Private equity group helps Mongolian firms connect with outside world
Private equity pioneer supports companies through financing and managerial expertise
In a country rich in minerals Batsaihan Jamichoi provides a rare commodity - capital financing.
A partner in one of the country's first private equity groups, Mongolia Opportunities Partners, Jamichoi tries to help mid-tier firms with financial backing and managerial acumen.
"The main idea is financing into sectors with high growth potential. We help them find additional financing and strategic partners to help further business development. We also help improve corporate governance and general management practice so these companies would become one of the best performers in their sector. We function as a bridge," Jamichoi told the South China Morning Post.
A rambunctious parliamentary democracy and embracer of market economic reforms since the early 1990's, Mongolia's geographical remoteness seems an apt metaphor for its access to global capital markets.
Despite an abundance of natural resources, successive governments struggled during the 2000s to maintain healthy fiscal accounts in the face of volatile commodity prices, resulting in an intervention by the International Monetary Fund in 2009.
Only in recent years has the country been able to tap the global debt markets with a US$1.5 billion Chinggis bond and that issue took place before the deterioration in gross domestic product growth in late 2012. Sold in five and 10-year tranches, the government paid 4.125 per cent and 5.125 per cent interest respectively. A further US$580 million has been loaned via the government-backed Mongolian Development Bank.
In September, Mongolia's prime minister announced plans for a yen-denominated Samurai bond raising up to US$1 billion.
Data from Fitch and the World Bank suggests general government debt as a percentage of GDP will hit 40 per cent in 2013 from 29.3 per cent in 2011, while the fiscal deficit has deteriorated to 8.4 per cent of GDP in 2012 from 4.8 per cent in 2011.
Mongolian corporations still struggle to gain international financing. Companies have mostly relied on organic growth, investment from multilateral lenders such as the World Bank's International Finance Corp, or short-term bank loans with annual interest rates around 20 per cent. The local stock market has been bedevilled by seesaw returns, low liquidity and arduous listing rules.
The market's index of 20 leading companies is down 23 per cent for the year. There are few funds operating in Mongolia and daily trading turnover ranges from US$20,000 to US$60,000.
The driver behind plans to improve this is the Mongolian Stock Exchange (MSE). In partnership with the London Stock Exchange they have been upgrading their trading platforms and stripping out procedures that were hindering development.
"We now estimate IPOs can be done in four months instead of one year," said Andrew Economides, the MSE Head of Market Development.
As part of a new securities law to come into force in 2014, the government will allow a greater range of investment products to be developed, provide a stronger framework for dual listings and permit depositary receipts to attract foreign investors.
The MSE is also considering encouraging larger firms to dual list partly in Mongolia rather than exclusively overseas. One firm that analysts expect to do so is coal mining giant, Tavan Tolgoi, which could raise US$3 billion.
Complementing the securities law will be rules to allow the establishment of custodian banks making it easier for institutions to trade the market. Mongolian-listed firms will then also be able to trade on tracker funds such as the FTSE Frontier Market Index.
Regulators hope that foreign investment will help shake up the local securities firms. There are about 70 registered securities trading firms in Ulan Bator, but many do little trading. "One person with an excel spread sheet sitting in a car. He can be a broker," said Economides.
For local brokerages, the impact of new market entrants is a cause for concern. "Local connections and understanding how capital markets work" should give locals an advantage, says Masa Igata, chief executive of Mongolian brokerage Frontier Securities.
For investment firms like Jamichoi's, a functioning stock market will provide an important exit strategy for his fund's investments in the years ahead.
Launched in 2011, the fund has taken minority positions in a handful of firms including a mining equipment supplier and a building material firm. Backed by local and foreign investors including IFC and Mitsubishi, the fund typically invests US$5 million to US$10 million out of a total fund size of US$50 million.
"It usually takes a few interactions before firms capture the idea of equity investment. "The first question is what interest rate you charge and what is the repayment schedule," says Jamichoi.
With greater inter-connectivity to global capital markets those days will soon be numbered.