Hot frontier, at some point

Myanmar’s transformation from military dictatorship to democracy continues, drawing a crowd of frontier-focused private equity firms. But many say it is still too early to invest.

Last month’s swearing in of Aung San Suu Kyi (known as “The Lady”) as a member of Myanmar’s parliament represented the country’s “Berlin Wall moment”, according to a European official.

It’s too early to agree with that description, but not too early for private equity firms to make fundraising plans.

Myanmar’s ongoing political reforms translate into a compelling commercial story that is not going unnoticed.

Leopard Capital aims to launch a $100 million fund for the country by the end of 2012, revealed founder Douglas Clayton. Among the other firms lining up are Bagan Capital and Yoma Strategic Holdings – both opportunistically raising Myanmar private equity vehicles. Singaporean sovereign wealth fund Temasek Holdings has been “seriously looking for deals” on the ground, according to PE Asia’s industry sources. Most telling, TPG Capital co-founder David Bonderman made a recent visit to touch base with business and political leaders, The Financial Times reported.

From a macro view, Myanmar tells a pretty good story. The European Union has suspended sanctions and the US has pledged “targeted easing” of the ban on US financial services and investment. The GDP growth rate is climbing steadily, forecasted by the Asian Development Bank to reach 6 percent in 2012 and 6.3 percent in 2013.

Tokyo-based Patricia Higase, who has Burmese heritage, recently launched a Myanmar-focused private equity fund called Link Road Capital Management. She notes the real estate opportunities in Myanmar. “In eight years in a closed economy, residential property [values] went up three-fold. So if you think about the country opening up and all these foreign investors coming in and the lack of supply, I think residential demand easily can go up 10 to 20 times.”

Myanmar also offers an abundance of natural gas, jade, timber and oil. However, Chinese “buccaneers” and the Chinese government have been buying these resources, according to Thomas Holland, head of Asia at alternatives manager Cube Capital.

As a result, valuations won’t be as cheap as some may hope. But the markets will have benefitted from the investment activity. Holland says that the Chinese “filled a void” during the era of sanctions, when other investors were restricted in the country.

The stock market isn’t due until 2015 and the currency has just been floated. Therefore, private equity is likely to be the first form of investment, says Higase.

But she qualifies the enthusiasm. Western sanctions need to be lifted as opposed to simply suspended. She is also sceptical that fund managers waiting for the gates to open will have genuine local knowledge required for investing there. “There will be a lot of new surprises; I think it will be a very different climate in some ways from Vietnam [and] Cambodia.”

For private equity, the surprises could arise from the shaky legal system or lack of a credit system. Cube’s Holland explains, “The major thing is getting your money in and feeling comfortable that your money can come out. The whole system is untested really.”

Even the development banks are hesitant. They are doing little more than conducting research and giving quiet advice at this stage, says Leopard’s Clayton.

Myanmar’s next transformative phase will require economic growth. Roughly one quarter of the 60 million population live in poverty, with a per capital income sitting at $700, lower than neighbours Cambodia, Laos and Bangladesh. Foreign investment could play a major role supporting – and ideally helping to justify – the country’s fundamental shift to democracy.