Portrait Of A Frontier Investor

Courtesy of the Financial Times, an interesting look at Schulze Global Investments, a frontier market investment fund:

Gabriel Schulze

Pioneer fund: Gabriel Schulze is upbeat about Ethiopia

No sooner had US investor Gabriel Schulze moved to China to gain a foothold in the world’s most promising untapped markets eight years ago than he realised he was already behind. “I moved to China thinking I’m on the frontier, I’m ahead of the curve, and of course as I lunched in China where are all the Chinese going? They’re going to Africa.”

Mr Schulze, fifth generation of a billionaire mining family, quickly followed them to Ethiopia, where he created the first private equity fund dedicated to one of the continent’s most closed countries. “People told me I’m nuts?.?.?.[but] if you were looking for a place that wasn’t fully appreciated yet Ethiopia won hands down,” he says.

Mr Schulze is at the cutting edge of frontier investment, whose promise of reward for risk-taking is attracting increasing interest and delivering returns against the grain. While money haemorrhaged from emerging markets this year, shares in frontier markets far outperformed their less edgy peers, delivering double-digit growth.

Yet listed shares are only part of the story. Frontier stock markets sometimes run to only a handful of companies – or there is no bourse at all. That is why Mr Schulze prefers private equity investments, partnering with family-owned businesses.

Like many, Mr Schulze once saw Ethiopia as a “poor, impoverished country”, not least because his philanthropist parents adopted three Ethiopian orphans following the 1984 famine. Today he sees an Ethiopia filled with potential instead. His family put $10m into the groundbreaking private equity fund before attracting $90m more from others. The fund has taken stakes in coffee, education, food and cement companies.

Mr Schulze has since added further exotic and high-risk investment destinations, turning away from China and Brazil – “largely yesterday’s story” – in favour of cashmere and mining services in Mongolia, a $100m hydropower fund in Georgia and even North Korea.

“I really believe that opportunity is found on the edge of our comfort zone,” says Mr Schulze, a mandarin-speaker. He has a controlling stake in Schulze Global Investments, which he set up in 2006 with family money despite scepticism from his supportive father, who worried about geopolitical risk and poor governance in such edgy markets.

But Mr Schulze, who wants his group to manage more than $1bn in the next five years, believes frontier markets are not necessarily riskier. “They’re just very often misunderstood or overlooked,” he says.

His inherited wealth means the eye-poppingly tall (6ft 8in) investor is by no means obliged to seek a fresh fortune in the farthest corners of the globe. “If I really wanted to I could sit on my hands for the rest of my life and I’d be all right,” he says. “I get up and do this because I enjoy the challenge.”

It is a challenge he has largely taken on in private. Mr Schulze doesn’t generally give interviews and has even shut down his work email account, instead handing all correspondence over to his Singapore-based assistant. Carrying business cards is an innovation for a family that is otherwise private to the point of secrecy. He will not say how much his family’s private investments are worth – describing them only as “significant and well-diversified” – nor will he give his age. Nevertheless, Mr Schulze ends up speaking for six hours with great energy.

He diverges from the prevailing trend of big funds that spread emerging market risk through regional diversification and controlling stakes. Instead he favours single-country funds and minority stakes. So far he says he has exited more than a dozen deals with internal rates of return in excess of 30 per cent.

“I think sometimes people, including my own father, in the past looked at us and said, are you guys just cowboys? I think you can be a cowboy once and be lucky but I think we’ve developed a pattern of success in getting into these markets.”

In another way, the family has always embraced the cowboy spirit, pushing back frontiers in the best entrepreneurial traditions. His great-great-grandfather William Boyce Thomson was “a mining guy who went to Wall Street and figured out how to connect the two”.

The Colorado industrialist founded Newmont Mining in 1916, listed it in 1925; by 1930 it was the world’s third-biggest mining company and delivered the Schulze family the fortune it invests today.

Intervening generations died young, experimenting with their relationship to huge inherited wealth. Mr Schulze’s parents met and married in a New Age commune dedicated to enriching the soul rather than the wallet. Mr Schulze remembers a big Buddha in the dining room and tales of a long-haired beekeeper father before his parents left the commune and embraced Christianity.

“You can have everything but if you don’t have purpose you have nothing – wealth in and of itself can be as hurtful as it is potentially helpful,” says Mr Schulze, whose family today has very few shares left in the $13bn gold and copper miner, which employs 40,000 people.

“Inherited wealth can bring a certain degree of insecurity because the risk is that you’re never quite sure if you really deserve where you are in life.

“I think that?.?.?.?self-made billionaires, they look back and say, ‘Gosh?.?.?.?I worked hard and I made the right decisions and I succeeded’. Inheritors say, ‘Well, I woke up one day and I was born and I guess that was succeeding’, and it can be sometimes a bit undermining.”

That’s one reason the Wake Forest University student nurtured a desire to break away from “boring, plain vanilla” investment activities, pursue a trenchant work ethic, make a difference and do something productive with his “20-mile head-start”.

As a “strange” college student he regularly risked exhaustion rather than laziness, joined his father on weekend business trips and read private placement memorandums – “these thick, horrible legal documents that funds put together?.?.?.?for fun”.

Today he operates from Singapore, and likes his investment teams to be based locally so they face “the same realities” as their companies – capricious authorities and the necessity and frisson of relying on friendships without reverting to corruption in “incredibly opaque” yet dynamic markets.

North Korea is easily his most opaque – and provocative – investment destination, where Mr Schulze insists he complies with “very comprehensive” US sanctions that target an authoritarian regime that runs gulags and regularly threatens nuclear warfare.

“We decided to step out on a limb – in many respects the North Koreans are living in a world not too dissimilar from where China was 30 years ago. I think we can help build bridges,” he says.

“This is a country that is increasingly exposed to the outside world. I was really surprised by the level of economic vibrancy – the basic potential of North Korea is massive.”

So far he says he has done four “really clean” deals, involving million-dollar loans to three of the “more entrepreneurial” state-owned exporters, all repaid on time at a “very high” rate of interest, as a prelude to larger investments.

But even North Korea may not be the final frontier. At a recent board meeting, Mr Schulze and his father discussed the potential for opportunities in outer space.

“The boundaries of frontier investment will keep moving,” he smiles. “Some day in the decades to come we’ll be looking for first-mover advantage on Mars.”


How to get off the beaten track

Intrepid investors who believe they understand opportunity, risk and return differently from the rest of the herd have always plumped for frontier markets.

But even a risky frontier can attract an ill-informed stampede, as demonstrated by the 19th-century gold rushes in the US and other countries.

Indices help package the edgiest of offerings to today’s trailblazers. Some investors favour funds that track the MSCI frontier markets indices, which feature companies in 33 countries including Bangladesh, Bulgaria, Jamaica, Jordan, Kazakhstan, Kenya and Oman. The index is up 16 per cent so far this year.

Other fund managers have embraced frontiers as their bread and butter, including Franklin Templeton, whose $1.4bn frontier investment fund plumps for Kenya, Nigeria and Saudi Arabia among others.

There are also vehicles that pinpoint debt, such as JPMorgan’s Nexgem, or currency. Even if the returns can be impressive, large players find that such small markets cannot absorb the amount of money they want to invest.

To access the world’s least penetrated markets, the most off-grid investors go for private equity or old-fashioned trade.

Some, meanwhile, try to spot potential in countries emerging from war such as Sierra Leone or South Sudan, where there is no substitute for local knowledge.

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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.