Chris and I are on the ground in Phnom Penh this week preparing for our Meet Up, which will have begun as you are reading this. We arrived a few days ago and have been getting the lay of the land with our partner Scott, who has been living in Phnom Penh for several months already.
[tell-a-friend id=”1″ title=”Share this article with a friend!”]On the way in from the airport it was incredible to see the growth that has occurred here in such short order. Construction cranes are everywhere, traffic is nuts and the young population (a result of Pol Pot’s ‘cleansing’) are as enthusiastic and hungry, maybe even more so, as they are anywhere else in Asia.Last night we met up with our friend Simon Black, fresh off the heels of his blockbuster internationalization conference in Chile, he stopped by while making his rounds through Asia. While sitting river side in one of the many upscale boutique hotels catering to Western and Asian businessmen, he made the comment that the growth from just a year ago was “incredible”. Even Chris, a veteran of Frontier Markets, was frankly astounded by the growth in the capital city in just a few short years since his last visit.
We’ll certainly have more to report as the Meet Up progresses, but meanwhile I wanted to introduce our readers to Canary Risk Intelligence, a firm that is operated by our colleagues Matt Clark and Brent Muckridge. Canary provides risk assessment, which as you’ll see is a broad mandate, for investors putting capital to work in Frontier Markets.
What Matt and Brent do is fascinating, and we think you’ll agree. They’ve also been generous enough to offer our readers a complimentary look at what they do, so read on and enjoy!
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Mark: Matt, you’re a journalist by trade, while your partner Brent comes from an operational/finance background. That seems like a natural fit for what you’re doing now with Canary. Tell us how you developed the idea to get involved in risk consulting, and provide us with a bit more color on you two before we get into the nitty gritty.
Matt: Mark, thanks for the opportunity to talk about our favorite subject! As you said, Brent comes from the operational and finance side, having worked in Frontier Markets such as Afghanistan, Palestine, Eastern Europe (Poland, Hungary, and Croatia) and east Africa. Brent spent a lot of time raising financing for operations in these markets. As with most Frontier Markets, getting financing is very difficult as most institutions do not maintain a credit desk unless they are already invested there or have a local operation. Often times, Brent would turn to many of our competitors and find the information was dated, lacked local insight, missed any analysis or useable data or needed to be updated over the course of the deal. Worse yet, in Afghanistan, the same firm hired by the bank relied heavily on Brent to prepare the report for the bank!
Given that reality and identified need in the market for something better, Brent went on to establish a boutique consulting firm that helped corporates in Frontier Markets to raise debt financing from DFIs and local and cross-border commercial lenders. In working with his clients, Brent faced the same issues with the country, market or industry reports.
My background is as a journalist. I reported from several Frontier Markets, including Peru, Ecuador, Kenya, Ethiopia, Uganda, Rwanda, Chad, Congo and many others. I also spent years building one of the most extensive global source networks in the news business, which is why we have “boots on the ground” in more than 170 countries. These are folks who have rebel commanders on speed dial. They regularly meet with key business leaders, government officials, union leaders, diplomats, intelligence officials, etc. They are used to rapidly vetting and analyzing key information to provide forecasting and intelligence on regulatory, political, security, and reputational risks in volatile Frontier Markets. That’s why boutique risk firms increasingly try to tap them to fill gaps in their reports. So Brent and I thought: “Why not mobilize this valuable network to provide the reports directly to clients that increasingly need it… OUR clients!?”
Mark: That makes a lot of sense Matt. So you’re targeting Frontier Markets, but what’s the client profile for Canary? What kind of investors or institutions come to you for help?
Matt: Our main clients are corporations that are looking to establish or expand their operations in local markets. The other client focus is on the institutional investor or commercial lenders (including DFIs) that want to do additional due diligence or need to have independent research for their internal approval process. There are many areas in which these can overlap, but practically the focus of our work will vary between the clients.
