Venture Capital in Cambodia?

Frontier market venture capital and private equity is a unique niche. Therefore, when I first met Christophe Forsinetti, co-founder of DEVENCO, I knew I had to invite him to speak at our Cambodia Meet Up. His presentation was well received.  

A little background… A relatively young Cambodian Frenchman, Christophe has already spent more than a decade navigating developing countries. He is an expert in microfinance and has a keen knowledge of entry strategies, including: greenfield, acquisitions, and joint ventures. Prior to founding DEVENCO, he was responsible for the setup of a microfinance bank in Madagascar and also in Mexico. His expertise includes investment deal structuring and management consulting. Christophe holds a BA in International Business and a Masters degree in Geopolitics.

For those of you who weren’t able to join us recently in Phnom Penh, I managed to catch up with Christophe again recently. We discussed DEVENCO and some of the unique projects and experiences he and his team have had in Cambodia.
Scott: Christophe, Cambodia is increasingly on the radar for investors looking to position themselves in a high-growth SE Asian market. As a guy with European and Cambodian ancestry, I’m guessing you were intrigued by the possibilities in the country?

Christophe: Yes, I was. I started coming to Cambodia in 1996. My mother, being half Cambodian, there was an interest on my side to discover this country. It’s only in 2006 that I decided to live here permanently. At that time I was developing a microfinance bank (Microcred) in Madagascar and I thought I could combine my interest for financial services in frontier markets with learning more about my own culture.

Scott: Your interest in financial services and your desire to learn more about your family’s heritage led you to create your current firm, DEVENCO. How did you decide to focus the firm on SMEs?

Christophe: Financial services for the “bottom of the pyramid” is growing fast and experiencing very high demand. Microfinance, which would be credit, savings, transfers, insurance, etc., was a first step in satisfying the marketplace over the past 15 years. However, regarding SME financing, which is debt or equity for the missing middle, equipment leasing, retail finance, etc., these still need to be addressed.

Cambodia is a good example, with a well-developed microfinance industry, but an acute SME financing problem and no consumption lending. We decided to develop an innovative venture capital methodology for SMEs with the potential to be scaled up in other countries.

Scott: It’s no surprise that a number of firms are targeting the upper middle class and wealthy Cambodians. Boeung Keng Kang (KKK 1) is a perfect example. It’s full of boutique shops, high end restaurants and foreign chains. But the majority of Cambodia’s population lives in the countryside and that is where your focus is, correct?

Christophe: Right. It is quite common to see investors, especially foreign investors, focus on the higher end of the market, even if it’s narrower. The upper end has purchasing power, they are more transparent and you can use the traditional investment schemes used all over the world. For more informal, less educated, less transparent and really the “poor”, it really requires a different methodology and model. However, microfinance has proven that these people tend to reimburse and respect their business commitments better than the rest of the population.

Scott: So what is your execution strategy for operating in the SME niche?

Christophe: Over the past 6 years we have identified a large number of high growth SMEs/sectors with financing needs. We have finalized a methodology supporting the implementation of better management and business practices with a very hands-on approach. Our main problem has been to raise the funds needed to invest, and we are now focusing on this.

Scott: Among the other funds in Cambodia, DEVENCO is the only pure play VC. Does focusing on smaller deals which larger funds can’t participate in mean that the playing field is relatively open? In other words, do you have any real competition?

Christophe: No competition. Focusing on the smaller deals and less “formalized” companies allows us not to have to compete with the others on the small number of sizeable and already mature deals.

Scott: That’s a great situation to be in! We find that when countries become attractive to foreign investors, investment vehicles such as PE funds, and in some cases hedge funds, are created to service demand. However, these funds tend to focus on investments with ticket sizes of $3 million plus, which prices them out of the smaller, and in many cases more attractive deals.

Christophe: That’s true, and it’s understandable. Having your investment officer/manager flying 2 to 4 times a year to Cambodia to keep tabs on a US$500,000 project, you soon realize that the initial cost represents already 5% to 10% of the total investment! The only way to lower that cost is to be on site. And, it’s necessary to have the local insight as well. Few successful investment professionals accept to be based in Phnom Penh due to the misconception that there is little to be done here. This mentality is slowly changing, and your initiative with the Meet Up was a good example.

Scott: DEVENCO is really two businesses in one. You’ve a consulting arm and a portfolio management arm. How do these businesses support one another?

Christophe: There are many synergies between both departments. Some of our customers on the consulting side ask us to participate in their investment activities. The study of specific sectors allows us to build knowledge, train our staff and identify opportunities for the future. However, we are very cautious on making sure there are no conflicts of interest with our customers.

