Finnovation in Action: Exploring “Quasi-Equity” in Cambodia
By Brian Jones
Finnovators met with Gordon Peters, a Senior Consultant for Emerging Markets Consulting (EMC), on Tuesday, March 16. A former consultant at Bain and Company, Gordon directs EMC’s business development and leads various consulting projects. In addition to traditional consulting engagements with multilateral financial institutions and the private sector, EMC launched a private equity fund last year. Leveraging its industry expertise and understanding of the strategic business landscape in Cambodia, the firm is optimistic about investment opportunities.
The financial innovation utilized here is gaining favor among many investors in developing economies: quasi-equity. Typical features of this financial instrument include:
· Subordinated note. The debt-like nature of the instrument provides an exit strategy via the instrument’s maturity.
· Below-market coupon rate. Lower interest payments allow the operating company financial flexibility as it seeks to achieve growth and profitability.
· Equity conversion. An equity component compensates the investor with equity-like returns for taking substantial risk and extending below-market rate securities. This often takes the form of warrants or a conversion option.
A major concern among investors in Cambodia is the dearth of exit opportunities for equity investment. Liquidity is thin and acquisitions remain the primary means of monetization. At the same time, lack of transparency, corruption, and asymmetric information only compound the issue of putting reliable numbers behind otherwise enticing investment opportunities.
However, the country is gaining ground on many of these fronts. The government is increasingly focused on private sector expansion and regulated markets. To this end, a local stock exchange is expected to open within the next few years. And our finnovators have identified numerous companies that have recently started funds with a variety of investment theses and capital requirements—a signal that investment opportunities are becoming more attractive and that access to capital and liquidity are improving.
In short, Cambodia is experiencing the typical growing pains of a young, developing economy. And for investors willing to navigate these frustrations and put patient capital to work, social and financial returns look promising.
