Angels, and Devils in the Details
Talking shops are more than just about keeping up with the Joneses
CONFERENCES can be wonderful experiences, assuming you’re not jet-lagged and you don’t actually sit through all the conference sessions (yawn). It’s somewhat like college: you pick the sessions worth physically showing up for, and decide which ones to sacrifice for the sake of networking with peers (not to mention swiping sponsor freebies such as pens, USB flash drives, post-it pads, etc.). Now we hope none of our children get to read this, lest they think we parents are okay with cutting any classes whatsoever. Heaven forbid.
During last month’s Asian Venture Capital Journal (AVCJ) Forum in Hong Kong, we benefited just as much from topics discussed during the plenary and breakouts as from confidences exchanged during coffee breaks. A particularly fascinating one-on-one conversation we had (in between bites of mushroom quiche and sips of bubbly) was with a private equity managing partner who candidly lamented his travails in the arcane realm of Sharia law-compliant investing.
The fellow’s PE firm, based in a South East Asian country with a significant Muslim population, used to be a subsidiary of a state-owned investment arm of one of the smaller countries in the Arabian Peninsula. This PE manager had invested some years prior in a chicken-themed fast food chain that’s operating in a certain other South East Asian country that has some 7,000-odd islands, give or take a hundred or so. (Gee, do you think we’re giving away too much here?)
To further complicate matters, the fast food chain had of late experienced disturbing success with new menu items featuring bacon and other cuts of pork. Inevitably, a doctrinal question arose. This was no trivial matter, because the manager also happened to be in the middle of considering a possible new investment in a hotel chain in China. The specter of prohibiting alcohol from being served at the investee hotels in an infidel society crystallized the cultural clash between the less-conservative Asian manager and its more-orthodox parent.
“So just what constitutes Sharia-compliant?” we naively asked.
Apparently, we were told, there seems to be no global consensus to help PE managers navigate their way between the shoals of religion and the reefs of commerce.
The Middle-Eastern parent eventually sold off its South East Asian PE subsidiary, thereby allowing both firms to maintain their respective Sharia-related philosophies and policies (with the PE manager keeping its chicken-centric fast food restaurants in said predominantly-non-Muslim archipelago, and with the parent continuing to see – possibly literally – the devil in the menu details).
Mercifully, far less contention attends acceptable environmental, social, and governance (ESG) practices, which nowadays are a by-word in PE circles.
As recently as fifteen years ago, ESG was actually a four-letter word, espoused only by a handful of do-gooder development finance institutions (DFIs) such as the World Bank Group’s International Finance Corporation and the Asian Development Bank. Back then, conventional wisdom in the PE community held that profit was the one and only relevant yardstick for success, and all else was either socialist distraction or (worse) directly anathema to profit.
Why should a proposed hydroelectric dam need to budget even one penny for an endangered species of absurd-looking water fowl? Why must a discussion of the locations and number of seemingly-trivial fire exits and the coverage of fire insurance policies take place in parallel with negotiations on equity valuation? Why be bothered with the resettlement of impoverished communities that may be displaced by the new (fill in the blank: natural gas pipeline; call center buildings; refrigerated logistics hub; palm oil plantation; etc.)? Heresy, surely!!!
It may be no secret to some of those who follow this blog that we count ourselves among the ESG-indoctrinated. For this particular ideologue (whose conceit is to suppose he sits on the side of the angels), one worthwhile mission is to help persuade more and more businesses in the Philippines that it’s in their enlightened self-interest to marble ESG sustainability values into their behavior, because this commitment will aid in very real ways (and incidentally advertise) their long-term commercial fitness and viability in the global marketplace.
It was never inevitable that the DFIs would win the ESG wars. Certainly, a few years had to first pass before the rest of the international PE industry cottoned on to the logic of the Triple Bottom Line and came to subscribe to the very real economic benefits of sound ESG practices. Though we had hardly noticed the arrival of the tipping point for ESG, we strongly suspect that the accumulation of hearts and minds must have been helped in no small part by conferences, like the one AVCJ has hosted for 26 years now, that permit PE practitioners to schmooze and release viral ideas – whether in or outside of session.
Who knows? Maybe we had unwittingly been present at one of the signal moments in the formation of some future consensus on Sharia-compliant PE investing, however thorny the path to that goal appears today. It would indeed be truly nice if some meeting of scholarly minds does eventually happen, for this would matter greatly to the welfare of both the Islamic and non-Islamic parts of the world. Again, it needs to be stressed that agreement is not foreordained, and may ultimately prove impossible. But let’s keep talking, anyway.
The past few weeks have, for Philippines, been a wild roller coaster ride, marked by:
At the risk of sounding cynical, one might infer that only the owners of local media have been consistently happy about the riveting news flow. Regarding the dirty-money trail in government, yes, the medicine of exposure is bitter, but (from an institution-building standpoint) potentially salutary to the body politic’s long-term health and progress.
If there’s anything we remain steadfastly un-cynical about, it’s the abundance of good investment opportunities in the Philippines. Recently, some have circulated the worry that listed equities, real estate, and bank lending have started getting bubbly in Philippines. While we’ll grant that said asset classes have been lively, we feel the alarm is exaggerated and premature, most especially in the case of credit expansion.
Besides, we have studiously ignored those asset classes in order to focus instead on solid, honest-to-goodness privately-held businesses seeking growth equity. The PE asset class is what truly underpins the exciting long-term story for the country. Patient, contrarian investors will be delighted to discover that in this category the issue is in fact a shortage of available capital rather than oversupply.
Happy holidays to all, and a prosperous 2014 ahead!
The opinions expressed herein are the writer’s own, and are not necessarily official positions of Angeon Advisors Ltd. Neither the writer nor Angeon makes any representations or warranties as to the accuracy or reliability of the materials contained herein.
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Angeon Advisors is an independent alternatives manager specializing in private equity and venture capital growth themes in the Philippines and other markets in Asia. Angeon also provides financial advisory services to very select clients.