. or Hong Kong impresses me as superbly idiotic, and a first class opportunity to get screwed…and not in the enjoyable way.

Our CPAN service is a result of Mark and I identifying what we believe to be a unique set of circumstances in the frontier markets right now, including Mongolia. It also addresses the problems being encountered by many a PE fund manager looking to deploy capital in these “micro markets”. The main problem being the size of the deals, and the deal flow.

We discussed the service in-depth on a conference call recently, and at our Meet Up. Unfortunately the conference call had “technical” difficulties. We’ve prepared a transcript complete with Q&A. It will be disseminated to anyone who wants to learn more about the service.

If you’re interested in frontier markets private equity, and you’re an accredited investor or PE fund manager, I encourage you to checkout CPAN to see what we’re so excited about.

We have about half our slots filled, and we fully expect the balance of spaces to go very quickly, since we can only take a maximum of 40 participants.

- Chris

“I think this is also a great time to invest in private equity, helping companies grow from the ground up.” – Jim Rogers

Comments

  1. Sebastien says:

    Hello Chris and thanks to share your feelings !
    Unfortunately i didn’t follow the call live because of the time zone. How much time do you think before we have the complete transcript of the conference call in our mailboxes ? I’m very impatient ;-)
    And as a subsidiary question, if you can answer here of course, what is the usual minimum amount of investment in the private deals you share with the CPAN service ?
    Seb

    • Hi Sebastien.

      I, like you am impatient…so I fully understand. I have all the PDF presentations which attendees will receive but we’re working on getting the video side sorted. I’m on the road through SE Asia till next week so please be patient as my awesome biz partner Mark is pulling the cart in a big way…I will owe him more than a beer. Stay tuned. Its coming as soon as we can get it.

      Chris

  2. The Meet Up was awesome. You guys pulled together all the movers and shakers up there and they delivered priceless intel……I now feel much more comfortable about with who and in what to invest in Mongolia.

    And the Mongolian people themselves! They are unique from all other Asians that I have associated with. Bright, young, secure, educated, polite and motivated……The “kids” will do alright up there I think, especially when they get themselves placed into government over the coming decades.

    Thanks for a great time and a very well planned and executed summit. Looking forward to following your ideas……

    Pete

    • Mark Wallace says:

      Thanks Pete! I’d like to point out that we didn’t pay you to say that, LOL! But seriously, Chris and I were thrilled to meet you and all the other attendees that made the event as special as it was.

      We look forward to seeing you at the next one!

      Mark

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