By David Wolfe*
In the first few months of the Trump Administration, the United States pulled out of the Trans Pacific Partnership (TPP) and unveiled their new ‘skinny’ budget, slashing the budgets for the diplomatic corps and development assistance programs as promised during the campaign. This major shift in the US’s ‘soft power approach’ has left Asian emerging market economies concerned about US Government economic assistance and development as the US is retracting from President Obama’s ‘Asian Pivot.’ What’s more, the policy change leaves many states guessing whether the United States will remain the erstwhile partner it was in the past? In the short term, the answer is no. The majority of the region consists of emerging economies that relied heavily on the United States for both economic and security assistance. Regional economic development also served as a firewall to combat a rising Chinese hegemon. So what does this change signify for emerging economies that have traditionally relied on US Government FDI? Well, all indications point to Private Equity and Venture Capital (PE/VC) firms to gladly step into that void and seek an incredible return on a region ripe with opportunity, and incredible potential.
Regional states would rather not rely on China as a source for economic investment. First, this will put them at a considerable disadvantage with regards to maritime disputes in the South China Sea currently in arbitration. PE/VC firms traditionally have treaded lightly in a region full of political risk, and in many ways lacked the intellectual capital on their teams who bring an internalized understanding of the facts on the ground. However, times are changing. Given the potential for investment in emerging economies due to the continuation of TPP with regional states, as well as China’s One Belt One Road Initiative, firms can expand their global footprint and change the perception of being ‘vulture’ capitalists to actual venture capitalists.
PE/VC firms are expanding their research divisions with regional, cultural and linguistic experts. One key example of this is KKR’s installation of fmr. Gen. David Petraeus as the head of the KKR Institute, which focuses exclusively on the political risks and bridging the gaps between cultures that once were an impediment. In addition to KKR, the Carlyle Group and the McChrystal Group have invested heavily in regional experts. By reducing the political risk, once the primary concern for any potential investment, firms will feel greater security in potential investments. The employing of experts to conduct due diligence and lead negotiations with regional stakeholders, this will reduce miscommunications that tend to occur between western firms and Asian partners. Once again, many regional experts are expecting to be cut in the latest skinny budget from the State Department and USAID, and expect PE/VC firms to take full advantage. PE/VC firms will gain expertise, preexisting relationships, linguistic capabilities and a cultural understanding that changes political risk dynamic. For once, firms will not be flying blind and will know first hand where there is potential, and where there is not.
KKR was the first to publicly announce its intentions. In their 2016 report titled “Asia: Pivot Required” KKR stated that “with demand for credit now exceeding supply, we see demand for private capital by promoters and entrepreneurs solidly increasing.” KKR has backed this up by announcing on April 20th that they completed and funded US$250 million investment in Masan Group and in its branded meat platform, Masan Nutri-Science. This targeted investment provides greater insight into how the PE/VC community can pinpoint specific industries. Additionally, this injects confidence for other PE/VC firms to invest in the region. The KKR/Masan Group deal was not possible without regional experts who crossed over from the public sector and could conduct due diligence with regional contacts and previous regional experience in policy and culture. Experts in regional economics and policy know the risks first hand. They also know the reforms being made by regional players reduces the political risk that once made firms skeptical.
According to Gillian Tett of the Financial Times, Private Equity firms such as Kohlberg Kravis Roberts & Co (KKR) and the Carlyle Group rank in the top 10 of US based employers. They employ more than 700,000 people in their portfolio companies globally. With the US withdrawal from the Trans Pacific Partnership (TPP), investment firms are expected to expand investment into emerging regional market economies. Previous risks in Southeast Asian capital investments such as corruption and mismanagement are gradually improving. In order to become more attractive to private investors, emerging economies must address the corruption issue so private investors will see greater investment potential with less political and capital risk.
The majority of ASEAN countries rank in the bottom half of Transparency Internationals Corruption Perception Index for 2016. For the Asia Pacific region specifically, the report states that, “Poor performance can be attributed to unaccountable governments, lack of oversight, insecurity and shrinking space for civil society, pushing anti-corruption action to the margins in those countries. High-profile corruption scandals, in addition to everyday corruption issues, continue to undermine public trust in government, the benefits of democracy and the rule of law.” It must be noted that at the time of this assessment, both Vietnam and Myanmar were in the process of expansive reforms, and are expected to improve greatly. These states are critical to regional growth and are making incredible strides in expanding the private sector. Though the employment of more cultural and linguistic regional experts this will dramatically reduce traditional political risk and firms are already beginning to show they are ready to make that move.
Of course, as with any investment into emerging economies, risks remain present. However, there is no doubt that given the vacuum created by the US Government with regional partners, as well as a reluctance and trust to do business with the Chinese, PE/VC firms have incredible opportunity. By employing regional experts and former diplomats, PE/VC firms will find greater flexibility and potential to gain a significant regional foothold. With experts in place who bring a belief in economic development, intellectual transfer and a commitment to transparency, a new era is potentially on its way.
*David Wolfe is a specialist on Asian Security and private consultant for foundations, development firms and corporations specializing in human security, supply chain management and intellectual capacity building in emerging markets in Indo-Asia-Pac countries. He has previously written for the Denmark based Riskline, the Foreign Policy Journal, The Journal of Political Risk and Tokyo based Ai-Eye Magazine.