Mark: How do you assure your clients that you know what you’re doing? If I’m a $100M hedge fund and my investors are requiring I get third party opinions on the risks involved in a particular investment, how do they know to trust what you’re telling me, which in turn I’m telling them? Is there any kind of professional standards organization, peer group or certification for companies performing this kind of work?
Matt: One of the issues with the industry is there are no standards or certifications that are required. It is one of the reasons that the industry hasn’t changed in over 30 years. Most of our competitors are writing the reports while sitting at a desk in DC or London with little or no on the ground experience. That lack of experience shows in the quality of the reports and the focus that they take. For them, more pages of outdated data and generic indicators is their focus.
Mark: OK, so give us an example, theoretical or actual, of what a typical client project might look like.
Matt: We have worked with clients in Dubai and northern Africa that have looked to us to provide them with country level reports as well as market and industry reports. In some cases, these reports helped to support their business plans to attract equity investors. Others used the reports to support their internal credit and risk committees to approve the deals. The reason they went with Canary for these reports was they needed a quick turn around, the latest information and data in a format that fit their needs. They also wanted to make sure the report was concise and focused on the areas that mattered to them.
Mark: Obviously you two guys can’t cover the globe yourselves. As former journalists I’m sure you have networks in all kinds of odd places. Chris and I rely heavily on our contacts on the ground, it’s our “IP” if you will, the “secret sauce” that makes the whole recipe work. Give us an idea what’s in your secret sauce, how your information network operates and your depth and reach globally.
Matt: Sure. Great question. The first thing to realize about Canary is that it’s not just the two of us. It’s the network we’ve built day-in, day-out over many years. We work with over 200 suppliers on the ground in more than 170 countries. Each one has his or her own carefully cultivated satellite network of hundreds of local and regional sources. They know how to move quickly, vet information properly, and operate in extreme circumstances. Most have covered wars, insurgencies, labor unrest, economic turmoil, and political upheaval – not to mention legislative and business trends.
This network is what really sets us apart from other specialty risk firms that don’t command that global reach and rely heavily on academic analysis from offices in London, New York, or Washington. Where their information and analysis is quickly outdated, we are able to monitor the latest wrinkles from the scene.
Mark: Right, so you guys are able to move quickly and rely on a strong network because of your decentralized nature. Regardless, you probably have some regions you’re stronger in, as Frontier Markets encompass dozens and dozens of countries scattered across southeast Asia, Africa, South America, eEastern Europe, etc… Where is your network the strongest?
Matt: That’s a tough one. We truly are global. I guess I’d say we’re strongest in Africa and the Middle East. But we have strong networks in different parts of Asia and throughout the post-Soviet sphere. We’re also quite good in Latin America, especially Mexico, Brazil, Colombia, Venezuela, Peru, Ecuador, and Chile.
Mark: Chris and I believe we’re front-running a natural migration towards growth by investing in Frontier Markets. It’s not without challenges however, and without proper due diligence, guidance and some “luck” investors can get their proverbial butts handed to them. It’s happened to us many times! As experts in risk, what do you and Brent view as the single biggest challenge to investing successfully in Frontier Markets?
Matt: You guys definitely are out front on probably the biggest economic shift of the next few decades. I’d say the single biggest challenge of investing in Frontier Markets is embedded in the name itself. “Frontier” basically telegraphs the fact that you are out there in places where the rule of law hasn’t been established thoroughly. So you are left to the whims of politicians and their ilk much more than you are in the US or Europe. That’s scary!
While many investors focus on the economic and business trends – or on financial risks like liquidity risk or credit risk – they don’t really pay enough attention to political risks. I’m talking about things like regulatory changes, expropriation, prolonged political uncertainty, even insurgencies and social unrest. These risks are just harder to quantify or predict. The problem is those “softer” risks don’t just affect the cost of capital or limit your upside, they can destroy your entire investment. So you really need a firm understanding of the political dynamics, what’s likely to happen in the near and long term. And you need a strong on-the-ground source network to monitor the changes. Things can change so fast in these countries.
