Alexander Benard, CEO, Schulze Global Investors
First of all, we believe that the best opportunities in frontier market are to be found in private equity, as opposed to in publicly traded companies. There are many reasons for this, but primarily it is because most of the good businesses in frontier markets are still privately held.
In private equity, we see investment opportunities in four key areas. First are consumer-facing businesses. Populations in frontier markets are growing at a faster pace than in the more developed economies. Per capita incomes are also rising, with people spending more on basic consumer goods and services.
Second is infrastructure. Many frontier markets are investing heavily in roads, bridges, railways, and other large infrastructure projects. Although the projects themselves are often driven by the public sector, they create opportunities for private companies in construction, building materials and equipment.
Third is manufacturing. Many frontier markets are poaching manufacturing from countries such as China, where the labour cost has been rising. For example, Ethiopia is establishing industrial parks with the specific aim of developing a manufacturing base. Fourth is energy. In frontier markets, demand for electricity tends to grow at a rate of 1.5x GDP growth, with both retail and industrial consumers pushing up demand. As a result, many frontier markets offer attractive off-take arrangements, particularly for clean energy solutions such as solar, wind and hydro, to incentivise investment in these assets.
We believe it is exactly the right time to focus on frontier markets. In an era of low yields, frontier markets are still demonstrating strong growth. Indeed, in 2016, 18 of the world’s 20 fastest-growing economies were frontier markets.
At the same time, frontier markets are also becoming less risky, with more stable GDP growth, lower levels of inflation and fewer geopolitical conflicts.
And yet, despite their solid fundamentals, we find that frontier markets remain tremendously undervalued relative to the traditional emerging markets. Most investors shy away from them, so there is still a shortage of capital relative to the abundance of opportunity. Early movers can acquire high-quality assets at attractive prices.