Questions to ask when vetting Frontier Markets fund managers

Anyone who shares the opinion that New York Times coverage of an investment trend augurs its peak should be thinking twice about frontier markets allocation this year after its December 27 profile of Leopard Capital’s Doug Clayton. You can have at the full profile here, but many of the flashy numbers won’t surprise anyone accustomed to dealing in these sorts of markets. More notable to me is how upbeat the overall picture is being painted. As far as I’m concerned, this is the most important statement from the entire piece:

“He will have to tread cautiously. Mr. Clayton is moving into treacherous investment territory, plagued by infrastructure problems, corruption, political instability and weak or nonexistent regulatory leadership. For example, Mongolia’s economy is on shaky ground after a series of political maneuvers left foreign investors nervous.”

And that’s about as close as the NYT comes to addressing downside risks.

Let me state clearly that my concern here has nothing to do with Leopard Capital. I have yet to have any meaningful interaction with them beyond a few brief email exchanges, but judging by everything else I’ve seen come out of their shop they seem like they know their stuff. And while NYT coverage has obvious benefits for off-radar fund managers, one has to wonder to what extent NYT attention is a sell signal for some of these markets.

I realize this sort of approach doesn’t make for good headlines, but the bottom line is that for every Doug Clayton story out there, there are several more that didn’t quite work out. Part of this is no doubt due to Leopard’s particular approach; part of it is basic due diligence; part of it is luck; but part of it is a serious failure to acknowledge that the nature of risk in many developing markets is very different from even the riskiest propositions in developed markets, rendering many standard methodologies irrelevant (credit ratings, to name just one).

Of course, one of the grand lessons of the past decade-ish is that developing countries as a monolithic asset class kind of doesn’t work anymore and the need for differentiation among markets by now should go without saying. Cambodia admittedly isn’t my strong suit, so I can’t speak to the specifics of operating on the ground there, but I’ve had a running list of questions I’ve been wanting to ask a number of frontier markets funds, Leopard included.

So, I thought, until I have a chance to follow up on the backlog of conference calls with certain fund managers who have been reaching out to me recently, I would lay out what I have here and in the event anyone among you feels up for starting the conversation here, by all means feel free to go to it in the comments. In no particular order of importance:

1. What are the most probable risks you face investing in [country name] and what are the most effective ways you manage or mitigate those risks?

2. At what point did you conclude that the numbers you were seeing on paper bore some resemblance to reality?

3. What was the process you went through to incorporate in [country name], or whatever the proper description is for your physical presence there? From the moment you decided to enter [country name] until the moment you officially opened for business there, how much time elapsed?

4. What were the factors you took into consideration to devise your initial exit strategy? Has your exit strategy changed and if so, how and why?

5. What was your frontier markets experience prior to pulling the trigger on [country name] and what about your experience in [country name] so far is comparable to anything you’ve done or seen before elsewhere in the world?

6. What are some examples of obstacles you have encountered that you could have planned for better beforehand?

7. What are some examples of obstacles you have encountered that it was impossible to plan for?

8. Describe your due diligence process in seeking out local partners.

9. How do you deal with corruption?

If you like, you can consider this list of questions an addendum to this previously related reading: Frontier Markets Due Diligence, round two

Happy new year, etc, etc.

One response to “Questions to ask when vetting Frontier Markets fund managers

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