Mark: Right, we agree 100%! Canary is focusing on risk forecasting and intelligence, not strategy, but, your competition encompasses strategy. Why did you choose not to do the same?
Matt: The best way to put it is that focusing on forecasting and intelligence allows us to “put more wood behind the arrow” of our core service offering. We’ve seen competitors try to expand into strategy only to realize it distracted them and put them in a position of doing too many things and none of them well. In certain instances where strategic consulting makes sense, we can offer limited engagements.
Mark: Chris and I often find that investors perceive risk incorrectly. Where do you see the biggest disconnect for investors when assessing actual risk versus “perceived” risks in Frontier Markets?
Matt: Absolutely! We see that a lot. I think many investors have missed just how rapidly some of these countries are reforming, which lowers risks considerably. We see it throughout Africa, where Indian, Gulf Arab, and Chinese investors are pouring money now that the business, legal, and political frameworks of many countries have improved. Westerners, in many cases, are missing out. Much of the information they get continues to emphasize outdated risks that appear far greater from London or New York than they are on the ground. Because of our local presence, we understand how rapidly positive change can occur, especially in countries where a dominant regime can rush pro-business legislation or incentives through
Mark: Exactly! Investors are hearing a lot of opinions on places like Myanmar and Mongolia, both good and bad. Some call these places risky, others, including us, think they are outstanding risk/reward plays right now. Give us an idea where you think the highest risk/reward exists in Frontier Markets, and where would you absolutely NOT consider investing. Likewise, where do you think you HAVE to be investing? I’m looking for specific countries.
Matt: It’s our policy not to give specific transactional investment advice. But I can tell you some fast-growing economies where perceived risk far exceeds actual risk. Africa is now littered with countries in that category. Kenya is a good example. A lot of investors are worried about the stability of the country following its incursion into neighboring Somalia and ethnic tensions that consistently lurk just below the surface. The fact that Kenyans just elected a president wanted by the International Criminal Court doesn’t exactly put investors at ease. Still, Kenya is east Africa’s hub. Nearly all trade from rapidly growing neighbors must go through Kenya’s Indian Ocean port of Mombasa. And Kenya’s pro-business policies are not expected to change soon.
Nigeria is another one. The growth of Islamist terrorism in the north and the threat of renewed militant activity in the oil-producing south is scaring away many investors. But recent banking sector reform has dramatically decreased risks, making Nigerian banks a top investment destination.
When it comes to Asia, Cambodia is one example of a promising Frontier Market where perceived risk far exceeds actual risk. It has probably the lowest political risks and most pro-business policies of all its neighbors. It looks set to mirror the growth of Vietnam, which has been one of the top performing frontier markets in recent years.
Mark: Well we obviously agree with you on the Cambodia reality. It’s a tough place to get your mind around, as the Killing Fields and other domestic atrocities are still clearly in people’s memories. But, if you can get past that – not accept it, we would never suggest that – there are incredible opportunities here. We’ll be talking about those over the next few days at our Meet Up here in Phnom Penh.
Thanks Matt, it’s been a great conversation!
Matt: You’re welcome Mark, we’ll do it again.
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Matt and Brent have generously offered our readers a sneak peak at what they do, putting together a nice executive summary outlining Cambodia’s opportunities and outlook. You can access that for FREE here.
As we said, we’ll keep you posted as our Meet Up progresses, and what we uncover as we hear from Leopard Capital, the Cambodian Stock Exchange, Price Waterhouse Coopers, RMA Group, Bonna Realty and many others. If you couldn’t join us this time, never fear, you’ll get your chance at the next one!
– Mark
“Cambodia is where Vietnam was some 8 to 10 years ago… it’s one of the best investor diversification plays around.” – Marvin Yeo
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