May 12, 2014
Interviewed by: David Snow
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The New Emerging Markets

Chevy Chase Trust’s David Ross discusses the opportunities in Romania and the Philippines, as wage growth and, other economic shifts, in China and Germany prompt firms to look elsewhere.

Chevy Chase Trust’s David Ross discusses the opportunities in Romania and the Philippines, as wage growth and, other economic shifts, in China and Germany prompt firms to look elsewhere.

The New Emerging Markets
With David Ross of Chevy Chase Trust

David Snow, Privcap:

We are joined today by David Ross of Chevy Chase Trust. David, welcome to Privcap. Thanks for being here.

David Ross, Chevy Chase Trust:

Thank you. It’s my pleasure.

Snow: Your firm likes to take nuanced views into how to invest, based on in-depth research, and you have come up with a thesis that is at play in your emerging market strategy. I’d love for you to walk us through it. It has something to do with the changing nature of commercial relationships between the west and many emerging markets that you think is opening up new opportunities in emerging markets. Can you walk us through it?

Ross: For the last 20 years, the major story has been the role of China as the manufacturer to the world. In essence, China became the beginning of the supply chain. That was a factor due to their low wage cost and ability to always throw more people at any problem. That’s changed dramatically. Wages in China have jumped tremendously and the other part of that story has been the German export machine. It has been driven by wages that have stayed flat for over a decade in Germany, which were held down artificially due to the reunification with East Germany and the low wage structure they brought into the country.

All that is changing. Now, the new government in Germany is saying they’re going to implement a minimum wage for the first time in Germany that’s going to increase wages. So, in both cases, with China and Germany, those export machines are going to be moving outside their countries and into more regional hubs. We’re already seeing that move from China to Mexico with manufacturing coming back there because of proximity to the U.S. We’re starting to see some re-onshoring with U.S. manufacturing. But we’re also seeing a great move from China into the Philippines, which has been experiencing 7%+ growth for the last two years. Even with the typhoon last quarter, they still came up with 6.5% GDP growth. In the case of Germany, we’re seeing movement into the emerging markets of eastern Europe.

We’re seeing an expansion into Romania, which, from my perspective looks like the next Colombia. Again, we’re very early in that stage, but 10 years from now, people will be saying, “I really missed an opportunity in Romania.” That’s the thesis we’re building out and those are also some of the areas we’re looking next for private equity opportunities. In Romania, the stock market capitalization is 7% of the GDP of the country. There is no stock market, so you really have to rely on private equity to provide capital.

Snow: What would be some types of assets or companies that one would want to own as these trends unfold? Would it be logistics? Run us through some of the private equity plays where the investors would benefit from these trends you describe.

Ross: Particularly in a country like Romania, they are going to be undergoing privatization of state assets over the next two years. So, we would look for private equity to be involved in that bidding process to get part of those privatizations. It’s a bit different in countries like the Philippines or in the Asian countries where many firms are family dominated and are undergoing tremendous growth. Again, when you look at the banking structure of most of Asia, particularly in the Philippines, banks there don’t lend money. They bring in cheap deposits and they buy government bonds. The deposits range about 0.5% and they can buy government bonds at 5% or 6% at no risk. So, to capitalize firms, there’s a role for private equity to be stepping in and providing that.

Snow: It’s one thing to say, “I would like to be the indirect owner of these kinds of assets because I believe the world is going to change in a way that will favor the owners of those assets.” It’s another thing to find talented private equity managers who can actually execute that. Have you found it challenging to go to some of these frontier markets and find GPs that can actually do what needs to be done to capture that growth?

Ross: Yes. Obviously, there’s not a lot of homegrown talent in these regions and, because they’re small, under-the-radar types of economies, the large firms have not sent much talent into those areas. We’re encouraging people to look for the large firms to partner with a local firm, a local person. They can provide them with the expertise, but the local people know the bureaucracies, how to deal with the government and how to find the deals.

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