January 30, 2013
Interviewed by: David Snow
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Cordiant’s Emerging World View

From his headquarters in Montreal, David Creighton oversees an investment business that has placed equity and debt in private companies across 55 emerging markets. The President & CEO of Cordiant Capital returns to Privcap to share his views on why domestic consumption is the most attractive trend to invest behind, why Russia and second-tier Russian cities remain attractive, and why frontier markets and frontier zones within the BRICs will be big themes in 2013 in emerging markets private equity.

From his headquarters in Montreal, David Creighton oversees an investment business that has placed equity and debt in private companies across 55 emerging markets. The President & CEO of Cordiant Capital returns to Privcap to share his views on why domestic consumption is the most attractive trend to invest behind, why Russia and second-tier Russian cities remain attractive, and why frontier markets and frontier zones within the BRICs will be big themes in 2013 in emerging markets private equity.

David Snow, Privcap: Today we are joined by David Creighton of Cordiant Capital. David, welcome to Privcap today. Thanks for being back.

David Creighton, Cordiant Capital: Thank you, David.

Snow: We’re going to talk all about the emerging markets private equity opportunity. Obviously your firm Cordiant is active all over the world in emerging markets. So I’ll be very interested to hear what the update is from your vantage point.

First, a question about the way you structured your firm. As far as private equity firms go, Cordiant is a modestly sized firm, and yet you’re active in many different geographies. How do you maintain a quality program of investing while being in so many different places?

Creighton: Yeah, well we’re doing both private equity and debt. And I guess the key driver of our strategy is that we partner with people on the ground who are motivated to work with us because we recognize the fact that we can’t go everywhere.

In my previous life, I’ve opened offices across Asia and I know that you can open an office and the country can graduate away from you. And then do you ever close the office? No, you actually just have to keep it open until it’s too late and it doesn’t make sense.

So the strategy that we have is to partner with groups that are on the ground, who want to work with us, and who can act as this “boots on the ground” concept which is just so important.

Snow: Given that you are active in many different places, where have you seen some interesting upticks in activity across the emerging markets, whether it’s by geography, or sector, or both?

Creighton: I think one of the things that we have really done is now, 10 years or 12 years into our existence, we’ve been able to look back at the 200 deals we’ve done across 55 different countries and try and find out what the commonality is to that. Because we have very broad range of sectors, and obviously countries, that we’re looking at. And the recognition is that within emerging markets that there are really three different ways to be able to gain access to corporations.

 

And probably the first one, and the obvious one, and the oldest one is the extractive industries. So whether it’s oil and gas, or mining, or what have you. The problem with that is that you’re subject to price fluctuations which are beyond your control and beyond the country’s control.

The second level is to go for manufacturing for export. So think of China and think of low-cost labor countries that are able to get products to the market. Again, you’re subject to the appetite from the Western markets.

And the third one, and this is really where we have found that the majority of our activity has come, is from domestic consumption. So whether that’s power generation, financial services, manufacturing for local consumption, these sorts of things. So without really talking about specific sectors or countries, the theme is there’s local consumption. And then the countries that we’re probably more involved with are those where there is an internal growth and there is that shift from one economic level to the next and people with disposable income.

The most fabulous thing about the emerging markets is that 10 years ago if I’d been asked which countries would we be involved in 10 years from now, I certainly wouldn’t have put down on the list a lot of the ones that we are doing business in. And those would include the Azerbaijans of the world, Nicaragua, certainly Columbia. It was a war zone 10 years ago, and now it’s just fine. And up and down throughout Africa, west Africa and east Africa, we’re certainly doing a lot more and down through the south. So certainly a lot of countries that we were not even thinking about doing business with 10 years ago that we’re now doing business with.

Snow: There’s a very large country in the BRIC acronym, Russia, that used to be seen as a very big private equity opportunity. But I think in recent years many institutional investors have been scared off the Russia opportunity for a number of reasons. I wonder what your view of Russia is, and is it a place that you would not prefer to go over the near term? Or do you remain optimistic about what could be done in Russia from a private equity standpoint?

Creighton: We’ve been investing in Russia for 10 years. We’ve done about a dozen deals and every single one of those deals has done exactly what it’s supposed to do. I can’t say the same thing about some of the other BRIC countries.

I coined a phrase a couple of years ago when we were all starting to think about Africa on perception of arbitrage, and I think that that now applies to Russia. The problem with Russia is all the news that you get is from the government talking about strategic assets. And all the high level problems with corruption, transparency, and all the rest of the stuff.

What we have found in Russia is that if you dig a couple levels down below that, you can find good business people that you can partner with. Great projects that have fundamental drivers behind them that will give you an investment that makes sense. And a public that actually wants to move forward.

So I think of real estate– you don’t want to do real estate in Moscow. Ikea has found that out. And that’s a tough business because it’s almost considered to be a strategic asset. But we’ve done shopping malls out in places like Saratov and out in some of these other 20-odd cities of population of one million outside of Moscow. Very few of them have any shopping malls and we’ve seen across Africa and elsewhere that there’s a real demand for that.

We’ve just going to deal in southern Russia, in Rostov, which is focused on soybean crushing for oil. And there’s a real demand domestically for this high quality oil as the Russian citizens are starting to demand higher quality products. This is the business that’s really being able to fulfill that.

So again, these are fundamental businesses, they’re off the radar of the central government. They’re not going to have any intermediation for non-commercial terms, which is a problem with the strategic assets. So there’s a real opportunity to be able to pursue that. And everybody’s scared away by the Russia stories, so there’s a real opportunity.

Snow: Your firm does, as you mentioned earlier, both equity and debt investing. Can you talk about why you’re active in debt and what kinds of opportunities lead to that type of investment as opposed to equity?

Creighton: To be honest, I think the risk return profile of emerging market debt is actually better than it is for equity. There’s a real demand for investors to gain a broad range of exposures across the emerging markets. And there are very few providers of private debt within the emerging markets, so that’s something that we’re were filling in.

Traditionally investors have gone into the public equity markets, the private equity markets, the sovereign debt and the publicly traded corporate bonds. But the private debt market is something that hasn’t really been pursued. So I just feel as though we’re in the right place and that there’s a demand for emerging market credit.

Snow: As you think about what you think the big trends and the big drivers will be of activity in 2013, what comes to the top of the list as far as private equity emerging markets goes?

Creighton: The BRICs and the coining of the BRICs phrase is something that really got a lot of people into the emerging markets. I think now people are becoming comfortable and they’re going to be moving into the frontier markets. The frontiers should also be including the frontier areas of the BRICs. So when I talk about Russia, you get away from Moscow, you go out into Siberia, and you go out into the far east. In Brazil we’ve been doing some projects way up in the Northeast.

So you’re not necessarily abandoning the BRICs altogether, but you’re finding those areas of opportunity that have not really been trodden yet. And then there’s the traditional frontier markets which is just continuing to expand. And Africa’s obviously an area of extreme interest and some very positive developments there. So I think that the crystal ball is going to just show that there is greater appetite to be pushing further out into newer countries.

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