Via EM PE, a look at Mongolia:

In the land of blue skies, a niche investment opportunity awaits for first movers in an unspoiled market of growing SMEs primarily in the infrastructure and services sectors.
I recently spent a few days in Mongolia as part of our investigation into making potential fund investments in the country. This was my fist trip out there and to be honest, I haven’t been on top of what’s been going on there compared to other markets in recent months. I was pleasantly surprised.  Although the opportunity is rather niche (i.e small), the need for private sector investment is clear and will only grow as the economy continues to expand thanks primarily to the current and foreseeable mining boom.
For a country of 2.8m and the size of Western Europe, I was intrigued to find out that almost half of the population live in the capital, Ulaanbaatar (“UB”). The rest of the country is comprised of sparsely populated centers driven by nomadic traditions focusing on herding and livestock rearing. From what I’ve heard, there are something like 14m+ sheep and some 10m+ goats, and it takes up to 40% of the population to keep them in check. Until mining began to take off, livestock was a key driver for the economy.
 As the country becomes one of the darlings of the global economy, I wonder how  Mongolia really make its mark. Mining is big business, but they are susceptible to global commodity prices like everyone else (even if your next door neighbor is buying everything that comes out of the ground). There is also the question of how the people will use this boom to improve their lot. Right now, everyone expects a piece of the mining pie. There is much public scrutiny (and expectation) for what’s going on with these mining concessions (which is great), that it’s unfortunately driving populist policies (this is an election year after all). 
So how does all this bode for SMEs and growth capital in particular? Well, I think the opportunity is there, but it will take some time before there manifests an ample supply of entrepreneurs that drive company growth for mainstream PE players to enter. That being said, there is clearly an opportunity for probably 2-3 niche PE fund investors (non-mining specific) over the next handful of years that could help build some interesting companies and cement the foundation to make equity capital flow into the country. These should be small funds, sub $100m and run by locals who know the business climate inside out.
Areas to watch? On my trip, I had a chance to spent some time and look at the Infrastructure and Financial services market. The mining boom is not only focused on the TT and OT projects. There are hundreds (some say thousands) of mines and dozens of infrastructure projects around the country that require equipment and the logistical services to support them. Leasing is still a nascent industry in Mongolia and as I’ve seen with leasing companies in the CIS, a strong demand resides with growing SMEs who simply do not have the capital outlay required to obtain equipment that range anywhere from cars to forklifts.
(From an Airline magazine off to the Gobi)
  • Concentration risk: UB, was designed for a population of 600k but now has almost 1.5m. There is nowhere to expand as its surrounded by mountains, leaving limited options of where industry can grow.
  • Population growth: The country is only growing at about 1.5% per annum.
  • Unemployment: Many of the people living in Yurts on the outskirts of UB are severely under employed which coupled with the harsh winters is leading to rising social problems.
  • Currency: The country has a freely tradable currency that should remain stable and steadily climb due to commodity exports.
  • Investment regime: They are in the process of implementing a new securities markets law that is very FDI friendly.
  • Growth: In 2010, the Mongolian Stock Exchange “MSE” saw shares climb 121% and was the second best performing market.
  • Partnerships: In April 2011, the MSE partnered with the LSE to help modernize and transform it into a top tier market in Asia. It will be going through changes to its listing requirements (dual listings now permitted) and make it generally easier for brokers to do business.
  • Doing Business: Mongolia shows up as No. 29 on the World Bank’s Doing Business report and averages a 6.3/10 on strength of protection (which is the same as Denmark and Pakistan for that matter)
  • Lack of Competitive financing sources: Local banking institutions do not readily make capital available for SMEs and lack of deep entrepreneurial culture does not support strong Angel investment community – leaving a strong demand private equity.
  • Political elite: Although there have been some questionable actions taken by current government against political opponents recently (running up to June elections) , it is interesting to learn how pro business the Government is. Most in power have private sector backgrounds and/or operate their own businesses.
  • Growth: The Economists expects a 15%+ GDP growth from last year. FDI inflows have increased an estimated 120% from 2011, while GPD grew by 17% in 2011 and projected up to 22.5% by 2013.
  • Mining Boom: Mongolia has benefited from the performance of global commodity prices and high demand from China. It has some of the largest coal and copper deposits in the world. With the beginning of the Tavan Tolgoi (“TT”) coal mine in the Gobi (which is amazing to behold BTW) and the OT for Copper, these will help trigger capital inflows with multiplier effects that will drive infrastructure investment, logistics, food and services across the economy (especially UB).
Some Challenges to look out for:
  • Sector dependence: Mining does account for 20%+ of the country’s GDP. It’s a little risky having all these eggs in one basket.
  • Restrictive skill set: It is estimated that 40% of the population earns their living involved in the livestock industry. 
  • MSE Size: Although only a little over 300 companies now, there is very little liquidity and you have anything from hair salons to statues that have listed. Later this year, TT is scheduled to launch an estimated $10b offering which should stimulate the markets and push for a clean up of listed entities.
  • Politics: Populist government policies of free land allocation (0.7 ha per person)  and one time payouts are great, but when they don’t have the funds to fix the weakening infrastructure around UB, something doesn’t add up.
  • ‘Dutch Disease’: As Mongolia becomes one of the largest Coal and Copper suppliers to the global economy, demand for its currency will drive up their value which can lower export demand. This also plays a role in driving up inflation. The Cashmere industry is already starting to feel the pinch.
All in all, the success of any PE entrant will be dependent very much on a locally entrenched team who are glued into the UB business circles. The country might be vast, but is rather small when it comes to business opportunities.  Elections are due at the end of June, we’ll just track how things evolve shortly after.
I like to compare many of these emerging markets to Vietnam (my personal fav)  . Have you look at the enclosed charts from the World Bank:
GDP Per Capita
Consumer Price Inflation (%)
Market Cap of listed companies (% of GDP)

This entry was posted on Wednesday, July 11th, 2012 at 4:45 am and is filed under Uncategorized.  You can follow any responses to this entry through the RSS 2.0 feed.  Both comments and pings are currently closed. 

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Wildcats & Black Sheep is a personal interest blog dedicated to the identification and evaluation of maverick investment opportunities arising in frontier - and, what some may consider to be, “rogue” or “black sheep” - markets around the world.

Focusing primarily on The New Seven Sisters - the largely state owned petroleum companies from the emerging world that have become key players in the oil & gas industry as identified by Carola Hoyos, Chief Energy Correspondent for The Financial Times - but spanning other nascent opportunities around the globe that may hold potential in the years ahead, Wildcats & Black Sheep is a place for the adventurous to contemplate & evaluate the emerging markets of tomorrow.