Scott: Seeing what is unfolding in Cambodia, it is no surprise that consulting services are in demand. What industries are your team providing consulting services in, and how do you intend to scale this side of the business? Is talent acquisition a challenge?

Christophe: We went through several phases, from small foreign investors in need of information, to large corporations needing corporate finance and more sophisticated services. We are also starting to provide consulting services to international development organizations such as the World Bank, the Asian Development Bank, the French cooperation, etc.

Scott: Give us some colour on your portfolio of companies and how you intend to grow, and eventually exit them.

Christophe: We have 6 companies in our portfolio: a waste management company; a pharmacy chain; an organic fertilizer factory; sports arena; shrimp farm operation; and, a water treatment and distribution company. We are not specialists, so our goal is to set up high growth companies to a level (profitability, governance and business practices) that matches the criteria of larger more strategic investors. We look to take a profit comparable to the risk taken to launch and foster these entities.

Scott: Not having a defined exit strategy is the catch 22 of playing in the SME space in a frontier market. Though, DEVENCO will no doubt create some substantial value in these businesses and seemingly have an attractive opportunity to either exit via a buyout or a listing. You guys are really the guerilla business men of Cambodia it seems!

Christophe: This is the advantage of not being a fund with a limited time frame and strict criterion. In a country where there are already a lot of barriers, it is challenging to add additional ones.

Scott: Of course. Branded as a business-friendly environment in which to conduct business, Cambodia is by no means a cake walk. What are some of the struggles you have faced as an organization getting to where you are today?

Christophe: We claim that we want to address the access to finance issue but we are the first victims really. Investors who understand what we do are hard to find; you need to understand Cambodia. HR is also a major issue. We need investment educated professionals (both locals and foreigners) and this is really hard to find here. If you add the fact that they have to change their established investment practices (risk assessment, negotiation practices) and be intellectually flexible, you realize that there are not many profiles like this in the country.

This is true for DEVENCO, but it’s also true for our projects. We were 2 years without a manager in our pharmacy chain because we could not find a pharmacist with management experience, or a manager with some pharmaceuticals expertise/understanding.

Scott: That’s common in frontier markets for sure. Talent acquisition in countries where it is in short supply can be an operational setback. On the consulting side of your business where do you source employees from then? Are they locals or expats?

Christophe: Our teams are a mix of young, well-educated expats willing to discover the frontiers of their expertise, and smart Cambodian managers learning about investment. The transfer of knowledge between these 2 very different individuals is healthy.

Scott: You are looking to raise $3 million over the next two years. What will those funds be put towards?

Christophe: 85% of these funds will be committed towards investing and expanding our portfolio. The rest will help us to strengthen our teams. Today we have a pipeline of projects ready to be invested in, but the lack of funds prevents us from investing in them. We had to intermediate and find investors for some of them.

As for the strengthening of the team, we identified the need for 2 more experienced managers to monitor projects, mentor managers and work on the strategy. So far the consulting team has also been involved in the project management, but resources now need to be separated.

Scott: Is DEVENCO looking to exchange equity for financing or is this a debt deal?

Christophe: This is an equity proposal. Investing in early stage companies takes 2 to 3 years to generate dividends and comfortably repay the debt. The goal is therefore to give exposure to the upside. Raising more capital through debt is definitely something we will look at in the next 2-3 years.

Scott: As previously mentioned, liquidity events in your portfolio are likely to be several years out. How do you comfort investors who expect a certain time frame for a return on their capital?

Christophe: The first projects have started to generate dividends and we have entered into negotiations for partial exits. The initial building and investment phase is the worst time, and that’s behind us. Liquidity events will take place in the next 3 years.

Scott: At present you have 6 projects under management. What is the ideal number you want to maintain on an ongoing basis?

Christophe: Considering the involvement required we don’t have the human resources to handle more than 10 projects at the same time. Anyway, 3 years of management support is generally enough to bring the managers of the project to a level where we are in the back seat.

Scott: Thank you for your time Christophe. I look forward to catching up again soon.

Christophe: Thanks to you. I was honoured to participate in your Meet Up. I can tell you that what you’re doing is definitely contributing to the improvement of the environment for the development of these kinds of activities in frontier markets.

Scott: We appreciate that, it’s fun work!
We’ll be keeping close tabs on DEVENCO. We’ve spoken to Christophe at length about getting involved in some capacity with what they are doing.

– Scott

 “If you think education is expensive, try ignorance” – Derek Bok


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